Technical Defects in Proof of Claim Not Grounds for Disallowance

By: Robert Ryan

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Firmly adopting the “exclusive” view of claim objections, the Tenth Circuit Bankruptcy Appellate Panel in B-Line, LLC v. Kirkland

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held that a claim could not be disallowed under 11 U.S.C. § 502

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for failure to submit supporting documentation with a proof of claim since that is not one of the grounds expressly stated in the statute.

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  Although Federal Rule of Bankruptcy Procedure 3001 requires that supporting documentation be provided with a proof of claim,

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neither the Rule nor the statute clearly states what to do if a creditor fails to submit supporting documentation.

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 The court held that section 502(b) provided an exclusive list of reasons why a claim should be dismissed, reasoning that the “shall allow … except” command in section 502(b) and the absence of an expansive term like “including” indicated that the list was exclusive.

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  Since the Rules cannot modify substantive rights, technical defects in the proof of claim are not grounds for objection.

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In this case the court ruled on an area of law where courts are split.

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  There are two different views on how to deal with an objection to a claim under 11 U.S.C. § 502, some courts adopt the “Exclusive View” while others adopt the “Nonexclusive View”.

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  The Nonexclusive View holds that the factors listed in section 502(b) are not the only grounds to dismiss a creditor’s claim.

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  Therefore, in this case, the bankruptcy court would have had the discretion to dismiss the creditor’s claim even though the failure to attach supporting documentation is not expressly stated in section 502(b) as a reason to dismiss the claim.  However, the Exclusive View, which the court adopted in B-Line, would not give courts the discretion to sustain such an objection to a claim.  According to this view, section 502(b) provides the exclusive reasons for a claim to be dismissed.

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  By adopting the Exclusive View the Bankruptcy Appellate Panel of the Tenth Circuit relied on cases from the Seventh, Eighth, and Ninth Circuits.

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  For example, in a recent case, the Bankruptcy Appellate Panel of the Eighth Circuit discussed this issue and stated that even if a creditor violated a Rule, “the claims are still allowed claims under section 502 of the Bankruptcy Code unless the debtor establishes an exception under section 502(2).”

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One of the most important implications of this ruling is that it reduces the burden placed on trustees to review and object to proofs of claim.

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  Although trustees have a duty to object to improper claims, this decision means that trustees do not have to raise an objection to every claim that is not in compliance with Rule 3001 or the Official Form.

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  Another important implication is that judicial resources will be saved by creating a finite set of reasons to dismiss a claim and avoiding the difficult determination of whether proofs of claim “substantially” comply with the Rule notwithstanding technical defects.

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  However, the court’s holding could also have a negative impact on the trustee.  As pointed out by the dissent, the lack of supporting documentation may impose additional burdens on a trustee to request it and may make it difficult to prevail since the proof of claim will enjoy the presumption of prima facie validity despite the lack of documentation.

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  The majority also relied upon the goal of just determinations to support its holding.  Many claimants are unsophisticated and should not be deprived of their right to participate in a distribution simply because they failed to attach documentation to their proofs of claim.