EXTENDING THE "DEEMED FILED" RULE BEYOND CHAPTER 11 (COMMISSION TRACK NUMBER 104)

Bankruptcy Rule 3002(a) sets forth the general rule regarding filing proofs of claim in a bankruptcy case, which is that all unsecured creditors must file proofs of claim in order for their claims to be allowed (fn. 19). Bankruptcy Rule 3003, however, carves out an exception to Rule 3002(a) in cases under chapters 9 and 11 of the Bankruptcy Code (fn. 20). Under Bankruptcy Rules 3003(b)(1), creditors in chapter 9 and chapter 11 cases whose claims are listed in the schedule of liabilities filed by the debtor and whose claims are not designated as disputed, contingent or unliquidated do not need to file proofs of claim in order for their claims to be allowed; the scheduled amount of their claims shall be prima facie evidence of the validity and amount of such claims (fn. 21). This exception applies only in cases under chapter 9 and chapter 11 of the Bankruptcy Code; creditors of debtors in cases under chapter 7 (fn. 22), chapter 12 (fn. 23) and chapter 13 (fn. 24) must file proofs of claim regardless of whether their claims are listed in the debtor's schedule of liabilities.

The theory of the current rule is that chapter 9 and chapter 11 debtors will generally have significantly more creditors than will debtors filing under other chapters of the Bankruptcy Code. Chapter 9 and chapter 11 debtors are also likely to have some sort of accounting system in place that will readily identify most creditors and the amounts of their claims. Moreover, at least in the large chapter 11 cases, the general practice is for the chapter 11 debtor to notify the creditors as to exactly how their claims are scheduled. By allowing creditors to rely on the scheduled amounts of their claims, it is presumably simpler for everybody.

Debtors filing under chapters 7, 12 or 13, on the other hand, generally have fewer creditors, and may have less of an idea of just how much they owe and to whom. Their accounting practices are often poor or nonexistent. Moreover, an individual debtor is strongly encouraged to liberally schedule all potential claims against him in order to discharge as many potential liabilities as possible. To the extent that he fails to schedule a claim, regardless of how remote that claim may be, that claim may not be discharged in his bankruptcy case. The individual debtor is under no real obligation to determine the precise amount of any claims against his estate; he only needs to provide his best estimate as to the amount of the claims and to provide the correct names and addresses of his creditors so that they will receive notice of his bankruptcy.

In cases under chapter 7, for example, the general procedure is for the bankruptcy court to send out a notice to the scheduled creditors of the commencement of the case and to notify the creditors of their right to file a proof of claim. In addition, the bankruptcy court will notify the creditors as to whether or not there is expected to be sufficient assets in the debtor's estate to provide a distribution to the creditors. If the chapter 7 case is expected to be a "no asset" case (as the vast majority are), then the creditors are advised that there is no point in filing a proof of claim. If the bankruptcy court determines that assets are expected to be available to distribute to creditors, the bankruptcy court will set a bar date for filing proofs of claim, notify the creditors of the bar date, and send the creditors proof of claim forms to fill out and return.

Proposals Before The Commission

Commission Track Number 104. The Government Working Group proposes to expand the applicability of Rule 3003 so that creditors in all bankruptcy cases will be able to rely on the debtor's schedules in the same manner that creditors currently can in chapter 9 and chapter 11 cases. In other words, if a creditor's claim is listed in the debtor's schedule of liabilities and is not listed as contingent, disputed or unliquidated, that creditor need not file a proof of claim in order for its claim to be allowed as a claim against the debtor's bankruptcy estate in the scheduled amount. See Government Working Group Proposal Number 1. The Advisory Committee has recommended that this proposal be dropped as unimportant.

Task Force Position

The Task force does not support the Government Working Group proposal.

Reasons for Position

Although the proposal would not appear to unfairly prejudice debtors, the proposal could have the unintended consequence of significantly increasing the administrative burdens of the trustee appointed to administer the assets of debtors in chapter 7, chapter 12 or chapter 13 cases, as well as prejudicing the legitimate creditors that care enough to file proofs of claim. The trustee appointed in bankruptcy cases has the responsibility of distributing the debtor's non-exempt assets to the legitimate creditors, and to object to any illegitimate claims. Under the current rule, any creditor that wants to receive a distribution from the debtor's assets in cases under chapter 7, chapter 12 or chapter 13 must file a proof of claim and attach any evidence to substantiate the claim. It is relatively easy for the trustee to make a cursory examination of the proofs of claim and the supporting documents filed in the case in order to determine whether or not to object to a claim. Moreover, it is a criminal offense for a creditor to file a false proof of claim. Accordingly, it is probably relatively rare that outright fraudulent claims are submitted or allowed to share in any distributions in most bankruptcy cases.

If the trustee were required to rely upon the debtor's schedules, however, it would be far more difficult for the trustee to determine which claims are legitimate and which ones are not. An individual debtor often has few records of his debts, has little incentive to substantiate the liabilities listed on his schedules, and is encouraged to schedule every conceivable liability to ensure that he receives as broad a discharge as possible. Accordingly, it is possible that the debtor will schedule far more creditors than actually hold legitimate claims against him as of the petition date. Since the trustee will not be able to verify the accuracy of those claims from the schedules alone, he has the choice of (i) independently investigating the scheduled claims in order to substantiate such claims, (ii) filing objections to any scheduled claim that could possibly be considered questionable, (iii) making distributions to illegitimate creditors, or (iv) all of the above. In either case, the estate's assets will be depleted through unnecessary administrative expenses or unwarranted distributions.

In sum, this proposal may sound good in theory but be bad in practice. It could easily drive up the cost of individual bankruptcies and deplete the estates' assets to the detriment of legitimate creditors. It will undoubtedly increase the administrative burdens on bankruptcy trustees. Furthermore, it may permit illegitimate creditors to share in the distribution of the debtors' estates to the detriment of the legitimate creditors.

It is the understanding of the Task Force that governmental taxing authorities do not suffer prejudice from application of the present rule. As a matter of routine, such creditors know to file proofs of claim outside of chapter 11. This change is not needed to protect taxing authorities from their own inadvertent errors.

Other Institutional Positions

A focus group of the American College of Bankruptcy opposes extending the deemed filed rule for governmental creditors only, but would support an extension for all creditors.

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fn. 19: Fed. R. Bankr. P. 3002(a). Bankruptcy Rule 3002(a) also requires holders of equity securities to file proofs of interest in order for their interests to be reorganized in the debtor's bankruptcy case. The filing requirements for the holders of equity securities are virtualy identical to the filing requirements of creditors. For the sake of simplicity, however, this comment will discuss the Bankruptcy Rules only as they apply to creditors.

fn. 20: Chapter 9 of the Bankruptcy Code applies when the debtor is a municipality. Chapter 11 of the Bankruptcy Code generally involves the reorganization of a business; however, it can, at times, apply when the debtor is an individual.

fn. 21: Fed. R. Bank. P. 3003(b)(1).

fn. 22: Chapter 7 involves the liquidation of the assets of an individual or an entity. Most chapter 7 cases involve individuals.

fn. 23: Chapter 12 involves the adjustment of debts of a family farmer with a regular annual income.

fn. 24: Chapter 13 involves the adjustment of debts of an individual with a regular income.

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Last updated June 1, 1997