Winter 2012 • Issue 42, page 16

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?

A: The general rule is that claimants who do not file their claims within the time limits set by the court are precluded from sharing in the receivership estate’s assets when distributed, unless they have a valid excuse for the delay. Courts have indicated that a claims bar date is indispensable to the administration of a receivership estate because the receiver, the parties and the Court need to know, before the Court determines how and to whom the estate’s assets are to be distributed, whom the claimants are, the nature and value of their claims, and the total amount of claims being asserted against the estate’s assets. The failure to timely file a claim, however, does not operate as an absolute bar, at least where there has not been a final distribution of the assets in the estate. The Court can allow a late filed claim. Courts tend to allow late claims if the claimant offers a reasonable excuse for the delay, if other claimants will not be prejudiced, and there are sufficient funds to pay the claims. A recent case involving a federal receivership, Commodities Futures Trading Commission v. Lakeshore Asset Management, Ltd., 646 F.3d 401 (7th Cir. 2011), analogized the claims bar date in a receivership to the claims bar in a bankruptcy proceeding and held the same standard should apply. That standard is a “excusable neglect” standard as set forth by the United States Supreme Court in Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380 (1993). The Court noted, however, that the “excusable neglect” standard is vague. Citing the Pioneer case, the Lakeshore court indicated that a court is to take “account of all the relevant circumstances surrounding the party’s omission… includ[ing]… the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.” Lakeshore , 646 F.3d at 404-05. The Lakeshore court noted: “The stronger the excuse and the graver the adverse consequences of rejecting it relative to the adverse consequences to the opposing party if the excuse is allowed, the more the balance leans towards granting.” Id. at 405.

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.

*Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP a Beverly Hills Law Firm. His practice includes representing Receivers and acting as a Receiver in State and Federal Court