class 4 bankruptcy, spring, 2009 allowance and disallowance of claims randal c. picker leffmann...

Class 4Bankruptcy, Spring, 2009

Allowance and Disallowance of Claims

Randal C. PickerLeffmann Professor of Commercial Law

The Law School

The University of Chicago

773.702.0864/[email protected] © 2005-09 Randal C. Picker. All Rights Reserved.

April 21, 2023 Copyright © 2005-09 Randal C. Picker 2

501

Filing of proofs of claims or interests (a) A creditor or an indenture trustee may

file a proof of claim. An equity security holder may file a proof of interest.

(b) If a creditor does not timely file a proof of such creditor’s claim, an entity that is liable to such creditor with the debtor, or that has secured such creditor, may file a proof of such claim.


502

Allowance of claims or interests (a) A claim or interest, proof of which is filed

under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.


502 (cont.)

Allowance of claims or interests (cont.) (b) Except as provided in subsections (e)(2),

(f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that –


502 (cont.)

Allowance of claims or interests (cont.) (1) such claim is unenforceable against the

debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured;

(2) such claim is for unmatured interest;


502 (cont.) Allowance of claims or interests (cont.)

(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds -

(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of -

• (i) the date of the filing of the petition; and• (ii) the date on which such lessor repossessed, or the lessee

surrendered, the leased property; plus (B) any unpaid rent due under such lease, without

acceleration, on the earlier of such dates;


502 (cont.) Allowance of claims or interests (cont.)

(b)(7) if such claim is the claim of an employee for damages resulting from the termination of an employment contract, such claim exceeds -

(A) the compensation provided by such contract, without acceleration, for one year following the earlier of -

• (i) the date of the filing of the petition; or• (ii) the date on which the employer directed the employee to

terminate, or such employee terminated, performance under such contract; plus

(B) any unpaid compensation due under such contract, without acceleration, on the earlier of such dates;


Borne Chemical

Core Facts Simplifying, Rolfite has a claim in a pending

lawsuit against Borne Borne files for Chapter 11 Rolfite gets relief from the stay to pursue

the lawsuit outside of bankruptcy Bankruptcy court temporarily disallows

claims pending state court resolution


Borne Chemical

Rolfite tries to block confirmation of plan of reorganization for Borne

When rejected, appeals to district court, which vacates disallowance order and requires estimation hearing

B Ct estimates claim at zero, again disllows until state case done and “in effect requir[es] a waiver of the discharge of the Rolfite claims”


502 (cont.)

Allowance of claims or interests (cont.) (c) There shall be estimated for purpose of

allowance under this section - (1) any contingent or unliquidated claim, the fixing

or liquidation of which, as the case may be, would unduly delay the administration of the case; or

(2) any right to payment arising from a right to an equitable remedy for breach of performance.


502 (cont.)

Allowance of claims or interests (cont.) (j) A claim that has been allowed or disallowed

may be reconsidered for cause. A reconsidered claim may be allowed or disallowed according to the equities of the case. Reconsideration of a claim under this subsection does not affect the validity of any payment or transfer from the estate made to a holder of an allowed claim on account of such allowed claim that is not reconsidered,


502 (cont.) but if a reconsidered claim is allowed and is of the

same class as such holder’s claim, such holder may not receive any additional payment or transfer from the estate on account of such holder’s allowed claim until the holder of such reconsidered and allowed claim receives payment on account of such claim proportionate in value to that already received by such other holder. This subsection does not alter or modify the trustee’s right to recover from a creditor any excess payment or transfer made to such creditor.


The Estimation

Two Approaches B Ct Approach

Assess weight of evidence: {0,100}, {40,60}, {51,49}, {100,0}

Based on weight, apply standard of proof rule: preponderance, clear and convincing, beyond a reasonable doubt

If proof standard isn’t met, disallow claims


The Estimation

If proof standard met, allow claims in full at estimated liablity amount?

Rolfite Approach Take point estimate of weight, say 40% Multiply that time estimated liability Use that as allowed estimate for claim


The Estimation

Key Question What is at stake? Distributions to creditors?

Control over the proceeding?


AH Robins

Core Facts Robins faces mass tort litigation from

production of Dalkon Shield Prior to bankruptcy, wide range in punitive

damage awards against company Tries to implement limited-fund class action

and fails Files for bankruptcy


The Fight over Punitive Damages

The Players Claimants Committee

Represents current claimants of Robins, favors recovery of punitive damages

Future Tort Claimants Committee Punitives should be allowable, but

subordinated to other unsecured claims


The Fight over Punitive Damages

Unsecured Creditors Committee Favors disallowance, and if not,

subordination under 510(c) Equity Committee

Favors disallowance Robins/The Debtor

Favors disallowance What explain the positions of the parties?


The Robins Reorganization

Key Features Establishes trust for resolution of current

and future torts claims Allocates value to the trust Plan contemplates $700 million distribution

to shareholders


Assessing Disallowance of Punitive Damage Claims

Key Questions Does 502 allow the bankruptcy court to

disallow punitive damage claims? Does 105 make that possible? The inherent

equitable power of the bankruptcy court? How should we assess the court’s reading

of Pepper, Heiser and Vanston?


Assessing Disallowance of Punitive Damage Claims

What do we make of 510(c) and 726(a)(4)? Again, how should we reflect state law in

bankruptcy? How should we account for the fact that

states differ in their approaches to punitive damages and different tort victims will have differing rights under state law?


510(c)

Subordination (c) Notwithstanding subsections (a) and (b) of this

section, after notice and a hearing, the court may - (1) under principles of equitable subordination,

subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or

(2) order that any lien securing such a subordinated claim be transferred to the estate.


105(a)

Power of Court The court may issue any order, process, or

judgment that is necessary or appropriate to carry out the provisions of this title.


726 Distribution of property of the estate (cont.)

(a)(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim;

class 4 bankruptcy, spring, 2009 allowance and disallowance of claims randal c. picker leffmann...

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