In Kipp Flores Architects v. Mid-Continent Casualty Co.,  Hallmark (Mid-Continent’s policyholder) had a license to build one home per KFA blueprints, but ended up building hundreds, and not paying KFA for its plans.  After KFA sued for copyright infringement, 2 Hallmark entities filed for Chapter 7 bankruptcy, stating there would be no money to distribute to unsecured creditors.  KFA filed a claim for $63 million on one entity and eventually got a judgment against another Hallmark entity for $3 million, which Mid-Continent paid.

But KFA wanted Mid-Continent to pay the “final judgment” it got by filing its proof of claim in the Hallmark bankruptcy, up to the policy limits of $6M.  When Mid-Continent refused to pay, KFA sued Mid-Continent for breach of contract as a judgment creditor of Mid-Continent’s policyholder, Hallmark,  and as third-party beneficiary under Mid-Continent’s policies. On cross motions for summary judgment, the trial court found for Mid-Continent, and the Fifth Circuit affirmed.

KFA claimed that since no party objected to KFA’s proof of claim, the claim was “deemed allowed,” became a final judgment against Hallmark and under principles of res judicata, suffices to trigger Mid-Continent’s duty to indemnify its insured, Hallmark.  Mid-Continent said the claim was not a judgment and didn’t mean anything in a no asset case. While a claim with no objection is deemed allowed under 11 U.S.C § 502(a), in a no asset case, claims are discouraged, since they can’t be paid.

The Bankruptcy Rules plainly contemplate pretermitting claims allowance and objection procedures when there are no distributable assets.

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Section 502 would be significantly transformed if, under KFA’s reading, certain “parties in interest” in no asset cases would be required to monitor, object to, and litigate proofs of claim that need not even be filed.

The court concluded:  “There cannot be a “deemed allowed” claim where there were no distributable assets, no other bankruptcy-related purpose for claims “allowance,” and parties in interest were not on notice of the obligation to file objections to claims.”

We hold that KFA did not have a “deemed allowed” claim that constitutes res judicata against Mid-Continent because in this no asset bankruptcy case, nothing in the court proceedings required claims allowance, no notice was provided to parties in interest to object to claims, and no bankruptcy purpose would have been served by the bankruptcy court’s adjudicating KFA’s claim. The district court’s judgment in favor of Mid- Continent is AFFIRMED.