UNITED STATES BANKRUPTCY COURT FOR

EASTERN DISTRICT OF KENTUCKY

COVINGTON DIVISION


IN RE:

J. KREFTING PIANOS, INC.

DEBTOR CASE NO. 03-22480

MEMORANDUM OPINION

Lori A. Schlarman (the "Trustee"), the trustee of the bankruptcy estate of J. Krefting Pianos, Inc. (the "Debtor"), is before the court on the Objection to Claim that she filed in this case on July 1, 2004. The objection seeks the disallowance of the claim of the Kenton County Attorney (the "Creditor") on the ground that the proof of claim was untimely filed. Having considered the objection and the arguments of counsel, the court will conditionally sustain the Objection to the extent and for the reasons set forth below.

On September 15, 2003 the Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Its schedules of liabilities did not list the Creditor. On September 16, 2003 the court issued a notice that this case was being treated as a "no asset" case. See Fed. R. Bankr. P. 2002(e). Accordingly, the deadline for filing proofs of claim prescribed by Rule 3002(c)(1) of the Federal Rules of Bankruptcy Procedure, cited by the Trustee in her objection, is inapplicable. Fed. R. Bankr. P. 3002(c)(5). Rather, on February 17, 2004 the Trustee made an electronic request that the court give notice to creditors of a bar date, and the court did so on February 20, 2004, notifying creditors: "Pursuant to Rule 3002(c)(5) the last day for filing claims is fixed as 90 days from the date of this notice." Thus, the bar date expired on May 20, 2004. A copy of the notice of that deadline was not sent to the Creditor, but it asserts that it did not receive the notice or actual knowledge of the case until May 20, 2004 and the Trustee does not dispute that assertion.

The Creditor filed its proof of claim on May 26, 2004. The claim is in the amount of $7,597.16; the proof of claim does not assert that the claim is entitled to priority, although the Creditor does appear to assert that the claim is secured. The Trustee has not yet made a distribution in this case.

Section 502(b)(9) of the Bankruptcy Code provides for the disallowance of a claim when the proof of claim "is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (3) of section 726(a) of this title or under the Federal Rules of Bankruptcy Procedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for relief or such later time as the Federal Rules of Bankruptcy Procedure may provide." Section 726(a)(1), (2), and (3), in turn, state:

(a) Except as provided in section 510 of this title, property of the estate shall be distributed--

(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed before the date on which the trustee commences distribution under this section;

(2) second, payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection, proof of which is--

(A) timely filed under section 501(a) of this title;

(B) timely filed under section 501(b) or 501(c) of this title; or

(C) tardily filed under section 501(a) of this title, if--

(i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and

(ii) proof of such claim is filed in time to permit payment of such claim;

(3) third, in payment of any allowed unsecured claim proof of which is tardily filed under section 501(a) of this title, other than a claim of the kind specified in paragraph (2)(C) of this subsection.

Paragraph (1) would apply if the Creditor's claim is "of the kind specified in . . . section 507," because the Trustee has not commenced a distribution. (1) However, the proof of claim does not assert that the claim is entitled to priority; also, the pertinent provisions of 507 apply only to unsecured claims, and the Creditor's proof of claim appears to assert that the claim is secured.

Subparagraph (A) of Paragraph (2) is inapplicable because the Creditor's proof of claim was not timely filed under 501(a) of the Bankruptcy Code, and Subparagraph (B) of 726(a)(2) is inapplicable because the proof of claim was not filed under 501(b) or (c) of the Code. Subparagraph (C) would appear to be applicable if the Creditor's claim is an "unsecured" claim, because the Creditor did not learn of the case until the same day that the deadline for filing proofs of claim expired and the Creditor did file a proof of claim prior to any distribution in the case. However, the proof of claim appears to assert that the claim is secured. Section 726(a)(3) is irrelevant because, if the claim is unsecured, Paragraph (1) or (2)(C) would accord the claim a higher priority than Paragraph (3).

For the foregoing reasons, the court will enter a separate order affording the Creditor an opportunity to amend its proof of claim to withdraw its assertion that the claim constitutes a secured claim. (2) If such an amendment is timely made, the Trustee's objection will be overruled without prejudice to her right to object to the claim on grounds other than timeliness; otherwise, the objection will be sustained.

Copies to:

Lori A. Schlarman, Trustee

Charles W. Vaughn, Esq.

Charles L.J. Freihofer, Esq.

1. As a practical matter, under 726(a)(1) and 502(b)(9), the deadline for filing proofs of claim with respect to priority claims is the commencement of distributions by the trustee. In the words of one bankruptcy court: "Section 726(a)(1) provides for distribution to priority creditors . . . whether or not the claim was timely filed so long as the claim is filed before the trustee commences distribution." In re Lewis, 227 B.R. 886, 890 (Bankr. W.D. Ark. 1998); see also In re Burnham, Connolly, Oesterle & Henry, 98 F.3d 1341 (Table), 1996 WL 580475, at **4 (6th Cir. 1996) ("The 1994 Bankruptcy Amendments . . . 'reveal[] Congress' intent to demand that claims be timely filed.' . . . Section 726(a)(1) has been modified to allow first-tier distribution status to timely filed claims and those that are 'tardily filed before the date on which the trustee commences distribution.'") (emphasis added).

2. The court is not deciding whether the Creditor may also amend the proof of claim to assert that the claim is entitled to priority; that issue will be addressed if and when the Creditor seeks leave to make such an amendment.