Rochelle's Daily Wire

Joining two other circuits, the Fifth Circuit upheld Bankruptcy Judge Stacey G.C. Jernigan by holding that amending a proof of claim after confirmation of a chapter 11 plan requires a showing of “compelling circumstances.”

The facts were complex but amounted to this: When the debtor confirmed a chapter 11 plan, the creditor had a claim on file for zero dollars. After confirmation, the creditor amended the claim, seeking almost $4 million. In substance, the bankruptcy court expunged the amended $4 million claim.

The district court affirmed, but the creditor appealed to the Fifth Circuit. In an opinion on May 21, Circuit Judge Catharina Haynes affirmed.

In the circuit, the creditor argued that the bankruptcy court incorrectly applied multiple factors in expunging the claim and should have followed what it claimed to be a two-factor test from the Fifth Circuit’s opinion in In re Kolstad, 928 F.2d 171 (5th Cir. 1991). Judge Haynes reviewed the bankruptcy court’s decision for abuse of discretion.

Judge Haynes explained that Kolstad dealt with a claim that was amended after the bar date but before confirmation. She therefore said that “Kolstad did not address or even consider whether a post-confirmation amendment warrants a heightened showing as other circuits have.” [Emphasis in original.]

Furthermore, Judge Haynes said that Kolstad “did not hold that a bankruptcy court must rigidly apply two factors in determining whether a proof of claim may be amended.” The two Kolstad factors she referred to were whether the claimant was effectively filing a new claim, and the degree of prejudice caused by the claimant’s delay. She said that Kolstad “did not rule out a more holistic approach, which comports with the equitable nature of bankruptcy courts.”

Judge Haynes held “that in circumstances like the case at bar — a post-confirmation amendment — more is required.” By “more,” she said, “we mean ‘compelling circumstances,’” as the Seventh and Eleventh Circuits held in Holstein v. Brill, 987 F.2d 1268, 1270–71 (7th Cir. 1993), and In re Winn-Dixie Stores, Inc., 639 F.3d 1053, 1056 (11th Cir. 2011).

Judge Haynes explained why “more” is required: “Post-confirmation amendments warrant a heightened showing because a confirmed plan of reorganization is equivalent to a final judgment in civil litigation . . . . This potential res judicata effect justifies ratcheting up the legal standard because post confirmation amendments may ‘mak[e] the plan infeasible,’ ‘disrupt the orderly process of adjudication,’ and ‘alter the distribution[s] to other creditors,’” quoting Holstein and Winn-Dixie.

The bankruptcy court, Judge Haynes said, “did not apply the incorrect legal standard when it” expunged the amended claim. “Instead,” she said, “it considered several equitable factors, including the fact that [the creditor] did not identify any appropriate reason — let alone a compelling reason — for its nearly year-long delay in seeking a post-confirmation amendment.” She added, “This unexcused delay would have been sufficient by itself for the bankruptcy court to deny the post-confirmation amendment.”

Finding no abuse of discretion, Judge Haynes affirmed.