Dorsey U.S. Bankruptcy Law Q&A Series Four

Dorsey & Whitney LLP

We hope that you found the three previous Q&A series regarding what to do when a U.S. customer files for Chapter 11 bankruptcy protection helpful. This Series Four will address questions relating to how claims are filed and dealt with in a Chapter 11 bankruptcy case.

1. Question: Is there a deadline for filing claims and, if so, how do I find out that deadline?

The deadline to file claims in a bankruptcy case is referred to as the “bar date” and it is one of the most critical dates in the bankruptcy case. Indeed, if a claim is filed late, it may be disallowed. Unfortunately, there is no standard manner in which bar dates are set in Chapter 11 cases. Rather, in some judicial districts, Chapter 11 debtors must file an application with the bankruptcy court to have a bar date set. In other judicial districts, the bar date is set automatically when the case is filed. Although notice of the bar date must be served on all known creditors, it is important to have a U.S. bankruptcy attorney monitor a Chapter 11 case to identify the bar date as promptly as possible, and even prior to when notice is sent to creditors.

2. Question: What is the process for filing a claim?

While the proof of claim form is relatively simple and straightforward, it requires a substantial amount of information and, particularly with respect to claims of creditors located outside the U.S., should be prepared with the assistance of counsel in order to avoid mistakes that could result in your claim being disallowed and to best protect your rights as a creditor in the bankruptcy case. In order for you or your attorney to complete the form, you will need detailed information about how much was owed as of the date the debtor filed its bankruptcy case, including interest and fees. You will also need to submit supporting documents along with the proof of claim or an explanation as to why such documents are unavailable. While the creditor must note the amount, type, and nature of the claim on the proof of claim form itself, it is advisable to include an addendum to your claim that sets forth in greater detail the basis of the claim and includes important reservation of rights provisions regarding your claim.

You should ensure that the proof of claim is true to the best of your knowledge because proofs of claim are executed under penalty of perjury. Once the proof of claim is completed, it will need to be filed. In some cases, claims are filed directly with the bankruptcy court through the e-filing system. But, in larger cases, a third-party claims administrator appointed by the court accepts the filing of claims either in hard copy or electronically. A U.S. bankruptcy attorney will be able to ensure the claim is correctly and timely filed. Once filed, proofs of claim may be amended (even after the bar date), in certain circumstances.

3. Question: How are different types of claims treated in Chapter 11 and are certain claims given priority over others?

How claims are treated in a Chapter 11 bankruptcy case depends on the type of claim:

  • Secured claims, in most instances, remain unaffected by the bankruptcy filing and are deemed to be secured to the same extent as prior to the bankruptcy. If the value of the secured creditor’s collateral is less than its claim, the secured creditor will be treated as having a partially secured claim up to the value of the collateral and a general unsecured claim for the balance. As a result, secured claims generally should either be paid in full (up to the value of the underlying collateral), in cash or other distributions, or the claims remain secured and pass through the bankruptcy case unaffected.
  • Administrative expense claims are those that are given first priority of payment in the bankruptcy case. These claims are generally for those that directly benefit the bankruptcy estate, such as the cost of goods and services supplied to the debtor during the bankruptcy case. While most administrative expense claims arise during the bankruptcy case, claims for goods sold in the 20 days prior to the bankruptcy filing are also given administrative expense priority. Subject to certain limited exceptions, all administrative expense claims must be paid in full in order for a Chapter 11 plan to be confirmed.
  • Priority claims are those that arose prior to the bankruptcy case, but are entitled to priority of payment. These claims include claims for the debtor’s employee wages and benefits (up to a cap), certain taxes, and certain customer deposits. To the extent there are sufficient funds, the Bankruptcy Code requires that these claims be paid in full, either soon after confirmation or over time, in order for a Chapter 11 plan to be confirmed.
  • General unsecured claims are those that arose prior to the bankruptcy case and not entitled to priority treatment. These claims include those for goods sold to a debtor prior to the bankruptcy filing and outside the 20-day window discussed above, and for which the creditor did not obtain a security interest. General unsecured claims are only entitled to payment after all priority claims are paid in full and often only receive a small percentage recovery.
  • Equity interests are those belonging to shareholders and, subject to certain exceptions, are only entitled to payment after all creditors are paid in full.

The foregoing treatment is what can be expected in a successful Chapter 11 case that results in a confirmed plan. In the event a Chapter 11 case is not successful, the priorities may change. We will address what happens in unsuccessful cases in a future series.

4. Question: Can a supplier seek to bar the discharge of its debt?

Yes, but permissible bases for doing so are limited. The Bankruptcy Code sets forth a number of grounds for preventing a debt from being discharged. In order to have a debt determined to be non-dischargeable on the basis that it arose from fraud, defalcation, or willful or malicious injury, a creditor must commence an action in the bankruptcy court to request such a determination. You should consult a U.S. bankruptcy attorney if you believe there are grounds for barring the discharge of your debt as soon as possible, as the deadline for commencing a non-dischargeability action is 60 days after the first Section 341 meeting of creditors (see Series Three for more information on such meetings).

5. Question: What happens if the debtor disagrees with the amount or nature of a supplier’s claim?

If a debtor – or a trustee or other party authorized to object to claims asserted against the debtor – disagrees with what you have asserted in your proof of claim (whether the amount of the claim or its type), the debtor may either reach out to you directly to resolve the dispute or it may file an objection with the bankruptcy court setting forth why the debtor believes the claim is incorrect or barred, or should be disallowed. Regardless, it is prudent to retain U.S. bankruptcy counsel to resolve any claims dispute on your behalf, either through informal negotiations or by formally responding to an objection. Keep in mind, there are no deadlines for filing objections to claims in the Bankruptcy Code or Bankruptcy Rules and, often, Chapter 11 plans will permit the filing of objections to claims after confirmation.

6. Question: Can an unsecured creditor sell its claim?

Yes, absolutely. As with anything, there are no guarantees in bankruptcy, particularly with respect to recoveries for unsecured creditors. Accordingly, if you are holding an unsecured claim, you may wish to at least consider the option of selling the claim to a third party at a discount to obtain some guaranteed recovery rather than wait until the conclusion of the case and the distribution, if any, to holders of such claims.

***

Please keep an eye out for Series Five which will address questions relating to the role of official committees of unsecured creditors in bankruptcy and whether to join such a committee or to informally join forces with other creditors in a case.

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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