Even though burdened with nondischargeable claims, an individual chapter 7 debtor lacks standing as a “party in interest” to object to a proof of claim, even if it’s the largest claim against the estate, according to Bankruptcy Judge Jennie D. Latta of Memphis, Tenn.
Saddled with a judgment of more than $1.6 million and an IRS claim exceeding $1.3 million, the debtor filed a chapter 7 petition. In her May 6 opinion, Judge Latta said that about $11,000 of the IRS claim was entitled to priority under Section 507(a)(8) and was therefore excepted from discharge under Section 523(a)(1)(A).
The debtor filed an objection to the $1.6 million claim of the judgment creditor. The trustee did not join the objection.
The trustee reported that the assets of the estate were about $40,000 and thus would not exceed filed claims.
The judgment creditor challenged the debtor’s standing to object to the claim. To posit standing, the debtor argued that reducing the size of the pool of claims would increase the distribution to creditors and thus reduce his liability for nondischargeable claims.
For lack of standing, Judge Latta denied the debtor’s claim objection.
The outcome turned on Section 502(a), which provides that a filed claim is deemed allowed absent objection by a “party in interest.” The Bankruptcy Code does not define “party in interest.”
Judge Latta said that “party in interest” is “generally understood to mean that the party has a pecuniary interest in the outcome of the controversy.” She cited the Sixth Circuit Bankruptcy Appellate Panel for saying a party in interest is someone with an actual pecuniary interest.
Typically, only a chapter 7 trustee has standing to raise claim objections. Some courts, Judge Latta said, have developed two exceptions allowing an individual chapter 7 debtor to object when: (1) all creditors can be paid in full; or (2) there is a nondischargeable claim.
Another group of courts allows a chapter 7 debtor to object to administrative claims if any claim is nondischargeable. Those courts, Judge Latta said, reason “that reduction in the amounts of administrative expenses to be paid by the estate would result in a higher distribution to creditor’s claims, thus reducing the debtors’ liabilities on their nondischargeable claims.”
The Sixth Circuit has no authority on point. However, Judge Latta was obliged to make inferences from Sixth Circuit precedent pointing in a direction unfavorable to the debtor.
The Sixth Circuit held in an unpublished opinion that a debtor lacked appellate standing to appeal an unfavorable decision finding that the debtor was not a party in interest entitled to raise a claim objection under Section 502(a). Khan v. Regions Bank (In re Khan), 544 Fed. Appx. 617 (6th Cir. 2013).
In Kahn, the debtor did not claim to have nondischargeable debts, but the Sixth Circuit said that a debtor would qualify as a “person aggrieved” if she or he were “directly and adversely affected” by the order on appeal. Id. at 619.
Judge Latta interpreted the Sixth Circuit as emphasizing “that the person aggrieved standard requires that a debtor have a direct pecuniary interest in the outcome of the appeal.” She said it would be “odd indeed” if her appeals courts were to have one standard for appeals and another for lodging a claim objection in bankruptcy court.
If the question were to confront the Court of Appeals, Judge Latta believes that the Sixth Circuit “would apply the person aggrieved standard to the question of whether a debtor has standing to object to a proof of claim when his only interest in the outcome of the claim is the possibility of increasing the pool of assets to be paid to other creditors thus reducing his liability on any nondischargeable claims.”
Acknowledging that the debtor’s nondischargeable debt represented a pecuniary interest, Judge Latta saw it as “remote rather than as direct . . . .”
Adopting the view of a bankruptcy judge in Chicago and dismissing the claim objection for lack of standing, Judge Latta said that allowing “the debtor to object to proofs of claim in every case in which there are nondischargeable claims would needlessly disrupt the administration of bankruptcy cases.” In re Adams, 424 B.R. 434, 436-37 (Bankr. N.D. Ill. 2010).
Even though burdened with nondischargeable claims, an individual chapter 7 debtor lacks standing as a “party in interest” to object to a proof of claim, even if it’s the largest claim against the estate, according to Bankruptcy Judge Jennie D. Latta of Memphis, Tenn.
Saddled with a judgment of more than $1.6 million and an IRS claim exceeding $1.3 million, the debtor filed a chapter 7 petition. In her May 6 opinion, Judge Latta said that about $11,000 of the IRS claim was entitled to priority under Section 507(a)(8) and was therefore excepted from discharge under Section 523(a)(1)(A).
The debtor filed an objection to the $1.6 million claim of the judgment creditor. The trustee did not join the objection.
The trustee reported that the assets of the estate were about $40,000 and thus would not exceed filed claims.
The judgment creditor challenged the debtor’s standing to object to the claim. To posit standing, the debtor argued that reducing the size of the pool of claims would increase the distribution to creditors and thus reduce his liability for nondischargeable claims.
For lack of standing, Judge Latta denied the debtor’s claim objection.