I recently wrote a post discussing what makes a claim “allowed” or “disallowed” in New York bankruptcy. I wrote, “Debtors often rejoice at seeing a creditor’s claim disallowed, but that’s not always the end of the story for creditors.” One way a disallowed claim can return is if the creditor files a motion for reconsideration of the bankruptcy court’s order disallowing the claim. This might sound totally unfair to debtors who went to the effort of trying to disallow the claim in the first place, but the Bankruptcy Code explicitly allows such a motion. So what are these motions and what can debtors expect from them?
Section 502(j) of the Bankruptcy Code simply states that “a claim that has been allowed or disallowed may be reconsidered for cause.” It adds that the “equities of the case” determine whether the claim should be allowed or disallowed. Beyond that the section specifies what happens to the remaining creditors if a previously disallowed claim is now allowed: None of the other creditors receive distributions until the newly allowed creditor receives distributions proportionate to what the others already received.
From the statute, then, it’s clear that reconsideration is a tool that any party, including the trustee or the debtor, can use to re-challenge a claim’s status in a bankruptcy. Moreover, two other aspects of reconsideration stand out. One, the party disagreeing with the order must show some kind of reason for the court to change its mind. In other words, parties can’t re-litigate the last motion over the claim without some kind of showing of something new. Two, the bankruptcy court has broad discretion in making its decision on such a motion based on the “equities of the case.”
This broad discretion sounds like bad news for debtors who want a disallowed claim to stay disallowed. Worse, a subtle point missing from section 502(j) is that there’s no time limit for a creditor to file a motion for reconsideration. As far as the code is concerned, a party can challenge a decision on a claim whenever it wants to—provided it has cause.
That’s not the end of it though. As often happens in bankruptcy, where the Bankruptcy Code doesn’t speak to an issue, the Federal Rules of Bankruptcy Procedure do. Although, Rule 3008 governs motions for reconsideration, rules 9023 and 9024 set out applicable time limits and, unfortunately, outsource even more details to the Federal Rules of Civil Procedure (rules 59 and 60).
Putting all these rules together, if a party files its motion for reconsideration within fourteen days of the order’s entry, then it gets notice and a hearing and is treated as a motion to alter or amend the order. If it’s filed after fourteen days but within one year then it’s a motion for relief from an order. The difference in terminology indicates what the party filing the appeal can hope to obtain. Motions to alter or amend an order are treated more lightly than motions for relief, which have stricter standards. Specifically, Federal Rules of Civil Procedure Rule 60(b) provides a list of grounds that the appealing party can use. In general, they relate to evidence arising after the order was entered that should favor the appealing party, e.g. evidence that could not have been reasonably discovered in time by the order.
The most significant way the bankruptcy rules alter the civil procedure rules is that if the order allowing or disallowing the claim is entered without contest by the moving party, then the one-year limit to the motion for reconsideration does not apply.
The Bankruptcy Code and accompanying rules pretty clearly support parties’ (mainly creditors’, in practice) rights to ensure that their claims will be allowed. If you are facing financial difficulties and you suspect one of your creditors may have problematic claims, then talking to an experienced New York bankruptcy lawyer will help you strategize your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
