In Re Wright
MEMORANDUM OPINION
At issue in this contested matter is creditor Member Advantage Credit Union’s “Motion for Leave to File Proof of Claim and to Be Included in the Chapter 13 Plan.” For the reasons stated below, the Court denies the motion. The Court has jurisdiction over this matter, a core proceeding, pursuant to 28 U.S.C. §§ 157(b)(2)(B) and 1334.
Background
Chapter 13 debtor Sandra Wright filed the instant bankruptcy petition on January 21, 2003, listing Members Advantage Credit Union (“Members Advantage”) as an unsecured nonpriority creditor holding a claim of $8000. Under her chapter 13 plan, the debtor proposed to pay general unsecured creditors an 85% dividend and included a special provision saying, “No payment shall be made on any general unsecured claim that is not timely filed.” On April 21, 2003, the Court confirmed this plan. The docket indicates that the clerk sent Members Advantage notice of the May 19, 2003 proof of claim filing deadline at 25 East Washington, Chicago, Illinois 60602-1708. Members Advantage did not file a proof-of-claim before the deadline.
In the pending motion, Members Advantage alleges (1) that it holds a $10,606.53 deficiency claim for a loan originally secured by a vehicle (later repossessed) and (2) that the debtor listed an incorrect address for it. Furthermore, neither Members Advantage nor its counsel allegedly received actual knowledge of this chapter 13 case until May 27, 2003, when the deadlines for filing a proof of claim and for participating in the plan-confirmation process had expired. Members Advantage’s motion requests “leave to file [a] proof of claim and to be included in the chapter 13 plan” pursuant to Bankruptcy Rule 7015(a).
Discussion and Analysis
What appears to be a relatively straightforward issue — whether a creditor can file a late proof of claim in order to correct the amount of its claim and to receive distributions from the chapter 13 bankruptcy estate — becomes much more convoluted upon further examination. This is especially true where the chapter 13 debtor schedules the creditor, but the creditor still fails to receive actual knowledge of the case in time to have any meaningful participation in it.
Bankruptcy Rule 7015(a), upon which Members Advantage relies, has no application to this dispute. That rule applies to the amendment of pleadings in adversary proceedings, and no adversary proceeding is currently pending in this bankruptcy case. See Fed. R. Bankr.Pro. 7001 (listing types of adversary proceedings) & 9014(c) (specifying that certain rules in Part VII apply to contested matters if the bankruptcy court so orders).
Instead, an appropriate beginning point for analysis is § 502 of the Code, which provides in relevant part as follows:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.
(b) ... if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim insuch amount, except to the extent that— ... (9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (8) of section 726(a) of this title or under the Federal Rules of Bankruptcy Procedure ...
This provision provides a basis for the disallowance of claims that would otherwise receive distributions from a chapter 13 bankruptcy estate upon the creditor’s filing a proof of claim in accordance with § 501; nine bases for disallowance are listed, including the one pertaining to claims that are not timely filed.
Even before the latter provision was added in 1994,
see
Act of Oct. 22, 1994, Pub.L. 103-394, Title II, § 213(a), 108 Stat. 4125, 4134, federal courts had construed sections 501 and 502 of the Code and Bankruptcy Rule 3002 to mean that a timely filed proof of claim was a precondition to allowance; otherwise the claim was “time barred,” making “disallowance” under § 502(b) in response to the debtor’s or trustee’s objection unnecessary.
United States v. Waindel (In re Waindel),
Moreover, the Seventh Circuit did not discuss the effect of Bankruptcy Rule 9006(b) in its discussion of the statute-of-limitations issue. This rule generally gives a bankruptcy court the authority to enlarge deadlines (such as the bar date for filing chapter 11 proofs of claim) upon a showing of excusable neglect; however, it limits extensions of time to file proofs of claim in chapter 13 cases to those situations listed in the previously described Bankruptcy Rule 3002(c).
In re Wrobel,
The inescapable conclusion, then, is that this Court has no authority under the Bankruptcy Code or the Bankruptcy Rules to grant Members Advantage leave to file a late claim, per its request.
In re Ryan,
This harsh rule of law obviously does not consider whether the debtor scheduled (or otherwise notified) the late-filing creditor or whether such creditor somehow obtained actual knowledge of the bankruptcy case. The severity has caused creditors and judges to turn to other provisions of the law, the violation of which may provide some basis for relief. For instance, under the mandate of § 521(1) of the Code and Bankruptcy Rule 1007(a)(1), the debtor must accurately list all creditors.
SouthTrust Bankcard Ctr. v. Curenton (In re Curenton),
Bankruptcy cases are nevertheless subject to the same fundamental legal requirements with which all judgments, orders, hearings, and other legal processes must comply: the Fifth Amendment to the U.S. Constitution. “No person shall ... be deprived of life, liberty, or property, without due process of law.” Some federal-court decisions that are hesitant about the severe nature of Rule 3002 merely state or imply that the proof-of-claim process is limited by the Due Process Clause without creating an exception to Rule 3002 in the pending controversy.
In re Duarte,
These Due Process Clause cases invariably point out the language from the Supreme Court opinion
Mullane v. Central Hanover Bank & Trust Co.,
In the present situation, Members Advantage apparently did not obtain actual knowledge of the pendency of the case until its procedural rights had expired; therefore, it did not receive due process in the form of having constructive notice of the claims bar date. Still, Wright’s inclusion of Members Advantage on the creditors’ mailing matrix using what she apparently believed to be Members Advantage’s last known address may have in fact been “reasonably calculated” to inform it of the alteration of its contractual rights through this chapter 13 case. The Court has no evidentiary record before it from which it can make this finding, so the party with the burden — the movant Members Advantage — cannot prevail on this issue.
More importantly, though, the Due Process Clause does not provide an equitable exception to the otherwise strict terms of the chapter 13 claims bar date because the Bankruptcy Code, when construed as a whole, provides other forms of relief to creditors who do not have actual knowledge of a bankruptcy case in time to exercise procedural rights essential for protecting its claim.
In re Brogden,
1. Possible Incorporation of § 726(a) Exception by Means of § 1325(a)(4)
The first one is the most problematic one. It surprisingly derives directly from § 502(b)(9): “the court ... shall allow such claim ... except to the extent that — ... (9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (3) of section 726(a) of this title or under the Federal Rules of Bankruptcy Procedure.”
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Thus, § 502(b)(9) permits the allowance of late claims to the extent that they are permitted by § 726(a) — the section setting forth the chapter 7 distribution scheme. The latter provision, which is apparently only applicable to chapter 7 cases according to § 103(b), permits bankruptcy-estate distributions to late-filing priority and nonpriority creditors if certain criteria are fulfilled.
3
Because general
The reason that some courts have assumed that § 726(a) has relevance to chapter 13 cases is that § 1325(a)(4), which contains the “best interests of creditors test” for the confirmation of chapter 13 plans, requires that chapter 13 plans pay allowed unsecured claims an amount in present-value terms that “is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.” While this section does not explicitly refer to § 726(a), no other section of chapter 7 could really be used to calculate a creditor’s distribution under a hypothetical chapter 7. The question, then, is to what degree and for what purpose § 1325(a)(4) incorporates the specific terms of § 726(a). If the answer is that it completely incorporates § 726(a), then the exception permitting tardily filing creditors (who otherwise meet the two criteria) to share in bankruptcy-estate distributions would provide relief to chapter 13 creditors who do not learn of the case’s existence until the most significant procedural rights have lapsed. This relief could alleviate any Due Process Clause concerns.
While courts have concluded that § 1325(a)(4) does completely incorporate § 726(a),
United States v. Waindel (In re Waindel),
While the conclusion reached by this latter line of cases (that § 1325(a)(4) does not effect a wholesale incorporation of § 726) is correct, the reasoning underlying it is somewhat flawed. In fact, there is no real policy or pragmatic reason why late-filed general unsecured chapter 13 claims that are filed before other similar creditors get plan dividends should be considered fundamentally different from late-filed general unsecured chapter 7 claims. As some bankruptcy courts have recognized, chapter 13 plan confirmation often occurs before the bar date for filing claims.
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See In re Fareed,
Moreover, many late-filing general unsecured chapter 13 creditors could, as a practical matter, still file in time to share in estate distributions, because short-term secured creditors and priority unsecured creditors must normally be paid in full through monthly plan payments, 11 U.S.C. § 1325(a)(5)(B), § 1322(a)(2), before general unsecured creditors receive a dime. The trustee sends distributions to general unsecured creditors
at the end of the plan term
according to § 1326(b), which requires the debtor’s payments to first be allocated toward administrative claims (including the debtor’s attorney’s fees), as well as a provision in most chapter 13 plans listing the order of priority (sections “E” and “F” of the Model Chapter 13 Plan for the Northern District of Illinois). Thus, the possibility that assets could be (or should be) distributed to late-filing general unsecured creditors before being returned to debtors does not distinguish chapter 7 cases from chapter 13 cases,
see, e.g., Matter of Pack,
While some portion of § 726(a) necessarily must be incorporated into § 1325(a)(4), the exception in § 726(a)(2) permitting late-filing chapter 7 creditors to share the same priority as other general unsecured creditors, nevertheless, is not incorporated into chapter 13.
Cf. In re Brogden,
Overall, then, the best conclusion is that § 1325(a)(4) incorporates the priority scheme of § 726(a) only at the most general level, leaving out the specific exception for late-filing creditors in § 726(a)(2)(C). While § 726(a) may alleviate due process concerns in chapter 7 cases,
In re Global Precious Metals,
2. Modification of the Automatic Stay for “Cause”
The second portion of the Bankruptcy Code that rectifies any due process concerns raised by the severe and inflexible nature of the claims-allowance procedure is § 362(d)(1), which empowers the Court to grant relief from the automatic stay of § 362(a) for “cause.” To determine whether relief from stay is warranted, courts consider such factors as interference with the bankruptcy case; the relative hardship and prejudice to the creditor/movant, to other creditors (i.e., the bankruptcy estate), and to the debtor from granting or not granting relief; the good or bad faith of the debtor; and the creditor/movant’s likelihood of success on the merits (if applicable).
In re Wrobel,
Whether relief from the automatic stay is appropriate in this particular case will depend on the above considerations, including the debtor’s reason for listing the wrong address for Members Advantage, the care with which she attempted to complete her fists and schedules, the point in time and manner in which Members Advantage learned of the case’s existence, and the possibility that Members Advantage’s collection of the debt in state court will interfere with the debtor’s plan payments. No evidentiary record from which the Court can make these determinations exists at this time. Furthermore, the stay relief possibility is significant only because its bears upon the constitutionality of the otherwise strict rules pertaining to the claims-allowance process in chapter 13 cases.
3. Nondischargeability of Debt for Which Creditor Did Not Receive Bar-Date Notice
A creditor who knows nothing about a chapter 13 bankruptcy case in time
Numerous court opinions have attempted to flesh out the contours of how a plan “provides for” a debt such that the debtor’s completion of the plan discharges the debt. Some opinions have seemed to say that a debt is “provided for” and therefore discharged under § 1328(a) if the chapter 13 plan deals with a category of debts such that a creditor’s choosing to file a proof of claim would have entitled it to payment under the plan — even if the debt- or nowhere refers to the creditor by name in the plan itself.
In re Leber,
The more difficult fourth scenario presented here, though, is the one where the creditor is scheduled but, due to the debtor’s listing an erroneous or outdated address or other failure, never obtains actual knowledge of the case in time to file a proof of claim or object to confirmation. The result in the fourth scenario should be a finding that the creditor was not “provided for,” just as in the third scenario, because
actual notice
is the most fundamental factor involved.
Cf. South-Trust Bankcard Ctr. v. Curenton (In re Curenton),
[F]or purposes of Chapter 13, the seemingly unpretentious two[-]word phrase, “provided for”, encompasses the procedural due process requirements of the 5th Amendment to the United States Constitution....
The United States Supreme Court has found that the fundamental requirement of due process, the right to be heard, is meaningless without notice. Mullane v. Central Hanover Bank & Trust Co., su pra,339 U.S. 306 , 314,70 S.Ct. 652 , 657. “An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all of the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”339 U.S. at 314 ,70 S.Ct. at 657 .
Crites v. Oregon ex rel. Roberts (In re Crites),
As one final matter on the issue of § 1328(a)’s operation, late-filing creditors would be well advised to carefully observe the language of the chapter 13 discharge provision and the (probably unintended) side effect of the 1994 amendment to § 502(b). Technically, the law provides that a completed chapter 13 plan discharges a debt either if 1) the plan “provides for” such debt (as discussed supra) or if 2) the related claim is disallowed pursuant to § 502.
See
11 U.S.C. § 1328(a). Because § 502(b)(9) now provides the basis for “disallowing” late-filed claims in chapter 13 cases, such a claim should be legally discharged under § 1328(a) because it has been “disallowed,”
9
even if the creditor knew nothing about the case until the claims bar date had passed. Creditors who miss the chapter 13 claims bar date would be well advised to avoid filing the claim altogether, because only a
filed
proof
In this case, Members Advantage is only requesting leave to file a late proof of claim; it has not already done so. Thus, the possibility that its debt may pass through the discharge of § 1828(a) remains viable.
4.Conversion or Dismissal of the Case Under § 1307(c)
A chapter 13 case may be dismissed or converted to a chapter 7 (which incorporates the usual exceptions to discharged debts, such as the aforementioned § 523(a)(3)) for “cause,” including a failure to notify creditors of the bankruptcy in certain circumstances.
In re Brogden,
5.Revocation of the Confirmation Order or Relief from a Final Judgment or Order
If the grounds in § 1330 of the Code (fraud presented within 180 days of the confirmation order) or more generally in Bankruptcy Rule 9024 (mistake, surprise, excusable neglect, newly discovered evidence, or fraud presented within one year of the final order) are present, the creditor may be relieved of the confirmation order, forcing the debtor to present a new plan.
In re Brogden,
No grounds justifying this form of relief have been presented in this contested matter.
6.Filing a Proof of Claim on Behalf of the Tardily Filing Creditor by Trustee
Under Bankruptcy Rule 3004 and § 501(c) of the Code, the standing chapter 13 trustee could file a proof of claim on behalf of a creditor who missed the claims bar date, but only within thirty days after the expiration of the first claims bar date. This option is useful if the creditor realizes it has missed the deadline shortly after it expires and then notifies the trustee in
Here, this option is no longer available, as the thirty-day deadline for the standing trustee has passed.
Conclusion
Consistent with due-process-of-law principles, the Court must deny Members Advantage’s motion for leave to file a tardy proof of claim in this chapter 13 case, although the result has surprised this Court and other courts,
see, e.g., In re Kristiniak,
The dispute concerning the amount of the claim is now moot because Members Advantage cannot file a proof of claim.
A separate order consistent with this opinion will issue pursuant to Bankruptcy Rule 9021.
Notes
. "(c) Time for filing. In a chapter 7 liquidation, chapter 12 family farmer’s debt adjustment, or chapter 13 individual's debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code, except as follows:
(1) A proof of claim filed by a governmental unit is timely filed if it is filed not later than 180 days after the date of the order for relief. On motion of a governmental unit before the expiration of such period and for cause shown, the court may extend the time for filing of a claim by the governmental unit.
(2) In the interest of justice and if it will not unduly delay the administration of the case, the court may extend the time for filing a proof of claim by an infant or incompetent person or the representative of either.
(3) An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property. If the judgment imposes a liability which is not satisfied, or a duty which is not performed within such period or such further time as the court may permit, the claim shall not be allowed.
(4) A claim arising from the rejection of an executory contract or unexpired lease of the debtor may be filed within such time as the court may direct.
(5) If notice of insufficient assets to pay a dividend was given to creditors pursuant to Rule 2002(e), and subsequently the trustee notifies the court that payment of a dividend appears possible, the clerk shall notify the creditors of that fact and that they may file proofs of claim within 90 days after the mailing of the notice."
. The exceptions in Federal Rule of Bankruptcy Procedure 3002 are not applicable to this contested matter, as mentioned above.
. "(a) Except as provided in section 510 of this title, property of the estate shall be distributed—
(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed before the date on which the trustee commences distribution under this section;
(2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection, proof of which is—
(A) timely filed under section 501(a) of this title;
(B) timely filed under section 501(b) or 501(c) of this title; or
(i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and
(ii) proof of such claim is filed in time to permit payment of such claim;
(3)third, in payment of any allowed unsecured claim proof of which is tardily filed under section 501(a) of this title, other than a claim of the kind specified in paragraph (2)(C) of this subsection;
(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniaiy loss suffered by the holder of such claim;
(5) fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and
(6) sixth, to the debtor.”
. In a chapter 13 case, a proof of claim may be filed within 90 days after the first date set for the creditors' meeting.
See
Fed. R. Bankr.Pro. 3002(c). Any objection to the allowance of the claim must be mailed or delivered at least 30 days prior to the hearing on the objection.
See
Fed. R. Bankr.Pro. 3007. Thus, a contested matter involving a claim objection could very well happen more than 120 days after the date set for the creditors’ meeting, and by that time, the chapter 13 debtor's proposed plan may have been confirmed.
In re Fareed,
. "[A] requirement that the allowance of claims under § 502 be fully adjudicated at the time of confirmation is not practicable, and would substantially delay confirmation and creditor payment. Unsecured claims against a debtor are often numerous and of small, but uncertain, amount; Chapter 13 plans therefore generally rely on the creditors' proofs of claim to indicate the amount of each claim owing, and then direct that unsecured claims be paid pro rata from funds available after higher priority claims are paid. It would be unrealistic to expect a debtor’s plan to assert a separate value for each unsecured claim.”
Fareed,
. Occasionally, some bankruptcy courts have mistakenly stated that certain types of debts are excepted from discharge by § 523(a) in chapter 13 cases, when in reality they are or would be discharged by the debtor’s completion of plan payments.
See, e.g., In re Glow,
. This situation arose often back in the day when bankruptcy court clerks automatically
. Where creditors have failed to receive notice of other types of bar dates, courts have declined to find a Fifth Amendment transgression where (1) the creditors had actual knowledge of the existence of the overall bankruptcy
case
and (2) the debtors’ listings of creditors' addresses were reasonably calculated to inform the creditors, even though the particular bar-date notices at issue ended up being technically defective for reasons beyond the control of the debtors.
See Green Tree Fin. Servicing Corp. v. Karbel (In re Karbel), 220
B.R. 108, 111-14 (10th Cir. BAP 1998) (missed bar date for filing objection to confirmation and a motion to value collateral);
In
re
Rockmacher,
. A couple of published decisions have overlooked this consideration and have incorrectly found that a disallowed late-filed claim was not covered by the chapter 13 discharge injunction.
SouthTrust Bankcard Ctr. v. Curenton (In re Curenton),