In re Gregory Davis 05-90690 (Judge Kaplan, June 11, 2010.) Note: the Case number on this case is 05-90690, NOT 05-09690, as is listed on the decision and order of June 11, 2010. Background information for this case note came from the court docket and the claims register, not just the decision.
This case was filed October 11, 2005, in the massive rush of cases filed immediately preceding the implementation of BAPCPA, the new bankruptcy provisions. Schedule F listed a total of thirteen claims for a total of $71,590.00. The case was closed as a no-asset case Feb. 28, 2006.
A year later, February 25, 2007, the trustee moved to reopen the case due to an unscheduled asset. Apparently the debtor had a pre-bankruptcy claim, arising out of a personal injury accident July 13, 2005, that had not been listed on his bankruptcy schedules.
A motion to settle the personal injury action for $25,000 was filed Dec. 22, 2008 and approved a month later. A separate motion to compromise an underinsured motorists claim for $65,000 was made Sept. 22, 2009 and approved a month after that.
On March 19, 2007, the Court Clerk sent out a notice to creditors to file claims. The deadline, or "bar date", to file timely claims was June 20. It appears that only two claims were filed prior to the bar date, for $5,267.58.
On September 16, 2009, the Court Clerk sent out a "Notice of Surplus Funds" to all creditors, stating that the time to file claims against the surplus had been extended to Oct. 9. As noted by the Court in its decision and order, the provision in Bankruptcy Rule 3002 authorizing this so-called "Surplus Money Notice" was deleted in 1996, following amendments to the Bankruptcy Code's treatment to tardy claims in 1994. The court stated that "[f]or some reason, a Surplus Money Notice went out in this particular case...", meaning for some reason other than a legally-justified reason.
In any case, no new claims were filed by October 9. Then, on November 15, 2009, the trustee filed thirteen claims, one for each of the originally-scheduled claims (including the two claims for which a timely proof of claim had previously been filed by the actual creditor.) These thirteen claims were for $71,590, the originally scheduled amounts, and included a student loan claim for $43,575.
The trustee's Final Report was filed Feb. 3, 2010. It states that the trustee had $51,675.56 to distribute; that all fifteen claims would be treated as timely filed general unsecured claims, and that they would be paid about 56% of their claims. It also stated that the trustee would receive $7,375.21 as a commission on the funds he was distributing to creditors. The trustee only receives a commission on funds paid to creditors, not funds paid to the debtor as surplus.
On Feb. 21, 2010, the debtor's attorney objected to the final report and filed an objection to the thirteen claims filed by the trustee. The objection simply stated that the claims were tardily filed. In a letter dated May 18, 2010, the trustee took the position that his thirteen claims should be allowed as valid tardy claims in the case (there is nothing to indicate why the original final report listed the trustee's claims as timely, not tardy.)
The Court disagreed with the trustee's position, in a careful statutory analysis:
Bankruptcy Code §501(a) authorizes a creditor to file a claim.
§501(c) states that if a creditor does not file a timely claim, the trustee may file a claim for the creditor.
Bankruptcy Code §726 describes the order in which payment is to be made to creditors in a Chapter 7 case:
§726(a)(1) provides first payment to priority and administrative claims, including trustee commissions and expenses.
§726(a)(2) directs the next right-of-payment to the following:
(A) timely-filed 501(a) claims;
(B) timely-filed 501(c) claims and
(C) tardily-filed 501(a) claims IF the creditor did not have actual notice of the bankruptcy claims bar date.
§726(a)(3) directs the next payment tier to tardily-filed §501(a) claims that don't fall into the lack-of-notice exception of §726(a)(2).
§726(a)(4) and (5) directs payment to fines and penalties and to post-petition interest.
§726(a)(6) directs any remaining surplus to the debtor.
The Court's conclusion is simple: a tardy claim filed by the trustee under §501(c) doesn't fall anywhere in the §726 distribution scheme. It would appear that for a trustee-filed claim under §501(c) is ever to be paid, it would have to have been filed before the claims bar date passed.
Observation: The predicament the trustee found himself in this case was unfortunate. The claims notice was mailed out two years after the case was filed because the debtor failed to list the personal claim asset on the original schedules. The claims were years old at that point and the bankruptcy schedules only listed a single address for each creditor. There is no way of knowing how accurate those addresses were, or whether credit departments, collection agencies or claims purchasers had contacted the debtor prior to the filing (I always include every address I can find for every creditor listed on my client's schedules.)
I don't know what the trustee intends to do with this case, but it is not too late to induce creditors to file claims. Even now such claims would be treated as tardily-filed 501(A) claims, which at a minimum would be paid in the §726(a)(3). From my own experience, I know how difficult it is to track down someone at a national credit card bank who can locate some account closed out years earlier, and which has often been sold off to some murky third party. In this particular case, the trustee might get lucky; if the huge student loan claim is still outstanding, that claim would be easier to track and to induce to file a claim (and the debtor would get his student loan bill paid off, not the worst outcome.)
But the method used by the trustee here was improper. The trustee undertook no investigation into why claims were not filed, and didn't even bother to knock off the two timely-filed claims from the list of claims he filed. If he had prevailed, he would have received his full commission, but I doubt any of the creditors that didn't file claims would have received any benefit. The dividend checks would have been mailed to the same dated addresses where the request to file claims had been filed. The checks probably would have been returned undeposited, and eventually these unclaimed dividends would have been deposited with the court clerk, to remain in limbo for years.