In some cases, the filing of a proof of claim by a creditor may not be prudent. Before filing a proof of claim, the creditor should carefully consider the potential effects on the creditor.
Generally, proofs of claim are not required in a chapter 11 bankruptcy case if:
In such cases, the schedule of liabilities is prima facie evidence of the validity and amount of the claim listed and the scheduled claim is deemed allowed unless a party in interests objects. Notably, the creditor should be aware the debtor may subsequently amend its schedules to modify the amount or designation of its scheduled claim, which might necessitate the filing of a proof of claim by the creditor.
In cases where the creditor’s claim is not appropriately scheduled by the debtor, commonly, the creditor should file a proof of claim.1 However, it is well-established that, by filing a proof of claim, the creditor is deemed to have consented to adjudication in the bankruptcy court.2 Supreme Court precedent supports the conclusion that, by opting into the bankruptcy case by filing a proof of claim, the creditor has submitted to the bankruptcy court’s equitable jurisdiction not just for the claim that it filed, but also for any counterclaims or defenses that the debtor might assert in response, insofar as those counterclaims would necessarily be resolved in the claims allowance process.
Filing a proof of claim may also constitute a waiver of a creditor’s Seventh Amendment right to a jury trial.3 Even if a claimant is entitled to a jury trial on a particular action outside of the bankruptcy court, the pursuit of a distribution from the debtor’s estate may change the nature of litigation affecting the claim. 4 While some of the issues are complex, it seems clear that a creditor will be deemed to waive its right to a jury trial in avoidance actions if the creditor files a proof of claim.
Filing a proof of claim can also impact a bankruptcy court’s decision whether to exercise its jurisdiction over litigation pending in another forum. Where a litigant has filed a proof of claim, a bankruptcy court may decline to remand a removed action to avoid “duplicative claims objection proceedings” and “encourage the efficient liquidation of the Debtor’s bankruptcy estate.”5
Once a proof of claim has been filed, the creditor cannot try to withdraw the claim as an improper strategic means to undo the bankruptcy court’s jurisdiction.6
Because of the potential effects on jurisdictional and jury trial issues, some creditors attempt to avoid or mitigate such effects by (i) styling the document wherein the claim against the debtor is asserted as something other than a proof of claim – like a “Reservation of Rights,” “Conditional Statement,” “Stipulation,” or “Notice” – and (ii) including in said documents, reservations of rights, disclaimers, etc. that allegedly avoid the effects of filing the proof of claim. Commonly, bankruptcy courts do not view such reservations of rights, disclaimers, and other similar provisions as binding on the bankruptcy court.7
Lastly, it should be noted that, notwithstanding the potential or anticipated effects of filing a proof of claim, the creditor may have some other mechanisms to try to have a forum other than the bankruptcy court to resolve the matter. For instance, depending on the applicable circumstances, the creditor could move the bankruptcy court to abstain from hearing the matter to allow a state court proceeding to resolve the claims, or move the district court to withdraw the reference to the bankruptcy court. For some creditors, it could be the case they can have the matter arbitrated pursuant to a prepetition arbitration provision in the applicable agreement between the parties. Thus, an arbitrator would liquidate the creditor’s claim, instead of the bankruptcy court.8
The foregoing brief discussion highlights that in some cases a creditor’s decision to file a proof of claim entails more than reviewing what the expected recovery is in the case under a plan. Depending on the creditor’s situation, a myriad of important issues and risks may also have to be considered in order for the creditor to determine its optimal strategy.
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Laura Davis Jones is a named and managing partner of Pachulski Stang Ziehl & Jones LLP, a national law firm specializing in restructurings. Laura began her career as a law clerk in the Bankruptcy Court (D. Del.), and has been very active representing debtors, creditors’ committees, noteholder groups, purchasers, and other substantial parties in national…
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