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To File or Not To File

Article

The Business Advisor

October 7, 2003

You are a creditor of X Corp. You learn that X-Corp. has filed for bankruptcy. You may have even received a notice from the bankruptcy court advising you of X Corp.’s bankruptcy and the date by which creditors must file proofs of claim.

What do you do? For most creditors, the answer seems simple–file a proof of claim. Generally, filing a proof of claim seems to be an easy and often necessary means of protecting a claim. The debtor may have: (i) filed its case under Chapter 7 (liquidation), Chapter 12 (family farmer), or Chapter 13 (individual wage-earner); (ii) failed to list the creditor’s claim in its schedules of liabilities; or (iii) listed the claim as “contingent,” “disputed,” or “unliquidated.” In any of those cases, to obtain a distribution in the bankruptcy, the creditor must file a proof of claim.[1] The debtor may have scheduled the claim for less than the amount owed or may have scheduled a secured claim or a claim enjoying one of the priorities under the Bankruptcy Code as a general unsecured claim. To obtain the correct treatment of the claim in the bankruptcy, the creditor must file a claim setting forth the correct information.

However, filing a proof of claim is not without risk. By filing a proof of claim, the creditor waives the right to a jury trial with respect to any issue related to the determination of the validity and amount of its claim.[2] For example, creditors filing proofs of claim waive their rights to a jury trial in so-called “avoidance actions such as actions by a debtor or trustee in bankruptcy to (a) recover certain payments made to a creditor during the ninety days immediately preceding the bankruptcy filing that are deemed “preferential” under section 547 of the Bankruptcy Code or to recover fraudulent transfers.[3] Similarly, professionals filing administrative claims for services rendered to a debtor post-petition may waive their jury trial rights in any professional malpractice action brought against them.[4] Absent the filing of a proof of claim or taking some similar action invoking the jurisdiction bankruptcy Court, creditors retain their jury trial rights in such actions.[5]

Retaining a jury trial right can significantly benefit a creditor. Because parties cannot be compelled to have a jury trial in a bankruptcy court[6], a creditor may be able to have a suit against it tried in the district court, rather than the bankruptcy court. A trial before a district court may lead to a more favorable result for the creditor. District courts, which were not established to administer bankruptcy estates and cases, may be more sympathetic to a creditor than a bankruptcy court might be. Similarly, depending on the facts of a case and the identities of the creditor and the debtor, a jury might be more sympathetic to a creditor than a debtor. In any event, the possibility that a suit against a creditor may be tried before a jury will impact on settlement negotiations.

A creditor should base the decision whether to file or abstain from filing a proof of claim on the specific facts of the case and the advice of counsel. Careful consideration should be given to: (i) the likely dividend to creditors in the case; (ii) the creditors’ actual exposure to suit by the debtor or the bankruptcy trustee; (iii) whether the suit would be one either for which the creditor would lack a jury trial under any circumstances[7] or which is not part of the claims allowance process and, therefore, once for which, under any circumstance, the creditor would have a right to a jury trial;[8] and (iv) how attractive the creditor or its case would be to a jury. Obviously, where the chance of a significant recovery to a the creditor is great and the likelihood of litigation or a significant judgment against the creditor is slim, the claim should be filed. Unfortunately, as is the case with many issues in bankruptcy, the relevant facts may not be clear and the decision may not be easy.



[1]See Rules 3002(a) and 3003(c)(2) of the Federal Rules of Bankruptcy Procedure.
[2]Langenkamp v. Culp, 498 U.S. 42, 45 (1990), reh’g denied, 498 U.S. 1043 (1991).
[3] Id.; SNA Nut Co. v. The Haagen-Dazs Co., Inc., 303 F.3d 725, 730-31 (7th Cir. 2002); In re Simon, 153 F.3d 991, 997 (9th Cir. 1998).
[4]See, e.g., Billing v. Ravin, Greenberg & Zackin, 22 F.3d 1242, 1246 (3rd Cir.), cert. denied, 513 U.S. 999 (1999) (debtor lacked jury trial right on malpractice action brought in response to his bankruptcy attorney’s administrative claim).
[5]See, e.g., Granfinanciera, S.A., v. Nordberg, 492 U.S. 33, 51 (1989) (because the non-debtor defendants in a fraudulent transfer suit had not invoked the jurisdiction of the bankruptcy court by filing a proof of claim they preserved their jury trial rights). .
[6]28 U.S.C. Section 157(e).
[7]Such as an action to recover an unauthorized post-petition transfer by a debtor to a creditor. In re M&L Bus. Mach. Co., 59 F.3d 1078, 1082 (10th Cir. 1995).
[8]See Germain v. Connecticut Nat’l Bank, 988 F.2d 1323, 1329 (2d Cir. 1993) (trustee’s action for tortious interference in debtor’s business, coercion and duress, breach of contractual duty of good faith and fair dealing, unfair or deceptive practices and misrepresentation was not part of the claims allowance process and, therefore, the trustee was entitled to a jury trial).