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Bankruptcy Client Alert

May 7, 2012Alternative Dispute ResolutionCorporate FinanceLitigation & Dispute Resolution

Recent amendments to the Federal Rules of Bankruptcy Procedure made important changes to the law governing proofs of claim, as well as to the Official Proof of Claim Form. The changes went into effect at the end of last year. (link to downloadable Official Proof of Claim Form 10 pdf with instructions above).

In the past, my advice to clients on proofs of claim has mainly been to make sure that they complete the form accurately and file it on time. Although there have always been nuances for filing claims in some situations, such as how to fill out a claim form for an equipment lease that is really a secured financing, the most important thing has always been not to miss that “bar date.”

It used to be sufficient in most cases (although maybe not wise) to get something filed which would put the debtor or trustee on notice of the claim -- even if the claim form was not complete or accurate.

However, amended Rule 3001 now puts that proposition in question.

The changes to the Rule and claim form include:

(i) more specific information requirements for secured claims, such as the interest rate applicable at the date of bankruptcy and a box to be checked for whether the interest rate is variable;

(ii) more specific documentation requirements including that summaries of documents are no longer sufficient and copies of the documents themselves must be attached; and

(iii) requirements to redact certain information, such as social security, tax identification or bank account numbers and birth dates (the last four digits and the birth year may be left unredacted).

Further, the individual signing the proof of claim is now required to provide more specific information, including the capacity in which he or she is signing (e.g., as the creditor, as the authorized agent for the creditor, as a trustee, etc.).

Most importantly, however, are the requirements -- not necessarily reflected on the form itself or in the form’s instructions -- relating to filing claims against individuals. The amendment introduced the first express penalty for failure to comply with the Rule, but only with respect to claims against individuals (i.e., non-entity debtors). The Rule now expressly requires the creditor to

(a) itemize on a statement attached to the form all “interest, fees, expenses, or other charges” as of the date of the bankruptcy filing,

(b) list the amount needed to cure any default relating to a secured claim and certain additional information if the claim is secured by the debtor’s “principal residence,” and

(c) attach all the documents supporting the claim. If any of this information is not included, the Rule now states with respect to individual debtors that the court may:

(i) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or

(ii) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.”

Although the Rule’s penalty provision is limited to cases involving individual debtors, courts might begin to apply similar sanctions in cases of partnerships, corporations or limited liability companies under the court’s equitable powers, pointing to the Rule’s penalty provisions relating to individuals for support by analogy. The reference in this Rule to any “contested matter” includes an objection to the claim, so do not be surprised if a debtor objects to your claim and simultaneously seeks to preclude your use of the documents necessary to support it in bankruptcy court.

Finally, although it was not part of this round of amendments, another trap is worth noting. The official proof of claim form was revised a few years ago, with little fanfare, to include within the category of secured claim (see box 4), the right to setoff as a basis for having a secured claim. Creditors who do not have a lien on a debtor’s property, but owe money to a debtor that can be used as a dollar-for-dollar offset, may lose that setoff right if they fail to file a claim as secured, check the setoff box in section 4 and provide the documentation to support the right of setoff (i.e., documentation for the debt owed by the creditor to the debtor).

Thus, filing a proof of claim on a timely basis should no longer be considered sufficient – it now behooves creditors to be accurate and comprehensive and heed the specific requirements of the Rule.

This Client Alert is published by Meyer, Suozzi, English & Klein, P.C. for the benefit of clients, friends and fellow professionals on matters of interest. The information contained herein is not to be construed as legal advice or opinion. We provide such advice or opinion only after being engaged to do so with respect to particular facts and circumstances.