As the economy continues its downward spiral, it is increasingly common for businesses to receive notice that a customer (the debtor) has filed a bankruptcy case.
When the debtor files a bankruptcy petition, it creates a bankruptcy estate comprised of substantially all of its assets. The actions a creditor must take to protect its claims vary depending on its relationship to the debtor.
One such action is filing a proof of claim (POC), a written statement that sets forth the creditor’s claim, and must conform substantially to Official Form 10. This is not difficult, but must be done properly to avoid technical pitfalls, which could permit the debtor or trustee to defeat the creditor’s claim.
Shortly after a bankruptcy case is filed, creditors receive the Bankruptcy Notice. The POC must then be filed with the clerk of the bankruptcy court in which the bankruptcy case is pending.
The creditor or its authorized agent should execute the POC with supporting documents attached. If a security interest is claimed in the debtor’s property, copies of the security agreement and recorded mortgages or financing statements should also be attached to the POC. The claim described in the POC is deemed allowed for the purpose of the creditor participating in distributions from the bankruptcy estate, unless a party in interest, such as the bankruptcy trustee, objects.
A POC executed and filed in accordance with the Bankruptcy Rules constitutes prima facie evidence of the validity and amount of the claim. If a party in interest objects to the POC, the creditor generally has 30 days to respond. If it does not, the objection is usually granted. If the creditor opposes the objection, the bankruptcy court conducts an evidentiary hearing on the creditor’s claim and the objection.
There is some risk because a party filing a POC is generally submitting itself to the jurisdiction of the bankruptcy court, which may not be desirable in all circumstances. It may also result in a waiver of the right to a jury trial. Accordingly, before filing, creditors should consult with legal counsel and evaluate whether these factors create unacceptable risks.
Timely filing is essential for a creditor to share in distributions from the estate. Businesses should consult with their legal advisers to take steps to increase their likelihood of receiving payment. Raymond J. Pikna is of counsel with Vorys, Sater, Seymour and Pease LLP in Cincinnati and specializes in bankruptcy law. He can be reached at (513) 723-4000.
