Secured Creditors Should Attach Evidence of Perfection of Their Security Interest in Filing Proofs of Claim
New bankruptcy forms and rules that took effect December 1, 2011, require secured creditors either to attach evidence of perfection of their security interest to the proof of claim form that they file, or attach a statement of why the documents are not available.
The official bankruptcy proof of claim form has previously been contradictory as to whether copies of evidence of perfection of security interests had to be attached to the proof of claim, or whether a summary would suffice. The contradiction has been removed, and copies of documentation evidencing perfection are now required for secured creditors. In the past, secured creditors have often simply stated that their claim was secured and left further inquiry to debtors review of the public record, or to informal inquiries. The clarification, plus explicit language in the Committee Note accompanying the revised form, clarifies that summaries will not suffice, and copies of the evidence of perfection "must be attached to the proof of claim."
Although the form also allows an explanation that the documentation of perfection is not available, this exception will rarely be applicable, since most perfection is through a recording in the public record; actual possession of the collateral or possession by a third party with an express agreement would be rare examples where documentation of perfection might not be available on the public record, but possession by a third party would typically be "perfected" by an agreement.
The consequences of failure to attach documentation showing perfection are unclear. The secured creditor might be allowed to amend its proof of claim, and the court might be persuaded that the actual fact of perfection should suffice as long as the secured creditor gave notice of its secured status by the time of the deadline to file proofs of claim, even if evidence of perfection was not provided with the filing. Alternatively, a bankruptcy court might insist that the new rule and form clarification now puts the burden on the secured creditor to show its perfected status in ways that are convenient to the debtor and others with an interest in the bankruptcy estate, and perhaps the creditor will not be allowed to show its perfected status.
The amendments to the bankruptcy rules that became effective December 1, 2011, also impose additional information requirements in particular circumstances involving consumer or individual debts.
If you have any questions regarding this article or its possible impact on your activities and operations, please contact your Sherman & Howard attorney or any member of the Banking & Finance Practice Group.
Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.
©2011 Sherman & Howard L.L.C. December 8, 2011