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allowing late claim to be filed where creditor acted six days after bar date
Summary of this case from In re US Airways, Inc.Opinion
Case No. 95-15090-AM
May 15, 1996
Nicholas D. Vlissides, Esquire, Vlissides Keisler, P.C., Fairfax, VA, for debtor in possession
W. McCauley Arnold, Esquire, McCandlish Lillard, P.C., Fairfax, VA, for creditors, Margaret and Talmadge Smith
MEMORANDUM OPINION
Before the court is the motion of Margaret and Talmadge Smith filed May 10, 1996, to alter or amend the order entered by this court on May 6, 1996, denying their motion to file a late proof of claim. The debtor in possession has filed a memorandum in opposition. Because the facts and relevant authorities are adequately set forth in the record and in the submissions of the parties, the court dispenses with oral argument. Local Rule 109(L).
Facts and Procedural History
The debtor, which is in the pay telephone business, filed a voluntary chapter 11 petition in this court on November 14, 1995, and continues to operate its business as debtor in possession. Among the creditors listed on the list of creditors filed with the petition and on Schedule F ("Creditors Holding Unsecured Nonpriority Claims") filed on December 13, 1995, were "Tal Margaret Smith, t/a Smith Communication, 2664 Westpark Dr., Baltimore, MD 21207." The Smiths are shown as having a claim "described only as `Legal Claim'" in the amount of $3,000,000.00, and the claim is listed as both "disputed" and "unliquidated." On Schedule B ("Personal Property"), the debtor lists as an asset a "legal claim against Talmadge Smith" having a value of $100,000.00.
Curiously, the Smiths are not listed on the List of 20 Largest Unsecured Creditors filed by the debtor, even though theirs is the largest (albeit disputed) unsecured claim.
On November 29, 1995, a "Notice of Commencement of Case Under Chapter 11 of the Bankruptcy Code, Meeting of Creditors, and Fixing of Dates" was mailed by the Bankruptcy Noticing Center to all listed creditors and parties in interest, including the Smiths. It is undisputed that the Smiths received the notice. The notice advised that the date set for the meeting of creditors under § 341, Bankruptcy Code, was December 19, 1995. The notice also contained several boxes with various items of information, among which was the following:
DEADLINE TO FILE A PROOF OF CLAIM:
For creditors other than governmental units:
March 20, 1996
For governmental units: May 13, 1996 FILING CLAIMS (NOTE: Use Form On Back!!)
The notice also contained the following text:
PROOF OF CLAIM. Schedules of creditors have been or will be filed pursuant to Bankruptcy Rule 1007. Any creditor holding a scheduled claim which is not listed as disputed, contingent, or unliquidated as to amount may, but is not required to, file a proof of claim in this case. Creditors whose claims are not scheduled or whose claims are listed as disputed, contingent, or unliquidated as to amount and who desire to participate in the case or share in any distribution must file their proofs of claim. A creditor who desires to rely on the schedules of creditors has the responsibility for determining that the claim is listed accurately. The place to file a proof of claim, either in person or by mail, is the office of the Clerk of the Bankruptcy Court. A proof of claim form is available on the reverse side of this notice or in the clerk's office of any bankruptcy court.
At the time the chapter 11 petition was filed, there was a pending lawsuit in the Circuit Court of Fairfax County, Virginia, by the debtor against the Smiths. In that suit, the Smiths had filed a counterclaim against the debtor and its president and sole shareholder, Fitzgerald Lewis, seeking $1,155,000.00 in compensatory damages and $3,500,000.00 in punitive damages. The Smiths were represented in that lawsuit by W. McCauley Arnold, who is a member of the bar of this court. Talmadge Smith, accompanied by Mr. Arnold, appeared at the meeting of creditors and questioned the debtor. On March 11, 1996, the Smiths, through Mr. Arnold, filed a motion for an examination of the debtor under Federal Rule of Bankruptcy Procedure 2004. In the motion, they asserted that they were creditors in the case but did not otherwise set forth any description of their claim. In particular, they did not state the amount or the nature of their claim. On approximately March 25, 1996, Mr. Arnold, in a telephone call with debtor's counsel concerning the motion for the Rule 2004 examination, first learned of the March 20, 1996 claim deadline. The next day — March 26, 1996 — the Smiths filed a "Motion for Leave of Court to File Proof of Claim" to which was attached a proof of claim form asserting an unsecured nonpriority claim in the amount of $3,275,000."
The court is advised that the lawsuit, which had been scheduled to go to trial on February 22, 1996, has been nonsuited.
The boxes for "Basis of Claim" and "Date Debt Was Incurred" were left blank.
A hearing on the motion was held on April 23, 1996. At the hearing, the Smiths' attorney represented that although his clients had informed him of receiving the meeting of creditors notice, they had not sent him a copy and he had not seen it prior to March 25, 1996. He also represented that the Smiths themselves, although they received the notice, either did not read or did not focus on the information concerning the deadline for filing claims. No witnesses testified at the hearing. The court, after hearing argument from counsel, found that the Smiths had not met their burden of showing that their failure to file the proof of claim within the time period stated on the meeting of creditors notice was the result of excusable neglect. The court accordingly ruled from the bench that the motion would be denied. An order reflecting the court's ruling was entered on the docket on May 6, 1996, and it is that order that the current motion seeks to alter or amend. The debtor has not yet filed a plan of reorganization.
Conclusions of Law and Discussion
Federal Rule of Bankruptcy Procedure 3003 governs the filing of proofs of claim or interest in chapter 11 reorganization cases. In distinct contrast to cases under chapters 7, 12, and 13 of the Bankruptcy Code, it is not always necessary for a creditor in a chapter 11 case to file a proof of claim. Specifically,
The schedule of liabilities filed pursuant to § 521(1) of the Code shall constitute prima facie evidence of the validity and amount of the claims of creditors, unless they are scheduled as disputed, contingent, or unliquidated. It shall not be necessary for a creditor or equity security holder to file a proof of claim or interest except as provided in subdivision (c)(2) of this rule.
F.R.Bankr.P. 3003(b)(1) (emphasis added). However,
Any creditor or equity security holder whose claim or interest is not scheduled or scheduled as disputed, contingent, or unliquidated shall file a proof of claim or interest . . . any creditor who fails to do so shall not be treated as a creditor with respect to such claim for the purposes of voting and distribution.
F.R.Bankr.P. 3003(c)(2). The time within which a proof of claim, if required, must be filed is set forth in F.R.Bankr.P. 3003(c)(3):
The court shall fix and for cause shown may extend the time within which proofs of claim or interest may be filed. Notwithstanding the expiration of such time, a proof of claim may be filed to the extent and under the conditions stated in Rule 3002(c)(2), (c)(3), and (c)(4).
i.e., claims by infants and incompetent persons, claims by an entity against whom a preference or similar avoidance judgment is entered post-petition, and claims arising from rejection of executory contracts or leases.
Under Federal Rule of Bankruptcy Procedure 2002(a)(8), creditors are entitled to 20 days notice of the bar date. Additionally, under § 502(b)(9), Bankruptcy Code, added by the Bankruptcy Reform Act of 1994, the claim of a "governmental unit" is timely if it is filed within 180 days after the date of the order for relief.
In this District, the bar date for filing proofs of claim in chapter 11 cases is fixed by local rule:
Rule 310 § Claims in Chapter 11 Cases
The last date for the filing of claims in a chapter 11 case shall be ninety days after the date first scheduled for the meeting of creditors. The Clerk shall give notice of the date in the meeting of creditors notice.
Since the meeting of creditors in the present case was scheduled for December 19, 1995, the actual last date under the local rule for filing claims was March 18, 1996 (a Monday). As noted above, however, the meeting of creditors notice advised that the last date was March 20, 1996, and for the purpose of the present motion, the court treats the latter date as controlling.
Under Federal Rule of Bankruptcy Procedure 9006(b)(i), "if a party moves for permission to act after having missed a deadline, the court may at any time in its discretion . . . permit the act to be done where the failure to act was the result of excusable neglect.'" Pioneer Investment Services Co. v. Brunswick Associates, L.P., 507 U.S. 380, 399, 113 S.Ct. 1489, 1500, 123 L.Ed.2d 74 (1993). In Pioneer, a creditor had missed the filing date for filing a proof of claim in a chapter 11 case in circumstances similar to those presented here. As here, the claims bar date was set forth in the meeting of creditors notice. The creditor's attorney was aware of the chapter 11 filing but did not "largely because he was moving his office at the time" carefully review the meeting of creditors notice until after the bar date had passed. The bankruptcy court denied the creditor's motion to permit the claim to be filed late. The District Court remanded for reconsideration, and the bankruptcy court again denied the motion. This time the District Court affirmed but was reversed by the Sixth Circuit, which ruled that a sufficient showing of excusable neglect had been made out. The Supreme Court affirmed, holding that "excusable neglect" is "not limited to situations where the failure to timely file is due to circumstances beyond the control of the filer," 507 U.S. at 391, 113 S.Ct. at 1496, but also extends to inadvertence, mistake, or carelessness. The Court noted,
The Pioneer opinion does not state how the claim deadline was actually calculated in that case, and there is no indication in the opinion that the date was set pursuant to a local rule.
Although inadvertence, ignorance of the rules, or mistakes construing the rules do not usually constitute "excusable" neglect, it is clear that "excusable neglect" . . . is a somewhat "elastic concept" and is not limited strictly to omissions caused by circumstances beyond the control of the movant.
507 U.S. at 392, 113 S.Ct. at 1496 (footnotes omitted). The Court then went on to hold:
With regard to determining whether a party's neglect of a deadline is excusable, we are in substantial agreement with the factors identified by the Court of Appeals. Because Congress has provided no other guideposts for determining what sorts of neglect will be considered "excusable," we conclude that the determination is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission. These include, as the Court of Appeals found, the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.507 U.S. at 395, 113 S.Ct. at 1498 (footnotes and internal citation omitted). The Court did, however, pointedly reject the argument that the consequences of an attorney's omission should not be visited on the attorney's client and reaffirmed that "each party [represented by an attorney] is deemed bound by the acts of his lawyer-agent and is considered to have "notice of all facts, notice of which can be charged upon the attorney." 507 U.S. at 397, 113 S.Ct. at 1499. Consistent with this stance, the Court gave little weight to the disruption resulting from the attorney's relocation of his law office. The Court did, however, "consider significant that the notice of the bar date provided by the Bankruptcy Court in this case was outside the ordinary course in bankruptcy cases," since "ordinarily the bar date in a bankruptcy case should be prominently announced and accompanied by an explanation of its significance." 507 U.S. at 398, 113 S.Ct. at 1499-1500. In particular, the Court agreed with the Sixth Circuit that the "peculiar and inconspicuous placement of the bar date in a notice regarding a creditors['] meeting" constituted an "unusual form of notice," which — in the absence of any evidence of prejudice to the debtor or any indication of bad faith by the creditor — "requires a finding that the neglect of respondents' counsel was, under all the circumstances, "excusable." 507 U.S. at 398-399, 113 S.Ct. at 1500.
Pioneer provides the framework for determining whether the Smiths have shown that their neglect in not filing a timely proof of claim was excusable. The only major facts that distinguish this case from Pioneer are as follows: (1) the Smiths filed a written pleading, describing themselves as "creditors" although not stating the amount and basis for their claim, within the period for filing claims; (2) the Smiths were at all times represented by an attorney who was admitted to the bar of this court and therefore presumably familiar with its local rules; and (3) the local rules fix the time for filing proofs of claim in chapter 11 cases. In addition, at the time the Smiths filed their motion and tendered their late proof of claim, the period within which governmental entities could file a proof of claim had not yet expired.
The present motion to alter or amend the order denying leave to file a late proof of claim is brought under Federal Rule of Bankruptcy Procedure 9023, which makes Federal Rule of Civil Procedure 59 ("New Trials; Amendment of Judgments") applicable "in cases under the Code, except as provided in Rule 3008." The latter rule permits a "party in interest" to move at any time "for reconsideration of an order allowing or disallowing a claim against the estate." Otherwise, a motion for a new trial under Fed.R.Civ.P. 59(a) or to alter or amend a judgment under Fed.R.Civ.P. 59(d) must be filed within 10 days after entry of the judgment. Here, the motion was filed within 10 days of the order sought to be amended, but the debtor in possession asserts that relief is nevertheless unavailable under Rule 9023, because the rule only applies to adversary proceedings, and the order the Smiths seek to have amended is not in literal terms a "judgment."
The court does not find this argument persuasive. First, the rules specifically relating to adversary proceedings are set forth in Part VII (entitled "Adversary Proceedings") of the Federal Rules of Bankruptcy Procedure. Rule 9023 is located in Part IX (entitled "General Provisions") of the Federal Rules of Bankruptcy Procedure. It is clear from such placement that the drafters of the rules did not intend Rule 9023 to apply only to adversary proceedings, notwithstanding the use in Rule 59 of the term "judgment." More to the point, under Bankruptcy Rule 9002(5), for the purpose of applying the Federal Rules of Civil Procedure in bankruptcy cases, "Judgment1 includes any order appealable to an appellate court" (emphasis added). This broad use of the term "judgment" is carried over in Bankruptcy Rule 9021 ("Entry of Judgment"), which refers to a "judgment entered in an adversary proceeding or contested matter." A contested matter is one "not otherwise governed by [the Federal Rules of Bankruptcy Procedure] and is brought by motion. F.R.Bankr.P. 9014. The ruling of the court in a contested matter is ordinarily embodied in an "order" rather than a "judgment." Regardless of what it is called, if it grants, denies or decrees relief and is appealable under 28 U.S.C. § 158(a), it is a judgment for the purpose of Bankruptcy Rule 9023. The order denying leave to file a late proof of claim was an appealable final order and is therefore, under Bankruptcy Rule 9002(5), a "judgment" for the purpose of Bankruptcy Rule 9023.
There remains the issue of whether, on the merits, amendment of the order is justified. No new facts or authorities have been advanced by the Smiths, and in effect the Smiths are simply asking the court to re-think its prior ruling. This is ordinarily not the proper function of a Rule 59(e) motion. Nevertheless, in view of the very severe prejudice that the Smiths will suffer if not permitted to assert their claim, the court finds it appropriate in the circumstances of this case to reassess the equitable factors weighing in favor of and against granting leave to file a late claim. In doing so, the court concludes that in the initial ruling excessive weight was given to the fact that the Smiths' attorney was a member of the bar of this court and therefore presumed to be familiar with the deadline fixed by Local Rule 310 for the filing of claims in chapter 11 cases.
"The . . . Fourth Circuit has recognized three grounds for altering or amending a prior judgment: — 1) to accommodate an intervening change in controlling law; (2) to account for new evidence not available at the time of trial; or (3) to correct a clear error of law or prevent manifest injustice.'" In re K L Lakeland, 185 B.R. 20 (Bankr.E.D.Va. 1995), quoting Hutchinson v. Staton, 994 F.2d 1076, 1081 (4th Cir. 1993).
This is not to say that the Smiths and their attorney were not negligent. Both the Smiths and their attorney were unquestionably negligent: they for not reading the meeting of creditors notice more carefully, he for not asking for a copy and not reviewing the local rules. In the absence of countervailing circumstances, where there is no excuse for the late filing of a proof of claim other than the carelessness of the creditor and the creditor's attorney, such neglect is not excusable. In re Rose's Store, Inc. 165 B.R. 410 (Bankr. E.D.N.C. 1994) (Small, J.) (distinguishing Pioneer because, among other reasons, "notice of the bar date in this case was given in the usual and customary manner"); See, also, Huennekens v. Marx (In re Springfield Contracting Corp.), 156 B.R. 761 (Bankr. E.D. Va. 1993) (Shelley, J.) (no excusable neglect to file late notice of appeal where attorney knew of deadline and simply waited until last minute).
In the present case, not only is there the same circumstance on which the Supreme Court relied so heavily in Pioneer — the inconspicuous placement of the bar date in the notice for the meeting of creditors — but there was meaningful participation by the creditors in the case prior to the bar date. The Fourth Circuit has long held that participation in a debtor's bankruptcy case may justify allowing a creditor to file a late proof of claim. Fyne v. Atlas Supply Co., 245 F.2d 107 (4th Cir. 1957); Scottsville Nat'l Bank v. Gilmer, 37 F.2d 227 (4th Cir. 1930). Although both Fyne and Scottsville were decided under the former Bankruptcy Act of 1878 rather than the current Bankruptcy Code, the principles remain unchanged. Davis v. Columbia Constr. Co., Inc. (In re Davis), 936 F.2d 771 (4th Cir. 1991); In re Faust, 180 B.R. 432 (Bankr. D.S.C. 1994). As explained in Faust, "For an amended claim to be allowed in the absence of a prior written informal claim, the creditor must undertake some affirmative action to constitute sufficient notice that he has a claim against the estate." 180 B.R. at 435. Although neither "[m]ere knowledge of the claim on the part of the Trustee" nor "the listing of the claim on the debtor's schedules" constitute sufficient notice to permit the filing of an amended claim, "[c]ourts have allowed the Debtors' indication of the amount of the claim to fulfill that portion of the proof of claim, (namely the amount) . . ." Id.
However, it should be noted that the restrictive construction of the term "excusable neglect" applied by the Court of Appeals in Davis was rejected in Pioneer.
Here, the Smiths did not sit back and ignore the bankruptcy. They actively participated in the meeting of creditors and, prior to the expiration of the bar date, filed a formal pleading asserting their status as "creditors." Although the motion for leave to conduct a Rule 2004 examination of the debtor did not state the amount or basis of their claim, the listing of the claim on the debtor's schedules would supply that information. Faust, supra, 180 B.R. at 435. The delay in this case is very short: only six days. Moreover, at the time the motion was filed, the bar date for claims by government entities still had more than six weeks to run. There is no suggestion that in failing to file a timely proof of claim the Smiths were acting in bad faith or deliberately ignored the filing deadlines. It is true that allowing the claim to be filed may (if the claim is ultimately allowed) cause some prejudice to the debtor and other creditors if only because it is the largest single claim against the debtor's estate. And it is true that there will be some expense to the estate in having to litigate the claim. On the other hand, no plan of reorganization has been filed, and it does not appear that allowing the claim to be filed at this point would unduly delay the reorganization proceedings. Finally, as in Pioneer, there was no separate notice of the bar date for filing proofs of claim, and the notice of the bar date contained in the notice for the meeting of creditors was not particularly prominent or calculated to catch the reader's attention. Given all the circumstances and balancing all the equities, the court concludes that leave should be granted to file a late proof of claim.
In any event, this court has the power under § 502(c)(1), Bankruptcy Code, to estimate, for the purpose of allowance, "any . . . unliquidated claim, the fixing or liquidation of which, as the case may be would unduly delay the administration of the case." Additionally, under F.R.Bankr.P. 3018(a), if there is an unresolved objection to a claim at the time of voting on a plan, this court may "temporarily allow the claim . . . in an amount which the court deems proper for the purpose of accepting or rejecting the plan."
A separate order will be entered granting the motion to alter or amend the order of May 6, 1996 and allowing the Smiths an extension of time to file their proof of claim.