United States v. Steven Oscher , 452 F. App'x 858 ( 2011 )

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________ FILED
U.S. COURT OF APPEALS
No. 10-15627 ELEVENTH CIRCUIT
NOVEMBER 22, 2011
Non-Argument Calendar
JOHN LEY
________________________ CLERK
D.C. Docket No. 8:10-cv-01394-JSM
BKCY No. 8:07-bk-04394-KRM
IN RE: J.H. INVESTMENT SERVICES, INC.,
Debtor.
______________________________________
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
versus
STEVEN OSCHER, Chapter 11 Trustee,
Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Middle District of Florida
________________________
(November 22, 2011)
Before BARKETT, MARCUS and COX, Circuit Judges.
PER CURIAM:
Daniel Prewett operated J.H. Investment Services, Inc. (“JHIS”), which
engaged in a fraudulent real estate investment scheme. When the scheme went south,
JHIS’s creditors initiated an involuntary Chapter 11 case. The bankruptcy court
appointed Steven Oscher as Trustee. Oscher subsequently located and sold forty real
properties belonging to JHIS. The bankruptcy court ordered that one percent of the
sale proceeds (the “carve-out fund”) be set aside for JHIS’s unsecured creditors. This
fund totaled about $83,000.
The IRS has a claim against JHIS for unpaid taxes. Since this case began, the
IRS has submitted several proof-of-claim forms, each superseding the previous one.
Claim #6-1 asserted a $46 million unsecured claim, with approximately $26 million
designated as priority. Claim #6-2 asserted a similar claim, but Claim #6-3 added a
secured claim of $764. Oscher objected to Claim #6-3 on various grounds. The IRS
then submitted the claim at issue here, Claim #6-4, which categorizes the IRS’s entire
$46 million claim as secured. (Dkt. 1-6.) Claim #6-4 does not note a general
unsecured claim or an unsecured priority claim.
In December 2009, Oscher proposed a Chapter 11 liquidating plan (the “Plan”).
(Dkt. 618.) The Plan expressly excludes the carve-out fund from the IRS’s
distribution. That same month, Oscher filed a disclosure statement indicating that the
estate’s assets had a value of about $750,000. (Bankr. Ct. Dkt. 619 at 25.)
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Two months later, and only a week before the confirmation hearing, the IRS
objected to the Plan. (Dkt. 1-8.) The IRS contended that Claim #6-4 asserted an
unsecured claim, that the claim was allowed under § 502, and that the claim was
entitled to priority under § 507(a)(8). Thus, the IRS argued, the Plan violated
11 U.S.C. § 1129(a)(9)(C) because it paid the carve-out fund to JHIS’s general
unsecured creditors before paying the IRS’s priority claim in full. Oscher countered
that Claim #6-4 did not assert an unsecured claim, and thus, the IRS did not have one,
either priority or general. The bankruptcy court agreed with Oscher and ordered the
carve-out fund distributed to JHIS’s general unsecured creditors.
The IRS appealed to the district court, which affirmed the bankruptcy court.
(Dkt. 35.) The district court concluded that undersecured creditors must provide
notice of their intent to pursue a deficiency claim. This notice alerts the Trustee and
other interested parties “that more than a secured claim may be forthcoming” and
gives them an opportunity to oppose that claim. (Id. at 7.) But in this case, Claim #6-
4 did not indicate an intent to pursue an unsecured claim. Oscher and the other
creditors had neither notice of the IRS’s unsecured claim nor an opportunity to
oppose it. Thus, the court concluded, permitting the IRS to collect on a claim which
no party had the opportunity to contest would violate due process. (Id. at 9.)
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DISCUSSION
Under the Bankruptcy Code (the “Code”), a claim is a right to payment,
whether secured or unsecured. See 11 U.S.C. § 101(5)(A). Some secured creditors
are undersecured—i.e., the value of their collateral is less than the full value of their
claim. 11 U.S.C. § 506(a)(1). The Code treats these creditors as holding both a
secured and an unsecured claim. See id. Section 506(a)(1) provides:
An allowed claim of a creditor secured by a lien on property in which
the estate has an interest, . . . is a secured claim to the extent of the value
of such creditor’s interest in the estate’s interest in such
property, . . . and is an unsecured claim to the extent that the value of
such creditor’s interest . . . is less than the amount of such allowed
claim.
Id.; see Official Bankruptcy Form 10 at 2. The unsecured portion of an undersecured
claim is called a deficiency claim.
In this case, it is undisputed that the IRS submitted Claim #6-4 and that it was
undersecured. But the parties dispute whether Claim #6-4 properly raised or
preserved the IRS’s unsecured claim. The IRS contends that § 506(a)(1)
automatically bifurcated Claim #6-4 into a secured and an unsecured claim and that
the unsecured claim was allowed under § 502. Section 506(a)(1) also put Oscher and
the other creditors on notice that the IRS would pursue its deficiency claim. Thus,
the IRS argues, the district court’s concerns about due process are misplaced.
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Additionally, the IRS contends that even if it had to note its unsecured claim on
Claim #6-4, its mistake in failing to do so should be excused as harmless. It claims
that Oscher and the other creditors learned it would pursue a deficiency claim when
the IRS objected to the Plan. Because no one objected to the validity of the IRS’s
unsecured claim at that time, the claim should be allowed. We reject the IRS’s
arguments.
Under the Code, a creditor must take an affirmative step to pursue an unsecured
claim. No creditor—even an undersecured creditor—is required to pursue a claim in
bankruptcy or file a proof -of-claim form. 11 U.S.C. § 501 (stating “[a]
creditor . . . may file a proof of claim”) (emphasis added). The Code merely prevents
nonfiling creditors from receiving distributions from the debtor’s estate. See, e.g.,
11 U.S.C. § 524(a); In re Thomas, 883 F.2d 991, 996 (11th Cir. 1989). The Federal
Rules of Bankruptcy Procedure (“Rules”) further underscore this point. See Fed. R.
Bankr. P. 3002(a) (stating that an unsecured creditor “must file a proof of
claim . . . for the claim . . . to be allowed.”); Fed. R. Bankr. P. 3003(c)(2) (stating that
“any creditor who fails to [file a proof of claim] shall not be treated as a creditor with
respect to such claim for purposes of voting and distribution.”). To pursue an
unsecured claim under the Code, a creditor need only fill out and file a one page form.
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See Official Bankr. Form 10. But filing this form is an affirmative step, and the
decision to take that step rests squarely on the creditor’s shoulders.
Contrary to the IRS’s contention, § 506(a)(1) does not automatically assert a
deficiency claim. An undersecured creditor is not required to pursue a deficiency
claim. In fact, the Rules and Official Bankruptcy Forms suggest that when an
undersecured creditor does not note an unsecured claim on its proof of claim, it has
decided not to pursue that claim. Under Rule 3001, a proof of claim must “conform
substantially to the appropriate Official Form.” Fed. R. Bankr. P. 3001(a). The
relevant proof of claim form is Official Bankruptcy Form 10 (“Form 10”). Form 10
permits a creditor to note a secured claim and the amount of that secured claim.
However, in the same box and right next to the line for the amount of the secured
claim, Form 10 asks for the amount of the claim which is unsecured.1 Official Bankr.
Form 10, Box 4. Moreover, the instructions to Form 10 clearly explain that an
undersecured creditor should note both the secured and unsecured value of its claim.
Official Bankr. Form 10 at 2 (“The amount of the secured claim cannot exceed the
value of the property. Any amount owed to the creditor in excess of the value of the
property is an unsecured claim.”). Thus, to substantially comply with Form 10, a
1
Box 5 permits a creditor to note if any of its claims are entitled to priority under § 507
and the amount of the claim entitled to priority. The IRS did not indicate that any of its claim
was entitled to priority or the amount of that claim.
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creditor should note the portion of its claim it believes is unsecured. When an
undersecured creditor does not, the Trustee and other parties can conclude that the
creditor has decided not to pursue its deficiency claim.
Requiring an undersecured creditor to signal its intent to pursue a deficiency
claim serves an important notice function. Under § 502, a proof of claim is allowed
“unless a party in interest . . . objects.” 11 U.S.C. § 502(a). But parties do not make
objections when they do not have to. A Form 10 which evinces an undersecured
creditor’s intent to pursue a deficiency claim puts the interested parties on notice of
that claim, see In re Neptune Pool Serv., Inc., 144 B.R. 926, 927 (Bankr. M.D. Fla.
1992), and gives those interested parties an opportunity to object to it, Fed. R. Bankr.
P. 3007. But when a Form 10 does not evince such an intent, the Trustee and other
creditors have no reason to object.
The Code does not force creditors to pursue deficiency claims. The motive for
a creditor’s decision is irrelevant as far as the Trustee is concerned. The Trustee has
no duty to ask the undersecured creditor why he elected not to pursue a deficiency
claim. See In re Padget, 119 B.R. 793,798 (Bankr. D. Co. 1990) (“[The
Trustee] should not, and is not charged with the obligation to, examine a claim with
a purpose and view to increasing the claim or improving a claimant’s status over that
asserted by other creditors.”)
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We find further support for our conclusion in the House Report which
accompanied the adoption of the Code. In describing § 501, the Report says:
This section governs the means by which creditors . . . present their
claims . . . to the court. . . . This subsection is permissive only, and does
not require filing of a proof of claim by any creditor. It permits filing
where some purpose would be served, such as where . . . a creditor with
a lien is undersecured and asserts a claim for the balance of the debt
owed him (his unsecured claim, as determined under proposed 11 U.S.C.
506(a)).”
H.R. Rep. No. 95-595, at 315, 1978 U.S.C.C.A.N. 5963, 6307 (1978). The report
goes on to say that:
In general, . . . unless a claim is listed in a Chapter 9 or Chapter 11 case
and allowed as a result of the list, a proof of claim will be a prerequisite
to allowance for unsecured claims, including priority claims and the
unsecured portion of a claim asserted by the holder of a lien.
Id. It logically follows that Congress intended an undersecured creditor’s proof of
claim to address that creditor’s unsecured claim.
The IRS has cited no cases holding that § 506(a)(1) automatically asserts a
deficiency claim.2 In fact, in the cases the IRS cites, the secured creditors
substantially complied with Form 10’s requirements by noting their unsecured claims.
See, e.g., In re Rowell, 421 B.R. 524, 528, 535 (Bankr. D. Minn. 2009); Demarah v.
2
It is unclear from the factual discussion in In re Healis, 49 B.R. 939, 940-42 (Bankr.
M.D. Pa. 1985), whether the IRS noted both a secured and unsecured claim. But, it is clear that
the Healis court did not address this specific issue.
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United States, 188 B.R. 426, 427-29 (E.D. Cal. 1993). Additionally, an undersecured
creditor who initially fails to note a deficiency claim may seek leave to amend its
proof of claim. In re S. Atl. Fin. Corp., 767 F.2d 814, 819 (11th Cir. 1985).
Amendments asserting deficiency claims are among those usually allowed. See, e.g.,
In re Haack, 165 B.R. 501, 504 (Bankr. M.D. Fla. 1994).
For the above stated reasons, we conclude the IRS did not assert an unsecured
claim on Claim #6-4. On its face, Claim #6-4 indicated the IRS’s collateral was worth
the full value of its claim. (Dkt. 1-6.) Surely the IRS had no reason to believe that
JHIS’s assets were worth $46 million. But even if it did, the IRS learned that it could
not receive the full value of its secured claim in December 2009 when Oscher
reported that JHIS’s assets totaled no more than $750,000. After that date, the IRS
took no affirmative step to properly present its unsecured claim to the bankruptcy
court as required by the Code and the Rules.3
The IRS also contends that its objection to the Plan sufficiently notified the
other parties that it would pursue its deficiency claim. But the IRS objected to the
3
After the bankruptcy court concluded that Claim #6-4 did not assert an unsecured
priority claim, the IRS filed Claim #6-5. (Dkt. 1-15 at 2.) This claim showed that the IRS had a
secured claim worth $148,000, an unsecured priority claim for approximately $26 million, and a
general unsecured claim for $20 million. (Id.) The IRS argued that Claim #6-5 properly
amended Claim #6-4 to assert its deficiency claim. (Id.) Oscher opposed the IRS saying that
Claim #6-5 was untimely. (Dkt. 1-17.) Unfortunately, the record does not contain the bankruptcy
court’s resolution of this issue, and at any rate, the IRS has not raised the disallowance of Claim
#6-5 on appeal.
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Plan because it did not address its unsecured priority claim as required by
11 U.S.C. § 1129(a)(9)(C). (Dkt.108 at 1.) That provision assumes the objecting
party has an allowed unsecured priority claim. But because Claim #6-4 did not
properly assert an unsecured claim, the IRS’s objection was invalid. See Rule
3003(c)(2).4 The IRS also argues that no one objected to the validity of its unsecured
claim. But, Oscher and the other creditors did not have to because no such claim was
before the court.
As the district court noted, distributing the carve-out fund to the IRS would
deprive Oscher and JHIS’s other creditors of due process as they had neither notice
of nor an opportunity to contest any unsecured claim by the IRS. Therefore, the
judgment of the district court is due to be affirmed.
AFFIRMED.
4
The IRS argues, in its reply brief, that Rule 3018(d) permits it to vote as both a secured
and unsecured creditor. However, that rule applies only to creditors “whose claim has been
allowed in part as a secured claim and in part as an unsecured claim.” Fed. R. Bankr. P. 3018(d).
Because we conclude the IRS did not have an allowed unsecured claim, Rule 3018(d) does not
apply.
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