• Informal Proofs of Claim Are Upheld By The Third Circuit, But Their Use Should Be Avoided If Possible
  • November 9, 2005
  • Law Firm: Meyer, Unkovic & Scott LLP - Pittsburgh Office
  • The United States Court of Appeals for the Third Circuit recently reaffirmed the ability of a creditor to file an informal Proof of Claim in a bankruptcy proceeding but clarified the procedure that had to be followed in order for the informal Proof of Claim to be allowed. In re American Classic Voyages Co., 405 F.3d 127; 2005 U.S. App. LEXIS 7185, 44 Bankr. Ct. Dec. 177 (2005). In this case a creditor, holding a claim that arose from an accident prior to the commencement of the bankruptcy case, failed to timely file a formal Proof of Claim by the Bar Date that had been established by the Court. The claimant's attorney (not a practicing bankruptcy attorney) sent a letter to the court-appointed claims agent and indicated that his client had a claim against the debtor that arose on a particular date but did not give much more detail. The attorney did ask for a claim form but did not file it prior to the Bar Date. The claimant had also received the claim form but he did not file the claim form prior to the Bar Date. When the attorney realized his mistake he filed (i) a motion for relief from stay to pursue his claim in another forum and also (ii) a motion for enlargement of time to file the Proof of Claim under Federal Rule 9006(b)(1), claiming excusable neglect. The attorney also subsequently argued that the letter constituted an informal proof of claim. The Bankruptcy Court denied these motions and the District Court affirmed. On appeal the Third Circuit affirmed the District Court and took the time to clarify the rules that were applicable to informal Proofs of Claim in this circuit.

    At the outset of its opinion the Court noted that the requirements for a proof of claim was initially set forth in an opinion that was almost 100 years old. First National Bank of Woodbury v. West (In re Thompson), 227 F. 981 (3d Cir. 1915). These requirements were very simple: (i) a demand, (ii) against the estate, (iii) with the intention to hold the estate liable had to be made. Over the years courts have had the opportunity to review this issue but they never relaxed these simple rules. The Third Circuit in fact had arrived to the point where it allowed an informal proof of claim if five (5) elements were satisfied:

    1. The claim had to be in writing. 2. The writing had to contain a demand by the creditor on the estate. 3. The writing had to express an intent to hold the debtor liable for the debt. 4. The writing had to be filed with the bankruptcy court. 5. The claim had to be justified in light of the facts and equities of the case.

    When the issue of the validity of the informal proof of claim came up in American Classic, the Court noted that requirements applicable to filing claims were now governed by rules that were much more elaborate that those that existed in 1915, the year that Thompson was decided. First the Court cited Rule 3001(a), which defines a proof of claim as a "written statement setting forth a creditor's claim." Second, Rule 5005(a)(1) was cited to show that, subject to certain specified exceptions, the proofs of claim had to be filed with the bankruptcy court.

    In American Classic, the Court found that the claimant's letter to the claims agent failed the modern test for an informal proof of claim. The Court also noted that the letter failed the second prong of the older five-part test, i.e. that the alleged claim contains a demand on the estate. Merely putting the debtor on notice of the claim was not sufficient. The letter had to put the debtor and/or the court on notice as to the "existence, nature and amount of the claim (if ascertainable.)." (The Court also noted that since the letter did not satisfy the modern rules or the second prong of the five-part test, i.e. a "demand", it also did not satisfy the test under Thompson either.) Since the letter was deemed to be defective the Court did not consider whether or not the letter would have satisfied the other factors of the five-part test.

    Once the Court determined that the letter was not an informal Proof of Claim it considered whether or not the Court could accept a late claim because the delay resulted from excusable neglect. The Court focused on Rule 9006(b)(1) of the Federal Rules of Bankruptcy Procedure the four factors announced in Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380, 123 L.Ed. 2d 74, 113 S.Ct. 1489 (1993): (i) prejudice to the Debtors; (ii) length of delay and its potential impact on judicial proceedings; (iii) the reason for the delay, including whether it was within the reasonable control of the movant, and; (iv) whether the movant acted in good faith. Id. at 395. All factors had to be considered and balanced; no one factor would trump the others. See George Harms Constr. Co. v. Chao, 371 F.3d 156, 164 (3d Cir. 2004).

    When the Court considered the first two Pioneer factors it concluded that the Debtor in American Classic would be prejudiced by the exposure to a late claim and the length of delay would have a substantial impact on the bankruptcy proceedings. There was also a fear that other creditors might seek relief from the automatic stay to pursue similar claims. Such action could have disrupted the Debtor's reorganization.

    The easiest decision for the Court was to focus on the third Pioneer factor. In the Court's opinion the entire problem was within the claimant's control and it could have been avoided if the claimant's attorney had simply reviewed the Notice that had been sent to him by the claims agent. The claimant had to be accountable for the acts and omissions of their chosen counsel. Thus, the Court found that the third factor weighed heavily against the claimant and the late claim would not be permitted. Since the first three factors of Pioneer were clearly against the claimant the court did not consider the motives of the claimant's attorney and whether or not he had acted in good faith.

    In sum the lessons to be gleaned from American Classic are simple:

    - Review carefully any Notice that you receive from the Bankruptcy Court.

    - Make sure that you file a Proof of Claim by the Bar Date. Since the Proof of Claim form is simple, and it does not cost anything to file, use the Official Form. Do not rely on an informal Proof of Claim even though the rules permit it.

    - Select competent bankruptcy counsel.

    For more information about this case or other bankruptcy issues, please contact Joel M. Helmrich at (412) 456-2841 or [email protected]