No Proof of Claim, No Problem: Bankruptcy Court Finds Declaration to Be Effective as Informal Proof of Claim

Regardless of whether a creditor has a claim identified in a debtor’s schedules of assets and liabilities, generally speaking, most attorneys representing creditors in the context of a chapter 11 case will advise their clients to file a formal proof of claim with the bankruptcy court.  Often this is just “belts and suspenders” and a matter of good practice but, if nothing else, a formal proof of claim will serve to protect a creditor’s rights and interests vis à vis the estate. In many cases, however, some creditors, for whatever reason, either forget or simply fail to file a proof of claim prior to the expiration of the bar date. Although the usual effect would be that the claim would be barred against the estate, a recent decision out of the United States Bankruptcy Court for the District of Idaho shows that all may not be lost because another document prepared by the creditor (there, a declaration submitted to the United States Trustee) may serve as an effective “informal proof of claim.”   
Parrott Broadcasting Limited Partnership filed for chapter 11 bankruptcy protection and identified Marquee Broadcasting, Inc. as an unsecured creditor on its schedules holding a non-contingent, undisputed and liquidated claim. Prior to any bar date, Marquee filled out and submitted a form declaration that was sent by the U.S. Trustee to various creditors identified in the debtors’ schedules for the purpose of gauging the creditors’ interest in serving on the official committee of unsecured creditors. The declaration was executed by a Marquee officer and indicated that Marquee’s claim was based upon a “promissory note” and that the claim amount was approximately $230,000. The declaration was neither sent to, nor filed with, the bankruptcy court; rather, it was submitted directly to the U.S. Trustee. Thereafter, Marquee was appointed by the U.S. Trustee to serve on the Creditors’ Committee, and the Marquee officer that executed the declaration was elected to serve as the Committee’s chairperson.
After about a year in chapter 11, the debtor’s case was converted to chapter 7 and a trustee was appointed. After the deadline to file claims had passed, the chapter 7 trustee filed a final reporting which outlined, among other things, the anticipated pro rata distributions to allowed general unsecured claims in the case. It was at that time that Marquee’s representatives realized that they had failed to file a proof of claim at any time during the bankruptcy case. Marquee filed a formal proof of claim shortly thereafter (which was later amended to include a copy of its promissory note) and later, at the bankruptcy court’s direction, Marquee filed a formal motion requesting that its claim be deemed timely and allowed. Hilo Broadcasting LLC, one of the debtor’s other unsecured creditors, objected to the motion arguing that (a) Marquee had failed to meet the standards for allowance set forth under the applicable case law, and (b) Hilo would be prejudiced if Marquee’s amended claim was allowed because its anticipated distribution would be diminished.
The court correctly noted that because Marquee had not physically filed the declaration with the bankruptcy court, nor was there any evidence that it had intended for it to be filed, the relevant provisions of the Bankruptcy Code (i.e., Sections 501(a), 502(a), and 726) and the Bankruptcy Rules (i.e., Rules 3002, 5005, and 9009) governing the filing and allowance of claims were inapplicable to the case at hand. The court, instead, focused its attention on whether the declaration constituted an “informal” proof of claim.
The doctrine of informal proofs of claim implements a “so-called rule of liberality in amendments to creditors’ proofs of claim so that a late-filed formal claim relates back to a previously filed informal claim.” To be considered effective in the Ninth Circuit, an informal proof of claim must state an explicit demand, showing the nature and amount of the claim against the estate, and evidence an intent to hold the debtor liable. In applying this doctrine in various contexts, the Ninth Circuit BAP has instructed that a creditor must show (i) the presentment of a writing, (ii) within the time for the filing of claims, (iii) by or on behalf of the creditor, (iv) bringing the claim to the attention of the court, and (v) the nature and amount of a claim asserted against the estate.
Although Hilo did not dispute that the first two prongs of the informal proof of claim doctrine had been satisfied, it contended that the declaration failed to satisfy the remaining three prongs of the test. With respect to the third prong, the court concluded that, although there was some minor variance between the name on the declaration and the name in the late proof of claim, “reasonably construed,” the declaration made it clear enough that a claim was held by Marquee, even though the exact name of the creditor in the declaration was not precisely correct. The court next concluded that the declaration, which indicated both that Marquee’s claim was based on a promissory note and the amount of that claim, adequately stated the nature and amount of the claim asserted against the estate. The court further noted that, as a request to be appointed to the Creditors’ Committee, whose goal it was to represent the interests of the debtor’s unsecured creditors, the declaration was “sufficient to state Marquee’s intent to hold the bankruptcy liable for the amount claimed.”
The harder issue for the court, however, was determining whether the declaration, sent only to the U.S. Trustee, was sufficient to “bring the claim to the attention of the court.” This is when it is important to remember that this decision comes out of the Ninth Circuit. As the bankruptcy court explained, unlike other circuits, in the Ninth Circuit, an informal proof of claim need not be filed with the court; rather, the writing need only be received by either the bankruptcy court or a representative of the bankruptcy estate no later than the claims bar date. This is a significant distinction from courts in other circuits, including the Fifth, Sixth, Tenth and Eleventh Circuits, which require a writing to be filed for consideration as an informal claim. The bankruptcy court in Parrot Broadcasting stated, “In other words, in this Circuit, letters or other communications to representatives of the bankruptcy estate, so long as the writing meets the other requirements for an informal proof of claim, can satisfy this prong of the test even though they were never filed with the court.” Relying in part on a similar decision out of the Eighth Circuit, First Am. Bank & Trust of Minot v. Butler Machinery Co. (In re Haugen Constr. Servs., Inc.), and based upon the Ninth Circuit’s liberal approach to what constitutes an informal proof of claim, the court concluded that the U.S. Trustee was “a representative for purposes of receiving an informal proof of claim” and that the declaration sent to the U.S. Trustee prior to the deadline for filing claims was sufficient to bring the claim to the attention of the court.
The court further determined that, although the declaration did not contain all of the information required by the Bankruptcy Rules for an allowed proof of claim, Marquee successfully amended its informal claim when it later filed its formal proof of claim, which contained a copy of the promissory note in question. Despite assertions by Hilo of prejudice, the court found that the informal proof of claim had been properly amended, holding that “a mere reduction in the distribution is not sufficient prejudice to justify disallowing Marquee’s amended claim.”
Although this case may describe a good back-up plan for creditors that fail to timely file a proof of claim, the decision should be read with a grain of salt. The bankruptcy court more than once stated that it was granting Marquee’s relief “somewhat reluctantly.” More importantly, as previously noted, this decision comes out of the Ninth Circuit, which has especially liberal rules with respect to informal proofs of claims. Creditors in other circuits may not be so lucky.