Seventh Circuit Says Secured Creditors Must File Proof of Claim Within Ninety Days of Meeting of Creditors

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Author(s) , Alex Dugan

Financial Services Perspectives Blog

Seventh Circuit Says Secured Creditors Must File Proof of Claim Within Ninety Days of Meeting of CreditorsTimely proof of claim filings by secured creditors have “been a thorn in the side of many Chapter 13 cases involving secured creditors,” according to Judge Wood in In re Pajian. However, a recent Seventh Circuit decision may cause the industry to revise their current process for proof of claim filings. Bankruptcy Rule 3002(c) requires creditors to file proofs of claim within 90 days of the date set for the meeting of creditors. Bankruptcy courts have come to conflicting conclusions on whether Rule 3002(c)’s deadline applies to all creditors or merely unsecured ones.

In re Pajian involved the debtor’s objection to a proof of claim filed by his secured creditor more than 90 days after the meeting of creditors. The bankruptcy court overruled the debtor’s objection as to the secured portion of the claim, concluding that a secured creditor seeking a distribution under a debtor’s plan need only file a proof of claim before the plan’s confirmation. The Seventh Circuit reversed that decision and concluded that all creditors are bound by the Rule 3002(c) deadline:

…[I]t makes sense for subsection (a) only to cover only unsecured claims. If an unsecured creditor does not file a proof of claim, it will not share in the recovery authorized under the plan and its claim will be discharged in bankruptcy. The same does not apply to secured creditors; secured debts are non-dischargeable, and secured creditors can enforce their liens even if they do not participate in the debtor’s Chapter 13 plan. Subsection (a) is thus about who must file in order to collect on debts. There is no reason why its limitation to unsecured creditors should carry over to subsection (c).

The Seventh Circuit further cited the recent proposal of the U.S. Judicial Conference’s Advisory Committee on Bankruptcy Rules to amend Bankruptcy Rule 3002(a) to support its conclusion. The Committee has recommended revising that subsection to clarify that secured creditors, along with unsecured creditors, must file a proof of claim in order for their claims to be allowed. The proposal also makes explicit that a secured creditor’s failure to file a proof of claim does not void its lien.

While this opinion appears to resolve the issue of whether Bankruptcy Rule 3002(c) applies to secured creditors in the Seventh Circuit, it is likely that conflicting opinions in other circuits will follow, unless the proposal to amend Rule 3002(a) is adopted.  To avoid litigating these issues, secured creditors should implement processes to ensure that proofs of claim are filed less than ninety days after the meeting of creditors.

Resources:

In re Pajian, No. 14-2052 (7th Cir. May 11, 2015)

Preliminary Draft of Proposed Amendments to the Federal Rules of Appellate, Bankruptcy, Civil and Criminal Procedure