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In an unusual bankruptcy matter where a creditor failed to perfect a security interest out of concern that such aggressive action would lead to a breakdown of negotiations on issues under mediation, a Northern District of New York judge has granted a request to file an informal proof of claim. U.S. Bankruptcy Judge Robert E. Littlefield, in In re: Florence E. Kaufman, 97-14946, affirmed the longstanding principle and practice of wide judicial latitude in recognizing informal proofs. However, the ruling presented the court with novel issues of law dealing with a trustee’s ability, through strong-arm powers, to supersede a creditor’s unperfected lien. The decision, which involves a unique and probably unrepeatable fact pattern, arises out of a Chapter 7 petition filed voluntarily by Florence Kaufman in 1997. On the petition, Chase Automotive Finance was listed as a secured creditor of her 1997 Saab automobile. Chase, however, failed to perfect its interest, and the debtor bought the car for $14,000 after the trustee was given judicial authority to sell the vehicle. Later, the trustee initiated an adversary proceeding to discern the status of Chase’s security interest. Ultimately, the lien was avoided under �544 of the Bankruptcy Code. While the clock was running on Chase’s opportunity to file a proof of claim, negotiations between the creditor and the trustee were ongoing. Chase contended that it did not file the proof of claim during the pendency of those discussions “because it did not want to engage in any conduct that would appear to be aggressive while several issues were being mediated,” Judge Littlefield said in the decision. Judge Littlefield said he “sympathizes with the creditor,” but was disturbed that relations “could breakdown to such an extent.” However, he also said it would be “unacceptable for an attorney to let the Statute of Limitations expire while trying to negotiate a settlement,” and equally “improper for the creditor not to file a formal proof of claim within the allotted time frame because the parties were attempting to mediate resolution of other issues.” INFORMAL PROOF Still, Judge Littlefield observed that the 2nd U.S. Circuit Court of Appeals has recognized the informal proof theory, leaving a question of what precisely constitutes one ( In re Gibraltor Amusements Ltd., 315 F2d 210, 1963). What is evident, he said, is that written “informal” proof must be filed with the bankruptcy court, that it must express an intent to hold the debtor liable and that an amendment must be equitable. In this matter, Judge Littlefield said the only issue for him to decide was equity, and in a case such as this, where the creditor has provided extensive written documentation that leaves no doubt that a claim is being made, “it is difficult to imagine how allowing the amendment to these filings would be inequitable.” Judge Littlefield, while “in no manner condoning the creditor’s failure to file a formal proof of claim,” granted the request to amend over the strenuous objections of the Chapter 7 trustee, Douglas J. Wolinsky of Burlington, Vt. The creditor’s attorney, Rudolph J. Meola of Miller & Meola in Albany, N.Y., said that this matter arose in part because the state Department of Motor Vehicles had, apparently through oversight, failed to note the lien on the title of the car. Subsequently, Mr. Meola, said the Legislature has amended the Vehicle and Traffic Law to ensure that such an oversight does not subject a lien to avoidance. The amendment took effect Sept. 7, 1999. “Unperfected automobile liens were subjected to avoidance all the time,” Mr. Meola said, referring to the period prior to the law being amended. “The only one getting a windfall were the general unsecured creditors in the case who were able to recover some of the proceeds from the liquidated autos.” John T. Snell of Plattsburgh represented the debtor.

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