Kipp Flores Architects, LLC v. Mid-Continent Casualty Co.

Case: 16-20255 Document: 00513925398 Page: 1 Date Filed: 03/24/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 16-20255
Fif h Circuit
FILED
March 24, 2017
KIPP FLORES ARCHITECTS, L.L.C., Lyle W. Cayce
Clerk
Plaintiff - Appellant
v.
MID-CONTINENT CASUALTY COMPANY,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, BARKSDALE, and COSTA, Circuit Judges.
EDITH H. JONES, Circuit Judge:
This is the third appeal arising out of an architectural copyright
infringement action and subsequent Chapter 7 bankruptcies of two related
companies in the homebuilding business. After Kipp Flores Architects (“KFA”)
sued Hallmark Collection of Homes, L.L.C., for copyright infringement,
Hallmark Collection commenced a “no asset” bankruptcy case. KFA filed a
bankruptcy proof of claim for copyright infringement damages. Relying on its
“deemed allowed” claim, 11 U.S.C. § 502(a), as a final judgment, KFA sued
appellee Mid-Continent Casualty Company, the debtor’s liability insurer. KFA
argues that the unobjected-to claim constitutes a final judgment and is
res judicata as to Mid-Continent. The question on appeal is what “deemed
allowed” means when a proof of claim is filed in a no-asset bankruptcy case, no
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deadline is set for objections to claims, and no “party in interest” objects? We
conclude that the text and structure of the Bankruptcy Code, Rules and Official
Forms, and relevant case law all support affirming the district court’s
summary judgment against KFA.
BACKGROUND
Appellant KFA creates and markets proprietary home designs and
plans. In a series of licensing agreements, KFA prepared twenty-one different
architectural designs for Texas-based Hallmark Collection of Homes, L.L.C.
(“Hallmark Collection”). Hallmark Collection obtained a license to build one,
and only one, house per plan—unless Hallmark Collection compensated KFA
for each additional house built from that plan. Hallmark Collection, however,
built several hundred houses from the licensed plans without paying KFA.
KFA filed suit in March 2009 for violations of federal copyright law and
actual or statutory damages under 17 U.S.C. § 504. The defendants included
Hallmark Collection, the limited partnership Hallmark Design Homes, L.P.
(“Hallmark Design”), and Joe Partain, an owner of Hallmark Collection. In the
midst of the copyright lawsuit, Hallmark Collection and Hallmark Design filed
separately for Chapter 7 bankruptcy protection in November 2009. Both
bankruptcy filings stated on Form B1 that, “after any exempt property is
excluded and administrative expenses paid, there will be no funds available
for distribution to unsecured creditors.” KFA’s copyright suit was stayed
pending the bankruptcy cases on November 23, 2009. 11 U.S.C. § 362(a).
Hallmark Collection’s schedules disclosed liabilities in excess of $2.5
million but listed no assets available for distribution to creditors. KFA was
listed as a creditor with an unsecured nonpriority claim for an unknown
amount based on the copyright suit. In early January 2010, the Chapter 7
Trustee distributed the following notice to creditors:
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It having appeared from the schedules of [Hallmark Collection] at
the time of filing that there was no estate from which any dividend
could be paid to creditors, the notice to creditors advised that it
was unnecessary for any creditor to file his claim at that time.
It appearing subsequently that there is an estate from which a
dividend to creditors may be paid, creditors must now file claims
in this case in order to share in any distribution from the estate.
CLAIMS MUST BE FILED ON OR BEFORE NINETY (90) DAYS
FROM THE ISSUANCE OF THIS NOTICE.
Claims which are not filed timely as set forth above will not be
allowed, except as otherwise provided by law.
Responding to this notice, KFA timely filed a proof of claim for $63,471,000
against Hallmark Collection. (This amount was based on the debtor’s gross
receipts from sales of the infringing homes.) No deadline was set by the court
for objecting to claims. Unsurprisingly, neither the trustee nor any other party
in interest objected to KFA’s proof of claim. The bankruptcy court entered no
order allowing or disallowing the claim. But in August 2010, the Chapter 7
Trustee submitted a No Asset Report, stating that there were no proceeds from
the Hallmark Collection estate for distribution to creditors. The bankruptcy
court closed the case five weeks later.
While Hallmark Collection’s case was pending, KFA amended its
complaint in the copyright lawsuit and added individual defendants Laura
Partain and William Graper, each of whom filed Chapter 7 bankruptcy cases.
KFA persuaded the district court in August 2011 to withdraw the reference to
the bankruptcy court of claims against Hallmark Design, Joe Partain, and
Laura Partain in the underlying copyright suit. See 28 U.S.C. § 157(d). KFA
never made a similar request with respect to the claim against Hallmark
Collection.
In November 2011, KFA amended its proof of claim in the Hallmark
Design bankruptcy case, seeking over $83 million, and filed an identical claim
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in the Partain case. The respective Chapter 7 Trustees’ objections to KFA’s
claims were consolidated with the underlying copyright action. After the
district court lifted the automatic stay, KFA prevailed in a jury trial of the
copyright suit that yielded a finding of $3,231,084.00 damages against
Hallmark Design but imposed no liability on the individual defendants. KFA
was granted an “allowed unsecured claim” for $3,239,688.40 in the Hallmark
Design bankruptcy. Hallmark Design appealed, and the Fifth Circuit
affirmed. 1
Appellee Mid-Continent, Hallmark Design’s insurer, had been approved
to represent the trustee in KFA’s litigation. The insurer next filed a
declaratory judgment action in January 2013 to challenge its policy coverage
of the judgment against Hallmark Design. KFA counter-claimed and prevailed
in the district court. 2 The Fifth Circuit affirmed that judgment 3, and Mid-
Continent paid KFA $3,031,563.12.
While litigation over the Hallmark Design judgment was pending, KFA
made demand on Mid-Continent to pay off KFA’s “final judgment” obtained for
its proof of claim in the Hallmark Collection bankruptcy. KFA sought payment
of the Mid-Continent policies’ $6 million face value.
When Mid-Continent refused to pay, KFA filed this action in September
2014 for breach of contract as a judgment creditor of Hallmark Collection and
third-party beneficiary under Mid-Continent’s policies. The district court
referred the matter for pretrial management, pursuant to 28 U.S.C.
1 Kipp Flores Architects, L.L.C. v. Hallmark Design Homes, L.P., 544 Fed. App’x. 553,
554 (5th Cir.2013).
2See Mid-Continent Cas. Co. v. Kipp Flores Architects, LLC, No. 1:13-CV-60-JRN,
2014 WL 3417544 (W.D. Tex. Apr. 3, 2014).
3 See Mid-Continent Cas. Co. v. Kipp Flores Architects, LLC, 602 Fed. App’x 985 (5th
Cir. 2015).
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§ 636(b)(1)(A) and (B), to a magistrate judge. Following protracted
proceedings, the parties filed cross-motions for summary judgment.
Citing precedent from multiple bankruptcy courts around the country,
the magistrate judge concluded that “KFA’s proof of claim was not ‘deemed
allowed,’ as a matter of law.” In part, the magistrate judge reasoned that in
cases where there are no assets available for distribution to creditors, the
bankruptcy claims allowance process “was never ‘triggered’ at all.” After
reviewing KFA’s objections to the magistrate judge’s recommendation, the
district court adopted it with one modification that is irrelevant here. KFA
appealed.
STANDARD OF REVIEW
The standard of review for a district court’s grant of summary judgment
is de novo, Sossamon v. Lone Star State of Tex., 560 F.3d 316, 326
(5th Cir. 2009), applying the usual standards under Federal Rule of Civil
Procedure 56. RSR Corp. v. Int’l Ins. Co., 612 F.3d 851, 857 (5th Cir. 2010).
DISCUSSION
KFA contends that the district court judgment created a “no asset case”
exception to 11 U.S.C. § 502(a) contrary to the provision’s plain language.
According to KFA, the Bankruptcy Code is unambiguous: any proof of claim is
deemed allowed if no party in interest objects. Because no party objected to
KFA’s proof of claim in the Hallmark Collection bankruptcy case, the claim
was “deemed allowed,” became a final judgment against Hallmark Collection,
and under principles of res judicata, suffices to trigger Mid-Continent’s duty to
indemnify its insured, Hallmark Collection.
Mid-Continent responds that KFA’s proof of claim did not result in a final
judgment in Hallmark Collection’s no asset Chapter 7 case. The allowance of
KFA’s claim for copyright infringement damages served no bankruptcy
purpose because there were no assets to be marshalled and distributed among
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creditors. According to Mid-Continent, the Bankruptcy Code, read as a whole,
provides that proofs of claim may be filed and become subject to bankruptcy
court adjudication in the claims process only when assets are available or are
thought to be forthcoming for distribution.
This appeal raises an intriguing question of statutory interpretation. We
conclude that Mid-Continent has the better of the argument when Section 502
is read in tandem with other provisions of the Bankruptcy Code. Further light
is shed on the question by the relevant Bankruptcy Rules and Official Forms,
which are promulgated under the auspices of the U.S. Supreme Court and
approved by Congress. See 28 U.S.C. § 2075 (“Bankruptcy Rules”).
The core of KFA’s case is Section 502(a), which states:
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.
11 U.S.C § 502(a). Standing alone, the provision appears to say that any
bankruptcy proof of claim not objected to by a “party in interest” is “deemed
allowed.” KFA would have the analysis stop here. But interpretations of the
Bankruptcy Code, many of whose terms are subject to further explication,
rarely end with a single sentence. This provision deems proofs of claim
“allowed” only when the claims are “filed under [11 U.S.C.] Section 501,” and
the claims are not objected to by “any party in interest.” “An understanding of
the codal structure for the allowance or disallowance of creditors’ claims is
critical to a proper understanding and analysis of this case.” In re Simmons,
765 F.2d 547, 551 (5th Cir. 1985). Section 502(a) cannot be correctly
understood without examining the context in which “filing,” “allowance,” and
“party in interest” are used throughout the Code.
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The definition of a “claim” in bankruptcy is extremely broad,
encompassing all rights to payment, of whatever nature, whether fixed,
liquidated, contingent, matured, disputed, legal, equitable, or secured. See
11 U.S.C. § 101(5)(A). The job of the bankruptcy courts is to oversee trustees’
marshalling of a debtor’s assets for appropriate distribution among the
creditors. Pioneer Invest. Serv. Co. v. Brunswick Assoc. Ltd. P’ship,
507 U.S. 380, 389 (1993). Claims “allowance” covers the approval, revision, or
rejection of filed claims, and the process afforded by the Bankruptcy Rules, as
effectuated in court orders.
A creditor whose claim is allowed may participate in the ultimate
distribution of the debtor’s assets. Prefatory to allowance, however, Section
501 states that a creditor “may” file a proof of claim. 11 U.S.C. § 501(a). In
fact, that section uses the term “may” six times. Id. §§ 501(b), (c), (d), (e).
“May” is not “must;” “may” can mean “is permitted to,” 4 or “possibly” (as in
“may or may not”). 5 That filing a claim is described in permissive or contingent
terms contrasts with the mandatory language prevalent elsewhere in Title 11.
For example, if an objection is made to a filed claim, the bankruptcy court
“shall determine the amount of the claim and allow the claim in such amount.”
11 U.S.C. § 502(b) (emphasis added); see also § 502(b), (c), (d).
4 “Section 501 permits, but does not require, a creditor to file a proof of claim.”
In re Thomas, 883 F.2d 991, 996 (11th Cir. 1989).
5 See “May,” The Random House Dictionary of the English Language (1966). See also
“May,” Merriam-Webster’s Dictionary of the English Language, http://www.merriam-
webster.com/dictionary/may, accessed Mar. 22, 2017 (defining “may” as “used to indicate
possibility or probability”).
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Relevant here, courts have frequently held that creditors “may” choose
not to file claims in a bankruptcy case with no assets available for distribution. 6
“A proof of claim should be filed only when some purpose would be served.”
In re Simmons, 765 F.2d at 551; see also Matter of Smith, 21 F.3d 660, 663
(5th Cir. 1994) (holding creditors are not obliged to file proofs of claim in no
asset cases). 7 “[I]n no-asset cases it is unnecessary for creditors to file claims
and the bankruptcy court therefore sets no deadline for filing such claims.”
Eide v. Colltech, Inc., 987 F. Supp. 2d 951, 958 (D. Minn. 2013). “Courts have
consistently viewed no-asset cases differently” because “proofs of claim are
either unnecessary or not accepted for filing.” In re Anderson, 72 B.R. 783, 787
(Bankr. D. Minn. 1987). “If a trustee has determined that there are no assets
6 Secured creditors, for instance, are also not required to file proofs of claim in order
to protect their security interests. 11 U.S.C. § 506(d). See In re Be-Mac Transp. Co., Inc.,
83 F.3d 1020, 1025 (8th Cir. 1996) (“a secured creditor need not file a claim in a bankruptcy
proceeding to preserve its lien”); In re Kleibrink, No. 3:07-CV-0088-K, 2007 WL 2438359, at
*10 (N.D. Tex. Aug. 28, 2007) (“the bankruptcy code does not require a secured creditor to file
proof of claim to preserve a lien.”).
7 See also In re Mendiola, 99 B.R. 864, 867 (Bankr. N.D. Ill. 1989) (“[A] proof of claim
serves only one purpose in a Chapter 7 case: it is the creditor’s assertion of a right to
participate in the distribution of the assets of the estate. In a case without assets to distribute
the right to file a proof of claim is meaningless and worthless.”). Indeed, the bankruptcy
hornbook answer to the question in this appeal is that the only purpose of a Chapter 7 case
is to distribute whatever assets the trustee marshals on a pro rata basis among the creditors:
In no-asset chapter 7 liquidation cases, the filing of a proof of claim serves no
practical purpose since there will be no distribution from the estate in which
to participate. In such cases, the notice of the meeting of creditors may include
a statement that it is unnecessary to file claims. If a trustee subsequently
notifies the bankruptcy court that a dividend may be possible, Bankruptcy
Rule 3002(c)(5) provides that notice may be sent to creditors informing them of
the need to file a proof of claim.
4 Collier on Bankruptcy ¶ 501.01, at 501-3[b] (16th ed. 2011). Rather than reflecting a
“purposivist” interpretation of claims filing, however, the hornbook applies “may” in Section
502 consistently with related provisions as detailed in text above.
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to distribute in a Chapter 7 case, the requirement to file a proof of claim is
meaningless.” In re Baskowitz, 194 B.R. 839, 845 (Bankr. E.D. Mo. 1996).
Indeed, creditors are often discouraged from filing claims by the issuance
of a standard “no asset” notice:
In a chapter 7 liquidation case, if it appears from the schedules
that there are no assets from which a dividend can be paid, the
notice of the meeting of creditors may include a statement to that
effect; that it is unnecessary to file claims; and that if sufficient
assets become available for the payment of a dividend, further
notice will be given for the filing of claims.
Fed. R. Bankr. P. 2002(e) (emphasis added). Creditors who are told there are
no assets available for distribution may be instructed that it is unnecessary to
file claims. There’s the contingency again. “Indeed, creditors in no-asset
chapter seven cases are not even required to file proofs of claim.” In re Mesa
Bus. Park P’ship, 127 B.R. 144, 148 (Bankr. W.D. Tex. 1991) (emphasis
original). See also In re Beezley, 994 F.2d 1433, 1436 (9th Cir. 1993) (“The
bankruptcy rules . . . permit the court to dispense with the filing of proofs of
claim in a no-asset case.”). “Since most Chapter 7 cases begin and end as no
asset cases, the Rule [Bankr. Rule 2002(e)] has saved substantial time and
storage space for bankruptcy clerks throughout the country.” In re Corgiat,
123 B.R. 388, 389 (Bankr. E.D. Cal. 1991).
The other side of the same coin appears in Bankruptcy Rule 3002(c)(5),
which dictates procedures if assets are later discovered in what initially
appeared to be a no-asset case:
If notice of insufficient assets to pay a dividend was given to
creditors under Rule 2002(e), and subsequently the trustee notifies
the court that payment of a dividend appears possible, the clerk
shall give at least 90 days’ notice by mail to creditors of that fact
and of the date by which proofs of claim must be filed.
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Fed. R. Bankr. P. 3002(c)(5) (emphasis added). Thus, if there are assets and
distribution “appears possible,” the clerk shall give notice and establish a
deadline. Fed. R. Bankr. P. 3002. No permissive language eliminates the
trustee’s obligation to give notice and set a claims deadline in an asset case.
In sum, whether or not claims “may” be filed pursuant to Section 502(a)
is generally contingent on the possibility of asset distribution. Likewise, the
necessity for creditors to file and the courts to adjudicate claims depends on
the existence of assets in the debtor’s estate. See In re Mesa, 127 B.R. at 150,
n.8 (“Chapter seven trustees . . . are discouraged from objecting to ordinary
unsecured claims even in asset cases if the claims will not receive a distribution
in any event.”). The Bankruptcy Rules plainly contemplate pretermitting
claims allowance and objection procedures when there are no distributable
assets.
The current Official Bankruptcy Forms 8—critical to everyday
bankruptcy practice—reinforce that Section 502(a) is directed to deeming
claims “allowed” where a debtor’s estate may afford a distribution on account
of those claims. Form 9D provides notice of the meeting of creditors and filing
deadlines in a Chapter 7 business case and is parenthetically titled
“Corporation/Partnership Asset Case.” Form 9D at 1 (emphasis added). This
form is specific to cases with assets. Similarly, the default setting on the form
applicable to corporate Chapter 7 cases, Official Form 9C (for Corporations
and Partnerships), line 8, “Proof of claim,” states: “Please do not file a proof of
claim unless you receive a notice to do so.” Later, Form 9C states:
No property appears to be available to pay creditors. Therefore,
please do not file a proof of claim now. If it later appears that assets
are available to pay creditors, the clerk will send you another
8 See “United States Courts Services & Forms,” where users can search for and find
national federal court forms that can be used in all federal courts, available at
http://www.uscourts.gov/services-forms/forms, last accessed Mar. 22, 2017.
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notice telling you that you may file a proof claim and stating the
deadline.
Id. (emphasis added). No assets means no proofs of claim should be filed.
Not only the Official Bankruptcy Forms, but the “General Information”
instructions included with them consistently distinguish between asset and no-
asset cases for purposes of claims filing. For example, “[f]orms 9A, 9B, 9C and
9D – used only for chapter 7 cases, – vary based on whether there are assets
available to pay creditors.” Instructions, Form B9(A-I), 12.01.09, at 1
(emphasis added). The instructions later state:
In the forms used in no-asset cases – Forms 9A and 9B, there is no
deadline for filing a proof of claims. In its place, creditors are
instructed not to file a proof of claim unless they receive a notice
to do so.
Id. at 3. Unless the Official Forms are inconsistent with Section 502(a), a
contention not made by KFA, they explain that proofs of claim need only be
filed in asset-holding bankruptcy cases, for it is only in such cases that the
claims allowance process is required. 9
According to these standard procedures, when creditors in a no asset
case are instructed not to file proofs of claim, they are effectively deterred from
exercising their rights as “parties in interest” to object to others’ claims. The
Bankruptcy Code does not provide an exclusive definition of a party in
interest, 10 but the Code broadly includes debtors, creditors, trustees, indenture
trustees, and equity security holders among the parties entitled, e.g., to notice
9 “A bankruptcy court will normally not involve itself in fixing the amounts of claims
in no-asset cases. Bankruptcy procedure is structured so that there will not be a claims
resolution process in a no-asset chapter 7 case.” In re Shapiro, 188 B.R. 140, 148 (Bankr.
E.D. Pa. 1995).
10“The list of potential parties in interest in [11 U.S.C.] § 1109(b) is not exclusive.”
In re Glob. Indus. Techs., Inc., 645 F.3d 201, 210 (3d Cir. 2011).
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of proceedings in the case. See, e.g., Fed. R. Bankr. P. 2002. Any “party in
interest” may object to a proof of claim and request the court to determine its
correct amount. See Fed. R. Bankr. P. 3007(a). Objections are often filed by
the trustee or other parties in order to prevent unauthorized distributions to
creditors. KFA contends that Mid-Continent was a “party in interest” in the
Hallmark Collection case not only because it is the debtor’s liability insurer
but because it specifically sought notices in the case and in fact participated in
the Hallmark Design case. 11 Regardless, after learning that the Hallmark
Collection bankruptcy was a no asset case, no party in interest, including Mid-
Continent, had any reason to ascertain that KFA filed a proof of claim, much
less to object to the superfluous claim.
Section 502 would be significantly transformed if, under KFA’s reading,
certain “parties in interest” in no asset cases would be required to monitor,
object to, and litigate proofs of claim that need not even be filed. Those parties
would have to invoke the claims allowance process, not to affect non-existent
distributions from the debtor’s estate, but solely to prevent collateral
consequences in other litigation. Not only insurers like Mid-Continent, but
also parties in the position of sureties, guarantors, general partners, and other
entities that might share liability for claims against a debtor would risk
suffering adverse judgments in the form of “deemed allowed” claims. Since the
11“[C]ourts are generally in agreement that an insurance policy will be considered
property of the estate . . . Any rights the debtor has against the insurer, whether contractual
or otherwise, become property of the estate.” Matter of Edgeworth, 993 F.2d 51, 55 (5th Cir.
1993). See also In re Davis, 730 F.2d 176, 184 (5th Cir.1984); Homsy v. Floyd (In re Vitek,
Inc.), 51 F.3d 530, 533 (5th Cir. 1995). Liability insurance, however, is a different matter.
“We have held that while insurance policies are generally property of the estate, the proceeds
of liability insurance policies, unlike first party policies, generally are not.” Sosebee v.
Steadfast Ins. Co., 701 F.3d 1012, 1023 (5th Cir. 2012). See also Landry v. Exxon Pipeline
Co., 260 B.R. 769, 801 (Bankr. M.D. La. 2001) (“[T]he proceeds of liability insurance payable
to non-debtor parties are not property of the debtor’s estate under 11 U.S.C. § 541, or any
other provision of the Code.”).
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bankruptcy courts “shall” adjudicate claims to which an objection has been
filed, 11 U.S.C. § 502(b), the courts’ workload would increase substantially
without yielding any benefit whatsoever to the debtor or the debtor’s estate.
Mid-Continent emphasizes the lack of benefit to the bankruptcy process
to argue that in this case, the bankruptcy court lacked jurisdiction to
adjudicate KFA’s claim against Hallmark Collection because the outcome of
the dispute could have no conceivable impact on the non-existent debtor’s
estate. See Matter of Wood, 825 F.2d 90, 93 (5th Cir. 1987) (holding the outer
limit of the bankruptcy court’s subject matter jurisdiction involves matters
which have a “conceivable effect” on the estate’s administration);
In re Skuna River Lumber, LLC, 564 F.3d 353, 357 (5th Cir. 2009) (holding
that a bankruptcy court lacked subject matter jurisdiction to impose
Bankruptcy Code surcharge after property was transferred from the estate);
In re Mesa, 127 B.R. at 147–78 (declining to value lender’s deficiency claim as
advisory opinion in the absence of any assets available for distribution to
creditors). We do not agree. That a bankruptcy case is filed as or becomes a
no asset case does not deprive the bankruptcy court of subject matter
jurisdiction for many administrative purposes. The bankruptcy court had
subject matter jurisdiction over this no asset case, but the Bankruptcy Code
affords discretion with regard to claims allowance, and no claims allowance
procedures took place here. There cannot be a “deemed allowed” claim where
there were no distributable assets, no other bankruptcy-related purpose for
claims “allowance,” and parties in interest were not on notice of the obligation
to file objections to claims.
It is additionally worth observing that filing a proof of claim in the
Hallmark Collection case was not only superfluous but wholly unnecessary to
preserve KFA’s ultimate rights. Courts often grant creditors relief from the
automatic stay so they can adjudicate their unliquidated claims against a
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debtor outside of bankruptcy court, particularly when the claims are already
the subject of pending litigation. See, e.g., In re Xenon Anesthesia of Texas,
510 B.R. 106, 112 (Bankr. S.D. Tex. 2014). In the Hallmark Design case, this
is what happened, and KFA recovered a judgment, which it then enforced to
the extent of that debtor’s policy from Mid-Continent. KFA could have sought
relief from the automatic stay to pursue its claim against Hallmark Collection
in litigation. In fact, requesting such relief might not have been necessary
inasmuch as the stay terminates against a non-individual debtor, like this
L.L.C., when the case is closed or dismissed. 11 U.S.C. § 362(c)(2). Such a
debtor, unlike an individual debtor, is not entitled to a discharge or to
protection against later litigation, 11 U.S.C. § 727(a), and the statute of
limitations is suspended during the bankruptcy case. 11 U.S.C. § 108. The
Bankruptcy Code did not (and still does not) interfere with KFA’s right to
pursue its claims against Hallmark Collection, and subsequently its insurer,
for their full value without more than a temporary hindrance from the
automatic stay. These facts further undermine the argument that KFA should
benefit from having filed a superfluous proof of claim.
KFA relies on a body of cases that simply quote or rephrase Section
502(a) where the provision’s meaning for no asset cases was not at issue. See,
e.g., In re Taylor, 132 F.3d 256, 261 (5th Cir. 1998) (in a Chapter 11 tax liability
dispute,“[o]nce a proof of claim is filed, the debt is considered allowed unless
the debtor or another party in interest files an objection to the proof of claim”).
KFA attaches to these holdings the general principle that judicial
interpretation of a statute should be limited to “the words of the statute, which
are assumed to carry their ordinary meaning.” Stanford v. Comm’r,
152 F.3d 450, 455–456 (5th Cir. 1998). This approach, however, fails to
address the whole context covered by Sections 501 and 502 as elucidated in the
Bankruptcy Rules and Official Forms and case law. It also fails to account for
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the fact, evidenced by the Hallmark Design case, that lifting the Section 362
automatic stay allows a creditor even in a no-asset case to litigate its dispute
with the debtor outside of the bankruptcy court. KFA’s interpretation of
Section 502(a), in contrast, invokes the claims allowance procedure in a no-
asset case unnecessarily and solely for its offensive purposes in extrinsic
litigation.
Just one appellate court case, Siegel v. Federal Home Loan Mortg. Corp.,
143 F.3d 525 (9th Cir. 1998), superficially supports KFA’s interpretation of
Section 502(a). There, the Ninth Circuit held that because a mortgagee’s proof
of claim had been “deemed allowed” in the absence of an objection, the debtor
was precluded from pursuing a later state court suit arising out of the
mortgagee’s foreclosure. Id., 143 F.3d at 529–30. Siegel states that proofs of
claim not objected to are deemed allowed. Siegel does not, however, discuss
the claims allowance process for a no asset case. 12 Moreover, as Mid-Continent
correctly notes, Siegel concerned a potentially valuable asset of the debtor’s
estate: lender liability claims against the creditor. The Ninth Circuit reasoned
that if the causes of action could have been successfully prosecuted, the debtor
“could even have come out solidly solvent,” rather than bankrupt. Siegel,
143 F.3d at 531. The lender liability suit might, in other words, have
conceivably affected the debtor’s estate. The situation here is the opposite. As
the magistrate judge noted, no matter what the outcome of KFA’s lawsuit,
12 KFA urges this court to take judicial notice of a PACER filing showing, in the
underlying bankruptcy, that Siegel did indeed concern a no-asset case. But regardless
whether the Siegel bankruptcy was, in fact, a no-asset case, the specific question of whether
claims should be deemed allowed in a no-asset case was not addressed by the Ninth Circuit.
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Hallmark Collection’s bankruptcy estate would have remained insolvent and
without assets. Siegel is both distinguishable and non-dispositive for KFA. 13
KFA also contends that rejecting its narrow textual interpretation would
have unintended consequences for IRS’s “routine” filing of proofs of claim in no
asset cases and for claims arising from individual debtors’ personal property
that is subject to security interests. 11 U.S.C. § 521(a)(6). Both propositions
are incorrect, and both are based on the premise, not adopted here, that the
bankruptcy court lacked jurisdiction to rule on claims in a no asset case. First,
KFA cites only one case in support of its contention about IRS practice.
In re Geisler, 539 B.R. 253 (W.D. Pa. 2015), aff’d. sub nom. In re Geisler, No.
15-3828, 2016 WL 4206378 (3d Cir. 2016). Read carefully, however, Geisler
referred to an IRS tax claim as “deemed allowed” that had been filed in the
debtor’s Chapter 13 case and was not objected to until a year later and
following subsequent conversions to Chapter 11 and Chapter 7. A Chapter 13
case, by definition, has assets. Moreover, the court ruled on the merits of IRS’s
claim rather than resting on the claim’s “deemed allowed” status. Geisler is
inapposite. Finally, 11 U.S.C. § 505 expressly authorizes bankruptcy courts to
determine all debtors’ tax liability within certain parameters. Second, Section
521(a)(6) requires particular secured creditors of individual debtors to have an
“allowed claim” as a predicate for reaffirmation or redemption agreements that
must be approved by the bankruptcy court. By specifying how the claims
allowance procedure operates in particular instances, Section 521(a)(6) as well
as Section 505 confirm rather than undermine the conclusion that the
13KFA contends that Siegel has been adopted in this circuit, but Siegel was cited only
for a general proposition while this court was deciding whether a debtor has standing to
pursue the appeal of a claim allowance. In re Mandel, 641 Fed. App’x. 400, 403 (5th Cir.
2016) (per curiam, unpublished).
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necessity for claims allowance procedures must be interpreted in light of the
Bankruptcy Code as a whole.
CONCLUSION
We hold that KFA did not have a “deemed allowed” claim that
constitutes res judicata against Mid-Continent because in this no asset
bankruptcy case, nothing in the court proceedings required claims allowance,
no notice was provided to parties in interest to object to claims, and no
bankruptcy purpose would have been served by the bankruptcy court’s
adjudicating KFA’s claim. The district court’s judgment in favor of Mid-
Continent is AFFIRMED.
17