Creditors Beware: Eleventh Circuit Denies Creditor From Amending Claim After Confirmation of Plan

Landlords and other creditors should be aware of the recent decision Winn-Dixie Stores, Inc., ___ F.3d. ___, 2011 WL 1601279 (11th Cir. April 29, 2011), in which the Eleventh Circuit holds that, absent compelling circumstances, res judicata bars a creditor from amending a proof of claim after confirmation of a plan precludes subsequent amendment of claims regardless of any reservation of rights to amend and supplement the claims in the original claims.

The creditors who filed the appeal in Winn-Dixie attempted to amend their claims after confirmation of the plan. Prior to that time, they objected to neither confirmation of the plan nor the reduction of the amount of their claim by the bankruptcy court. They relied upon the express reservation of the right to amend that was included in the creditors' original proofs of claim and their assertion that the final amount of the claim could not have been calculated until the creditors were able to mitigate their damages.

The decision in Winn-Dixie denied the right to amend a claim after confirmation by adopting the Seventh Circuit's rationale in Holstein v. Brill, 987 F.2d 1268 (7th Cir. 1993) that (i) confirmation of a reorganized plan is the equivalent of a final judgment and entitled to the finality doctrine of res judicata; (ii) upon confirmation, pre-confirmation claims are extinguished and substituted for the judgment; and (iii) upon confirmation, each claimant essentially receives a new claim based upon whatever treatment is provided for such claim in the plan. It held that the reservation of the right to amend was ineffective to overcome res judicata. The Eleventh Circuit reiterated that its rule acknowledges that amendments to proofs of claim should be freely granted prior to confirmation of a plan. After confirmation of a plan of reorganization, however, amendments to claims are permissible only if exigent circumstances justify the amendment. The Eleventh Circuit, however, found that the creditors' (i) failure to object to the reduction of the original claim; (ii) failure to object to the plan; and (iii) failure to file their amended claim until two months after completion of the mitigation efforts, did not justify any post-confirmation amendment.

Lesson learned: a creditor should not simply rely on reservation of rights to amend in a proof of claim and make sure that all steps are taken to preserve the claim prior to confirmation of the plan. To the extent that the creditor is in the process of mitigating its loss, it should file its proof of claim in the maximum allowable amount so that any subsequent amendment will be a reduction in the amount of the claim. Finally, a creditor also must be vigilant and, if appropriate, object to confirmation of a plan or the reduction in the amount of a filed claim as a result of an objection by the debtor or other party in interest or the terms of a plan.

For more information on the issues raised by Winn-Dixie, please feel free to contact any one of the members of the Restructuring, Bankruptcy and Creditors' Rights Practice Group of Schiff Hardin LLP.

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