Michigan Bankruptcy Blog

Bankruptcy Court Decision to Allow Late-Filed Claim in Chapter 13 Case Reversed on Appeal

Chapter 13 bankruptcy allows debtors to confirm plans that provide for the payment of their debts through future earnings while, at the same time, retaining their assets. If a creditor wishes to receive payments pursuant to a debtor’s plan, the creditor must file a proof of claim. And it must do so timely.

The issue of timeliness was central to a recent appeal of a bankruptcy court decision to permit a creditor to late-file a claim in a Chapter 13 case. The debtor appealed the bankruptcy court’s ruling that creditor Ohio Catholic Federal Credit Union (“Ohio Catholic”) could late-file its claims on the grounds of excusable neglect. The Bankruptcy Appellate Panel of the Sixth Circuit (“BAP”) reversed the decision.[1]

The Bankruptcy Court Decision and Arguments on Appeal

Ohio Catholic filed proofs of claim eight days after the claim deadline, and at the same time filed a motion to allow late-filed claims. The debtor objected. Ohio Catholic argued that the court should allow its late-filed claims under Bankruptcy Rule 9006(b) and on the basis of fairness and equity. It pointed to several equitable considerations that justified allowing its late filing:

• First, it was not known when Ohio Catholic received notice of the bar date.
• Second, in an affidavit, Ohio Catholic’s new collections manager alleged that, despite contacting debtor’s counsel by phone after becoming aware of the debtor’s bankruptcy, the collections manager received no further paperwork or communication from debtor’s counsel.
• Third, Ohio Catholic learned of the bar date one day after it passed and filed its claims only eight days late, so the debtor suffered no harm as a result.

The debtor countered that the bankruptcy court did not have the power to allow the late-filed claims under Bankruptcy Rule 3002(c), which provides six exceptions to its bar date, none of which were relevant to Ohio Catholic. The debtor further argued that the “excusable neglect” exception under Bankruptcy Rule 9006(b)(1) is not available in Chapter 13 cases under Bankruptcy Rule 9006(b)(3).

The bankruptcy court ruled that Ohio Catholic’s failure to timely file claims constituted excusable neglect.

On appeal, the BAP explained that the excusable neglect standard is not applicable to deadlines set by Bankruptcy Rule 3002(c) and, thus, to the extent that the bankruptcy court’s decision was based on the excusable neglect option it should be reversed. However, it was not clear that the creditor was arguing excusable neglect on appeal. As the BAP noted, “[T]he creditor argues instead that the bankruptcy court made an equitable determination after considering all the relevant circumstances at hand. This suggests that Ohio Catholic may be arguing that the bankruptcy court is acting on its inherent equitable authority under section 105 of the Bankruptcy Code.” The BAP rejected this argument, however, because section 105(a) does not permit a court to override explicit mandates found elsewhere in the Bankruptcy Code.

Finally, although neither party raised it, the BAP considered whether “the doctrine of equitable tolling may provide a diligent, though late-filing, creditor a narrow exception to Bankruptcy Rule 3002(c)’s claim bar date.” It held that equitable tolling is not available, and even if it were, it was not clear in this case that “the creditor was sufficiently diligent to avail itself of that doctrine’s exemption.”

In ruling against Ohio Catholic, the BAP concluded by explaining the Sixth Circuit’s policy reasons (as set forth in United States v. Chavis (In re Chavis), 47 F.3d 818 (6th Cir. 1995)) behind maintaining a strict claims deadline in Chapter 13 cases.

In a Chapter 13 action, the debtor retains the assets in exchange for an agreement to make periodic payments to the creditors. The payments to the creditors must equal or exceed the amount that the creditors would receive under Chapter 7...If late-filed claims are not barred in Chapter 13 actions, it would not be possible to determine, with finality, whether a Chapter 13 plan satisfies this standard.

This case demonstrates the importance of timely filing proof of claims. If you have any questions about this case, or bankruptcy issues in general, please contact Patricia Scott at pscott@fosterswift.com or 517.371.8132.

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[1] In re Tench, Case No. 15-8026 (B.A.P. 6^th Cir., May 11, 2016)

Categories: 6th Circuit Court of Appeals, Chapter 13