December 22, 2009
Gerald Baldwin

The Sixth Circuit Court of Appeals has reaffirmed that a bankruptcy court has broad discretion in choosing to either allow or deny an unsecured creditor’s “informal proof of claim.” In PCFS Financial v. Spragin, 2009 U.S. App. LEXIS 24915 (Nov. 13, 2009), the Court took the opportunity to revisit several issues decided in the earlier case of Barlow v. M.J. Waterman & Assoc., Inc., 227 F.3d 604 (6th Cir. 2000), affirming that an informal proof of claim is permissible where it is (1) in writing, (2) demands payment from the debtor’s estate, (3) expresses the intention to hold the debtor liable and (4) is filed with the Court.

Most importantly, the Court confirmed that, even when these four elements are present, the bankruptcy court may still disallow the claim if it determines that it would be inequitable to allow it. Technically, if an informal proof of claim exists, the creditor must amend it by filing a formal claim. While creditors who have timely filed claims have the right to amend them after the bar date, the creditor relying on the informal proof of claim doctrine has no such right; it must satisfy the court that allowing its claim will not result in inequity to other creditors.

Specifically, in the PCFS Financial case, the Sixth Circuit affirmed the bankruptcy court’s determination not to permit amendment of the informal proof of claim. The bankruptcy court found that it would have been inequitable to allow the informal claim because (1) the creditor had clearly been on notice of the need to file a proof of claim; (2) the creditor offered no explanation for failing to file a proof of claim for over three years; and (3) permitting the filing would have decreased the distribution available for other creditor from 100% to 29%. The Sixth Circuit held that the bankruptcy court did not abuse its discretion in determining that the equities weighed against allowance of the claim.