557 B.R. 343
Bankr. M.D. Penn.2016Background
- Debtor filed Chapter 7 on April 4, 2012; his estranged wife Carole sued M & T Bank in state court asserting her signature was forged on a mortgage encumbering jointly held Mechanicsburg real estate.
- Carole timely filed an unsecured proof of claim for ~$150,000 (Mar. 5, 2013) and prosecuted the quiet-title action; the state court held she did not sign the loan documents and voided M & T’s mortgage as to her (bench trial Jan. 7, 2015).
- Trustee retained Caldwell & Kearns as special counsel to pursue the title issue; Caldwell had represented Carole and received contingent compensation for estate work but also billed Carole on an hourly postpetition basis (disclosure issues noted).
- Trustee sold the property, paid Carole her one-half share, paid Caldwell for estate work, and deposited $40,748.58 to the estate; Trustee’s Final Report proposed distributing remaining funds to Carole based on an amended claim seeking $31,613.75 (mostly postpetition attorney fees).
- M & T did not timely amend/file a claim after its lien was stripped and waited until Aug. 10, 2016 (after the Final Report) to file a claim — erroneously filed as secured despite lien being voided and property sold.
- Bankruptcy court sustained M & T’s objection to the Final Report on alternative grounds: it cannot disburse final funds until claims (Carole’s amended claim and M & T’s late claim) are resolved; court granted leave for trustee to object to M & T and for M & T to object to Carole.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Carole’s amended claim (attorney fees) is untimely/new and should be treated as tardy | Carole (and Trustee) treat amended claim as proper amendment to timely claim and thus allowable | M & T contends the amendment is a new, materially different claim and thus untimely | Court: Claim is deemed allowed absent an objection; because no timely objection was filed, court will not disallow now and will permit M & T to object (leave granted) |
| Whether Trustee may distribute estate funds to Carole now | Trustee argued equitable grounds and that Caldwell’s efforts produced estate funds, so payment to Carole (via her claim) is appropriate | M & T objected that distribution cannot occur while claims are unresolved and that Carole’s claim is improper | Court: Sustained objection to Final Report — distribution deferred until claims adjudicated; Trustee must be allowed opportunity to object to M & T’s claim |
| Effect of M & T’s late-filed claim and its incorrect secured designation | M & T argues its claim should be allowed (and if tardy, entitled to share pro rata with any other tardy claims) | Trustee/Carole argue bank’s delay and wrong claim status preclude immediate allowance | Court: M & T’s late claim cannot be allowed until trustee has chance to object; court set period for trustee to object; M & T may be subordinated if tardy |
| Whether Carole can recover postpetition attorneys’ fees from the estate (American Rule) | Carole/Caldwell argued equitable exception (debtor’s alleged forgery/bad faith) justifies fee recovery | M & T argued American Rule bars recovery absent statute/contract; most fees are postpetition and may not be a prepetition claim | Court: Raises serious doubt about claim under American Rule and whether most fees are allowable; but cannot disallow absent objection — granted M & T leave to object |
Key Cases Cited
- In re Ben Franklin Hotel Assocs., 186 F.3d 301 (3d Cir. 1999) (amendments to claims relate back when they cure defects, provide greater particularity, or plead new theories on same facts)
- Kowal v. Malkemus (In re Thompson), 965 F.2d 1136 (1st Cir. 1992) (chapter 7 trustee generally is proper party to object to proofs of claim)
- In re White, 908 F.2d 691 (11th Cir. 1990) (bankruptcy court may not disallow claims on its own motion; a party in interest must object)
- In re Washington, 420 B.R. 643 (Bankr. W.D. Pa. 2009) (post-bar-date amended claims relate back only if they arise from the same facts as the original claim)
- In re Padget, 119 B.R. 793 (Bankr. D. Colo. 1990) (trustee has no duty to advise creditors to amend claims; trustee’s duty is to object to improper claims)
- Citicorp Venture Capital, Ltd. v. Unsecured Creditors Comm., 323 F.3d 228 (3d Cir. 2003) (reiterating the American Rule that prevailing litigant ordinarily may not recover attorneys’ fees from the loser)