Recent Amendments to the Federal Rules of Bankruptcy Procedure

The current United States’ bankruptcy law was created by Congress’s enactment of the Bankruptcy Act of 1978, and its procedural rules are promulgated by the Supreme Court and local courts.  An important goal of the system is centralizing the allowance and payment of claims in a simple and efficient way.

Generally, creditors must file a “proof of claim” in order to insure that their claim has a chance of being “allowed” (even then, it may only be paid a very small fraction of its face amount).

Ordinarily, the practical effect of most consummated bankruptcies will be a discharge (or the functional equivalent) of prebankruptcy claims, whether or not a proof of claim has been filed.   A claim, proof of which has not been filed, is unlikely to be paid anything. Thus, knowing when to file a proof of claim can spell the difference between recovering something and nothing.

Certain amendments to the Federal Rules of Bankruptcy Procedure effective December 1, 2017 provide some clarity on these issues.  (Please see our original article for a more complete discussion of these amendments).

Proof of Claim Bar Date:

Secured Claims: Amended Rule 3002(a) provides that a secured creditor is now required to file a proof of claim for chapter 7, 12 and 13 cases to have an allowed secured claim and be eligible to receive distributions from the estate. Failing to file a proof of claim, alone, will not cause the voiding of the security interest or lien.

Bar Date: Amended Rule 3002(b) provides that the deadline for filing proofs of claim has been shortened in chapter 7, 12 and 13 cases, and the deadline is no longer determined with reference to the date first set for the meeting of creditors. Now, a proof of claim in a voluntary chapter 7 case must be filed no later than 70 days after the petition date. In an involuntary chapter 7 case, a proof of claim must be filed no later than 90 days after the entry of the order for relief.

Determining the Amount of Secured and Priority Claims:

Priority: Amended Rule 3012 now permits a court to determine (by motion after a claim or an objection thereto is filed) the amount of a claim entitled to priority (or the amount of a secured claim). The priority (or amount) of a governmental unit’s secured claim, however, can only be determined after the governmental unit has either filed a proof of claim, or the time for doing so has expired.

Determination of Secured Claim in Chapter 12 or 13 Plan: Amended Rule 3012 provides that courts may determine the amount of a secured claim by motion, claim objection, or under a chapter 12 or 13 plan. Amended Rule 3015(g) provides that a determination in a plan under Amended Rule 3012 regarding the amount of a secured claim is binding on the holder of the claim, even if the holder files a contrary proof of claim or the debtor schedules that claim, and regardless of whether an objection to the claim has been filed. The confirmed plan will trump the proof of claim and the schedules. Thus, secured creditors must carefully review a debtor’s plan to determine whether an objection is necessary.

Applicability of Amendments to Pending Cases?: The amendments apply to bankruptcy cases filed on or after December 1, 2017. In addition, the amendments may apply in bankruptcy cases filed prior to December 1, 2017, if the Court determines that retroactive application is not unfairly prejudicial.

Although these rules may seem somewhat technical, many lawyers will confront a situation in which their client’s obligor has declared bankruptcy.  In such cases, knowing when to file their claim and how it will be addressed in bankruptcy can be critical to any recovery.

Richard Tannenbaum is a partner at Reed Smith in the Financial Industry Group. He focuses on wing to wing aspects of credit and risk issues arising in equipment finance transactions, including, deal origination, workouts and restructurings, bankruptcy, and litigation.

Kurt Gwynne is a member of the Financial Industry Group at Reed Smith, practicing in the area of Commercial Restructuring & Bankruptcy. Kurt is the managing partner of the Wilmington office and the head of the Wilmington bankruptcy group.

Emily Devan is a member of the Financial Industry Group at Reed Smith, practicing in the area of Commercial Restructuring & Bankruptcy. Emily represents all types of parties-in-interest in chapter 11 bankruptcy cases in Delaware and around the country.

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