Opinion ID: 2975051
Heading Depth: 3
Heading Rank: 1

Heading: Requirement of Filing a Proof of Claim

Text: Castle contends that it was not required to file a proof of claim since it was a secured creditor. A creditor’s secured status is determined under 11 U.S.C. § 506(a),6 which provides as follows: [a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim. Because Carl Sullivan’s $165,000 mortgage was senior to the judgment lien held by Castle, and because their liens were transferred to the $14,851 proceeds of the state court foreclosure sale in the order of their priority, Castle could have no prepetition secured interest in the Proceeds unless 6 Debtor’s bankruptcy case was filed before the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), and all references to the Bankruptcy Code in this opinion are to the pre-BAPCPA version of the Code. See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, sec. 1501(b)(1), Pub. L. No. 109-8, 119 Stat. 23, 216 (stating that, unless otherwise provided, the amendments do not apply to cases commenced under Title 11 before the effective date of the Act). -8- the Sullivan mortgage was avoided prepetition. That did not happen. Thus, at the commencement of the Chapter 7 case, the Sullivan lien had attached to the Proceeds and Castle was an unsecured creditor, at least with respect to those Proceeds.7 As an unsecured creditor, Castle was required to file a proof of claim in order to share in distributions from the bankruptcy estate. See Fed. R. Bankr. P. 3002(a). Castle’s argument to the contrary is without merit. To the extent that Castle is arguing that its status as an unsecured creditor with respect to the Proceeds changed due to the fact that the Trustee succeeded in avoiding the Sullivan mortgage under § 544, it is mistaken. Section 544(b) gives the trustee authority to avoid “any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim that is allowable . . . .” 11 U.S.C. § 544(b)(1). Any transfer avoided under § 544 is automatically “preserved for the benefit of the estate.” See 11 U.S.C. § 551. Thus, § 544(b)(1) “allows the trustee to ‘step into the shoes’ of a creditor in order to nullify transfers voidable under state fraudulent conveyance acts for the benefit of all creditors.” Corzin v. Fordu (In re Fordu), 7 In its appellate briefs, Castle does not identify the collateral that it alleges secured its claim. However, at the hearing on its objection to the Final Report, Castle identified as collateral securing its claim the Proceeds of the state court foreclosure proceeding, as well as real estate located at North Washington Street, South Monroe Street (“the Adams Square Condominiums), South Washington Street, North Grant Street, and Floral Wood Drive. The Floral Wood Drive property in which Debtor claimed a dower interest was never administered by the Trustee and will be abandoned at the closing of the case. See 11 U.S.C. § 554(c). The record on appeal does not reflect either Debtor’s interest in, or the disposition of, the Adams Square condominiums located on South Monroe Street. The remaining three properties, the North Washington, South Washington and North Grant Street properties, were sold free and clear of all liens and are the subject of the bankruptcy court’s February 12, 2001, order. That order provided for the disbursement of funds from the sale of those properties and further provided that, after payment of costs and expenses, several mortgages, and a total payment of $5,000 on account of Castle’s lien, the Trustee receive the balance of the proceeds from each sale “for the benefit of unsecured creditors.” (Appx., Tab 18.) Castle did not appeal that order and cannot now argue that it is entitled to any additional distribution from the proceeds of those sales due to its alleged secured status. While Castle may have had a secured interest in the Proceeds of the state court foreclosure proceeding if the Sullivan mortgage had been satisfied by the sale of other properties that were also the subject of that mortgage, that was not the case, and Castle does not so argue as a basis for finding it to be a secured creditor. In fact, the record on appeal indicates that the Sullivan mortgage was secured by only one of the three properties sold by the Trustee, the property located at 392 N. Washington, and generated only $13,791.03 in payment towards the $165,000 mortgage. (See Motion to Sell Property, Appx., Tab 16, p. 2 and attached Ex. B; Amended Order Granting Trustee’s Motion to Sell Property, Tab 18; Report of Sale, Tab 21.) -9- 201 F.3d 693, 698 n.2 (6th Cir. 1999) (emphasis added); see Waldschmidt v. Metals (In re Ward), 42 B.R. 946, 951 (Bankr. M.D. Tenn. 1984) (explaining that § 551 is intended to prevent the windfall to junior lienors that would result when a trustee in bankruptcy successfully avoids a senior lien on property). B. Castle’s Proof of Claim Is Not Deemed Timely Filed Castle argues that because it put the bankruptcy estate on notice of its claim when it filed its adversary proceeding against Debtor in August 1998, it should be deemed to have filed a timely proof of claim. The common law doctrine of “informal proofs of claim” “permits a bankruptcy court to treat the pre-bar date filings of a creditor as an informal proof of claim which can be amended after the bar date so that it is in conformity with the requirement of Fed. R. Bankr. P. 3001(a).” Barlow v. M.J. Waterman & Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604, 608 (6th Cir. 2000). Whether an informal proof of claim should be allowed is an equitable determination made within the sound discretion of the bankruptcy judge. Id. at 607. However, a review of the record on appeal fails to demonstrate that this argument was ever presented to the bankruptcy court.8 Absent special circumstances, this Panel will not consider “issue[s] not passed upon” by the trial court. Singleton v. Wulff, 428 U.S. 106, 120, 96 S. Ct. 2868, 2877 (1976). Moreover, even if considered, Castle’s argument must fail. The Sixth Circuit has articulated five factors to be considered in determining whether an informal proof of claim should be allowed: (1) the proof of claim must be in writing; (2) the writing must contain a demand by the creditor on the debtor’s estate; (3) the writing must express an intent to hold the debtor liable for the debt; (4) the proof of claim must be filed with the bankruptcy court; and (5) if the first four factors are met, a court should consider whether it would be equitable under the circumstance to allow the amendment of the informal proof of claim. Barlow, 227 F.3d at 609. Castle does not address these factors. While the filing of a complaint objecting to discharge and asserting the nondischargeability of a debt satisfies the first, third and fourth factors, Castle has not demonstrated that the complaint contains a demand on debtor’s estate. A review of the complaint, which is not part of the record on appeal, is necessary. Castle also has not demonstrated that it would be equitable to allow an informal 8 Castle did not include a transcript of the hearing on its motion to extend time to file a proof of claim in the record on appeal. -10- proof of claim under the circumstances of this case. Although it contends that it did not receive notice of the claims bar date, it did not file its motion to extend time to file proof of claim until nearly ten months after the bar date. There is no evidence indicating when Castle actually learned that it must file a proof of claim. However, the First Interim Application for Allowance of Compensation and Expenses filed by counsel for the Trustee reflects numerous contacts between Castle’s attorney and the Trustee or counsel for the Trustee during the time period between the date of notice of the bar date and the date Castle filed its motion to extend time to file its proof of claim. To the extent that Castle learned of assets that would be available for distribution at an earlier date and thus, the necessity of filing a proof of claim, it may very well be found to be inequitable to permit Castle to remedy its failure to act at such a late date. In any event, the record before this Panel is insufficient to make the determination required under Barlow. C. The Proceeds Were Properly Included as Property of the Bankruptcy Estate In arguing that the Proceeds are not property of the bankruptcy estate, Castle argues that the Trustee did not have authority to obtain the Proceeds from state court. Castle relies on § 550, which provides that “to the extent that a transfer is avoided under section 544 . . . the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property . . . .” 11 U.S.C. § 550(a). Castle’s argument, although somewhat confusing, seems to be that because Carl Sullivan’s mortgage on the real estate had been released prepetition, the Trustee could not recover the “property transferred” and was instead required to obtain an order to recover “the value of such property,” which the Trustee did not do. This argument has no merit. Carl Sullivan’s lien interest, which was in the form of a mortgage, was transferred to the Proceeds on sale of the real estate pursuant to the state court’s Order of Confirmation and Distribution. Thus, at the time the bankruptcy court avoided the interest transferred to Carl Sullivan by Debtor, the Proceeds had been substituted for the real estate and Sullivan’s lien interest had attached to the Proceeds. Therefore, the Trustee was entitled to recover the Proceeds, which were automatically preserved for the benefit of the estate pursuant to § 551, and was not required to obtain an order to recover the value of the property. Castle also presents somewhat convoluted arguments in support of its contention that it has greater rights in the Proceeds than the Trustee, apparently based on its belief that the Sullivan -11- mortgage was extinguished and, thus, that the Trustee did not succeed to any lien interest in the Proceeds. Of course, if any lien interest of Carl Sullivan was extinguished by the state court order confirming sale of the real estate rather than being transferred to the Proceeds, so too was Castle’s lien extinguished, thus, entitling Castle to no greater interest in the Proceeds. Nevertheless, as discussed above, Sullivan’s mortgage did, in fact, attach to the Proceeds, leaving Castle unsecured with respect to the Proceeds given its junior lien position. Castle also argues that the Proceeds cannot become property of the estate without a state court determination of its claim of entitlement to the Proceeds. This argument is also without merit. Castle’s claim is based on its contention that the Carl Sullivan mortgage constituted a fraudulent conveyance under Ohio law. As discussed above, § 544(b) permits the Trustee to assert in the bankruptcy case Castle’s fraudulent conveyance claim for the benefit of all unsecured creditors. Finally, Castle argues that, but for the bankruptcy court approving excessive fees of counsel for the Trustee, under § 726(a)(3), it would have been entitled to distribution from the estate even if considered an unsecured creditor with an untimely filed proof of claim. However, the record does not support this argument. The attorney fees challenged by Castle total $36,500. According to the Final Report, a total of $22,591 in priority claims and $22,465 in allowed unsecured claims for which proofs of claims were timely filed remain unpaid due to insufficient funds in the estate. Castle is not entitled to any distribution until those priority claims and unsecured claims are paid. See 11 U.S.C. § 726(a)(3). Thus, even if Castle succeeds in its challenge to the award of attorney fees, it has no pecuniary interest in the distribution of those additional funds. As such, Castle lacks standing to appeal the bankruptcy court’s order granting the Application for Fees and, in light of the foregoing, the bankruptcy court did not err in approving the Final Report.