Friday, May 30, 2008

Proofs of Claim in Commercial Bankruptcy Cases

Many of our commercial bankruptcy clients ask us if they need to file a Proof of Claim in Chapter 11 commercial bankruptcy cases. Let's briefly review the law regarding the filing of Proofs of Claims in Chapter 11 bankruptcy cases and related issues.

In a Chapter 11 bankruptcy petition, if a creditor is listed on the Debtor's bankruptcy schedules and the claim is not listed as disputed, contingent or unliquidated, then the creditor is not required to file a Proof of Claim. If a creditor is not listed on the bankruptcy petition schedules (which is often the case) and/or the claim is listed as disputed, contingent or unliquidated, then a creditor is required to file a Proof of Claim to evidence its claim against the Debtor. If a creditor files a Proof of Claim, it is then subject to the jurisdiction of the Bankruptcy Court. As an aside, in bankruptcy law we have the ultimate long arm statute, where service is made on parties by first class mail.

Whether or not a creditor files a Proof of Claim, if the Debtor desires to commence an adversary proceeding against a creditor, they can simply mail the summons and complaint to the creditor. Consequently, with respect to service of process, it is inconsequential whether a creditor files a Proof of Claim in a bankruptcy case. However, if a creditor files a Proof of Claim in a bankruptcy case, then it waives its right to a jury trial. The United States Bankruptcy Court for the Southern District of New York does not conduct jury trials. Accordingly, if a creditor is sued, it can remove or remand the case to the United States District Court for the Southern District of New York, if it desires a jury trial. On the other hand, if the creditor files a Proof of Claim and submits to the jurisdiction of the Bankruptcy Court, then it will not be able to obtain a jury trial. This was Judge Gonzalez's holding in In re WorldCom, Inc., Case No. 02-13533, Adv. Pro. No. 04-04338 (Bankr. S.D.N.Y. Dec. 7, 2007). In WorldCom, Judge Gonzalez ruled that if a creditor files a proof of claim, then it submits to bankruptcy court jurisdiction and waives its right to a jury trial in an adversary proceeding (bankruptcy litigation).

Therefore, before a creditor files a Proof of Claim in the case, it must weigh its potential recovery in the bankruptcy case as a result of filing the Proof of Claim versus submitting to Bankruptcy Court jurisdiction and waiving its right to a jury trial. It has been the experience of this law firm, however, that most creditors file a Proof of Claim and waive their right to a jury trial. Anyone who has questions regarding the filing of Proofs of Claims or creditors' rights in bankruptcy cases should contact Jim Shenwick of Shenwick and Associates.

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