## Facts

- Chapter 7 debtors granted PCFS Financial a mortgage on their Ohio residence about three years before filing bankruptcy.
- The debtors filed Chapter 7 in 2001, and the trustee issued a notice setting a proof-of-claim bar date of July 24, 2001.
- In October 2001, the trustee filed an adversary proceeding to avoid PCFS’s mortgage lien as defectively executed under Ohio law.
- In June 2003, the bankruptcy court avoided the lien, leaving PCFS as an unsecured creditor.
- The residence was sold in 2003 for about $300,000, creating an unsecured deficiency claim for PCFS.
- PCFS did not file a timely formal proof of claim, did not obtain an extension, and did not otherwise secure allowance of an unsecured claim after its lien was avoided.
- In 2007, the trustee filed a final report proposing distributions to unsecured creditors with allowed claims; PCFS was excluded.
- PCFS objected and moved to treat earlier filings as an informal proof of claim; the bankruptcy court denied the motion, citing both failure to meet requirements and equitable reasons.
- The Bankruptcy Appellate Panel concluded the filings could satisfy the traditional informal-claim elements but affirmed because the equitable denial was not an abuse of discretion.
- PCFS appealed; the Sixth Circuit affirmed.

## Issues

1. Whether the bankruptcy court abused its discretion by refusing, on equitable grounds, to treat PCFS’s prior filings as an informal proof of claim.
2. Whether, in the Sixth Circuit, satisfaction of the four written-filing elements can still be outweighed by equitable considerations in deciding whether to allow an informal proof of claim.

## Decision

- The Sixth Circuit affirmed the denial of PCFS’s request to recognize an informal proof of claim.
- The court held that the bankruptcy court did not abuse its discretion in concluding the equities weighed against allowing the late claim.
- The court emphasized PCFS’s prolonged inaction despite notice that its secured status was being challenged and the substantial prejudice to timely unsecured creditors if PCFS were added late.
- PCFS’s claim remained disallowed, and distributions proceeded to creditors with timely, allowed claims.

## Legal Principles

- An informal proof of claim requires a written filing that: (1) is in writing, (2) makes a demand on the estate, (3) shows an intent to hold the debtor liable, and (4) is filed with the bankruptcy court.
- Even if those four elements are met, allowance of an informal proof of claim is an equitable remedy; the bankruptcy court must balance the equities before granting relief.
- Appellate review of the decision to allow or deny an informal proof of claim is for abuse of discretion; reversal is warranted only for a decision that is arbitrary, capricious, or clearly unreasonable.
- In equitable balancing, relevant factors include creditor diligence, notice of the need to file a claim, reliance and finality concerns, and prejudice to other creditors from dilution of distributions.

## Conclusion

The Sixth Circuit held that informal proof-of-claim relief is discretionary and may be denied where a creditor, despite notice and years of opportunity to act, fails to file a timely claim and late recognition would materially prejudice creditors who complied with the bar date.


In re Nowak, 586 F.3d 450 (6th Cir. 2009)