Fifth Circuit Requires "Compelling Circumstances" to Amend Proof of Claim Post-Confirmation
Consistent with precedent in its sister circuits, the U.S. Court of Appeals for the Fifth Circuit in CLO Holdco, Ltd. v. Kirschner (In the Matter of Highland Cap. Mgmt. LP), 102 F.4th 286 (5th Cir. 2024), held that to amend a proof of claim after confirmation of a chapter 11 plan, the party seeking to amend must demonstrate compelling circumstances to do so because plan confirmation is akin to a final judgment in a civil case and reopening a confirmed plan could unfairly prejudice the debtor or other parties.
Procedures Governing Filing of Proofs of Claims or Interests in Bankruptcy
To determine the universe of creditor claims against, and equity interests in, a debtor, the Bankruptcy Code generally contemplates either that the creditor, interest holder, or other authorized party submits "proof" of the claim or interest to the bankruptcy court. See 11 U.S.C. § 501; Fed. R. Bankr. P. 3001; see generally Collier on Bankruptcy ("Collier") ¶ 501.02 (16th ed. 2024). A creditor or equity security must file a proof of claim or interest for the claim or interest to be allowed, with certain exceptions. See Fed. R. Bankr. P. 3002(a).
In a chapter 11 case, the "bar date" for filing proofs of claims or interests is established by the bankruptcy court (with certain exceptions, including the 180-day deadline established for certain "governmental unit" claims set forth in Fed. R. Bankr. P. 3003(c)(1)). See Fed. R. Bankr. P. 3003(c)(3). The bankruptcy court can extend this deadline "for cause shown." Id. Holders of claims or interests that are not scheduled by a chapter 11 debtor as disputed, contingent, or unliquidated need not file a proof of claim or interest. See Fed. R. Bankr. P. 3003(c)(2).
If a creditor fails to timely file a proof of claim without seeking an extension of the deadline prior to its expiration, the court will disallow the claim, unless the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure permit a late filing or the court authorizes a tardy filing, usually upon a showing of "excusable neglect." See 11 U.S.C. § 502(b)(9); Fed. R. Bankr. P. 9006(b); Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 395 (1993) (concluding that "the determination is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission").
If no party-in-interest objects to a proof of claim or interest, the claim or interest is deemed allowed. See 11 U.S.C. § 502(a). If an objection is filed to a claim, the bankruptcy court will, after notice and a hearing, allow or disallow the claim according to the criteria set forth in section 502(b) of the Bankruptcy Code.
A creditor may generally withdraw its claim as of right by filing a notice of withdrawal.
See Fed. R. Bankr. P. 3006.
A creditor may also amend its claim. Many courts have recognized that a timely filed amendment should be "freely allowed." See, e.g., Gens v. Resolution Trust Corp., 112 F.3d 569, 575 (1st Cir.), cert. denied, 522 U.S. 931 (1997); In re Unioil, Inc., 962 F.2d 988, 992 (10th Cir. 1992) ("Ordinarily, amendment of a proof of claim is freely permitted so long as the claim initially provided adequate notice of the existence, nature, and amount of the claim as well as the creditor's intent to hold the estate liable."); Belser v. Nationstar Mortgage, LLC (In re Belser), 534 B.R. 228, 243 (B.A.P. 1st Cir. 2015); In re S-Tek 1, LLC, No. 20-12241-J11, 2022 WL 162435, at *4 (Bankr. D.N.M. Jan. 18, 2022); see generally Collier at ¶ 501.02[4].
Heightened scrutiny, however, has been directed by courts at creditor attempts to amend a proof of claim after confirmation of a chapter 11 plan. For example, in Holstein v. Brill, 987 F.2d 1268, 1270 (7th Cir. 1993), the U.S. Court of Appeals for the Seventh Circuit held that because "[c]onfirmation of the plan of reorganization is a second milestone, equivalent to final judgment in ordinary civil litigation," "further changes [after confirmation] should be allowed only for compelling reasons." Similarly, the Eleventh Circuit ruled that "post-confirmation amendment—while not prohibited—is not favored, and only the most compelling circumstances justify it." In re Winn-Dixie Stores, Inc., 639 F.3d 1053, 1056–57 (11th Cir. 2011); accord In re Northstar Offshore Grp., LLC, No. 16-34028, 2024 WL 2888494, at *6 (Bankr. S.D. Tex. June 7, 2024); In re G-I Holdings, Inc., 514 B.R. 720, 760 (Bankr. D.N.J. 2014), aff'd, 654 F. App'x 571 (3d Cir. 2016).
Highland Capital
During the 2008 financial crisis, certain funds managed by Highland Capital Management, L.P. (the "debtor") were overwhelmed by redemption requests from investors at the same time that the funds' assets were losing value. The debtor placed the troubled funds in wind-down proceedings in Bermuda, which culminated in the approval of a joint plan of distribution and a scheme of arrangement. The joint plan and scheme sought to achieve the orderly management, sale, and distribution of the funds' assets. The debtor remained in place as investment manager, with a committee of the funds' investors (the "committee") overseeing the debtor's management of the funds' liquidation.
Disputes eventually arose between the committee and the debtor. The committee asserted that the debtor breached its fiduciary duty and its contractual obligations under the joint plan and scheme by purchasing the redemption claims of former fund investors for itself. An arbitration panel found in favor of the committee and ordered the debtor to pay the committee approximately $3 million, and either to cancel or transfer the redemption claims to the committee. However, before the arbitration award could be confirmed by a court, the debtor filed for chapter 11 protection in the Northern District of Texas.
The bankruptcy court set April 8, 2020, as the general bar date for filing proof of claims. CLO HoldCo ("HoldCo"), an entity that had purchased interests in the redemption claims from the debtor, filed a claim on account of such interests for $11 million. The committee and the funds also filed proofs of claims for approximately $190 million and $23 million, respectively, which were primarily based on the arbitration award and disgorgement of fees paid to the debtor in its role as investment manager. The debtor ultimately reached a settlement with the committee providing that the debtor would, consistent with the arbitration award, cancel the redemption claims. The bankruptcy court approved the settlement in October 2020.
Following approval of the settlement and cancellation of the redemption claims on which HoldCo's claim was based, HoldCo amended its proof of claim to zero dollars. HoldCo's counsel asserted in a hearing before the court that "[t]here is no pending proof[] of claim" and that counsel could "withdraw it because it is a zero amount."
In February 2021, the bankruptcy court confirmed the debtor's chapter 11 plan, which went effective in August 2021.
Nearly a year after confirmation of the plan, in January 2022, HoldCo again sought to amend its proof of claim—this time from zero to $3.7 million and $5.7 million—to advance a new theory of recovery on the redemption claims. HoldCo posited that when the redemption claims were cancelled pursuant to the settlement agreement, the debtor effectively received a credit equal to the purchase price of the redemption claims and, based on the interests held by HoldCo, the debtor owed such amounts to HoldCo. HoldCo also simultaneously filed a motion seeking to "ratify" its second amended proof of claim.
A litigation trustee (the "trustee") appointed under the debtor's chapter 11 plan objected to Holdco's first amended proof of claim and its motion to ratify its second amended proof of claim.
Although finding that it had discretion to allow an amendment to a proof of claim based on the Fifth Circuit's opinion in In re Kolstad, 928 F.2d 171, 172 (5th Cir. 1991), the bankruptcy court found the matter before it factually distinct and denied the motion to ratify the second amended proof of claim.
Kolstad involved a requested amendment to a proof of claim after the bar date but prior to confirmation of a chapter 11 plan. Pursuant to section 501(c) of the Bankruptcy Code, the debtor in Kolstad timely filed a claim on behalf of the Internal Revenue Service ("IRS") based on a potential tax liability. The bankruptcy court thereafter permitted the IRS to "amend" the proof of claim filed by the debtor notwithstanding that the bar date had passed. On appeal, the Fifth Circuit found that the amendment was not at odds with the bar date's purpose of "establish[ing] the universe of participants in the debtor's case," because it did "not set forth wholly new grounds of liability." Kolstad, 928 F.2d at 174. Among other factors, the Fifth Circuit also considered "the degree and incidence of prejudice, if any, caused by [the] delay." Id. at 175 n.7.
The bankruptcy court in Highland Capital found that several factors weighed against an exercise of its discretion to permit HoldCo's second amendment, including: (i) the timing of the amendment, which was more than a year after the bar date and 10 months after confirmation; (ii) the fluctuating claim amounts asserted by HoldCo; (iii) potential gamesmanship and inconsistent statements made by HoldCo's counsel; and (iv) the court's conclusion that the amendment was ultimately premised on a frivolous theory that would cause the debtor prejudice to litigate.
After the district court affirmed on appeal, HoldCo appealed to the Fifth Circuit, arguing that the lower courts misapplied Kolstad. According to HoldCo, Kolstad requires a mechanical application of two factors—(1) "whether [the litigant] is attempting to stray beyond the perimeters of the original proof of claim and effectively file a 'new' claim that could not have been foreseen from the earlier claim or events; and (2) the degree and incidence of prejudice, if any, caused by [the litigant's] delay." See Kolstad, 928 F.2d at 175 n. 7.
The Fifth Circuit's Ruling
A unanimous three-judge panel of the Fifth Circuit affirmed the rulings below.
The court rejected HoldCo's chief argument that, in accordance with Kolstad, bankruptcy courts are required to apply a two-factor test in determining whether a creditor should be permitted to amend a proof of claim. Instead, the Fifth Circuit held, bankruptcy courts are permitted to weigh "multiple factors" and should require "compelling circumstances" to permit a post-confirmation amendment to a proof of claim. CLO HoldCo, 102 F.4th at 290.
According to the Fifth Circuit, Kolstad is still good law because, while HoldCo framed the precedent as requiring a mechanical application of the two factors (set forth above), the decision does not demand this kind of mechanical analysis from a bankruptcy court. Instead, the Fifth Circuit reasoned, the Kolstad court only suggested that equitable considerations as to whether a party can amend a proof of claim "seem to subsume [those] two general questions." Highland Capital, 102 F.4th at 291. Therefore, the Fifth Circuit concluded, it is not an abuse of discretion for a bankruptcy court to weigh several equitable factors in deciding whether to allow a post-confirmation amendment to a proof of claim.
Critically, the Fifth Circuit distinguished the case at hand from Kolstad in that this case involved a post-confirmation amendment, which requires "a heightened showing because a confirmed plan of reorganization is equivalent to a final judgement in civil litigation." Id. at 291.
In affirming the bankruptcy court's ruling, the Fifth Circuit joined the Seventh and Eleventh Circuits in applying the "compelling circumstances" standard for post-confirmation amendment of a proof of claim. Finding no such compelling circumstances existed in the case before it, the Fifth Circuit affirmed the rulings below. According to the Fifth Circuit, Holdco "did not identify any appropriate reason—let alone a compelling reason—for its nearly year-long delay in seeking a post-confirmation amendment," an "unexcused delay [that] would have been sufficient by itself for the bankruptcy court to deny the post-confirmation amendment." Id.
Outlook
While other circuits have not ruled directly on this issue, the "compelling circumstances" standard appears to be the prevalent mode of analysis for whether a bankruptcy court should allow a post-confirmation amendment to a proof of claim. Appellate courts outside of the Fifth, Seventh, and Eleventh Circuits have all followed the principle that plan confirmation in bankruptcy is akin to a final judgment in civil litigation. See, e.g., Gens v. Resol. Tr. Corp., 112 F.3d 569, 575 (1st Cir. 1997) (citing Holstein for the proposition that plan confirmation is a "milestone" that "makes it more likely [that a proof of claim] amendment may be prejudicial"). Creditors should therefore view plan confirmation as creating a significant hurdle for any post-confirmation attempts to amend a proof of claim.
This article was prepared with the assistance of Richard P. Bordelon, a summer associate in Jones Day's New York Office.
