Under the Bankruptcy Code, as all but the newest practioners know, there are claims, and then there are claims. When it comes to voting on a chapter 11 plan, a creditor must hold an allowed claim to be entitled to cast a ballot. Through the use of Bankruptcy Rule 3018(a),¹ however, a claim that is not an allowed claim may become an allowed claim—temporarily—to permit the creditor to vote on a chapter 11 plan.

Chapter 11 Voting and the Allowed Claim

One of the requirements of plan confirmation in chapter 11 is that each class of impaired claims under the plan must vote to accept the plan.² Section 1126 of the Code provides that only a "holder of a claim...allowed under §502"³ is entitled to accept or reject a chapter 11 plan. Determining which claims are allowed claims, therefore, is critically important to the chapter 11 voting process.

Section 502 is the primary Code provision dealing with the allowance of claims, and it provides that a claim for which a proof of claim has been filed is deemed to be an allowed claim "unless a party in interest...objects."⁴ A creditor who files a proof of claim in a chapter 11 case can therefore be disenfranchised if a party in interest—usually the debtor—files an objection to the claim.⁵ A class of impaired claims is deemed to have accepted a chapter 11 plan if the holders of more than one-half in number and at least two-thirds in dollar amount of the voting claims in the class vote to accept the plan.⁶ Absent some remedy, a debtor could otherwise block the vote of a dissenting creditor who is likely to vote to reject a proposed plan by simply filing an objection to the claim. If the creditor's claim is large enough compared to the total amount of claims in a particular class, the debtor could thereby swing the vote in that class through such plan voting mischief.

The Basics of Rule 3018(a)

Rule 3018(a) permits an otherwise non-allowed claim to be temporarily allowed for purposes of voting on a chapter 11 plan:

Notwithstanding objection to a claim or interest, the court, after notice and hearing, may temporarily allow the claim or interest in an amount which the court deems proper for the purpose of accepting or rejecting a plan.⁷

The relatively sparse case law under Rule 3018(a) suggests three circumstances under which a motion to temporary allow a claim for voting purposes may be filed. The Tenth Circuit Bankruptcy Appellate Panel (BAP), for example, in Armstrong v. Rushton (In re Armstrong),⁸ observed that a creditor may file a temporary allowance motion under Rule 3018(a) where (1) an objection has been filed to the creditor's claim too close to the plan confirmation hearing to be resolved prior to voting, (2) a hearing on the claim objection would unduly delay the chapter 11 case or (3) a frivolous or questionable objection to the claim has been filed.⁹ The allowance of a claim under Rule 3018(a), moreover, is a summary proceeding,¹⁰ and is not binding as an allowance of the claim for aspects of the chapter 11 case other than voting on the plan.¹¹

Just as a claim objection that is not resolved prior to voting on a chapter 11 plan may affect plan confirmation, the outcome of a Rule 3018(a) proceeding could also swing the vote of an impaired class on plan. This outcome, of course, would depend on the size of the temporarily allowed claim relative to the total value of claims actually voted upon in that class. A bankruptcy court, however, must undertake the Rule 3018(a) temporary allowance analysis without regard for how its decision will ultimately affect confirmation of the plan. As one court succinctly stated: "[T]he court must decide the Rule 3018(a) motion on its merits and not consider what impact, regardless of what that impact would be, the decision will have on the plan confirmation process."¹²

The Mechanics of Rule 3018(a)

A bankruptcy court considering a Rule 3018(a) motion prior to plan voting must decide two questions: (1) should it temporarily allow a claim to which an objection has been made, and (2) if temporary allowance is appropriate, what is the proper method for temporarily allowing the claim? Both of these questions are left to the court's sound discretion.¹³

As to the first issue, courts are divided on the question of whether a creditor whose claim has been objected has an affirmative duty to seek temporary allowance of its claim in order to vote on a chapter 11 plan. The Ninth Circuit BAP, for example, held in Bell Road Investment Co. v. M. Long Arabians (In re M. Long Arabians)¹⁴ that where a creditor's claim has been objected to and the objection will not be resolved prior to the chapter 11 plan voting deadline, the creditor must seek temporary allowance of its claim under Rule 3018(a) or it will not be entitled to vote on the plan.¹⁵ In M. Long Arabians, a creditor whose claims had been objected to voted to reject a chapter 11 plan.¹⁶ The creditor's claims were large enough for the rejection votes to prevent the debtor from satisfying the Code §1129(a)(8) confirmation requirement that at least two-thirds in dollar amount of voted claims in an impaired class must vote to accept a plan.¹⁷ The creditor had not filed a Rule 3018(a) motion to temporarily allow its claims for voting purposes prior to casting its ballots on the plan.¹⁸ The BAP affirmed the bankruptcy court's findings that, because the creditor held no allowed claims due to its failure to seek temporary allowance, its votes on the plan should not have been counted, and that the §1129(a)(8) confirmation requirement had not been satisfied.¹⁹

The U.S. Bankruptcy Court for the Eastern District of Pennsylvania reached the opposite conclusion in In re Goldstein.²⁰ In that case, the largest unsecured creditor in the case voted to reject the debtor's chapter 11 plan.²¹ The debtor filed an objection to the creditor's claim during the voting period, and the creditor did not file a motion under Rule 3018(a) to have its claim temporarily allowed for voting purposes.²² Instead of disregarding the creditor's vote on the plan, as the debtor had urged, the court in Goldstein delayed the confirmation hearing until the claim objection could be determined.²³

The Goldstein court cited several justifications for not requiring a Rule 3018(a) motion before a plan vote by a creditor whose claim has been objected to may be counted, the first of which was one of fundamental fairness: "[I]t seems unfair to allow a debtor to disenfranchise even a large creditor from voting on a plan merely by its unilateral act of filing an objection to the creditor's proof of claim.²⁴ Second, the court in Goldstein disagreed with the debtor's position that the creditor's claim must be deemed to be disallowed because of the pending claim objection.²⁵ Finally, the court cited other Rule 3018(a) cases that permitted voting by holders of disputed claims in order to further the goal of including creditors in the chapter 11 reorganization process²⁶ and to prevent disallowing the votes of creditors who have no notice that their votes are being challenged.²⁷

The courts are somewhat more in agreement on the second issue involved in Rule 3018(a) litigation: how to temporarily allow the claim for voting purposes. Reported cases recognize that "some estimation process is required when a [Bankruptcy] Rule 3018(a) motion is presented to a bankruptcy court,"²⁸ while the precise method of estimating the claim is left to the court's broad discretion.²⁹ These decisions are based on the general principles in the Code and the Rules governing the allowance of claims, objections to claims and the placement of burdens of proof in claims objection litigation.³⁰

According to those procedural rules, the filing of a proof of claim constitutes prima facie evidence of a claim in a bankruptcy case.³¹ In response, the debtor or other objecting party must put forth some evidence to overcome the prima facie validity of the claim.³² Once that is done, the claimant—as with claims objection litigation—must then present sufficient evidence to establish its claim by a preponderance of the evidence.³³ Most courts, moreover, place the ultimate burden of persuasion in the Rule 3018(a) temporary claims allowance process on the claimant.³⁴ As summarized by one court:

[In] the court's assessment of the underlying issues on a Rule 3018(a) motion...the court follows the general burden of proof standards for claims objections. The filing of the proof of claim amounts to prima facie evidence to support the claim. The objecting party must produce evidence to overcome that prima facie standard. The claimant must then come forward with sufficient evidence under a preponderance-of-the-evidence standard to establish an entitlement to the claim.³⁵

At least one court analogized the burden of proof in a Rule 3018(a) action to the so-called "busting bubble" theory of presumptions.³⁶ Under this theory, once an opponent offers sufficient evidence to show the nonexistence of a presumed fact, the presumption disappears, or "bursts."³⁷ This is demonstrated in the Rule 3018(a) context by likening the creditor's filed proof of claim to a presumption in a civil case. Once a sufficient objection to the claim is filed, the prima facie nature of the proof of claim "bursts," and the creditor has the burden of coming forward to establish its claim.

Practical Applications of Rule 3018(a)

Rule 3018(a) is usually used defensively by a creditor to avoid being disenfranchised by a pending claim objection.³⁸ For instance, in In re First RepublicBank Corp.,³⁹ the FDIC asserted a $1 billion claim on account of a note purchase agreement and the debtor-banks' guaranty.⁴⁰ In analyzing whether to temporarily allow the FDIC's claim for voting purposes, the court found that the debtors' guaranty of the note purchase agreement would likely constitute a fraudulent transfer under §548.⁴¹ Applying the burden-of-proof analysis described above,⁴² the court held that the debtors and the unsecured creditors' committee would likely be able to overcome the prima facie validity of the FDIC's claim, and that it was unlikely that the FDIC would successfully establish an entitlement to its claim by a preponderance of the evidence.⁴³

Rule 3018(a) may also be used offensively by a debtor or other plan proponent. In re FRG Inc.⁴⁴ involved three affiliated debtors that had proposed a joint chapter 11 plan.⁴⁵ A creditor, Blumberg, filed a $2 million general unsecured claim in each debtor's case, representing its estimate of its likely recovery from the debtors in a pending federal district court action for securities laws violations fraud and breach of contract.⁴⁶ Prior to the date for the plan confirmation hearing, the debtors filed Rule 3018(a) motions to temporarily allow for voting purposes several large claims, including Blumberg's $2 million claims, fearing that rejection votes by holders of those claims would jeopardize confirmation of the plan.⁴⁷ The court referred to Rule 3018(a) as "a tool which the court or any party can invoke to expedite confirmation when numerous objections to claims cloud the issue of creditors' rights to vote."⁴⁸ Predictably, Blumberg voted his claims to reject the joint plan, and, but for his $2 million claim rejection vote under the plan's class 9, the plan would have been confirmed "by a landslide."⁴⁹

The FRG court observed that, although the creditor was present at the hearing on the Rule 3018(a) motion, Blumberg chose not to testify. Instead, he relied on his counsel's argument to the court that the Rule 3018(a) motion was an attempt to disenfranchise Blumberg.⁵⁰ The only evidence before the court were Blumberg's proofs of claim and the testimony of the debtors' president, who claimed that Blumberg's federal court action, as well as a predecessor action in state court, were baseless.⁵¹ Applying the burden of proof analysis under Rule 3018(a) actions, the court held that since the debtors had put forth evidence of Blumberg's claims' invalidity, Blumberg had the burden to establish his claims by a preponderance of the evidence.⁵² Finding that, since Blumberg "chose to present virtually no evidence to support his claims against the debtors' short but straightforward attack,"⁵³ the court granted the debtor's Rule 3018(a) motion and disallowed Blumberg's $2 million claims.⁵⁴ FRG, accordingly, stands for the proposition that Rule 3018(a) may be utilized defensively by a debtor that fears that rejection votes on account of invalid or questionable claims may jeopardize confirmation of a chapter 11 plan. When used in this fashion, the rule requires that the creditor put forth sufficient evidence to establish an entitlement to its claim by a preponderance of the evidence.

Conclusion

A debtor or other plan proponent should not be able to control the voting on a chapter 11 plan by disenfranchising a creditor with a simple objection to a creditor's claim. Rule 3018(a) provides a flexible mechanism to permit the claim to be temporarily allowed for voting purposes. The temporary allowance may be used by a creditor whose claim has been objected to or by a plan proponent to facilitate plan confirmation. While the ultimate burden of establishing a colorable claim in Rule 3018(a) litigation lies with the creditor, the bankruptcy court's broad discretion to temporarily allow the claim—and the method of estimating the claim—suggests that this burden should not present an undue burden to temporary allowance of the claim.

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Footnotes

¹ Fed. R. Bankr. P. 3018(a).

² 11 U.S.C. §1129(a)(8). If all other §1129(a) confirmation requirements are satisfied, except for the acceptance by each impaired class of claims, the plan may nonetheless be confirmed under the Code's cramdown provisions. See Id., §1129(b).

³ Id., §1126(a) (emphasis added).

⁴ Id., §502(a). Although §502(a) speaks of a claim, "proof of which is filed under [§]501 (Id.)," a claim that a chapter 11 debtor schedules but does not list as contingent, unliquidated or disputed will be deemed to have been filed under §501. See Id. §1111(a). Therefore, a scheduled claim that is not listed as contingent, unliquidated or disputed is also an allowed claim under §502(a), unless a party in interest objects.

⁵ See Stone Hedge Properties v. Phoenix Capital Corp. (In re Stone Hedge Properties), 191 B.R. 59, 63 (Bankr. M.D. Pa. 1995) ("[a] creditor whose claim is objected to is therefore disenfranchised from voting on the plan").

⁶ 11 U.S.C. §1126(c).

⁷ Fed. R. Bankr. P. 3018(a).

⁸ 294 B.R. 344 (Bankr. 10th Cir. 2003).

⁹ Id. at 354 (citing 9 L. King, Collier on Bankruptcy ¦3018.01[5] (15th ed. 2003)).

¹⁰ See In re Zolner, 173 B.R. 629, 633 (Bankr. E.D. Ill. 1994), aff'd. sub nom, Chicago Truck Drivers v. Zolner, 249 B.R. 287 (N.D. Ill. 2000) ("[u]nder Rule 3018(a), a summary-type hearing is contemplated"); In re FRG Inc., 121 B.R. 451, 456 (Bankr. E.D. Pa. 1990) (in "the estimation process...in furtherance of B. Rule 3018(a)...a very truncated trial process may be developed").

¹¹ See In re First RepublicBank Corp., 1990 Bankr. LEXIS 2840, *5 (Bankr. N.D. Tex. June 19, 1990) ("the court's assessment of the underlying issues on a [Bankruptcy] Rule 3018(a) motion cannot be binding on this or any other court when the merits of the claims objections and related adversary proceeding are finally litigated").

¹² Id. at *6.

¹³ See PBGC v. Enron Corp., No. 04 CIV 5499 (HB), 2004 U.S. Dist. LEXIS 21810, *16 (S.D.N.Y. Nov. 1, 2004) ("[t]he temporary allowance of a claim for voting purposes is committed to the sound discretion of the bankruptcy court pursuant to Federal Rule of Bankruptcy Procedure §[sic]3018(a)").

¹⁴ 103 B.R. 211 (Bankr. 9th Cir. 1989).

¹⁵ See Id. at 215.

¹⁶ See Id. at 213.

¹⁷ See Id.

¹⁸ See Id. at 214.

¹⁹ See Id. at 215.

²⁰ 114 B.R. 430 (Bankr. E.D. Pa. 1990).

²¹ See Id. at 431.

²² See Id.

²³ See Id. Interestingly, the court specifically referenced the debtor's counsel's "cocksuredness" about his position that, because the creditor failed to seek temporary allowance of its claim under Bankruptcy Rule 3018(a), its vote did not count. See Id. at 432.

²⁴ Id.

²⁵ As the court observed:

[t]o reach [the debtor's] result, we would be obliged to interpret 11 U.S.C. §502(a) as stating that, if a party objects to a claim, then it must be deemed disallowed. This Code section does not say that. It merely states that if a claim is not objected to, then it must be deemed allowed. Id. at 432-33 (emphasis in original). As a practical matter, it may make little difference to a creditor whose plan vote is disqualified because its claim is "not allowed" rather than being "disallowed."

²⁶ See Id. at 433 (citing In re Amarex Inc., 61 B.R. 301, 303 (Bankr. W.D. Okla. 1985) ("[t]o allow [the disputed claims] to vote on the plans, even though some may be eventually disallowed for purposes of distribution, is more in keeping with the spirit of chapter 11 which encourages creditor vote and participation in the reorganization process")).

²⁷ See Id. at 433-34 (citing In re Motel Assocs. of Cincinnati, 50 B.R. 196, 199 (Bankr. S.D.N.Y. 1985) ("it is inappropriate to disenfranchise a creditor who has duly filed a ballot rejecting a plan without notifying the creditor in advance of the hearing on confirmation that its vote would be challenged at the hearing")). Goldstein also cited In re Pizza of Hawaii Inc., 761 F.2d 1374 (9th Cir. 1985), for the holding that a bankruptcy court may actually be required to estimate a claim in order to rule on a chapter 11 plan's feasibility. See Goldstein, 114 B.R. at 433. Pizza of Hawaii, however, is not directly on point, because it involved the estimation of contingent or unliquidated claims under Code §502(c), not the temporary allowance of claims for voting purposes under Rule 3018(a).

²⁸ FRG, 121 B.R. at 456.

²⁹ See Id. ("the bankruptcy court is accorded broad discretion as to the method used by the court in the process of valuation and obtaining useful results from that process") (citing Bittner v. Borne Chemical Co., 691 F.2d 134, 135-36 (3d Cir. 1982)).

³⁰ See Id. ("[t]he [Bankruptcy Rule. 3018(a)] estimation process is merely a microcosm of the ordinary claims-determination process").

³¹ See First RepublicBank, 1990 Bankr. LEXIS 2840 at *5; Fed. R. Bankr. P. 3001(f) ("[a] proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim").

³² See First RepublicBank, 1990 Bankr. LEXIS 2840 at *5.

³³ See Stone Hedge Properties, 191 B.R. at 65 ("the debtor need only present evidence supporting its objection to shift the burden of proving the claim to the claimant, who bears the ultimate burden of proving the claim").

³⁴ See Armstrong, 294 B.R. at 354 ("[b]ecause a temporary allowance order only arises if there is an objection to a claim, we conclude that the burden of proof should be on the claimant to present sufficient evidence that it has a colorable claim capable of temporary evaluation"); Stone Hedge Properties, 191 B.R. at 65 ("the claimant...bears the ultimate burden of proving the claim"); FRG, 121 B.R. at 457 ("the allocation of the burdens of proofs [sic] in the B. Rule 3018(a) estimation process is the same as in deciding objections to proofs of claim...with, as at trial, the burden of proving its case by a preponderance of the evidence upon the claimant").

³⁵ First RepublicBank, 1990 Bankr. LEXIS 2840 at *5.

³⁶ See FRG, 121 B.R. at 456-57.

³⁷ See, generally Fed. R. Evid. 301.

³⁸ See supra note 6 and accompanying text.

³⁹ No. 388-SAF-11, 1990 Bankr. LEXIS 2840 (Bankr. N.D. Tex. June 19, 1990).

⁴⁰ See Id. at *1.

⁴¹ See Id. at *19.

⁴² See supra text accompanying notes 32-38.

⁴³ See First RepublicBank, 1990 Bankr. LEXIS 2840, at *19-*20.

⁴⁴ 121 B.R. 451 (Bankr. E.D. Pa. 1990).

⁴⁵ See Id. at 453.

⁴⁶ See Id. at 454.

⁴⁷ See Id.

⁴⁸ Id. at 453 (quoting In re Goldstein, 114 Bankr. 430,434 (Bankr. E.D. Pa. 1990)) (emphasis added). This tool, the court noted, was apparently used properly by the FRG debtors because all creditors whose claims were subject to the Rule 3018(a) motion (except Blumberg) settled, in many cases as drastically reduced claim amounts. See Id.

⁴⁹ Id. at 454.

⁵⁰ See Id. The creditor's disenfranchisement argument in FRG can be interestingly juxtaposed with the assertion that debtors may also try to disenfranchise creditors from the chapter 11 plan voting process by objecting to their claims. See supra text accompanying notes 5-7.

⁵¹ See Id. at 454-55.

⁵² See Id. at 457.

⁵³ Id. at 452.

⁵⁴ See Id. at 452-53.