As a general rule bankruptcy almost immediately instills an automatic stay upon creditors from taking further enforcement or collection action against a debtor and in that light can be viewed as a protection; however, that protection can become detrimental if creditors deceivingly seek claims or priority of such claims that are greater than to which they are entitled. Creditors often feast upon the bankruptcy buffet as a swarm of scavengers feast upon a carcass and use whatever method or manipulative effects to deceive and collect upon the recovery.
Bankruptcy proceedings provide for the reorganization, liquidation, collection and / or redistribution of funds, wealth and / or assets to the respective creditors in an order of priority. As a result of this clear designation and availability of information, creditors seek to file their claims in the highest order of priority in which they are able or in which they can deceive. While secured creditors obviously hold greater preference than unsecured creditors, and while priority claims hold greater weight than others, the amount in which can be claimed under the same priority often becomes muffled, confused, skewed, and manipulated with the intent to collect as much recovery as possible. One common, often misinterpreted, example of this type of event is with the application of penalty claims within bankruptcy proceedings.
Penalties are generally recognized in the following order of priority to claims filed:
Property of the estate shall be distributed—
(4)fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim;
(5)fifth, in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and
As a result, penalty assessments that do not represent compensation for actual losses incurred by the creditor as a result of acts or alleged acts of commission or omission by the debtor, do not hold the same priority and such amounts for penalties must be held behind all other unsecured claims. For example, if a creditor holds a valid claim consisting of priority claims such as for union contributions; however, also hold penalty claims as a result of debtor delinquencies from the same contributions, those penalties do not hold the same priority as the priority claim on the actual contributions and should only be released after satisfaction of all other secured and unsecured claims of all creditors. Regardless of the means by which the creditor presents the claim or recognizes the penalty, provided the penalty does not provide for recovery for actual pecuniary compensation loss, the penalty claim must be separated from and recovered distinctly separate from all other unsecured claims and only in priority to interest accrued after the petition date.
Creditors must not be allowed to unfairly and inequitably seek priority to which they are not entitled and trustees and trustee representatives must be careful to interpret claims accordingly.
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