Restructuring

Contributed by David G. Litvack
Many creditors choose not to file a proof of claim if their claim is listed on a debtor’s schedules as undisputed, non-contingent, and liquidated.  Notably, Bankruptcy Rule 3003(b)(1) and section 1111(a) of the Bankruptcy Code specifically provide that a scheduled creditor can have an allowed claim without filing a proof of claim.  Notwithstanding the foregoing, the United States Bankruptcy Court for the District of Nebraska recently ruled that a creditor with a scheduled claim who fails to file a proof of claim is ineligible to vote on a chapter 11 plan even if the plan impairs the creditor’s claim.
In In re Woodward, the debtor, an individual, sought confirmation of a chapter 11 plan after converting her chapter 7 case to a chapter 11 case.  A creditor objected to confirmation of the plan, claiming that no class of impaired claims had accepted the plan as required by section 1129(a)(10) of the Bankruptcy Code.  The debtor countered that the plan satisfied section 1129(a)(10) because an impaired creditor, whose scheduled claim was placed in its own class, had voted to accept the plan.
In its analysis, the court observed that, although the claim at issue was listed on the debtor’s schedules, the creditor holding the claim had not filed a proof of claim in the case.  Looking to section 1126(a) of Bankruptcy Code, the court ruled that, while the creditor could participate in the plan distributions as a result of its scheduled claim, it could not vote on the chapter 11 plan because section 1126(a) limits voting on a plan to holders of claims or interests “allowed under section 502.”  Section 502(a), in turn, provides that “[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects.”  (emphasis added).  Accordingly, based upon section 502 of the Bankruptcy Code, the court ruled that section 1126(a) limits voting to creditors who have filed a proof of claim.  Significantly, the court appears to have reviewed sections 1126 and 502 in a vacuum, as it failed to consider the impact of other sections of the Bankruptcy Code and the Bankruptcy Rules on the voting rights of scheduled creditors (as discussed below).
Interestingly, the dueling pleadings between the debtor and the objecting creditor do not mention the issue of whether a scheduled creditor is allowed to vote.  Rather, the pleadings dispute whether the claim at issue, incurred postpetition but preconversion, was a prepetition claim for purposes of section 1126(a) as a result of section 348 of the Bankruptcy Code, which discusses the effect of case conversions on such claims.  The court bypassed this issue and, instead, focused on the distinction between scheduled claims and filed claims.
Because the issue of whether a scheduled creditor can vote on a chapter 11 plan was not briefed, it appears that no party raised section 1111(a) of the Bankruptcy Code, which may have altered the court’s holding.  Section 1111(a) provides the following:

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.

11 U.S.C. § 1111(a) (emphasis added).  Thus, under section 1111(a), scheduled claims that are not listed as disputed, contingent, or unliquidated are treated the same as filed claims under section 501.  Because section 1126(a) looks to section 502 to determine which claims can vote, and section 502 looks to section 501, these Bankruptcy Code gymnastics provide the statutory basis for allowing scheduled claimants to vote on a chapter 11 plan (even if they elect to not file a proof of claim).  Bankruptcy Rule 3003(b)(1) offers further support for this conclusion, as it provides, in relevant part, that, “[i]t shall not be necessary for a [chapter 11] creditor . . . to file a proof of claim” if the creditor’s claim is scheduled as undisputed, non-contingent, and liquidated.
Allowing scheduled creditors to vote on a chapter 11 plan is the norm, notwithstanding the Woodward court’s decision.  Barring a scheduled creditor from voting merely because the creditor failed to file a proof of claim that it was not required to file in the first place seems unfair and runs contrary to the specific language and the goals of section 1111(a).  Section 1111(a) of the Bankruptcy Code, which promotes efficiency by not requiring the filing of duplicative claims, was enacted by Congress to “lessen the fury of the inevitable paper storm that descends upon bankruptcy proceedings.”  In re Crouthamel Potato Chip Co.  Creditors who wish to vote on a chapter 11 plan should not be forced to spend time and money preparing a proof of claim when their claim is listed correctly on a debtor’s schedules as undisputed, non-contingent, and liquidated.  Nevertheless, if you practice in Nebraska, in an abundance of caution, you may want to consider filing a proof of claim for a scheduled claim even if you are not technically required to do so.