Watching the Clock: It Pays to File Claims on Time in Bankruptcy Cases

The Seventh Circuit Court of Appeals has recently adopted a zero-tolerance policy for claims filed late in bankruptcy cases. Now more than ever, creditors must take action early in preparing their claims and seeking the advice of counsel.

In July 2009, the Court of Appeals affirmed the ruling of the District Court in Chicago against a creditor whose claim was filed late in the MarchFIRST, Inc. bankruptcy case (In re MarchFIRST, Inc.). With a deadline of 4:00 p.m. (eastern time) on October 11, 2001, the claims agent for MarchFIRST provided one address for mailed claims and another address for those sent via overnight courier. Avnet, Inc., a creditor of MarchFIRST, instead faxed its proof of claim form to the agent at 4:43 p.m. (eastern time) on October 11, 2001, with a note stating that the original proof of claim document would arrive via overnight courier the following morning. Avnet's original claim arrived at the agent's office as promised on October 12, 2001. However, the bankruptcy trustee for MarchFIRST objected to the claim as being filed late.

In In re MarchFIRST, Inc., Avnet argued that a faxed claim followed by a late original claim should be sufficient. The court reminded Avnet that faxes were not even a permitted method of transmission for claims in the MarchFIRST case. The court also rejected Avnet's argument that the equities were in its favor. Simply put, the fact that Avnet waited 43 minutes past the deadline before sending a fax copy of its claim did not generate sympathy. Avnet's final argument, that the fax copy of the claim was really an "informal" claim that was amended the next day by the original claim, also failed. The court explained that the "informal proof of claim doctrine" applies only to timely informal claims that are amended after the deadline by formal claims. Ultimately, the Court of Appeals rejected all of the creditor's arguments and affirmed the decision of the lower courts, leaving Avnet with no claim against MarchFIRST.

The result in In re MarchFIRST, Inc. is undoubtedly harsh, and one can almost hear the word "gotcha" echoing in the background. What is the lesson to be learned for creditors? Upon receiving notice of a deadline to file a claim in a bankruptcy case, it is critical that creditors take action immediately. Read the notice thoroughly, be on the lookout for the acceptable methods of transmitting the claim form and always consult an attorney. Remember: There is no penalty for filing a claim well in advance of the deadline, but the repercussions for filing late could be significant.