New Century: Bankruptcy Court Upholds Finality Of Bar Date Even Where Result Seems “Harsh”

The Delaware Bankruptcy Court recently reaffirmed the finality of the claims bar date and the extremely high bar a creditor seeking to file a claim after the bar date must meet. In In re New Century TRS Holdings, Inc. et al., 2012 Bankr. LEXIS 371 (Bank. D. Del 2012), Judge Kevin J. Carey disallowed and expunged a proof of claim filed four years after the bar date by an individual borrower that had obtained a mortgage from the debtors, notwithstanding that the Court recognized that “this result to a consumer borrower may seem harsh”. Id. at * 34.

New Century and its affiliates filed chapter 11 cases on April 2, 2007. Thereafter, the Court established August 31, 2007 as the deadline for filing proofs of claim in the cases. In July 2011, almost two years after the Court approved the debtors’ liquidating plan and almost four years after the claims bar date, Helen Galope filed a proof of claim against the debtors asserting amounts owed for fraudulent loan transaction under a mortgage note. The liquidating trustee objected to Mrs. Galope’s claim on the grounds that it was filed after the bar date. Mrs. Galope argued that her claim should be allowed because (1) she was not aware of her claim until after the bar date passed, (2) notice of the bar date was not sufficient as she did not receive direct or actual notification from the debtor, and (3) she should be allowed to file her claim after the bar date based on excusable neglect.

The Court concluded that Mrs. Galope had received adequate constructive notice of the claims bar date through publication of notice in the national edition of the Wall Street Journal and the local Orange County Register – notwithstanding Mrs. Galope’s assertions that she does not read either newspaper – because her claim did not appear in the debtors’ books and records and accordingly she was not entitled to actual notice of the claims bar date.

The Court next considered whether Mrs. Galope should be allowed to file a late proof of claim based on the “excusable neglect” standard because she did not become aware of her claim against the debtors until several years after the bar date. Mrs. Galope testified that she realized that she had a proof of claim against the debtors sometime in 2010, years after the bar date, and filed her proof of claim in 2011. The Court turned to the four factors set out in Pioneer Inv. Servs. v. Brunswich Assocs. Ltd. P’ship, 507 U.S. 380 (1993), to determine whether a claimant may file a claim after the bar date on the grounds of excusable neglect: (1) the danger of prejudice to the debtor, (2) the length of the delay and its potential impact on judicial proceedings, (3) the reason for the delay including whether it was within the reasonable control of the movant, and (4) whether the movant acted in good faith.

In considering these factors, the Court concluded that (1) allowing Mrs. Galope to file the claim would be significantly prejudicial to the debtors because it “unquestionably will open a floodgate to similar claims by other borrowers”, (2) “the four year delay is significant . . . [considering] the [liquidating] trustee had already completed two interim distributions and [was] finalizing administration of the trust assets”, and (3) Mrs. Galope’s “neglect in waiting until July 2011 to file a claim is not excusable”. Id. at * 31-32. As a result of the foregoing, the Court disallowed and expunged Mrs. Galope’s claim.

The Court recognized that, while “this result to a consumer borrower may seem harsh,” the result was compelled by the “importance of a bar date in the chapter 11 case,” which is essential to the debtors’ ability to determine the total amount and types of claims that a plan must address and accordingly is indispensable to the proposal of any meaningful plan of reorganization. Id. at * 34-35.

New Century is a powerful reminder of the power of the claims bar date to provide finality to a debtor regarding the prepetition claims it must address in its plan, and the heavy consequences to creditors of failing to file a proof of claim prior to that date.

This entry was posted in Claims.