This month I want to address Section 502(c) of the Bankruptcy Code (the “Code”). 111 U.S.C. §§ 101 et seq. Section 502(c) allows for the quantification of claims that are not readily susceptible to liquidation, thus ensuring that estate administration is not delayed.
Section 502(c), together with other provisions of the Code, represents a departure from prior law under the former Bankruptcy Act of 1898 (the “Bankruptcy Act”). 2See Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 (repealed 1978). The treatment of a claim under the Bankruptcy Act mostly depended on whether the claim was “provable.” Indeed, Section 17 of the Bankruptcy Act provided that a discharge in bankruptcy released a debtor from all of his or her “provable” debts. 3Id. § 17. Moreover, Section 63 of the Bankruptcy Act provided that a claimant could participate in distributions from the estate on account of its claim only if such claim was allowable and provable. 4Id. § 63. See also id. § 57 (discussing “proof and allowance of claims” under the Bankruptcy Act). In order for a claim to be considered “provable” it had to be liquidated or capable of ready liquidation. As a result, some unliquidated claims, especially tort claims, were neither discharged nor distributed on.
Section 502(c) of the Code, together with the broad definition of claims, 5A “claim” is defined in Code § 101(5) as follows
- (5) The term “claim” means—
- (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
- (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
11 U.S.C. §101(5). was meant to correct that situation to ensure a broad discharge and broad participation in the estate. Because the concept of provability has been abandoned, a claim need only be allowed under Section 502 of the Code to participate in distributions from the estate, and Section 502(c) provides one means of such allowance. Section 502(c) states:
- (c) There shall be estimated for purpose of allowance under this section—
- (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
- (2) any right to payment arising from a right to an equitable remedy for breach of performance.
11 U.S.C. § 502(c).
Though Section 502(c) was intended to monetize claims that are otherwise of uncertain amount, it is limited in its reach. On its face the provision is limited to contingent or unliquidated claims or claims for equitable remedies. Thus, Congress did not intend that it be used, for example, to quantify an affirmative defense to a fully liquidated contract claim.
Having said that, estimation can be used for limited purposes. A claim may be estimated and allowed for voting purposes 6In re Chemtura Corp., 2011 BL 103644, at **9, 448 B.R. 635, 649 (Bankr. S.D.N.Y. 2011) (holding that claims estimation under Section 502(c)(1) “can be used for a variety of purposes, including determining voting rights on a reorganization plan … .”) (citing In re Ralph Lauren Womenswear, Inc., 197 B.R. 771 (Bankr. S.D.N.Y. 1996)); In re Trident Shipworks, Inc., 247 B.R. 513, 514 (Bankr. M.D. Fla. 2000) (holding that it is “well established that [an] estimation proceeding may be used for the purpose of voting on a Plan of Reorganization … .”). or to determine whether a plan is feasible, 7In re Chicago Invs., LLC, 2012 BL 102660, **56–58, 470 B.R. 32, 101-02 (Bankr. D. Mass. 2012) (holding that “[c]laims estimation under Section 502(c)(1) … can be used to gaug[e] plan feasibility”) (quoting In re Chemtura Corp., 448 B.R. at 649-50); In re Pac. Gas & Electric Co., 295 B.R. 635, 641 (Bankr. N.D. Cal. 2003) (estimating certain antitrust claims as having no value solely for the purpose of determining plan feasibility); In re MacDonald, 128 B.R. 161, 164 (Bankr. W.D. Tex. 1991) (“The estimation of an unliquidated or contingent administrative claim such as the post-petition tort claim is essential prior to the hearing on confirmation of a plan, in order for the court to evaluate the feasibility of the plan without unduly delaying the confirmation process.”). for example. Estimation can also be for allowance for distribution in liquidation or under a plan. 8Indeed, Section 502(c) expressly provides that certain claims “shall be estimated for the purpose of allowance.” 11 U.S.C. § 502(c). Thus, estimation may fix a creditor’s recovery regardless of what a full trial to liquidate it might show.
As for the mechanics of estimation, the bankruptcy judge has broad discretion 9First City of Beaumont v. Durkay (In re Ford), 967 F.2d 1047, 1049 n.3 (5th Cir. 1992) (“‘Estimation’ for the purposes of [s]ection 502(c)(1) simply means that the bankruptcy court may exercise [its] discretionary powers to determine the allowability of claims in bankruptcy in accordance with the principles of equity.”) (citing In re Corey, 892 F.2d 829 (9th Cir. 1989)); In re Granite Broad. Corp., 2008 BL 132424, at **7, 385 B.R. 41, 49 (Bankr. S.D.N.Y. 2008) (“Bankruptcy judges have wide discretion in selecting a method for estimating claims, and may use whatever method is best suited to the circumstances.”) (internal quotations omitted) (citing 11 U.S.C. § 105(a)); In re C.F. Smith & Assocs., Inc., 235 B.R. 153, 159 (Bankr. D. Mass. 1999) (recognizing a bankruptcy court’s broad discretion under Section 502(c)) (citing Bittner v. Borne Chem. Co., 691 F.2d 134 (3rd Cir. 1982)). provided that the claimant is afforded due process. 10See In re Chemtura Corp., 448 B.R. at 649 n.46 (“Using estimation for claims allowance purposes, while permissible (and, indeed, expressly mentioned in Section 502(c)(1)), can sometimes raise due process concerns”). See also In re Baldwin-United Corp., 55 B.R. 885, 899-900 (Bankr. S.D. Ohio 1985) (requiring only a non-jury trial with live testimony limited to one witness for each party to satisfy due process in a Section 502(c) claims estimation hearing); In re MacDonald, 128 B.R. at 167 (“Were the estimation process to set the outer limits of allowance for such claims, the due process rights of such claimants would be jeopardized to a far greater degree than were the due process rights of the pre-petition claimants in Baldwin–United.”). The estimation process is supposed to be time-saving, however, so any evidentiary presentation must be truncated. See e.g., In re Windsor Plumbing Supply Co., Inc., 170 B.R. 503, 522 (Bankr. E.D.N.Y. 1994) (“It may sometimes be inappropriate to hold time-consuming proceedings which would defeat the very purpose of 11 U.S.C. § 502(c)(1) to avoid undue delay.”); In re Ford, 967 F.2d at 1053 (holding that the estimation process helps “avoid the need to await the resolution of outside lawsuits to determine issues of liability or amount owed by means of anticipating and estimating the likely outcome of these actions”). In all probability discovery will be limited as well.
The actual presentation of evidence may include live testimony, 11See, e.g
.
In re Wallace’s Bookstores, Inc., 317 B.R. 720 (Bankr. E.D. Kentucky 2004) (indicating court’s intention to permit time-limited presentation of evidence including live testimony with cross-examination); In re Baldwin-United Corp., 55 B.R. at 899 (approving on due process grounds of previously employed procedure limiting parties to testimony from only one witness each). See also In re Lionel, L.L.C., No. 04-17324, 2007 BL 75507, at *6 (Bankr. S.D.N.Y. 2007) (giving a lengthy list of courts that utilized Baldwin-United-style procedures). transcripts of depositions or prior proceedings 12In re MacDonald, 128 B.R. at 166 and affidavits, 13In re Eagle Bus Mfg., Inc., 158 B.R. 421 (S.D. Tex. 1993) (permitting the parties to provide evidence and testimony by witnesses as well as by affidavit); In re MacDonald, 128 B.R. at 166-67 (allowing limited live testimony). as well as exhibits. The practitioner will be well advised to understand the procedure set by the court or agreed to by the parties 14See e.g., N.D. Tex. L.B.R. 3007-4. and formulate a strategy accordingly.
In order to justify estimation of a claim, at least that is contingent or unliquidated, courts may require a showing (or agreement among the parties) that liquidation of the claim would delay administration of the debtor’s estate or the consummation of the case. 15In re Bittner, 691 F.2d at 135 (acknowledging that while “rare and unusual cases” might justify arbitration or jury trials to liquidate a claim, “[s]uch methods [usually run] counter to the efficient administration of the [estate]”); In re Windsor Plumbing, 170 B.R. at 520 (Bankr. E.D.N.Y. 1994) (suggesting abbreviated procedures to avoid undue delay) Concomitantly, the form of evidence will depend on the nature and size of the claim and the time available to liquidate it. Consequently, estimation procedures may vary by claim.
I have previously written about one unusual variation but it is worth addressing again. In the Pilgrim’s Pride case we had claims pending under the Fair Labor Standards Act in two district courts that had been the subject of some proceedings before the filing of Pilgrim’s Pride’s Chapter 11 case. The debtor needed those claims estimated for purposes of confirmation, but the lawyers representing the classes of plaintiffs—in the ten thousands—wanted to proceed to trial in the courts familiar with the cases.
Obviously there was an advantage to letting the courts experienced in the matters continue with them. On the other hand, confirmation of the debtor’s plan could not be delayed to allow for full trial of the claims. The solution was to transfer the claim estimation proceedings to the courts in which the FLSA cases were pending.
Federal Rule of Bankruptcy Procedure 7087 and 28 U.S.C. § 1412 permit transfer of adversary proceedings for the convenience of the parties and in the interests of justice. Federal Rule of Bankruptcy Procedure 9014(c) provides that adversary rules not ordinarily applicable in contested matters—estimation of a claim is a contested matter—may be made applicable in contested matters. Thus, we were able to get the estimation proceedings transferred to the relevant district courts, serving both debtor’s need for speed and the desire of the plaintiffs to take advantage of the experience of the district courts. See
Pilgrim’s Pride Corp. v. MDL FLSA Litig., 415 B.R. 635, 637 (N.D. Tex. 2009).
Section 502(c) provides yet another tool for the practitioner. In appropriate situations it may clear a road block that otherwise would delay administration of a case. Like the FLSA cases in Pilgrim’s Pride, facing judicial quantification of a claim not only speeds things up, but may lead to a sensible settlement.
