To Claim Or Not To Claim

David B. Wheeler
Moore & Van Allen, PLLC
40 Calhoun Street, Suite 300
Post Office Box 22828
Charleston, SC 29413-2828
(843) 579-7015
(843) 579-8727 facsimile
davidwheeler@mvalaw.com

When involved in a chapter 11 case, creditor’s counsel will often advise, and many credit managers will often file, proofs of claim for the amount due the creditor regardless of whether the claim amount already specified by the debtor in its schedules approximates or is identical to the amount the creditor’s records show as being due. The primary reason for filing a claim under such circumstances is “to be on the safe side”. A recent decision from the bankruptcy court in Delaware underscores the need to evaluate such a policy in the face of legal rights that may be surrendered as a result.

Judge Peter Walsh established a bright line test for determining whether a defendant may demand a jury trial in a preference or other avoidance action lawsuit in the case of EXDS, Inc. v. RK Electric, Inc. (In re EXDS, Inc.)¹. Judge Walsh ruled that the creditor-Defendant’s filing of a proof of claim irrevocably vested the bankruptcy court with equity jurisdiction, over adjudication of claims, notwithstanding the defendant’s subsequent attempt to withdraw its proof of claim.

In EXDS, the defendant timely filed a proof of claim. Subsequent to plan confirmation and the commencement of a preference action against it, however, the defendant filed a motion under Federal Rule of Bankruptcy Procedure 3006 to withdraw its claim. In doing so, the defendant was seeking to nullify the effect of having filed a claim, i.e., seeking to have a right to trial by jury in the avoidance action as though it had never filed a claim.⁴

The bankruptcy court reasoned that under applicable U.S. Supreme Court precedent interpreting the Granfinanciera case, and in particular, Langenkamp v. Culp ⁵, once vested with equitable jurisdiction as a result of filing a claim, a creditor may not divest the court’s equitable jurisdiction simply because of a subsequent claim withdrawal. In Langenkamp, the Supreme Court ruled that a creditor filing a proof of claim against a debtor that is thereafter sued in a claim avoidance action remains subject to the equity jurisdiction of the bankruptcy court without recourse to a jury trial. Accordingly, the Court in EXDS, emphasized that the equitable nature of its jurisdiction was vested upon the claim filing and not subject to waiver, regardless of the outcome of a motion to withdraw claim.⁶

Clearly, it is often to a creditor’s advantage to avoid⁷ the bankruptcy court venue and have its case determined by a less debtor-friendly trier of fact, i.e., a jury. Removing the case from the warm embrace of the bankruptcy court will usually provide the bankruptcy estate with a much greater level of incentive for settlement. This consideration is particularly important in a chapter 11 case where an unsecured creditor is often more concerned about prospective preference liability than recovery of its unsecured claim. So, if yours is scheduled as a liquidated, undisputed, non-contingent claim for which no separate claim filing is required to preserve recovery⁸, it may be advisable to evaluate possible preference liability and the desirability of access to a jury trial before filing that claim.

FOOTNOTES

¹ 2003 Bankr. LEXIS 1417 (Bankr. D. Del. Oct. 31, 2003)
[back to text]
² 492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989)
[back to text]
³ Id. @ 58
[back to text]
⁴ 2003 Bankr. LEXIS @ 1418
[back to text]
⁵ 498 U.S. 42, 111 S. Ct. 330, 112 L. Ed. 2d 343 (1991)
[back to text]
⁶ 2003 Bankr. LEXIS @ 1419
[back to text]
⁷ No pun intended
[back to text]
⁸ 11 U.S.C. §1111(a); FRBP 3003(b)(1)
[back to text]

OTHER STORIES
IN THIS ISSUE:

Cybergenics: En Banc Restores the Status Quo by Allowing Creditors' Committees to Pursue Derivative Claims

Overcoming Obstacles To Unsecured Creditors Committee Participation

WLC Committee Highlights