Bankruptcy Court Rules That Undersecured Creditor Could Object to Claims that Were Listed on the Debtor’s Bankruptcy Schedules as Undisputed and Not Contingent or Unliquidated, Even Though No Proofs of Claim Had Been Filed

Posted by Irve Goldman
June 26, 2014

In In re 3333 Main, LLC, Case No. 13-51533 (ECF No. 172) (Bankr. D. Conn. May 29, 2014) (Shiff, J.), the Debtor listed a number of unsecured claims on its bankruptcy schedules without indicating they were disputed, contingent or unliquidated.  The creditors who held these claims did not file proofs of claim, apparently because under §1111(a) of the Bankruptcy Code, a proof of claim in a chapter 11 case “is deemed filed” under §501(a) of the Bankruptcy Code for any claim that appears on the debtor’s schedules, as long as it is not scheduled as disputed, contingent or unliquidated.  These creditors were apparently friendly to the Debtor and would have been prepared to accept the Debtor’s plan of reorganization.

A hostile secured creditor, whose claim was undersecured by at least the amount of $977,000, filed objections to the claims that were listed on the Debtor’s schedules as undisputed and not contingent or unliquidated.  The Debtor was the only party to respond to the objections, and objected on the basis that the claims could not be objected to by the undersecured creditor because no proofs of claim had been filed.

The Bankruptcy Court ruled that because proofs of claim were “deemed” to be filed for these undisputed claims by §1111(a), an objection to the “deemed filed” proofs of claim could be asserted on the basis of §502(a), which states that “[a] claim…proof of which is filed under section 501 of this title, is deemed allowed unless a party in interest…objects.”(emphasis added).  Since a creditor qualifies as a party in interest under §1109(b) of the Bankruptcy Code, the undersecured creditor was held to have standing to object to the claims.

The Bankruptcy Court then sustained the objections to the claims because, after proper service of the objections and the notice of hearing, the creditors whose claims were objected to did not respond and prove the bona fides of their claims.  The Bankruptcy Court reasoned that, although the normal burden of proof on an objection to claim requires the objecting party to come forward with some evidence to refute at least one essential element of the claim, that rule did not apply here because it is only directed to the situation where a creditor actually files a proof of claim.  In that event, the Bankruptcy Rules supply “prima facie evidence of the validity and amount of the claim,”  Fed. R. Bankr. P. 3001(f), and thus, when a proof of claim is filed, the objecting party must come forward with evidence that rebuts the presumptive validity and amount of the claim.

After disallowing the claims, the Bankruptcy Court turned to the undersecured creditor’s motion to convert the Debtor’s chapter 11 case to one under chapter 7.   Since the Debtor had on file a plan of reorganization and disclosure statement at the time the motion to convert was considered, the Bankruptcy Court undertook an analysis of whether the plan could be confirmed in determining whether to convert the case.

The Bankruptcy Court converted the case to chapter 7 because it found that the plan could not be confirmed as a matter of law.  This was because after disallowance of the “deemed filed” claims, the only impaired class of creditors under the Debtor’s plan, other than the class housing the secured portion of the undersecured creditor’s claim, was the class of unsecured creditors, which was overwhelmingly dominated by the unsecured portion of the undersecured creditor’s claim.  Thus, because the undersecured creditor would not vote to accept the Debtor’s plan, the Bankruptcy Court found it impossible for the Debtor to satisfy the requirement of plan confirmation that if there are one or more impaired classes of claims under a plan, as there were here, at least one of them must accept the plan.  As a result, there was no reasonable likelihood of rehabilitation under chapter 11, which is a separate ground for conversion under §1112(b)(4)(A) of the Bankruptcy Code.

 

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