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Business Bankruptcy Issues Recent Developments

Amendments To Federal Bankruptcy Rules, Official Forms, And Federal Rules Of Evidence Are Now In Effect

Bankruptcy Rule Amendments. As reported in a post last month, this year’s amendments to the Federal Rules of Bankruptcy Procedure have now taken effect today, December 1, 2011.

Amended Official Bankruptcy Forms. In addition to the national bankruptcy rules, revisions have been made to a number of the official bankruptcy forms. This sentence contains a link to a set of these updated official forms.

Amended Federal Rules Of Evidence. Finally, a restyled edition of the Federal Rules of Evidence also goes into effect today; follow the link in this sentence for the revised evidence rules. Although the substance of the rules of evidence has not changed, revisions in the numbering of some subsections and the style of how the rules are phrased have been implemented.

Business Bankruptcy Issues Recent Developments

Amendments To The Federal Bankruptcy Rules, Including Rule 2019, To Take Effect December 1, 2011

Almost every year, changes are made to the set of rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The changes address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. There are seven amendments to the national bankruptcy rules this year. Some affect bankruptcy cases involving individuals but major revisions have been made to Rule 2019, which governs disclosures by ad hoc committees and groups of creditors or equity security holders in Chapter 11 business bankruptcy cases and in Chapter 9 municipality cases. All of the new amendments will take effect on December 1, 2011, barring unlikely action by Congress.

Read All About It. A copy of the Advisory Committee’s report, together with a redline of the new rule amendments, is available by following the link in this sentence. The report also includes the Advisory Committee’s notes on each new or amended rule.

Significant Revisions to Rule 2019: Controversy Resolved? Over the past several years, Rule 2019, the national bankruptcy rule regarding disclosure by unofficial committees and groups of hedge fund and other investors, has been the subject of much litigation and a number of conflicting court decisions, including opposite views from different bankruptcy judges in Delaware. Follow the link in this sentence for a collection of previous posts on the blog discussing those past decisions and the controversy surrounding old Rule 2019.

In an attempt to put the controversy to rest, the Advisory Committee drafted, and the Supreme Court has approved, a new Rule 2019, which will take effect on December 1, 2011. It requires disclosure in Chapter 11 and Chapter 9 cases by unofficial committees, groups and entities consisting of or representing multiple creditors or equity security holders that are (1) acting in concert to advance common interests, and (2) not composed entirely of affiliates or insiders of each other, and which take a position before the court or solicit votes on confirmation of a plan.

The new rule focuses on the nature and purpose of the committee or group, rather than how it names itself. In contrast, old Rule 2019 covered entities and committees, leading to disputes over whether a self-designated "group" had to make disclosures. Also dropped from the final version of new Rule 2019 was language from the initial proposed rule amendments that would have permitted the court to require disclosure of the amount paid for a disclosable economic interest, another topic of much prior controversy. 

Disclosable Economic Interest. Amended Rule 2019 is built around the defined term "disclosable economic interest," which is defined to mean the following:

Any claim, interest, pledge, lien, option, participation, derivative instrument, or any other right or derivative right granting the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest.

Required Disclosures Under Rule 2019. A covered group or committee will be required to file a verified statement disclosing facts and circumstances on the following topics listed in new Rule 2019(c):

  • The group or committee’s formation;
  • Any entity’s employment and the party at whose instance the employment was arranged;
  • Each member’s and entity’s name, address, and nature and amount of their disclosable economic interest;
  • For each member of a group or committee claiming to represent any entity beyond the group’s members, the date of acquisition by quarter and year of each disclosable economic interest, unless acquired more than a year before the bankruptcy petition was filed; and
  • Where applicable, a copy of any instrument authorizing the entity, group, or committee to act on behalf of creditors or equity security holders.

If any material changes have occurred since the group or committee’s last statement, a supplemental statement must be filed whenever the group or committee takes a position before the court or solicits votes on confirmation of a plan.

Consequences of Non-Compliance With Rule 2019. A party in interest or the court on its own motion can determine whether there has been any failure to comply with the new Rule 2019’s requirements. If so, the court may refuse to permit the group or committee from being heard in the case and/or hold invalid any authority, objection, or plan votes made or obtained by the non-complying entity, group or committee, as well as grant any other appropriate relief.

Other Business Bankruptcy Rule Amendments. In addition to Rule 2019, three of the other new amendments directly impact business bankruptcy cases.

  • New Rule 1004.2 applies in Chapter 15 cross-border bankruptcy cases. It requires that any petition for recognition of a foreign proceeding under Chapter 15 of the Bankruptcy Code state the center of the debtor’s main interests (aka, "COMI"), as well as each country in which a foreign proceeding involving the debtor is pending. The rule is designed to help identify whether the foreign proceeding is a foreign main or nonmain proceeding.
  • Amended Rule 2003(e) will require the United States Trustee or designee to file a statement specifying the date and time to which any Section 341(a) meeting of creditors has been adjourned. This rule amendment was included to be sure that creditors who did not attend a meeting of creditors could learn when the continued meeting will take place, information that sometimes was known only to those who attended the original meeting.
  • Rule 6003, discussed in this prior blog post on the 2007 rule amendments, has been amended to clarify that although a court cannot, absent immediate and irreparable harm, enter an order during the 21 days after a petition has been filed on certain matters, including employment of professionals, it can enter an order after those first 21 days that grants relief effective as of a date prior to entry of the order, i.e., as of the petition date.

Rule Amendments for Individual Bankruptcy Cases. The balance of the new rule amendments involve cases in which the debtor is an individual.

  • Amended Rule 3001(c), governing proofs of claim, requires in an individual debtor’s case that an itemized statement of interest, fees, expenses or other charges be filed with the proof of claim. If a security interest is claimed in the debtor’s property, a statement must also be included giving the amount required to cure any default. If the property involved is the debtor’s principal residence, the proof of claim must attach, and give the information required by, a new official form addressing this rule change, and also must include information related to any escrow account. Penalties for non-compliance can include barring the claimant from presenting the omitted information in any contested matter or adversary proceeding, and an award of reasonable attorney’s fees and expenses caused by the failure.
  • New Rule 3002.1, related to claims secured by a Chapter 13 debtor’s principal residence, sets forth a number of additional requirements when the claim is provided for under Section 1322(b)(5) of the Bankruptcy Code. The new rule details required information related to post-petition fees, expenses, and charges, as well as procedures for determining those amounts and the final cure amount.
  • Rule 4004(b) has been amended to allow a party in interest, under certain circumstances, to seek an extension of time to file an objection to a debtor’s discharge after the deadline for filing such objections to discharge has already expired.

Updated Official Forms. As mentioned, some of the pending amended rules will require revisions in official bankruptcy forms. You can find the proposed revised forms, which will be formally released on December 1, 2011 (unless Congress surprises us and prevents the amendments from taking effect), by following the link in this sentence.

Conclusion. For business bankruptcy professionals, and companies and investors involved in Chapter 11 bankruptcy cases, the most important change to the Federal Rules of Bankruptcy Procedure this year is the newly revised Rule 2019. However, several of the other amendments also will impact Chapter 11 cases, and all are worthy of note.

Business Bankruptcy Issues Recent Developments

Official Bankruptcy Forms Revised To Reflect April 1, 2010 Dollar Amount Adjustments

As discussed in an earlier post called "On The Rise: Bankruptcy Dollar Amounts Will Increase On April 1, 2010," various dollar amounts in the Bankruptcy Code and related statutory provisions were increased for cases filed on or after April 1, 2010. Now several official bankruptcy forms have been revised to reflect these new dollar amounts.

Remember, the increased dollar amounts reflected on these forms apply only to cases filed on or after April 1st.

Business Bankruptcy Issues Recent Developments

Winter 2010 Edition Of Bankruptcy Resource Now Available

The Winter 2010 edition of the Absolute Priority newsletter, published by the Cooley Godward Kronish LLP Bankruptcy & Restructuring group, of which I am a member, has just been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter or to register to receive future editions. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

This edition also reports on some of our recent representations, including the successful Chapter 11 reorganization of our client, retailer Crabtree & Evelyn, Ltd., and our work for official committees of unsecured creditors in Chapter 11 bankruptcy cases involving major retailers. Recent committee cases include Eddie Bauer, Uno Restaurant Holdings, Ritz Camera, Filene’s Basement, BT Tires Group, Gottschalk’s, Bernie’s Audio Video TV Appliance, G.I. Joe’s, Against All Odds, Samsonite Company Stores, Mervyn’s Holdings, The Ski Market, and Lenox Sales, among others.

I hope you find the latest edition of Absolute Priority to be of interest.

Business Bankruptcy Issues Recent Developments

Second Circuit Decides Whether Unsecured Creditors Can Recover Post-Petition Attorney’s Fees

On November 5, 2009, the U.S. Court of Appeals for the Second Circuit became the second court of appeals to answer the question left open in the U.S. Supreme Court’s March 2007 decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007): Can unsecured creditors recover post-petition attorney’s fees as part of their unsecured claims? For more on the Travelers decision, follow the link to this earlier post.

The Ninth Circuit’s Earlier SNTL Corp. Decision. In June 2009, the Ninth Circuit, in a per curiam decision in In re SNTL Corp., 571 F.3d 826 (9th Cir. 2009), held that post-petition attorney’s fees were allowable as part of an unsecured prepetition contract claim. The Ninth Circuit adopted the December 2007 opinion of the Ninth Circuit Bankruptcy Appellate Panel, In re SNTL Corp., 380 B.R. 204 (9th Cir. BAP 2007), which is available by following the link in this sentence. You may find this earlier post on the SNTL Corp. case of interest as well.

The Second Circuit’s New Decision. In its November 5, 2009 opinion in Ogle v. Fidelity & Deposit Company of Maryland, the Second Circuit held — as the Ninth Circuit did in the SNTL Corp. case — that an unsecured creditor can include post-petition attorney’s fees authorized under a prepetition contract valid under state law. In Ogle, the Second Circuit extended its holding in United Merchants & Manufacturers, Inc. v. Equitable Life Assurance Society of the United States, 674 F.2d 134 (2d Cir. 1982), a case decided under the Bankruptcy Act, and concluded that United Merchants survived both the statutory revisions made by the Bankruptcy Code and the Supreme Court’s Travelers decision.

In reaching this result, the Second Circuit analyzed the issues presented, in part, as follows:

All of the fees at issue in Travelers were incurred post-petition; so the amount was necessarily unknown when the bankruptcy petition was filed. It follows that if an unsecured claim for post-petition fees was for that reason unrecoverable, the Travelers Court could have disposed of the claim on that simple, available ground alone. Travelers, therefore, proceeds along lines that, reasonably extended, would suggest (notwithstanding the Court’s express disclaimer) that section 502(b)’s requirement–that the court “shall determine the amount of such claim . . . as of the date of the filing of the petition”–does not bar recovery of post-petition attorneys’ fees.

In the present appeal, as in Travelers: The underlying contract is valid as a matter of state substantive law; none of the section 502(b)(2)-(9) exceptions apply; and the Code is silent as to the particular question presented–in Travelers, whether the Code allows “unsecured claims for contractual attorney’s fees incurred while litigating issues of bankruptcy law,” 549 U.S. at 453; and here, whether the Code allows unsecured claims for “fees incurred while litigating issues of” contract law more generally.

Accordingly, we hold that an unsecured claim for post-petition fees, authorized by a valid pre-petition contract, is allowable under section 502(b) and is deemed to have
arisen pre-petition.  Accord SNTL, 571 F.3d at 844 (“[W]e reject the position . . . that section 502(b) precludes such fees.”).
 

The Court then turned to the question of whether Section 506(b) of the Bankruptcy Code expressly disallows the recovery of attorney’s fees as part of an unsecured claim:

As Travelers makes clear, the question is whether the Code disallows post-petition attorneys’ fees, and does so expressly. It was therefore decisive in Travelers that “the Code says nothing about unsecured claims for contractual attorney’s fees incurred while litigating issues of bankruptcy law.” 459 U.S. at 453 (emphasis in original). And while Travelers declined to address section 506(b) (because the parties had not raised the issue below), see id. at 454-56, it is decisive here that the Code says nothing about such fees incurred litigating things other than issues of bankruptcy law. The teaching of Travelers is therefore fully consonant with our decision in United Merchants.

Accordingly, we hold that section 506(b) does not implicate unsecured claims for post-petition attorneys’ fees, and it therefore interposes no bar to recovery.

Finally, the Second Circuit rejected arguments that (1) Section 502(b)(2)’s disallowance of unmatured interest bars claims for post-petition attorney’s fees, (2) Section 502(e)(2) regarding claims for reimbursement or contribution implicitly forecloses post-petition attorney’s fees, and (3) as a policy matter it would be unfair to allow contract creditors to recover post-petition attorney’s fees when tort claimants and many trade creditors cannot.

Conclusion. We now have two U.S. Court of Appeals decisions this year holding that, after Travelers, post-petition attorney’s fees are allowable as part of an unsecured claim if otherwise recoverable under a prepetition contract. Particularly given the major bankruptcy cases filed in the Southern District of New York, within the Second Circuit, unsecured creditors may make a point of including post-petition attorney’s fees as part of their claims when their contracts so provide. This decision raises questions as well:

  • Will the potential allowance of post-petition attorney’s fees for bankruptcy-related issues impact a debtor’s reorganization prospects?
  • What procedures will debtors propose for managing the process as unsecured creditors amend their claims to add attorney’s fees incurred in protecting their rights during the course of a bankruptcy case?
  • Will individual unsecured creditors become more active in Chapter 11 cases, particularly in those cases in which a large distribution is likely?
  • What standards will bankruptcy courts use to assess the reasonableness of an unsecured creditor’s post-petition attorney’s fees for bankruptcy-related issues?
  • Will claims buyers pay more for unsecured claims based on contracts providing for recovery of post-petition attorney’s fees now that bankruptcy-related fees are recoverable?
  • Will creditors be more insistent on including attorney’s fees provisions in contracts?

Not every unsecured creditor will have the right to attorney’s fees, and most may not incur significant fees after a bankruptcy is filed. However, those that do now have another important arrow in their quiver when seeking to add those fees to their unsecured claims. It will be interesting to see how these issues play out in the months ahead.

 

Business Bankruptcy Issues Recent Developments

First Court Of Appeals Decision Addresses Question Left Open In The Supreme Court’s Travelers Opinion: Can Unsecured Creditors Recover Post-Petition Attorney’s Fees?

On June 23, 2009, the U.S. Court of Appeals for the Ninth Circuit became the first Court of Appeals to answer the question left open in the U.S. Supreme Court’s March 2007 decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. — whether post-petition attorney’s fees can be added to unsecured claims.

The Travelers Case. Before turning to the SNTL Corp. case itself, let’s look back at the Supreme Court’s decision. In March 2007, the U.S. Supreme Court overruled the Ninth Circuit’s so-called Fobian rule in the Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. decision. However, it did not decide whether unsecured creditors could recover, as part of their unsecured claims, post-petition attorney’s fees incurred during the course of the bankruptcy case. For more on the Travelers decision, follow the link in this sentence.

The SNTL Corp. BAP Decision. In the December 2007 BAP decision, Bankruptcy Judge Dennis Montali, writing for the unanimous BAP panel, held that that "claims for postpetition attorneys’ fees cannot be disallowed simply because the claim of the creditor is unsecured." On the unrelated issue, the BAP held that a guarantor’s liability was revived after a preference settlement.

The Ninth Circuit Rules In The SNTL Corp. Case. On June 23, 2009, the Ninth Circuit decided the appeal, issuing a brief, per curiam decision, stating as follows:

The Bankruptcy Appellate Panel decision is AFFIRMED for the reasons stated in its opinion in this case sub nom. We adopt the BAP opinion, In re SNTL Corp., 380 B.R. 204 (B.A.P. 9th Cir. 2007), as our own and attach it as an appendix to this opinion. See Appendix, infra.

A Second Look At The BAP’s Decision. Given that the Ninth Circuit affirmed and adopted as its own the BAP opinion in its entirety, further review of the BAP’s analysis is merited. In reaching its decision, the BAP carefully reviewed two earlier decisions by bankruptcy courts that had taken up the open "Travelers" issue, In re Qmect, Inc. (see earlier post on the Qmect decision) and In re Electric Machinery Enterprises, Inc. (see prior post on the Electric Machinery decision), as well as pre-Travelers law, and first explained its analysis of the interplay between Sections 502 and 506(b):

We are not persuaded by the approach of the Electric Machinery court and, like Qmect, we reject the argument that section 506(b) preempts postpetition attorneys’ fees for all except oversecured creditors. While we cannot predict how the Ninth Circuit will decide this issue in Travelers, we do find a clue in Joseph F. Sanson Inv. Co. v. 268 Ltd. (In re 268 Ltd.), 789 F.2d 674, 678 (9th Cir. 1986), where the Ninth Circuit observed that section 506(b) defines secured claims and does not limit unsecured claims:

When read literally, subsection (b) arguably limits the fees available to the oversecured creditor. When read in conjunction with § 506(a), however, it may be understood to define the portion of the fees which shall be afforded secured status. We adopt the latter reading.

268 Ltd., 789 F.2d at 678.

Next, the BAP discussed Section 502(b)(1)’s requirement that the court determine the amount of an unsecured claim as of the petition date:

The Electric Machinery court, like the bankruptcy court here and many of the pre-Travelers majority courts, disallowed the postpetition fees of an unsecured creditor because section 502(b)(1) provides that a bankruptcy court “shall determine the amount of such claim . . . as of the date of the filing of the petition” and the postpetition fees did not exist as of that date. Elec. Mach., 371 B.R. at 551; Pride Cos., 285 B.R. at 373. Because the amount of fees incurred postpetition cannot be determined or calculated as of the petition date, section 502(b) purportedly precludes their allowance. Id. We disagree with this approach, as it is inconsistent with the Bankruptcy Code’s broad definition of “claim,” which — as discussed previously — includes any right to payment, whether or not that right is contingent and unliquidated. See 11 U.S.C. § 101(5)(A); Qmect, 368 B.R. at 884.

The BAP then held that the Supreme Court’s 1988 Timbers decision did not apply:

We believe that Electric Machinery’s reliance on Timbers is misplaced. Timbers provided that an undersecured creditor could not receive postpetition interest on the unsecured portion of its debt. Timbers, 484 U.S. at 380. This holding is consistent with section 502(b)(2), which specifically disallows claims for unmatured interest. Inasmuch as section 502(b) does not contain a similar prohibition against attorneys’ fees, the comparison between the current issue and that presented in Timbers is not persuasive.

Finally, the BAP held that it was unnecessary to reconcile the competing public policy considerations advanced by the Electric Machinery and Qmect decisions:

Because we find that the Bankruptcy Code itself provides the answer to this issue (by not specifically disallowing postpetition fees), we do not attempt to reconcile these policy concerns. In the end, it is the province of Congress to correct statutory dysfunctions and to resolve difficult policy questions embedded in the statute.

For more on this decision, as well as the BAP’s discussion (now adopted by the Ninth Circuit) on the revival of a guarantor’s liability after a preference settlement, this earlier post on the BAP’s In re SNTL Corp. decision may be of interest.

On Remand From The Supreme Court’s Travelers Decision. One interesting side note involves the BAP’s December 2007 comment in the In re SNTL Corp. decision about being unable to predict how the Ninth Circuit would decide this issue in the Travelers case on remand from the U.S. Supreme Court. Months later, in May 2008, the Ninth Circuit issued this brief order in the Travelers case, effectively remanding the case for "consideration of the bankruptcy court in the first instance." The bankruptcy judge to whom the decision was remanded? Bankruptcy Judge Dennis Montali, who wrote the BAP opinion in In re SNTL Corp.

Impact On Unsecured Creditors? As the first ruling by a U.S. Court of Appeals on this open issue, the Ninth Circuit’s decision may lead unsecured creditors to include post-petition attorney’s fees as part of their allowed unsecured claims when their contracts or a statute provides for them outside of bankruptcy. It will be interesting to see whether the decision has a significant impact on how unsecured creditors in the Ninth Circuit and other jurisdictions pursue claims in bankruptcy cases, and how bankruptcy estates react to such claims for post-petition attorney’s fees.

Business Bankruptcy Issues Recent Developments

If Madoff Investors Are Sued By The SIPA Trustee And Pay Money Back, Can They File Proofs Of Claim After The Bar Date?

Recently, I posted about SIPA liquidations of brokerage firms, prompted by the Securities Investor Protection Act (known as SIPA) liquidations of Lehman Brothers, Inc. and Bernard L. Madoff Investment Securities LLC. An interesting issue has come up in the Madoff case involving investors who redeemed their accounts before the Madoff bankruptcy was filed. In other alleged Ponzi scheme cases, trustees have sued such investors asserting fraudulent transfer or other claims. The investors in turn often raise defenses, including that they redeemed their accounts in good faith and without any knowledge of the alleged fraud, and lengthy and complex litigation usually results.

Resolution of such litigation can come long after the deadline set for filing proofs of claim (known as a "bar date"). This raises a question: if investors end up paying money back to the estate as a result of the trustee’s litigation, will they be able to file proofs of claim — after the bar date — for the amounts they have to return? Before turning to that question, let’s take a look at how such post-bar date claims are dealt with in non-SIPA bankruptcy cases.

Section 502(h) Of The Bankruptcy Code. Under the Bankruptcy Code, if a person or entity is sued by the bankruptcy estate (usually by a trustee, the debtor in possession, or a creditors’ committee) for receipt of an alleged preference or fraudulent transfer, they will be able to file a proof of claim if they end up paying money back to the bankruptcy estate in settlement or as a result of a judgment. Bankruptcy Code section 502(h) expressly covers this situation:

(h) A claim arising from the recovery of property under section 522, 550, or 553 of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.

Section 502(h) recognizes that resolution of avoidance actions may come long after the original bar date for filing proofs of claim has past and allows holders of these later-arising claims to share in the estate along with other creditors. The Bankruptcy Code treats these claims as having arisen at the time of the payment back to the bankruptcy estate and allows proofs of claim to be filed months or even years after the bar date. 

The Claims Bar Date In SIPA Liquidations. In a SIPA liquidation, there are generally two claims bar dates. The first bar date set is for customer claims, in which customers of the failed brokerage firm seek to recover the securities in their accounts (or more likely in the Madoff case, the securities that were supposed to have been in their accounts). The Securities Investor Protection Corporation insurance of up to $500,000 applies to customer claims. A second bar date, usually a few months later, is for general claims. General creditors may include customers with claims in excess of the $500,000 SIPC protection or those who have more traditional trade creditor or other claims. 

The Madoff Case. In the Madoff case, last month several investors filed a motion seeking to have the bar date order clarified with regard to their potential claims in the event that the Madoff trustee later sued them and they were forced to return funds under a fraudulent transfer or other avoidance (sometimes called a  "clawback") cause of action after the general claims bar date.

  • These investors had previously redeemed some or all of their investments, and were seeking an order holding that claims arising from avoidance actions could be filed within 30 days after the judgment giving rise to the claim became final, a provision common in non-SIPA bankruptcy bar date orders due to Bankruptcy Code section 502(h).
  • The moving parties were concerned that without this clarification, any such claims they filed after the bar date might be held to be barred. On the other hand, if they were forced to file a protective claim before the bar date, they would submit to the court’s equitable jurisdiction and may be held to have waived their right to a jury trial in any avoidance action brought against them.
  • The Madoff trustee filed an opposition to the motion (copy available at the prior link) arguing, among other things, that these investors were not creditors, had not been sued, and as a result did not present an actual case or controversy ripe for adjudication. In addition, the trustee argued that Section 502(h) of the Bankruptcy Code was inapplicable, contending that it was inconsistent with an absolute bar date provision under SIPA. (The SIPA statute provides that Bankruptcy Code provisions are generally applicable in SIPA cases to the extent consistent with SIPA.)
  • The SIPC also filed a response to the motion (copy available at the prior link) making arguments similar to those advanced by the trustee. In particular, the SIPC argued that Section 502(h) was inconsistent with what the SIPC called SIPA’s "immutable" bar date.

The Court’s Decision. In a five-page decision issued on February 24, 2009, U.S. Bankruptcy Judge Burton R. Lifland denied the motion, first holding that the Court did not have the discretion to extend the bar dates involved. (A copy of the decision is available by clicking on the link in the prior sentence.) The Court then stated that the motion essentially sought a determination of whether Section 502(h) of the Bankruptcy Code was applicable in SIPA liquidations. Because no avoidance action had yet been filed, the Court held that the requested relief, if granted, would amount to an improper advisory opinion.

  • As a result, the Court refused to decide whether Bankruptcy Code Section 502(h) applies in SIPA cases, commenting as follows: "Although section 78fff(b) of SIPA specifies that the provisions of the Bankruptcy Code shall apply in SIPA liquidation proceedings, to the extent that they are consistent with SIPA, it is unclear whether section 502(h) of the Code would apply. 15 U.S.C. § 78fff(b) (1981)."
  • The Court concluded by noting that the investors could file a protective proof of claim before the general claims bar date, although that would subject them to the Court’s equitable jurisdiction.

An Open Question. Although the Court denied the motion, it left open the ultimate issue involved — whether Section 502(h) of the Bankruptcy Code applies in SIPA liquidations and permits parties to file proofs of claim after the bar date if they are sued by a trustee and later have to return funds or other property. With the issue undecided for now, some investors may choose to file a protective proof of claim before the bar date passes.