The trustee for a chapter 11 liquidating trust came up with a creative theory for the summary disallowance of a claim that was filed before the bar date. The theory perhaps went beyond the pale of creativity.
The theory went like this: If the statute of limitations expires during a chapter 11 case but claim objections are conducted after confirmation, the creditor must obtain a modification of the automatic stay and file a lawsuit outside of bankruptcy court during the extension provided by Section 108(c)(2). Otherwise, the claim will be time-barred.
Bankruptcy Judge Craig T. Goldblatt of Delaware found “the contention surprising” but “nevertheless incorrect.”
“Once a creditor has filed a timely proof of claim,” Judge Goldblatt held in his April 20 opinion, “the only dispute that requires resolution is the allowance or disallowance of the claim.”
Typical Facts
Claiming to hold a claim for medical malpractice, the creditor was a patient in a hospital that ended up in chapter 11. The patient had not filed suit before bankruptcy, but the creditor filed a proof of claim before the bar date and before the two-year statute of limitations would have run under state law.
The debtor confirmed a chapter 11 plan and created a liquidating trust after the statute of limitations expired under state law on the malpractice claim. Objections to claims devolved upon the trust after confirmation.
The trustee filed a motion for summary judgment objecting to allowance of the claim, based on the trustee’s understanding of Section 502(b). The section provides that “the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount . . . .”
The trustee reasoned as follows: Although Section 502(b) says that the amount of a claim is determined as of the filing date, the validity of the claim is determined when the court rules on the allowance of the claim. If the statute of limitations has run after the filing date because the creditor had not filed a prepetition lawsuit, the timely filing of a proof of claim is insufficient.
The case demonstrates a fact often noted by young lawyers: Sometimes there is no authority for self-evident legal principles. Indeed, Judge Goldblatt found no authority on point rejecting the trustee’s theory, but he found one decision from the bankruptcy and district courts in Pennsylvania from 1999 that supported the trustee’s argument.
Judge Goldblatt found the Pennsylvania courts’ “reasoning unpersuasive.”
Timely Claim Filing Is Enough
If the trustee’s theory were valid, Judge Goldblatt said that “creditors whose claims are valid as of the petition date but have upcoming statutes of limitations would be required to seek stay relief to file lawsuits in state or federal court outside of bankruptcy in order to preserve their right to payment.”
Judge Goldblatt rejected the trustee’s argument based on the language of Section 502(b). He said that the theory was “also inconsistent with longstanding principles of bankruptcy law and sensible bankruptcy policy.” Section 502(b) “provides for a centralized mechanism by which bankruptcy courts resolve disputed and unliquidated claims that may be asserted against the bankruptcy estate.”
Judge Goldblatt held that Sections 501 and 502 “establish a mechanism by which the court assesses the validity of the creditor’s right to payment, under non-bankruptcy law, as it existed as of the petition date, subject only to the exceptions set forth in § 502(b).” He said that the “claims allowance mechanism . . . is intended to provide the debtor [with] a centralized forum in which to litigate the merits of a creditor’s claim.”
The trustee’s theory, according to Judge Goldblatt, “would thus operate to create one of the very problems that bankruptcy is intended to solve.” Contrary to the trustee’s theory, the judge said “there is no reason for a creditor to file a complaint outside of bankruptcy . . . because § 502(b)(1) asks the court to determine the validity of the claim as it existed as of the petition date.”
The trustee cited several cases that Judge Goldblatt distinguished by saying they did not “actually stand for” the proposition espoused by the trustee. However, the Pennsylvania case was on point but “unpersuasive.”
The Pennsylvania case was based on the idea that the bankruptcy court lacked subject matter jurisdiction over personal injury tort claims under Section 157(b)(2)(B). Because the premise was “incorrect,” Judge Goldblatt said that “most of the rest of the court’s reasoning falls away.”
Note to readers: This story does not do justice to Judge Goldblatt’s explanation of the trustee’s theory nor to his reasoning for ruling to the contrary. For anyone interested in the issue, we recommend reading the opinion in full text.
The trustee for a chapter 11 liquidating trust came up with a creative theory for the summary disallowance of a claim that was filed before the bar date. The theory perhaps went beyond the pale of creativity.
The theory went like this: If the statute of limitations expires during a chapter 11 case but claim objections are conducted after confirmation, the creditor must obtain a modification of the automatic stay and file a lawsuit outside of bankruptcy court during the extension provided by Section 108(c)(2). Otherwise, the claim will be time-barred.
Bankruptcy Judge Craig T. Goldblatt of Delaware found “the contention surprising” but “nevertheless incorrect.”
“Once a creditor has filed a timely proof of claim,” Judge Goldblatt held in his April 20 opinion, “the only dispute that requires resolution is the allowance or disallowance of the claim.”