Anticipated Amendments to Bankruptcy Rules Require Changes to Claims Filing Procedures

The US Supreme Court recently authorized a number of significant changes to the procedural rules applicable to bankruptcy proceedings. Absent Congressional intervention, which appears unlikely, the new rules will take effect on December 1, 2017. The amendments will most impact creditors dealing with consumer debtors in Chapter 13 cases, creating new deadlines for filing proofs of claim and allowing debtors to prosecute challenges to secured creditor claims through the plan submission and confirmation process. Some of the more significant changes are:

• Adoption of an “official” Chapter 13 Plan. The new rules provide for an “official,” standardized Chapter 13 Plan. Under amended Rule 3015(c), debtors will need to use the “official” form unless their jurisdiction has adopted its own local form, which must itself include the information outlined in Rule 3015.1. Among other things, Rule 3015.1 will require local form Chapter 13 Plans to include a paragraph requiring the debtor to highlighting any nonstandard plan provisions, provisions that limit any secured creditor’s claim to the value of its collateral, or provisions that seek to avoid a lien on the debtor’s real or personal property.
• Required Notice for Chapter 13 Confirmation Hearings and Objections to Confirmation. Rule 2002 has been amended to establish definitive notice provisions in Chapter 13 cases. A new subsection (2002(a)(9)) will require the debtor to provide creditors with at least 21 days’ notice of the deadline for objecting to Chapter 13 Plans. Another new subsection (2002)(b))(3)) calls for 28 days’ notice of the confirmation hearing in Chapter 13 cases.
• Proofs of Claim. The amendments will also alter the procedures for filing proofs of claim. Specifically:

• Rule 3002 is amended to clarify that secured creditors must file proofs of claim to have their claims allowed. (However, the Rule makes clear that a secured creditor’s claim will not be rendered void if it chooses not to file a proof of claim.)
• Rule 3002(c) makes changes to the periods for calculating the claims bar deadline in Chapter 7 (liquidation), 12 (family farmer), and 13 (individual debt readjustment) cases. For those types of cases, the deadline for filing a proof of claim will be reduced. Whereas the current Rule requires proofs of claim to be filed within 90 days after the initial §341 meeting of creditors, the revised Rule will require creditors to file their proofs of claim within seventy (70) days after the bankruptcy petition filing date.
• When a case is converted to a case under Chapter 12 or 13, the new, 70-day period for filing proofs of claim will run from the date of the court’s order converting the case. If a case is converted to a case under Chapter 7, a new time period for filing claims will begin running.
• Amended Rule 3002(c)(6) will allow the Bankruptcy Court to extend any proof of claim deadline if the debtor has failed to file a complete list of his/her creditors.
• New Rule 3002(c))(7) establishes a 2-stage deadline for filing mortgage proofs of claim where the claim is secured by an interest in the debtor’s principal residence.

• Claims Objections. Rule 3012, as amended, provides that any party-in-interest may seek a determination of the amount and priority of any claim. Moreover, in a departure from current practice, the amended Rule will permit plan proponents in Chapter 12 and Chapter 13 cases to include objections to the amount and/or priority of claims in the body of the Plan. Rule 3007, as amended, will require that a party objecting to a proof of claim must serve the affected creditor by first-class mail directed to the name and address indicated on the filed proof of claim form. Under amended Rule 3007, the Bankruptcy Court will no longer be required to schedule or hold a hearing on every claim objection.
• Objections to Liens or Transfers of Exempt Property.  Consistent with revised Rule 3012, amended Rule 4003(d) will allow a request to avoid a lien or other transfer of the debtor’s exempt property to be made either by motion or in the debtor’s Chapter 13 Plan.

Again, these changes to the Bankruptcy Rules are scheduled to take effect on December 1, 2017. Creditors should become familiar with the new requirements and begin developing internal procedures as necessary to ensure compliance. 

Supreme Court Rules: Even Gifts Must Play by the (Absolute Priority) Rule

Last week, the Supreme Court handed down its opinion in Czyzewski v.Jevic Holding Corp., stating that non-consensual, priority violating, structured dismissals are not allowed under the Bankruptcy Code.  In a well-reasoned opinion, the Court gave a simple answer to what has become a complex issue, especially in large Chapter 11 cases where the path out of bankruptcy is not always clear: the absolute priority rule is absolute (unless the affected parties agree otherwise).

Czyzeweski v. Jevic Holding Corp. Case

The Jevic case involved the demise of a trucking company. As it closed down and just before seeking bankruptcy protection, the debtor fired most of its employees, including a group of truck drivers (the “Petitioners”). After company’s Chapter 11 filing, the Petitioners sued the debtor and Sun Capital Partners (who had acquired Jevic in a leveraged buyout) for violation of the Worker Adjustment and Retraining Notification Acts (“WARN”).  The Petitioners won a $12.4 million summary judgment award against the debtor on their WARN claims, entitling them to (among other things) an approximately $8.3 million priority wage claim against Jevic’s estate. The Petitioners also pursued similar WARN claims against Sun outside the bankruptcy proceeding.

Separately, the unsecured creditors’ committee pursued litigation against Sun and CIT Group, a secured creditor with which Sun had refinanced the debt incurred in Jevic’s LBO, for misdeeds in effectuating the leveraged buyout, fraudulent transfers, and preferential transfers. Eventually, Sun and CIT settled with the creditors’ committee. The deal provided that the estate would receive funds for administrative and some priority tax claims, with the remainder going to general unsecured creditors—skipping the priority wage claims of the Petitioners, and violating the priorities of the Bankruptcy Code (Sun admitted it did not want to fund the Petitioners’ WARN litigation against it).  The Bankruptcy Court approved the settlement and the District Court and Third Circuit Court of Appeals affirmed the decision.  The Supreme Court reversed and remanded, ruling that a bankruptcy court could not approve a structured dismissal that violated the priorities of the Bankruptcy Code.

Facing Bankruptcy

Jevic, like many Chapter 11 debtors, was faced with the difficult decision of how to get out of bankruptcy. The estate was administratively insolvent; it had $1.7 million in cash, which was not sufficient to pay administrative claimants in full, all subject to Sun’s lien. Unable to confirm a plan, Jevic was left with two options: conversion to a case under Chapter 7 or dismissal. Conversion would have resulted in the senior secured creditors receiving everything in the liquidation. If successful, a structured dismissal could provide some of the benefits of a plan—releases for the debtor’s management and professionals and, through a mechanism commonly described as “gifting” by a secured party of a portion of its collateral, payments to junior creditors who would otherwise receive nothing in a liquidation scenario.

At the tail end of a bankruptcy case, an administratively insolvent debtor such as Jevic is often at the mercy of its secured creditor, who holds a lien over all or substantially all of the debtor’s assets. Absent a “gift” from the secured creditor, the debtor often cannot offer any incentive to induce parties in interest to settle their disputes with the debtor (or pay its professionals). In Jevic, that gift came with strings attached: Sun would not permit payments to priority claimants who were also litigating against it. The Court cut one of those strings. Under Jevic, the party funding an end-of-case structured settlement cannot dictate terms that violate the absolute priority rule unless the adversely affected classes consent.

Consensual Dismissal

However, the Court left open the possibility for consensual dismissals that violate the priority scheme of the Bankruptcy Code. In addition, the Court specifically did not rule on the permissibility of other priority violating distributions, such as “first-day” pre-petition wage and critical vendor orders and “roll-ups” in debtor-in-possession financing, that allow certain prepetition creditors to be paid first on their prepetition claims in the early days of a bankruptcy case. Pointing to the policy rationale of preserving the debtor as a going concern and promoting the possibility of a confirmable plan, the Court did not address the viability of mid-case structured settlements that violate the Bankruptcy Code’s priority scheme but do not resolve the case. Neither of these rationales applies to an end-of-case settlement with an administratively insolvent debtor.

In addition, the Jevic case may provide additional leverage for taxing authorities and other priority claimholders in plan and/or dismissal negotiations, knowing that debtors (and their secured creditors) have one less arrow in their quiver.  And it remains to be seen whether secured parties will push for conversion to Chapter 7 of an administratively insolvent debtor when they can no longer dictate the terms of a structured dismissal to the detriment of priority claimants. Restructuring professionals should plan accordingly.

Contact Us

For any assistance with bankruptcy and restructuring, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights, and Restructuring Practice Group.

Rue Toland practices as an associate with Preti Flaherty's Business Law and Creditors' Rights Groups from the firm's Concord, NH office. Rue provides counsel on transactional and financing matters, secured and unsecured lending, out-of-court loan workouts, bankruptcy proceedings, and other distress situations.

Ex Parte Attachment, and Priority, Reinstated to First in Time Creditor

In Estate of Summers v. Nisbet, the Maine Supreme Judicial Court reinforced the first in time, first in right nature of attachment and trustee process under Maine law.  Attachment and trustee process are powerful enforcement tools with which a plaintiff can place a lien on a defendant’s real or personal property while the case is pending, so that the defendant cannot transfer or abscond with property while being sued.
 
After a tragic fire at an apartment building in Portland, Maine that resulted in five deaths, the probate estate of Steven Summers, one of the victims, obtained a December 2014 ex parte attachment against the property of the building owner.  The probate estates of several other victims subsequently obtained attachments in February 2015 and asked the Superior Court to have the Summers ex parte attachment dissolved, asserting that the Summers estate had failed to demonstrate the “exigent circumstances” necessary for the grant of an attachment without hearing.
 
The Superior Court granted that motion, and dissolved the Summers estate’s original ex parte attachment and reinstated it as of February 2015.  As a consequence of the Court’s ruling, all five of the victims’ probate estates were left with attachments that were deemed to have been granted simultaneously.

The Summers estate appealed.  The Law Court vacated the trial court’s dissolution of the Summer ex parte attachment, ruling that the trial court had erred because no one had asserted or established that the Summers estate had failed to make the basic showing required for an attachment, and ordered the Summers attachment reinstated as of the date it was ordered, in first place.  In doing so the Court confirmed that under Maine attachment law, first in time is first in right, and that creditors in Maine must act expeditiously to protect their rights.