Lending Money to a Friend, You Lose Both the Friend and the Money

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

In the case of In re Ricky L. Moore (19-01228), the United States Bankruptcy Court for the Northern District of Iowa taught an important lesson in the context of Chapter 12 bankruptcy cases[1]: do not rely on repeated assurances of payment from a friendly debtor in lieu of filing your bankruptcy proof of claim.

In Moore, Sexton Oil Co. provided the Debtor with fuel for farm use before the Debtor filed bankruptcy. The owner of Sexton Oil had a personal relationship with the Debtor, was aware that the Debtor filed bankruptcy, and had ongoing discussions with the Debtor during the bankruptcy about the delinquent account. The Debtor repeatedly assured Sexton Oil that the account would be paid. However, the Debtor did not pay Sexton Oil as promised, and Sexton Oil then filed its proof of claim nearly a year-and-a-half late. The Debtor objected to Sexton Oil’s claim as untimely.

The bankruptcy court recognized that in some instances, late-filed claims can be accepted. Generally, “excusable neglect” will allow a creditor to assert late-filed claims in Chapter 11 cases. Excusable neglect is a very fact-intensive inquiry that focuses on, among other things, the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay (including whether it was within the reasonable control of the creditor), and whether the creditor acted in good faith. However, the bankruptcy court held that the doctrine of excusable neglect does not apply in a Chapter 12 case[2].

Creditors may also argue that, even though they did not file a formal proof of claim, they are deemed to have submitted an “informal proof of claim” through their significant participation in the bankruptcy case and their intent to hold the debtor liable for their claim. However, the bankruptcy court held that this doctrine also could not help Sexton Oil, because Sexton Oil had not participated at all in the bankruptcy case until it had filed its motion to allow its late claim.

While the bankruptcy court may have felt sympathy for Sexton Oil, particularly in that the court encouraged parties to “stand behind their verbal assurances,” the court stated that in this particular case, it simply had no discretion to allow Sexton Oil’s late proof of claim. Therefore, the bankruptcy court denied Sexton Oil’s late-filed claim and barred the claim against the debtor.

While Moore is a Chapter 12 case, the lesson to creditors from this cautionary tale is clear: go ahead and file your proof of claim. Not only is it easier to negotiate with the debtor once your claim is filed, but the process of attempting to assert a late claim is expensive and leads to uncertain results.

[1] Chapter 12 cases are designed for “family farmers” or “family fishermen.”

[2] The doctrine of excusable neglect is rooted in Bankruptcy Rule 9006(b) which allows the court to enlarge certain periods of time when the failure to act was the result of excusable neglect. However, Bankruptcy Rule 9006(b)(3) states, “The court may enlarge the time for taking action under Rule[ ] . . . 3002(c) . . . only to the extent and under the conditions stated in [that] rule[ ].” Rule 3002(c) governs Chapter 12 cases, and none of the conditions of Bankruptcy Rule 3002(c) would have applied to Sexton Oil.

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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