My Customer Filed Chapter 11 – Do I Need to File a Proof of Claim?
It is almost always advisable to file a proof of claim!
Failure to file a proof of claim can limit or eliminate your participation and recovery in the bankruptcy!
It’s the notice no provider of goods or services, or landlord wants to receive – a customer has filed for bankruptcy while owing for goods and services it already received. Depending on how much you are owed, your customer’s bankruptcy filing could result in significant financial distress – or even bankruptcy – for your own business. The question then becomes, how does a creditor secure as much of a recovery as is possible?
For most creditors, this process begins with filing a proof of claim. Unless the debtor scheduled the debt on its petition as noncontingent, liquidated and undisputed, creditors generally must file a proof of claim to obtain a distribution from the debtor’s estate. In addition to the creditor’s identity and the amount owed, a proof of claim includes the basis for the claim (e.g., rent, goods or services provided), the status or priority of the claim in the case (e.g., secured, priority, general unsecured), and any supporting documentation the creditor may have to support the validity and enforceability of the claim. In some instances, where documentation is too voluminous to file (e.g., in the case of a real estate lease), the creditor may simply note that such documentation is available “upon request.”
The bankruptcy court sets a deadline, known as a “bar date”, by which claims must be filed. Creditors listed on the debtor’s petition receive notice of the bar date. Depending on the type of claim a creditor asserts, different bar dates may be relevant. For instance, a creditor may need to file by the “general bar date” or a separate date applicable to administrative claims. Separate deadlines may also be set for landlords entitled to lease rejection damages.
The bankruptcy court will set forth the requirements for the debtor to serve the notice of the bar date on all of the debtor’s known creditors and sometimes also certain non-creditors. Generally, this is done by mail. If, however, there are creditors who may be unknown to the debtor – or whose addresses may be unknown – the court can require any form of notice it believes is best-suited to reach all creditors. More than one form of notice may be required.
As a creditor, you will receive the notice of the bar date and usually also a proof of claim form. The notice explains what the proof of claim form is, the date by which it must be completed and received by the debtor or its designated claims agent, the acceptable methods of returning the proof of claim form (e.g., First Class U.S. Mail, hand delivery, overnight mail), and any other specific instructions.
Bar dates are strictly enforced. If a creditor fails to file a proof of claim by the deadline, it is generally barred from receiving any recovery from the debtor’s estate. As such, if there is any doubt as to whether a creditor needs to file a proof of claim, it should do so. There is no downside to filing an unnecessary proof of claim, but the risk of not filing a necessary proof of claim is substantial. While a debtor can generally agree to accept a late-filed proof of claim, few will do so. Additionally, filing a proof of claim, rather than relying on the claim amount scheduled for you by the debtor, allows you to amend your claim to include amounts you later determine were not included. This may include attorneys’ fees you are contractually entitled to receive under a lease.
If, after filing the claim, a creditor needs to make changes, they may generally file an amended claim. It is not uncommon for a creditor rushing to file by the bar date to inadvertently miss certain invoices in reviewing its file, or to ascribe an incorrect priority to such claim. Amending the claim provides such creditors an opportunity to fix any mistakes in the initial filing. If a creditor waits too long to amend, however, the court may not allow it.
Aside from protecting creditors’ rights and interests, proofs of claim provide guidance to the debtor in formulating its plan of reorganization or liquidation (“plan”). The plan will provide for how each class of creditors will be treated, or what portion of their claims will be paid, in what form, and when.
Proofs of claim are, on their face, proof of validity of the claim asserted. This means that unless there is a successful objection to the claim, the claim will receive the treatment provided for it in the plan, once the plan is confirmed. Creditors may object to filed claims on a variety of bases, such as if the amount asserted differs from the amount reflected in the debtor’s own books and records or if the debtor does not believe there is sufficient documentary evidence to support the proof of claim in its entirety, amount, or asserted priority. Only creditors with allowed claims are permitted to vote on whether to accept or reject the plan – a topic for another day.
If you are a creditor whose customer has filed for bankruptcy, call us to see if you need to file a proof of claim or take other measures to protect your interests.