Amending Claims after the Bar Date Last in Line
Why You Should Care
Unsecured creditors, being the last creditors in the payment line, suffer from increases in the amount and priority of others' claims. A priority claim removes money "from the pot" to pay unsecureds while another unsecured creditor's increasing its claim dilutes your pro rata "share of the pot." The latter is definitely the lesser of the two evils.
Timing Is Everything
Since filing an amended claim can include a "new" claim, the changed portion of the claim should initially be viewed as a totally new claim. Late-filed claims (filed after the bar date) are usually disallowed under §502(a)(9), and that portion of the claim not referenced in the original claim is eliminated.
Courts view amended claims quite differently depending on the status of the case. Generally, the first critical date is the bar date for filing proofs of claim. Amendments before the bar date are generally freely allowed, while amendments thereafter are scrutinized.
Another critical date is the confirmation date of a plan of reorganization. A creditor's post-confirmation amendment faces even higher scrutiny since it would (most likely) have passed both the bar date and confirmation of a reorganization plan. Amending claims at this late date becomes even more suspect. The final critical date is the objection to the proof of claim.
Courts generally deal with post-objection amendments, like requests to amend a complaint in civil litigation, since the claim is already in dispute. In that sense, it is truly a litigation issue (instead of a mere possibility) and a very formal procedure and review is justified.
Circuit Courts' Views on Amendments
The Seventh Circuit has been particularly active in ruling on the effects of amended claims. In Holstein vs. Brill,2 it described dates as "milestones" when it said, "Leave to amend should be freely granted early in a case (cite omitted), but passing milestones in the litigation make amendment less appropriate." It then identified the bar date and confirmation date as two milestones and said, "Once that milestone (confirmation) has been reached, further changes should be allowed only for compelling reasons."3 It even drew on Biblical analogies when it wrote, "To everything there is a season, and the season for stating the amount of a debt is before the confirmation of a plan of reorganization."4
The Seventh Circuit also denied the Internal Revenue Services' (IRS) attempt to increase its claim by more than 220 times the original amount. In In re Stavriotis,5 the IRS audit occurred during the bankruptcy case. The IRS amended its claim when the audit was completed. In the amendment, the IRS added taxes for a different year and substantially increased the taxes owed for a year already addressed in its original proof of claim. In affirming the bankruptcy court's rejection of the amended claim, the Seventh Circuit noted that permitting amendments to claims also extends the deadline for filing claims, and cautioned that bankruptcy courts need not allow "late amendments which are primarily used as a back-door route to secure bar-date extensions."6 It agreed that taxes for a different year were a new cause of action and that denying the incredible increase was not an abuse of discretion.
The Fifth Circuit followed a similar course when it stated, "Amendments do not vitiate the role of bar dates; indeed, courts that authorize amendments must ensure that corrections or adjustments do not set forth wholly new grounds of liability."7 It then affirmed the bankruptcy court's allowing the IRS to amend the claim that the debtor filed on its behalf.8
Perhaps the best summary of the criteria for evaluating an amendment is the following:
First, the proposed amendment must not be a veiled attempt to assert a distinctly new right to payment as to which the debtor estate was not fairly alerted by the original proof of claim. Second, the amendment must not result in unfair prejudice to other holders of unsecured claims against the estate. Third, the need to amend must not be the product of bad faith or dilatory tactics on the part of the claimant.9
Courts frequently rely on Federal Rule of Civil Procedure 15 regarding amended pleadings when evaluating amended proofs of claim.10 This is particularly true if the amendment follows an objection. Rule 15 provides that leave to amend a pleading "shall be freely given when justice so requires" and specifies when an amendment relates back to the date of the original filing. This is particularly true after an objection to the claim.
Additional Cases of Note
Not all late claims are barred from participating in the case. For example, if there had been excusable neglect in the filing, the claim could be allowed.11
Likewise, filing a priority claim late in a chapter 7 case is not fatal to the claim. Under 11 U.S.C. §726, late claims filed before distributions begin retaining their priority against junior creditors and are only subordinated to the timely filed claims in their original classes.12 This allows a chapter 7 trustee adequate time to process the paperwork and recalculate the claims. Since chapter 7 does not contemplate a reorganization, fixing that priority (albeit subordinate to similar claims that were timely filed) is viewed with less scrutiny.
There are as many different reasons for amending claims as there are creditors who file them. Unsecured creditors must carefully review claim amendments to assure that other creditors are not unreasonably or inappropriately looting or diluting "the pot" through amended claims.
1 In chapter 9 or 11 cases, the court sets a bar date by either a specific order or a local rule. Federal Bankruptcy Rule of Procedure 3003(c)(3). In chapter 7, 12 and 13 cases, F.B.R.P. 3002 sets the bar date at 90 days after the first date set for the meeting of creditors unless the creditor is a governmental unit (which has 180 days after the order for relief) or one of the other four requisites for extension is met. F.B.R.P. 3002(c). Return to article
10 In re Trans World Airlines Inc., 145 F.3d 124, 141 (3rd Cir. 1998); Gens v. RTC, 112 F.3d 569, 575 (1st Cir. 1997); In re Plunkett, 82 F.3d 738, 740 (7th Cir. 1996); In re Alliance Operating Corp., 60 F.3d 1174, 1176 (5th Cir. 1995). Return to article