It’s sometimes impossible to find authority for a proposition that’s self-evident. Affirming Bankruptcy Judge Craig T. Goldblatt on direct appeal, the Third Circuit stated an obvious rule of law by holding that a timely filed claim can be allowed even if the statute of limitations expires before there’s an objection to the claim.

In the same vein, Circuit Judge Marjorie O. Rendell decided in a March 3 opinion that a creditor is not required to obtain a modification of the automatic stay and file a lawsuit outside of bankruptcy court to prevent the statute of limitations from barring allowance of a timely filed claim.

The Med-Mal Claim

A patient claimed to have suffered medical malpractice about 18 months before the hospital filed a chapter 11 petition. State law had a two-year statute of limitations for the malpractice claim that would have run during the course of the chapter 11 case.

The patient filed a $10 million proof of claim before the bar date and before the statute would have run. The debtor confirmed a liquidating chapter 11 plan and created a liquidating trust.

Aiming for a recovery only through the claim in bankruptcy court, the patient did not seek authority to sue in state court. More than two years after the statute of limitations would have run, the liquidating trustee filed a motion for summary judgment in bankruptcy court seeking disallowance of the claim.

Judge Rendell characterized the trustee as contending that “bankruptcy courts should assess whether a claim is allowed as of their evaluation date, rather than the date the petition was filed.” The trustee also argued that “a creditor must file a timely non-bankruptcy action prior to the expiration of the limitations period to protect its bankruptcy claim.”

In what Judge Rendell called a “well-reasoned opinion,” Bankruptcy Judge Goldblatt denied the trustee’s motion for summary judgment. In re Promise Healthcare Group LLC, 18-12491, 2023 BL 133502, 2023 Bankr. Lexis 1085, 2023 WL 3026715 (Bankr. D. Del. April 20, 2023). To read ABI’s report, click here.

The trustee sought leave to appeal the interlocutory order directly to the circuit. The district court authorized a direct appeal, which the circuit accepted.

What Section 502(b) Means Isn’t So Obvious

The outcome of the appeal rested on Sections 502(a) and 502(b). Section 502(a) provides that a “claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects.” When there is an objection, Section 502(b) says that the court “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.” [Emphasis added.]

Judge Rendell recounted how the trustee contended that the court should “assess the amount of claims as of the petition date, and the validity of claims as of the evaluation date.” [Emphasis in original.]

Citing Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450 (2007), Judge Rendell said that “the Bankruptcy Court should not have allowed [the patient’s] claim if it was untimely under Florida’s two-year statute of limitations.” But for the precise question on appeal, she said there was no controlling authority:

Neither the Supreme Court nor this Court has spoken to whether § 502(b) unenforceability is to be determined as of the petition date, or as of the date at which the court evaluates the claim. We now clarify that the petition date is the proper reference point.

Quoting a 1911 opinion by Justice Oliver Wendell Homes, Jr., Judge Rendell said, “Bankruptcy law generally presumes that the petition date ‘fixes the moment when the affairs of the bankrupt are supposed to be wound up.’ Sexton v. Dreyfus, 219 U.S. 339, 344 (1911).”

The trustee’s contention, Judge Rendell said, “contravenes the purpose of statutes of limitations: to ensure that parties do not sit on their rights and then ‘unfair[ly] surprise’ defendants with ‘stale claims.’ Coello v. DiLeo, 43 F.4th 346, 351–52 (3d Cir. 2022) (quoting Kreiger v. United States, 539 F.2d 317, 322 (3d Cir. 1976)).” In the case on appeal, she said that the patient “did not sit on his rights, and there is no risk of unfair surprise: [The patient] filed his proof of claim by the bar date, and within the limitations period.”

While there was no controlling authority from the Supreme Court or the Third Circuit, Judge Rendell pointed to the Eighth Circuit Bankruptcy Appellate Panel and the Second Circuit for supporting the patient’s theory. With regard to the statutory language — “as of the date of the filing of the opinion” — she cited the Second Circuit for having said that the statute “is best read to mean that bankruptcy courts should assess claim allowance as of the petition date.” In re Flanagan, 503 F.3d 171, 178–79 (2d Cir. 2007).

Similarly, Judge Rendell cited the Ninth Circuit Bankruptcy Appellate Panel for saying that the post-petition running of the statute of limitations should not be the basis for disallowance of a valid prepetition claim. In re Brown, 606 B.R. 40, 46 n.6 (B.A.P. 9th Cir. 2019).

Judge Rendell ended her opinion by refuting the trustee’s contention, based on Section 108(c), that the patient should have filed a lawsuit in state court before the statute ran. For a statute of limitations that has not expired before filing, Section 108(c) says, in substance, that the statute does not expire “until the later of” the limitations period extended by any suspension after the filing date or “30 days after notice of the termination or expiration of the stay.”

Judge Rendell said that “§ 108(c) does its primary work with respect to claims not resolved through the bankruptcy process — for instance, claims disallowed (for non-merits reasons) or not discharged, or claims arising during the proceedings that can still be pursued after the bankruptcy proceedings are concluded.”

In short, Judge Rendell held that “Section 108(c) is not relevant to the instant dispute.” She affirmed Judge Goldblatt’s decision denying the trustee’s motion for summary judgment.