11 U.S.C. Section 502 - Allowance of Claims or Interests

What Is Section 502?

Section 502 is the gateway provision for claim allowance in bankruptcy. It begins with a deceptively simple rule: a properly filed proof of claim under Section 501 "is deemed allowed, unless a party in interest objects." That single sentence (Section 502(a)) shifts the burden of going forward onto any party who wants the claim disallowed. The substance of the disallowance analysis is then set out in Section 502(b), which lists nine specific grounds on which a claim must be disallowed, in whole or in part.

Prima Facie Validity

Federal Rule of Bankruptcy Procedure 3001(f) provides that "a proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." That presumption flows into Section 502(a): unless objected to, the claim is allowed at the amount stated. To rebut prima facie validity, an objector must produce evidence sufficient to negate at least one essential element. If the objector meets that burden, the burden of going forward shifts back to the claimant to prove the claim.

The Nine Disallowance Grounds: Section 502(b)

Section 502(b) requires the court, on objection, to disallow the claim to the extent that:

1. 502(b)(1): The claim is unenforceable against the debtor and property of the debtor under applicable law (other than because it is contingent or unmatured) - the "state law defenses" provision.
2. 502(b)(2): The claim is for unmatured interest.
3. 502(b)(3): The claim is for a tax assessed against property of the estate that exceeds the value of the estate's interest in the property.
4. 502(b)(4): The claim is for services of an insider or attorney of the debtor that exceed the reasonable value of the services.
5. 502(b)(5): The claim is for a debt that is unmatured on the petition date and excepted from discharge under Section 523(a)(5) (domestic support).
6. 502(b)(6): The claim is by a lessor for damages from termination of a real-property lease, capped under a statutory formula.
7. 502(b)(7): The claim is by an employee for damages from termination of an employment contract, capped at one year of compensation.
8. 502(b)(8): The claim results from a reduction in employment-tax credits because of late employment-tax returns.
9. 502(b)(9): The proof of claim is not timely filed.

Section 502(b)(1) and State-Law Defenses

The Supreme Court in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., 549 U.S. 443 (2007), confirmed that Section 502(b)(1) requires the court to apply non-bankruptcy law to determine the underlying enforceability of a claim. Statutes of limitations, statutes of frauds, and contract defenses all flow through Section 502(b)(1).

The Supreme Court in Midland Funding, LLC v. Johnson, 581 U.S. 224 (2017), held that filing a proof of claim on a debt that is unenforceable under a state statute of limitations is not, by itself, a violation of the Fair Debt Collection Practices Act - but the time-barred status remains a complete defense to allowance under Section 502(b)(1).

Estimation Under Section 502(c)

Section 502(c) requires the court to estimate, for purposes of allowance, any contingent or unliquidated claim "the fixing or liquidation of which would unduly delay the administration of the case," and any right to equitable relief that gives rise to a right to payment. Estimation is the standard mechanism for mass-tort claims, environmental claims, and contingent guarantees in Chapter 11 cases.

Reconsideration: Section 502(j)

An allowed claim may be reconsidered for cause; a disallowed claim may be reconsidered "according to the equities of the case." This is a substantive provision, broader than ordinary Rule 60(b) reconsideration, but it is not a vehicle to relitigate matters already actually litigated.

The Claim-Objection Procedure

Claim objections are contested matters under Federal Rule of Bankruptcy Procedure 9014 unless they include a request for relief that would make them an adversary proceeding under Rule 7001 (such as a determination of validity, priority, or extent of a lien). Most objections are resolved on a paper record at a single hearing; complex objections often involve discovery and an evidentiary hearing.

Related Bankruptcy Code Sections

• Section 501 - Filing of proofs of claim
• Section 506 - Secured status of an allowed claim
• Section 507 - Priorities of allowed claims
• Section 523 - Nondischargeability (allowed claims can still be nondischargeable)
• Section 1129 - Confirmation (allowed claims drive the best-interests test)

Understanding how these sections interact is important for creditors filing claims, debtors objecting to claims, and trustees administering estates.