Spring 2017 • Issue 60, page 16
Ask the Receiver: What Happens to a Credior's Claim If They Received Notice and Fail to File by the Bar Date?
By Davidson, Peter*
Q: I am a
receiver in a fraud case where there are a lot of investors, trade
creditors and secured creditors. Pursuant to my request, the court
established a claims procedure and set a deadline for all creditors to
file claims with me. A creditor with a lien on one of the estate’s assets
did not file a claim, despite my sending it a claim form and notice of the
claim filing deadline. Is the creditor entitled to participate in the
distribution of estate assets? Does the answer change if it files a late
claim? Does the creditor lose its security interest because it did not
timely file a claim?
A: While a recent
case, SEC vs. Nadel,
2016 WL 398026 (M.D. Fld. 2016), came to the conclusion, siding with the
receiver, that a secured creditor’s failure to file a claim by the court
established claims bar date not only bars the secured creditor from
receiving a distribution from the receivership estate, but also results in
the extinguishment of its security interest, that decision seems wrong
based on prior precedent. Indeed, the secured creditor in that case, Wells
Fargo, has appealed the district court’s decision. In the case, the court,
at the receiver’s request, had established a claims procedure and, as part
of the claims procedure, a claims bar date that required all creditors to
file claims by the claims bar date and specifically stated that “any
person or entity that fails to submit” a proof of claim “shall be forever
barred and precluded from asserting any claim.” The court held that this
meant that secured creditors must file proofs of claim before the claims
bar date. Wells Fargo argued not only did it have an excuse for not timely
filing a claim, but even if its claim was denied that should have no
effect on its security interest in the estate’s assets. The district court
disagreed. While it conceded that, generally, a secured creditor’s in rem
rights to collateral are distinct from its right to receive a cash
distribution from receivership assets through a claims process, the court
specifically ordered all creditors to file claims and, therefore, Wells
Fargo was required to follow the claims procedure. Its failure to do so,
given the court’s order, resulted in it not being allowed to participate
in the claims distribution process, but also the extinguishment of its
lien on estate assets.
In rendering its
decision, the court appears to have ignored clear precedent that
receiverships do not affect existing liens on receivership assets.
SEC v. Vescor Capital Corp.,
599 F.3d 1189, 1195 (10th Cir. 2010) (“[A]ppointment of a receiver does
not determine any rights nor destroy any liens.”); SEC vs. Madison Real
Estate Group, LLC,
647 F.Supp.2d 1271, 1276 (D. Utah 2009) (“[T]he Interveners are secured
creditors. ‘It is well established that a “receiver appointed by a federal
court takes property subject to all liens priorities or privileges
existing or accruing under the laws of the State’.” Consequently, the
Intervener’s priority interest remains intact despite the receivership.”).
Even with regard to the
disallowance of the late filed claim, the court appears to have made the
wrong decision. Generally, while courts may set deadlines for the filing
of proofs of claim, and order that claims not timely filed are disallowed,
if parties have a valid excuse for filing a late claim and the receiver
has not made a final distribution of receivership assets, the court, as a
court of equity, can allow a late filed claim, unless a statute otherwise
provides. Chicago
Title & Trust Co. v. Fox Theatres Corp., 91 F.2d 907, 911 (2d Cir.
1937) (“The practice of entering an interlocutory order limiting the time
within which claims of creditors must be presented has developed as an aid
to convenient administration; it does not preclude the court from
permitting a creditor whose claim is thereafter presented to share in the
distribution of assets still on hand ...”); Dickinson v. Universal
Service Stations,
100 F.2d 753, 759 (9th Cir. 1938) (“It seems to be the usual practice to
allow creditors to come in almost as a matter of course where distribution
has not been made.”).
The case law generally
holds that whether to allow a late claim or not is to be dealt with
individually with respect to each claim.
See generally, SEC v. Hardy,
803 F. 2d 1034,1039 (9th Cir. 1986), where the Ninth Circuit affirmed the
district court’s consideration of late claims on a case by case basis, but
also acknowledged “that the rights of creditors of a receivership must be
balanced against the need for expeditious administration of the
receivership” and that it is therefore proper “to establish deadlines for
filing claims, and to bar untimely claims.”
The situation is
different in bankruptcy cases. In a Chapter 13 case, because of the way
the rules are specifically written, in order to participate in
distributions creditors must timely file proofs of claim or they are not
entitled to a distribution. In Re Barker, 839 F.3d 1189 (9th Cir. 2016)
[citing Fed. R. Bankr. P. 3004]. That is not the case in Chapter 7 or
Chapter 11. In Chapter 11, if the creditor is scheduled it does not have
to file a claim at all. 11 U.S.C. §1111(a). In Chapter 7, a creditor can
file a late claim and the result is the claim is subordinated to timely
filed claims. 11 U.S.C. §726(a)(3). In all those cases, however, if the
creditor is a secured creditor, whether the creditor files a claim or not
has no effect on the creditor’s security interest. In Re Blendheim, 803
F.3d 477, 485 (9th Cir. 2005) (“A creditor with a lien on the debtor’s
property may generally ignore the bankruptcy proceedings and decline to
file a claim without impairing his lien, secure in the in rem right that
the lien guarantees him under non bankruptcy law: the right of
foreclosure”); In Re
Baker, supra. at
1193 (“However, a secured creditor, who does not wish to participate in a
Chapter 13 plan or who fails to file a timely proof of claim, does not
forfeit its lien.”)
So, to answer your
questions: (1) a creditor is only entitled to participate in a
distribution of receivership estate assets if it files a claim with the
receiver, pursuant to the court established claims procedure; (2) whether
a late filed claim will be allowed depends on why the claim was late filed
and the determination is individual to each claimant and; (3) secured
creditors do not lose their security interest in estate assets simply
because they have not filed a proof of claim with the receiver.
NOTE: After this Ask the Receiver
was written the Eleventh Circuit reversed the district court, for
basically the reasons set forth above, and held: “while a federal district
court has wide-ranging authority to supervise a receivership, we hold it
does not have the authority to extinguish a creditor’s pre-existing state
law security interest…” SEC v. Wells Fargo Bank, 848 F.3d 1339
(11th Cir. 2017).
*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.
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