Blawgletter understands — we think — that bankruptcy proceedings aim to settle claims against the bankrupt.  Creditors of every description — bank lenders, bond holders, trade creditors, and even tort claimants — generally must go through the sausage-making apparatus if they hope to get some of their money from the insolvent one.  A decision today by the Second Circuit highlighted another key feature of the process — the proof of claim process.

Your proof of claim asserts that the bankrupt has stiffed you somehow.  The debtor and other creditors may contest your proof of claim.  If someone does pick a fight, the bankruptcy court usually resolves it.

What happens if nobody objects?  The court will likely rubber stamp the proof of claim.  And — prepare to gasp in horror — the rubber-stamp order will have the same effect as a final judgment. Res judicata, baby!

The Second Circuit decision involved a proof of claim by the Internal Revenue Service for back taxes.  The IRS claim sailed through with nary a fuss.  After emerging from bankruptcy, the former-debtor sued to get a refund.  The district court granted the IRS’s motion for summary judgment on the ground that the bankruptcy court’s order allowing the proof of claim constituted res judicata.  The Second Circuit agreed.  EDP Medical Computer Systems, Inc. v. United States, No. 06-0106 (2d Cir. Mar. 9, 2007).

Simple as that.

Barry Barnett

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