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
773.702.0864/[email protected]
Copyright © 2005-09 Randal C. Picker. All Rights
501

Filing of proofs of claims or interests
(a)
A creditor or an indenture trustee may
file a proof of claim. An equity security
holder may file a proof of interest.
(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.
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502

Allowance of claims or interests
(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.
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502 (cont.)

Allowance of claims or interests (cont.)
 (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 –
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502 (cont.)

Allowance of claims or interests (cont.)
(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;
 (2) such claim is for unmatured interest;

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502 (cont.)

Allowance of claims or interests (cont.)

(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  (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

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(B) any unpaid rent due under such lease, without
acceleration, on the earlier of such dates;
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502 (cont.)

Allowance of claims or interests (cont.)

(b)(7) if such claim is the claim of an employee for damages
resulting from the termination of an employment contract, such
claim exceeds  (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

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(B) any unpaid compensation due under such contract, without
acceleration, on the earlier of such dates;
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Borne Chemical

Core Facts
Simplifying,
Rolfite has a claim in a pending
lawsuit against Borne
Borne files for Chapter 11
Rolfite gets relief from the stay to pursue
the lawsuit outside of bankruptcy
Bankruptcy court temporarily disallows
claims pending state court resolution
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Borne Chemical
Rolfite
tries to block confirmation of plan of
reorganization for Borne
When rejected, appeals to district court,
which vacates disallowance order and
requires estimation hearing
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”
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502 (cont.)

Allowance of claims or interests (cont.)
 (c)
There shall be estimated for purpose of
allowance under this section 

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(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.
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502 (cont.)

Allowance of claims or interests (cont.)

(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,
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502 (cont.)
 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.
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The Estimation

Two Approaches
B
Ct Approach
Assess weight of evidence: {0,100}, {40,60},
{51,49}, {100,0}
 Based on weight, apply standard of proof
rule: preponderance, clear and convincing,
beyond a reasonable doubt
 If proof standard isn’t met, disallow claims

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The Estimation

If proof standard met, allow claims in full at
estimated liablity amount?
Rolfite
Approach
Take point estimate of weight, say 40%
 Multiply that time estimated liability
 Use that as allowed estimate for claim

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The Estimation

Key Question
What
is at stake? Distributions to creditors?
Control over the proceeding?
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AH Robins

Core Facts
Robins
faces mass tort litigation from
production of Dalkon Shield
Prior to bankruptcy, wide range in punitive
damage awards against company
Tries to implement limited-fund class action
and fails
Files for bankruptcy
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The Fight over Punitive
Damages

The Players
Claimants

Represents current claimants of Robins,
favors recovery of punitive damages
Future

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Committee
Tort Claimants Committee
Punitives should be allowable, but
subordinated to other unsecured claims
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The Fight over Punitive
Damages
Unsecured

Favors disallowance, and if not,
subordination under 510(c)
Equity

Creditors Committee
Committee
Favors disallowance
Robins/The


Debtor
Favors disallowance
What explain the positions of the parties?
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The Robins Reorganization

Key Features
Establishes
trust for resolution of current
and future torts claims
Allocates value to the trust
Plan contemplates $700 million distribution
to shareholders
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Assessing Disallowance of
Punitive Damage Claims

Key Questions
Does
502 allow the bankruptcy court to
disallow punitive damage claims?
Does 105 make that possible? The inherent
equitable power of the bankruptcy court?
How should we assess the court’s reading
of Pepper, Heiser and Vanston?
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Assessing Disallowance of
Punitive Damage Claims
What
do we make of 510(c) and 726(a)(4)?
Again, how should we reflect state law in
bankruptcy?
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?
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510(c)

Subordination
 (c)
Notwithstanding subsections (a) and (b) of this
section, after notice and a hearing, the court may 

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(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
(2) order that any lien securing such a subordinated
claim be transferred to the estate.
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105(a)

Power of Court
The
court may issue any order, process, or
judgment that is necessary or appropriate to
carry out the provisions of this title.
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726

Distribution of property of the estate (cont.)
 (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;
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