Client Alerts
February 20, 2013

Procedural arguments may carry the day, but only if timely raised

Stites & Harbison Client Alert, February 20, 2013

Procedural arguments may carry the day, but only if the arguments are timely raised. The Sixth Circuit recently ruled that a bank forfeited the prima facie validity of its proof of claim provided by the Federal Rules of Bankruptcy Procedure by failing to develop the argument until appeal, after the bankruptcy court had already ruled upon the merits of the dispute.

In State Bank of Florence v. Richard K. Miller (In re Richard K. Miller), 2013 U.S. App. LEXIS 2582 (Feb. 5, 2013), the Sixth Circuit, in an opinion penned by the Honorable Jane B. Stranch, affirmed the decision of a bankruptcy court, as previously affirmed by the Bankruptcy Appellate Panel, denying the bank relief from stay and overruling the bank’s objection to the debtor’s Chapter 13 plan because the bank no longer had a debt to enforce.

In this case, the bank had timely filed a proof of claim against the debtor, pursuant to Section 501 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 3001. Under Rule 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.” Section 502(a) of the Bankruptcy Code provides that a proof of claim filed under Section 501 “is deemed allowed, unless a party in interest…objects.” Despite raising issues with respect to the bank’s debt in several pleadings, the debtor never filed an objection to the bank’s proof of claim, as it is required to do by Rule 3007.

The bank subsequently filed a motion for relief from stay and an objection to the debtor’s Chapter 13 plan. The debtor responded that he did not owe a debt to the bank. The parties proceeded to litigate the merits regarding the debtor’s alleged indebtedness to the bank. Ultimately, the bankruptcy court refused to grant the bank relief from stay, finding that the bank did not have a debt to enforce. Likewise, the bankruptcy court overruled the bank’s objection to the debtor’s Chapter 13 Plan.

The bank, on appeal to the Bankruptcy Appellate Panel, raised a new argument - that the debtor’s failure to file an objection to its proof of claim pursuant to Federal Rule of Bankruptcy Procedure 3007(a) resulted in the automatic allowance of the bank’s proof of claim. Ultimately, the Bankruptcy Appellate Panel found that the bank forfeited this argument by waiting too long to raise it. The Sixth Circuit affirmed. Both the Bankruptcy Appellate Panel and the Sixth Circuit relied upon the U.S. Supreme Court’s opinion in Kontrick v. Ryan, 540 U.S. 443, 460 (2004). Specifically, the Sixth Circuit stated: “the principle embedded in Kontrick, however, is that a party may not litigate the merits of an issue and later attempt to defeat an adverse decision by asserting the other party’s failure to comply with a claim-processing rule.”

State Bank of Florence v. Miller serves as a good reminder regarding compliance with the procedural aspects of bankruptcy. The Bankruptcy Code and the Federal Rules of Bankruptcy Procedure provide a number of “claims processing” rules. A debtor’s failure to timely comply with these rules may allow a creditor to avoid defending the merits of its claim – but only if the debtor’s non-compliance is timely raised.

Related Capabilities
Health Care - Bankruptcy & Restructuring