Claims Procedure and Late Filed Claims
By Davidson, Peter*
Q: A claims procedure was established pursuant
to a Court order that provides that anyone seeking to share in the
receivership estate’s assets had to file a claim with the receiver by a
certain date. That time expired. A creditor now wants to have its late
claim allowed. I am against allowing the late claim because the creditor
had been sent notice of the claims bar date. Am I being too tough?
The facts in Lakeshore case are interesting. They show how inaction by a creditor can result in the denial of a claim and that simply claiming “excusable neglect” is not sufficient. In that case, a bank in Andorra invested $7.5 million in Lakeshore’s commodity pool. After Lakeshore was shut down and the receiver had the Court establish a claims procedure and a claims bar date, the receiver sent out notice to Lakeshore’s creditors indicating they had forty-five (45) days within which to file a claim or they would be excluded from the distribution of the estate’s assets. The receiver sent notice of the claims bar date and a claim form to the bank by Federal Express. No employee of the bank was named as the addressee, because the bank was the only name on the account. The bank claimed it never got the notice and claimed the receiver’s letter, as addressed, would not have come to the attention of any bank employee who would have recognized its significance. The court, however, felt this was irrelevant. The bank testified that it believed (the court said “strangely”) that U.S. law was similar to Andorran law and concluded that the government would distribute Lakeshore’s assets to the defrauded investors in due course and that the bank needed to do nothing. Not only did the District Court find this strange, the Court of Appeals indicated that the thinking was “mind boggling.” The bank knew about the receivership, knew about the website the receiver had set up which posted information and documents, and yet did nothing. The court found that the bank did not have a good excuse for failing to timely file its claim. With regard to the second portion of the test, the relative consequences, the Court observed that the harm to the bank would be considerable. The bank would lose $2.6 million which would have been distributed to it. However, the court found that the prejudice to the other claimants would also be significant, and not because of the loss of a windfall that they would receive because the bank’s claim would not be paid. Rather, the court held that the prejudice would be the delay in payment to the other creditors if the receiver had to recompute their share of the asset pool and the further delays that would occur because claimants, as the court stated: “would be bound to squawk, further prolonging the receivership proceeding.” (This does not seem to be the type of prejudice the Supreme Court meant, but that is what the Seventh Circuit has held).
As a result, the late claimant in your case will
have to show that it meets the excusable neglect standard set forth by the
Supreme Court in Pioneer if it wants to have its late claim
allowed. That will depend on “all relevant circumstances” and the impact
on the receivership estate and other creditors.