Secured Creditors Must File Bankruptcy Proofs of Claim in the Seventh Circuit

In a reversal of a decision of the U.S. Bankruptcy Court for the Northern District of Illinois, the United States Seventh Circuit Court of Appeals in In re Pajian rejected a common bankruptcy court practice of not requiring secured creditors to file proofs of claim in order to receive distributions toward pre-petition secured arrearages as part of a debtor’s chapter 13 plan of reorganization.

Pajian involved a chapter 13 bankruptcy debtor indebted to Lisle Savings Bank, a secured creditor.  Lisle filed a late proof of its secured claim and the debtor objected to the claim based upon its untimeliness.  Formerly, courts would allow a secured creditor such as Lisle Savings Bank to abstain from filing a proof of claim and, instead, wait to object to a proposed plan of reorganization that failed to include payments toward the creditor’s secured pre-petition arrearage claim.

In opining that Rule 3002(c) of the bankruptcy code requires all (not only unsecured) creditors to file proofs of claim within 90 days of a Section 341 meeting of creditors, the Court of Appeals effectively barred Lisle Savings Bank from receiving distributions on its pre-petition secured arrearage claim as part of the debtor’s plan of reorganization.  While the Court of Appeals acknowledged that a secured creditor’s lien (and right to foreclose the same) remains unaffected by its failure to timely file a proof of claim, the court’s decision means that a debtor need not make plan payments to its tardy secured lender during its plan of reorganization (presumably 5 years), but is only required to make loan payments to its lender coming due during the plan in order to avoid a foreclosure of the bank’s lien.

As a result, the debtor in Pajian was not required to make plan payments of loan arrearages during the course of its entire plan of reorganization.  Because Lisle’s lien was not avoided, however, the bank remained entitled to realize upon its pre-petition secured arrearage to the extent of the value of its security, but only after completion of the debtor’s plan of reorganization or default under the terms thereof.

Many deadlines are very short under the bankruptcy rules.  If you are a creditor, whether secured or unsecured, it is of utmost importance to contact bankruptcy counsel immediately upon receiving a notice of bankruptcy.  Failure to comply with bankruptcy deadlines, including the filing of a timely proof of claim, may prejudice the rights of a secured creditor as displayed by Pajian.

For further information, please contact John Schreiber or any of the attorneys in OCHD&L’s Banking & Creditors’ Rights Practice Group.