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Filing of claims in reopened cases

In re J&S Conveyor, Inc. 95-22963(Decision August 11, 2009; Judge Ninfo, Rochester). Complicated decision in an old, reopened case. The debtor corporation filed Chapter 11 Oct. 27, 1995. Apparently the corporation was the beneficiary of a life insurance policy that was listed on Schedule G (Executory Contracts) but not on Schedule B, line 9 (Assets – Interests in insurance policies.) The Chapter 11 debtor entered into a typical "cash collateral" agreement with the bank that had a security interest in all its assets, including its cash and receivables. Some creditors filed claims in the Chapter 11 case. A year later, the case was converted to Chapter 7, and a Chapter 7 notice to creditors of the trustee hearing was mailed out. That notice stated that there was no need for creditors to file claims at that time. The trustee filed a report stating there were no assets to be distributed to creditors, and the case was closed as a no-asset case in November 1998. Apparently the life insurance policy vested, in an amount of over $350,000. The case was reopened in September of 2006 to administer the life insurance proceeds (which has a complicated history, but that's another story.) A new notice to creditors was sent out by the Court Clerk, requesting claims to be filed.

Claims in the reopened case: After the new claims deadline (or bar date) passed, the trustee objected to both the old claims filed in the original Chapter 11 and the new claims filed in the reopened Chapter 7. Had these motions succeeded, all the money would have gone to bankruptcy administrative claims and to the owner of the shares of the corporation. The trustee's argument was that, by 2006, the statute of limitations had run on the debts owed by the corporation in 1995 and, therefore, none of the creditor claims were valid anymore. Judge Ninfo ruled that the claims filed in the original Chapter 11 case were still valid, that the passage of time did not eliminate the validity of those claims when they were first filed. The judge ultimately ruled that the claims filed in the reopened Chapter 7 case were also valid, although this determination was against his better judgment. The judge believes that claims must be valid at the time they are filed, not merely as of the petition date, so claims filed years after the statute of limitations had run were no longer valid (the six year New York statute of limitations was tolled, or suspended, while the original Chapter 11 & converted Chapter 7 cases were pending, but the statute resumed when the case was closed in 1998.) However, the judge acknowledged, at the urging of the United States Trustee, that the 1996 clerk's notice instructed creditors not to file claims, and it would be inequitable to punish creditors for following the instructions of the Court Clerk. The Court reluctantly allowed these claims.

Scheduling insurance policies: When a case is closed, as this case was in 1998, all assets listed on the schedules that have not been administered by the trustee are deemed abandoned back to the debtor. In this case, the life insurance was listed on Schedule G ("executor contracts") but not on Schedule B, where line 9 specifically asks for interests in insurance policies to be set out. The Court ruled that this asset was not deemed abandoned in 1998 because it was not properly listed on Schedule B.

Informal proof of claim: To make a long complicated story short, the rights of the shareholder in this case to claim superior rights in the life insurance policy depended on whether the cash collateral agreement entered into at the beginning of the Chapter 11 case could be considered the filing of an informal proof of claim. The court ruled that it was not, as it failed to meet one of the four tests of an informal proof of claim: it failed (in the Court's view) to evidence the creditor's intention to hold the debtor personally liable on the debt in question.

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