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The Fifth Circuit Court of Appeals holding in Raymond James & Associates, Inc. v. Jalbert (In re German Pellets Louisiana, LLC), 91 F.4th 802 (5th Cir. 2024), shows that sitting on the sidelines amidst a bankruptcy does not always pay off.

Proof of Claim and Raymond James

There are times when a creditor will make a strategic decision not to file a proof of claim in a bankruptcy. If a creditor does file a proof of claim, the creditor consents to the jurisdiction of the bankruptcy court.

In Raymond James, the debtor used proceeds from a bond offering underwritten by Raymond James & Associates (“Raymond James”) to build a large manufacturing plant. Soon after, having encountered financial issues, the debtor filed a chapter 11 bankruptcy petition. The debtor did not list Raymond James as a creditor even though it had indemnification rights. Further, Raymond James chose not to file a proof of claim even though it was well aware of the bankruptcy.

Per the confirmed plan of reorganization, third parties with a claim were barred from asserting any right of setoff or recoupment. The plan further provided for the creation of a trust whereby the debtor transferred its remaining assets and causes of action to the trust.

Soon after, the bondholders transferred their claims of misrepresentations by Raymond James in the sale of the bonds to the trust. The trust sued Raymond James in state court for violating state securities laws. In response, Raymond James filed a counterclaim against the trust for setoff and recoupment based on its indemnification claim. The trust responded to the counterclaim by filing an adversary proceeding in bankruptcy court and then filed a motion for summary judgment alleging that by virtue of the plan, Raymond James was precluded from asserting its right to setoff or recoupment related to its rights to indemnification based on the confirmed plan of reorganization. Raymond James in turn filed a motion requesting that the plan be modified allowing it to assert its claims for indemnification as an offset and/or recoupment.

The bankruptcy court ruled in favor of the trust, finding that the plan controlled and that the plan could not be modified. The district court affirmed and Raymond James appealed to the Fifth Circuit Court of Appeals. The Fifth Circuit found that even though Raymond James was not scheduled by the debtor as a creditor, it was bound by the terms of the plan because it was aware of the bankruptcy filing and chose to sit it out.

As for Raymond James’ request that the plan be modified allowing it to then assert its indemnification claim, the Fifth Circuit found that the bankruptcy court did not abuse its discretion by refusing to modify the plan as Raymond James was “fully aware” of the bankruptcy filing. Further by virtue of having knowledge of the bankruptcy, it could have appeared and objected to the bond holders transferring their claims against Raymond James to the trust. Failing to do so, it was now precluded from doing so and from asserting that the trust did not have standing to sue it.

Bottom line, though there are times when one is advised not to file a proof of claim and appear in a bankruptcy proceeding, a creditor should not hide behind the log and totally ignore the proceeding. At the very least, had Raymond James followed the bankruptcy proceeding it could have objected to the bondholders transferring their claims to the trust and objected to the plan.

The takeaway here is to follow the bankruptcy proceedings and avoid the catastrophic consequences Raymond James faced having been precluded from asserting its indemnification rights.


Avatar of Bill Siegel
William L. (Bill) Siegel is a Shareholder and Section Head of the Cowles and Thompson Bankruptcy and Creditors’ Rights Practice Group as well as a member of the Corporate and Business Practice Group. His experience includes representing individuals and business entities in their corporate and transactional affairs, including drafting and negotiating agreements of all types, and representing individuals and business entities in disputes that may arise in litigation in State and Federal Courts. He also represents debtors, creditors, Trustees, and Committees in bankruptcy matters in Chapter 7 liquidations and Chapter 11 reorganizations. His clients include small and medium-sized businesses, start-up technology companies, and partnerships. He frequently publishes articles and content regarding trends in bankruptcy law, the economy, commercial real estate, and retail-related matters.