Class 4 Bankruptcy, Spring, 2009 Allowance and Disallowance of Claims Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago Copyright © Randal C. Picker. All Rights Reserved.

December 6, 2015Copyright © Randal C. Picker2 501 n Filing of proofs of claims or interests u (a) A creditor or an indenture trustee may file a proof of claim. An equity security holder may file a proof of interest. u (b) If a creditor does not timely file a proof of such creditor’s claim, an entity that is liable to such creditor with the debtor, or that has secured such creditor, may file a proof of such claim.

December 6, 2015Copyright © Randal C. Picker3 502 n Allowance of claims or interests u (a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.

December 6, 2015Copyright © Randal C. Picker4 502 (cont.) n Allowance of claims or interests (cont.) u (b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that –

December 6, 2015Copyright © Randal C. Picker5 502 (cont.) n Allowance of claims or interests (cont.) w (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured; w (2) such claim is for unmatured interest;

December 6, 2015Copyright © Randal C. Picker6 502 (cont.) n Allowance of claims or interests (cont.) u (6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds - w (A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of - (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus w (B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates;

December 6, 2015Copyright © Randal C. Picker7 502 (cont.) n Allowance of claims or interests (cont.) u (b)(7) if such claim is the claim of an employee for damages resulting from the termination of an employment contract, such claim exceeds - w (A) the compensation provided by such contract, without acceleration, for one year following the earlier of - (i) the date of the filing of the petition; or (ii) the date on which the employer directed the employee to terminate, or such employee terminated, performance under such contract; plus w (B) any unpaid compensation due under such contract, without acceleration, on the earlier of such dates;

December 6, 2015Copyright © Randal C. Picker8 Borne Chemical n Core Facts u Simplifying, Rolfite has a claim in a pending lawsuit against Borne u Borne files for Chapter 11 u Rolfite gets relief from the stay to pursue the lawsuit outside of bankruptcy u Bankruptcy court temporarily disallows claims pending state court resolution

December 6, 2015Copyright © Randal C. Picker9 Borne Chemical u Rolfite tries to block confirmation of plan of reorganization for Borne u When rejected, appeals to district court, which vacates disallowance order and requires estimation hearing u B Ct estimates claim at zero, again disllows until state case done and “in effect requir[es] a waiver of the discharge of the Rolfite claims”

December 6, 2015Copyright © Randal C. Picker (cont.) n Allowance of claims or interests (cont.) u (c) There shall be estimated for purpose of allowance under this section - w (1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case; or w (2) any right to payment arising from a right to an equitable remedy for breach of performance.

December 6, 2015Copyright © Randal C. Picker (cont.) n Allowance of claims or interests (cont.) u (j) A claim that has been allowed or disallowed may be reconsidered for cause. A reconsidered claim may be allowed or disallowed according to the equities of the case. Reconsideration of a claim under this subsection does not affect the validity of any payment or transfer from the estate made to a holder of an allowed claim on account of such allowed claim that is not reconsidered,

December 6, 2015Copyright © Randal C. Picker (cont.) u but if a reconsidered claim is allowed and is of the same class as such holder’s claim, such holder may not receive any additional payment or transfer from the estate on account of such holder’s allowed claim until the holder of such reconsidered and allowed claim receives payment on account of such claim proportionate in value to that already received by such other holder. This subsection does not alter or modify the trustee’s right to recover from a creditor any excess payment or transfer made to such creditor.

December 6, 2015Copyright © Randal C. Picker13 The Estimation n Two Approaches u B Ct Approach w Assess weight of evidence: {0,100}, {40,60}, {51,49}, {100,0} w Based on weight, apply standard of proof rule: preponderance, clear and convincing, beyond a reasonable doubt w If proof standard isn’t met, disallow claims

December 6, 2015Copyright © Randal C. Picker14 The Estimation w If proof standard met, allow claims in full at estimated liablity amount? u Rolfite Approach w Take point estimate of weight, say 40% w Multiply that time estimated liability w Use that as allowed estimate for claim

December 6, 2015Copyright © Randal C. Picker15 The Estimation n Key Question u What is at stake? Distributions to creditors? Control over the proceeding?

December 6, 2015Copyright © Randal C. Picker16 AH Robins n Core Facts u Robins faces mass tort litigation from production of Dalkon Shield u Prior to bankruptcy, wide range in punitive damage awards against company u Tries to implement limited-fund class action and fails u Files for bankruptcy

December 6, 2015Copyright © Randal C. Picker17 The Fight over Punitive Damages n The Players u Claimants Committee w Represents current claimants of Robins, favors recovery of punitive damages u Future Tort Claimants Committee w Punitives should be allowable, but subordinated to other unsecured claims

December 6, 2015Copyright © Randal C. Picker18 The Fight over Punitive Damages u Unsecured Creditors Committee w Favors disallowance, and if not, subordination under 510(c) u Equity Committee w Favors disallowance u Robins/The Debtor w Favors disallowance n What explain the positions of the parties?

December 6, 2015Copyright © Randal C. Picker19 The Robins Reorganization n Key Features u Establishes trust for resolution of current and future torts claims u Allocates value to the trust u Plan contemplates $700 million distribution to shareholders

December 6, 2015Copyright © Randal C. Picker20 Assessing Disallowance of Punitive Damage Claims n Key Questions u Does 502 allow the bankruptcy court to disallow punitive damage claims? u Does 105 make that possible? The inherent equitable power of the bankruptcy court? u How should we assess the court’s reading of Pepper, Heiser and Vanston?

December 6, 2015Copyright © Randal C. Picker21 Assessing Disallowance of Punitive Damage Claims u What do we make of 510(c) and 726(a)(4)? u Again, how should we reflect state law in bankruptcy? u How should we account for the fact that states differ in their approaches to punitive damages and different tort victims will have differing rights under state law?

December 6, 2015Copyright © Randal C. Picker22 510(c) n Subordination u (c) Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may - w (1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or w (2) order that any lien securing such a subordinated claim be transferred to the estate.

December 6, 2015Copyright © Randal C. Picker23 105(a) n Power of Court u The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.

December 6, 2015Copyright © Randal C. Picker n Distribution of property of the estate (cont.) u (a)(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim;