The U.S. Court of Appeals for the Seventh Circuit recently held that a secured creditor must file its proof of claim no later than the 90-day deadline under Federal Rule of Bankruptcy Procedure 3002(c) in order to receive distributions under a Chapter 13 plan of reorganization.
A copy of the opinion is available here: Link to Opinion.
An individual debtor filed his petition under Chapter 13 of the Bankruptcy Code. The clerk of the Bankruptcy Court mailed the “Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines” to the debtor’s creditors. Pursuant to Federal Rule of Bankruptcy Procedure 3002(c), the notice required creditors other than governmental creditors to file a proof of claim within 90 days after the date scheduled for the meeting of creditors.
A secured creditor filed its proof of claim more than three months late. The proof of claim included a secured claim for the first mortgage on certain commercial property, and an unsecured claim for a deficiency judgment entered in a state court foreclosure action against residential property.
The debtor objected to the secured creditor’s claim as untimely. The secured creditor argued in response that: (a) a secured creditor does not have to file a proof of claim in order to receive distributions under a Ch. 13 plan; (b) a pleading filed before the deadline was the functional equivalent of a proof of claim; and (c) the 90-day deadline set forth in Rule 3002(c) does not apply to secured claims.
The bankruptcy court rejected the secured creditor’s first and second arguments, but agreed with the third. The bankruptcy court held that a secured creditor can file a proof of claim at any time before the Chapter 13 plan is confirmed, overruling the debtor’s objection to and allowing the secured claim, but sustaining the debtor’s objection to the secured creditor’s parallel unsecured claim. The debtor directly appealed to the Seventh Circuit, challenging the bankruptcy court’s ruling allowing the secured part of the claim.
Section 158(d)(2)(A) of the United States Code permits federal circuit courts of appeal to hear direct appeals of bankruptcy court orders if the order involves “a question of law as to which there is no controlling decision,” “a question of law requiring resolution of conflicting decisions,” or “a matter of public importance.” See 28 U.S.C. § 158(d)(2)(A)(i)-(ii).
The Seventh Circuit began its analysis by noting that, because the appeal involved a thorny and unresolved legal question of public importance, it would review the bankruptcy court’s decision under the de novo standard.
The Court then noted that, under Federal Rule of Bankruptcy Procedure 3021 and section 502(a) of the Bankruptcy Code, a creditor must file a proof of claim in order to receive Chapter 13 plan distributions. However, the Court also noted that, although all creditors must file a proof of claim in order to receive distributions, a secured creditor that opts not to file a proof of claim can still enforce its lien through foreclosure, even after the debtor receives a discharge.
Pursuant to 11 U.S.C. § 502(a) and (b)(9), a debtor has the right to object to a claim if the proof of claim is not timely filed within the 90-day period set forth in Federal Rule of Bankruptcy Procedure 3002(c), and the court must disallow an untimely claim.
The Seventh Circuit stated that the narrow issue before it was whether the 90-day deadline in Rule 3002(c) applies to all creditors, or just to unsecured creditors. Because Rule 3002 does not expressly mention “secured creditors” at all, some courts have held that the rule applies only to unsecured creditors.
The Seventh Circuit rejected that line of cases, concluding that the better interpretation of the rule is that all creditors—both secured and unsecured—are bound by the Rule 3002(c) deadline.
The Court reasoned that subsection (c) of the Rule expressly applies to any proof of claim, and does not distinguish between secured and unsecured claims. The Court also reasoned that subsection 105(5)(A) of the Bankruptcy Code, and Federal Rule of Bankruptcy Procedure 9001, by incorporation, define “claim” as including both secured and unsecured claims. Since Rule 3002 contains both the terms “all” claims and “unsecured” claims, and subsection (c) does not specifically refer to unsecured claims, the Court concluded that the 90-day deadline applies to all claims, unless one of the six enumerated exceptions applies.
The Court noted that the fact that under subsection 3002(a) only unsecured creditors must file a proof of claim in order to receive payments under a Chapter 13 plan does not undermine its conclusion, because if an unsecured creditor does not file a proof of claim, it will not receive payments and its claim will be discharged, but on the other hand secured debts are non-dischargeable.
The Court also noted that its conclusion that subsection 3002(c) requires all creditors to file a proof of claim within 90 days after the meeting of creditors furthered “[p]rinciples of sound judicial administration,” i.e., the bankruptcy court’s ability to manage is docket.
According to the Seventh Circuit, “[r]equiring all creditors to file claims by the same date allows the debtor to craft and finalize a Chapter 13 plan without the concern that other creditors might swoop in at the last minute and upend a carefully constructed repayment schedule. If we held otherwise, secured creditors could wreak havoc on the ability of the debtor and bankruptcy court to assemble and approve an effective plan.”
Because the Court held that the deadline for filing a proof of claim under Rule 3002(c) applies to all claims, including secured creditors, and the secured creditor here filed its proof of claim after the deadline had passed, the Court held that the bankruptcy court should have disallowed the secured portion of the secured creditor’s claim with the disallowance of the unsecured claim.
Accordingly, the Seventh Circuit reversed the bankruptcy court’s order overruling the debtor’s objection to the secured part of the bank’s claim, and remanded for further proceedings.
Maurice Wutscher attorney Patrick Kane also contributed to this article.