Restructuring

Contributed by Julio C. Gurdian
Bar date litigation is no late-comer to the bankruptcy scene.  For years, holders of ostensibly late-filed claims have fought to have the bankruptcy court overlook their lateness for one reason or another.  Though the underlying facts differ, the moral of these stories is generally the same: file a proof of claim on time or risk being deprived of a distribution in the bankruptcy case.  On June 1, 2012, Judge Lifland of the United States Bankruptcy Court for the Southern District of New York, in In re Greenwich Sentry, L.P. and Greenwich Sentry Partners, L.P., held that, when it comes to bar dates, holders of interests are no different than holders of claims when he found that the failure to file a proof of interest contrary to a bar date order was fatal to certain holders of limited partnership interests.

The Schedules and Initial Plan
The case relates to several investment partnerships that sold limited partnership interests.  Following their bankruptcy filings, the debtors filed a summary of schedules and statement of financial affairs.  The schedules specifically noted that

This list of equity holders is based upon the administrator’s records of investors in [the debtors] as of November 30, 2008.  This list may include limited partners that made redemption requests prior to November 30, 2008, but to whom no redemption payments were made as a result of the disclosure on or about December 11, 2008 of the Ponzi scheme that had been operated by Bernard L. Madoff Investment Securities LLC.

Thereafter, the bankruptcy court entered a bar date order, which stated that interest holders need not file proofs of interest if the interests are listed in the schedules, so long as such “[i]nterest is not scheduled as ‘disputed,’ ‘contingent,’ or ‘unliquidated.’”  Although the notation in the debtors’ schedules signaled that the debtors were not able to provide accurate information related to equity interests in the limited partnerships, the schedules did not expressly provide that the interests were disputed, contingent, or unliquidated.
Subsequently, the debtors proposed a plan that provided interest holders would not receive any distributions under the plan unless such holders filed proofs of interest in accordance with the bar date order.  Certain interest holders objected on the grounds that they did not file proofs of interest because such interests were not explicitly listed as “disputed,” “contingent,” or “unliquidated” on the debtors’ schedules.   They also argued that they were exempt from filing a proof of interest under section 1111(a) of the Bankruptcy Code, which provides that “[a] proof of claim or interest is deemed filed under section 501 of this title for any claim or interest that appears in the schedules filed under section 521(a)(1) or 1106(a)(2) of this title, except a claim or interest that is scheduled as disputed, contingent, or unliquidated.”
The Extended Bar Date Order and Revised Plan
The debtors subsequently agreed to extend the bar date to allow interest holders to file proofs of interest, and the bankruptcy court entered an order extending the bar date for the interest holders.  The extended bar date order required that the debtors issue a notice stating that holders of interests are required to file proofs of interest regardless of whether their interests are listed as “disputed,” “contingent,” or “unliquidated” on the debtors’ schedules.  In addition, the extended bar date order stated that “If you have an Interest against either of the debtors that arose on or prior to the Filing Date . . . you MUST file a Proof of Interest to share in distributions from the debtors’ bankruptcy estates and vote with respect to such Interest on a Chapter 11 plan filed by the [d]ebtors.”  (emphasis in original).  Following the instructions in the extended bar date order, the debtors issued a notice, which specifically stated that

REGARDLESS OF WHETHER YOUR INTEREST IS NOT SCHEDULED AS “DISPUTED,” “CONTINGENT” OR “UNLIQUIDATED” IN THE LIST OF EQUITY HOLDERS ANNEXED TO EACH OF THE DEBTOR’S STATEMENT OF FINANCIAL AFFAIRS, YOU ARE STILL REQUIRED TO FILE A TIMELY PROOF OF INTEREST.

(emphasis in original).
Subsequently, the debtors filed an amended plan that provided for distributions to “Allowed” claims and interests.  An interest in the debtors would be “Allowed” under the revised plan if the holder files a proof of claim or interest, unless the “[c]laim or [i]nterest has been or hereafter is listed by the Debtor in the Schedules as liquidated in an amount and not disputed or contingent.”
Failure to File Proof of Interest
The partners attempting to have their interests upheld in the case received the extended bar date notice, but failed to file proofs of interest.  Contending that the debtors should allow their interests, nonetheless, the interest holders asserted three arguments: (i) section 1111(a) of the Bankruptcy Code prevented the bankruptcy court from ordering the filing of proofs of interest, (ii) the amended plan nullified the requirement to file proofs of interest, and (iii) disallowing the interests deprived the interest holders of property without due process.
Addressing each of the arguments, the bankruptcy court espoused the general principle that “[b]ar dates ensure the sound administration of a bankruptcy estate by ‘enabling the parties to a bankruptcy case to identify with reasonable promptness the identity of those making claims against the’” estate.  Disagreeing with the interest holders’ contentions, the court stated that a bankruptcy court has the power to enter orders requiring interest holders to file proofs of interest.  It cited several cases with respect to that proposition, including In re Yonkers Prof’l Hosp., 113 B.R. 153, 157 (Bankr. S.D.N.Y. 1990), which held that ordering interest holders to file proofs of interest rebutted the presumption set forth in section 1111(a) of the Bankruptcy Code.
The bankruptcy court then refuted that there was any inconsistency between the extended bar date order and the revised plan.  It explained that the interests were not listed as liquidated in the debtors’ schedules.  Rather, the interests were listed as estimated, and subject to redemption payments.  The bankruptcy court, therefore, concluded that the interests could not be considered “Allowed” under the debtors’ plan, unless a proof of interest had been filed.
Finally, the bankruptcy court rejected the interest holders’ due process arguments by noting that it was uncontested that the limited partners received the extended bar date notice that clearly stated that all interest holders must file proofs of interest.  The bankruptcy court then warned that the “[l]imited [p]artners’ failure to file proofs of interest by the Extended Bar Date cannot be condoned.”
Although the interest holders may have believed the debtors’ revised plan excused them from having to file proofs of interest, as the bankruptcy court’s holding shows, when in doubt, send the proof of interest out!