Court Rules That Creditors May Assert Full Amount of Claim Despite Partial Recovery From Third Parties

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On June 23, 2014, a federal bankruptcy court in Nebraska issued an order in the chapter 11 bankruptcy cases of Biovance Technologies, Inc. and William Edward Julien that granted American National Bank’s (“ANB”) motion for summary judgment and overruling Biovance’s and Julien’s objections to ANB’s proofs of claim. The court’s opinion reminds creditors that payments from third parties on debts owed by a debtor do not have to be immediately credited against the amount of the debt. The court also provides some comfort for creditors in situations involving inaccuracies or mistakes in filed proofs of claim, and, cautions creditors that care and diligence must be exercised in filing and amending proofs of claim.

Background

ANB filed two proofs of claim in Julien’s bankruptcy case, but Julien only objected to one of the claims. The basis for the claim at issue was Julien’s guaranty of two financing leases. The first of the leases, identified as Lease #8452, was for industrial coolers and various accessories owned by ANB and leased to Biovance Texas, LLC, a separate entity from the debtor, Biovance Technologies, Inc. The second lease, identified as Lease #8441, was for the lease of computer equipment by ANB to Biovance Technologies, the chapter 11 debtor.

Both leases were secured by a certificate of deposit. In addition to the claims ANB filed in Julien’s bankruptcy case, ANB also filed a proof of claim in Biovance’s bankruptcy case based on Biovance’s obligation under Lease #8441, the computer equipment lease.

After filing its proof of claim in Julien’s bankruptcy case, ANB liquidated the certificate of deposit, as well as the leased property, and applied all of the proceeds to past due amounts under Lease #8452. While the bankruptcy cases were pending, ANB also recovered $50,000 in a settlement of a lawsuit relating to Lease #8452, filed against related third parties.

The Court’s Ruling

The first issue for determination by the court was the debtors’ judicial estoppel argument that ANB should be prohibited from amending its original proof of claim filed in Julien’s bankruptcy case. ANB had amended the claim it filed in Julien’s bankruptcy case after collecting some funds pursuant to both leases. Upon preparing the amended proof of claim for filing, ANB discovered that it had miscalculated the amount asserted in its initial proof of claim, and therefore, recalculated the amount asserted as due and owing in its amended proof of claim. The court rejected the debtors’ arguments, and instead found that ANB was entitled to correct its calculation of the original balance due.

The court next considered and rejected the debtors’ arguments that ANB was required to apply the $50,000 in settlement proceeds received from related third parties to reduce the amount of its proof of claim. The court cited two U.S. Supreme Court cases from 1935 and 1946, as well as an 8th Circuit Court of Appeals case, in finding that ANB was not required to immediately credit the settlement proceeds to reduce its claims against the debtors. The court stated that “until such time as [ANB] has received payment in full, it is entitled to assert the balance due against all responsible parties.”

Finally, the court considered the debtors’ request for sanctions due to ANB’s pursuit of its inaccurate proof of claim. The court stated that to the extent the debtors’ request for sanctions relied on their arguments regarding estoppel and the application of third party proceeds to the claim, the request was denied, because the previous arguments had already been rejected by the court. Additionally, the court found that ANB had acted reasonably in promptly amending its claims after the debtors raised issues regarding the inclusion of post-petition late charges and the failure to allocate certain credits and collections. Therefore, the court denied the debtors’ request for sanctions.

What Does This Mean For Creditors?

The usefulness of the court’s opinion is two-fold:

  • First, a creditor is entitled to continue to assert the full amount of its claim against the debtor, despite amounts received from third parties, until the creditor has received payment in full. This allows creditors to simultaneously pursue more than one available avenue of potential recovery for the entire amount of the debt, improving their chances of recovering more of the debt owed to them. Creditors should remember, however, that this principle does not apply to payments received from the debtor itself - any payments received from the debtor must be credited against the claimed amount.
  • Second, this opinion provides some comfort, but also a warning, to creditors. If a creditor legitimately makes a mistake in calculating the amount due and owing when it initially files its proof of claim but then promptly amends its proof of claim upon discovering the error, the mistake is likely to be excused by the bankruptcy court. However, this certainly doesn’t give creditors a license to be careless when preparing their proofs of claim, or to be less than diligent about amending their claims once a mistake is discovered. Creditors should keep in mind that in signing a proof of claim, they are declaring under penalty of perjury that “the information provided in [the] claim is true and correct to the best of [their] knowledge, information, and reasonable belief.” The Biovance and Julien court specifically pointed out that ANB did not argue or attempt to pursue the inaccurate proof of claim once issues were discovered, but instead promptly amended the claim.

Topics:  Chapter 11, Commercial Bankruptcy, Creditors, Recovery Laws

Published In: Bankruptcy Updates, Civil Procedure Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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