Opinion
No. 3:98-CV-1866-M, Bkcy. No. 385-30348-HCA-11, Adv. No. 397-3243
June 14, 2000
MEMORANDUM OPINION AND ORDER
On May 5, 2000, came on for oral argument the appeal filed by James A. Christopher ("Appellant" or "Christopher") from a decision rendered by Bankruptcy Judge Harold Abramson in favor of Kendavis Holding Company ("Kendavis" or "Appellee"). Having considered the briefs filed by the parties, the record on appeal, and the applicable law, the Court is of the opinion that the appeal is meritorious and that the Final Judgment of the Bankruptcy Court entered on March 13, 1998 should be REVERSED AND RENDERED, for the reasons described below.
BACKGROUND FACTS AND PROCEDURAL POSTURE
The record in this case is very sparse. Items designated by the Appellant are not in the file. However, the facts upon which the Court bases its decision are clearly undisputed.
Christopher, an engineer, worked for Unit Rig Equipment Company ("Unit Rig"), in Tulsa, Oklahoma from 1954-77, except for a three-year period ending in 1973 when he worked for Unit Rig's Canadian division ("Unit Rig Canada"). Throughout Christopher's employment, Unit Rig and Unit Rig Canada were subsidiaries of the Kendavis Companies.
The Court assumes Kendavis Holding Company to be functionally the same as the "Kendavis Companies," since the parties seem to assume as much in their briefing.
Kendavis sponsored, administered and managed two defined benefit plans: The Kendavis Industries Pension Plan (the "American Plan") and the Kendavis Industries Canadian Pension Plan (the "Canadian Plan"). Christopher participated in the American Plan from its inception in 1961 until his transfer to Unit Rig Canada in 1970, and again upon his return to Unit Rig in 1973, until he resigned in 1977. He participated in the Canadian Plan from 1970-73. Christopher was vested in the American Plan when he resigned from Unit Rig in 1977 at the age of 47, and was entitled to claim his benefits when he reached 65, on February 1, 1995. He claims a similar entitlement to benefits under the Canadian Plan, although (unlike the situation under the American Plan) he has never received any benefits under the Canadian Plan. However, in a letter dated May 23, 1977, from A.V. Causey, the Vice President of Industrial Relations of Kendavis Industries International, Inc., Christopher was notified that he was "entitled to a vested benefit under the Kendavis Industries Canadian Pension Plan for the years which you were in Canada" and that payment would commence on Christopher's normal retirement date of February 1, 1995. The Administrator of both plans instructed Christopher to file his claim with Kendavis several months before February 1, 1995, so that he would receive his pension benefits timely.
Kendavis Industries International, Inc. ("KIII") was a co-debtor in the subject bankruptcy. It was a wholly-owned subsidiary of Kendavis providing financial services to Kendavis.
On February 21, 1985, involuntary bankruptcy proceedings were commenced against Kendavis under Chapter 11 of the Bankruptcy Code. The pension funds in the American Plan and the Canadian Plan were not scheduled as assets of the Kendavis bankruptcy estate. However, in 1985, the assets held in trust for the American Plan's participants and beneficiaries seemingly exceeded the plan's liabilities, so in October 1985, Kendavis disclosed its intention to terminate the American Plan, so as to recoup the Plan's surplus assets. Termination occurred on November 1, 1985. Kendavis and other entities moved to distribute $20,000,000 of the alleged plan surplus (the surplus having been defined as that amount exceeding what was necessary to discharge "all obligations guaranteed by the Plan") to pension plan participants. The other $20,000,000 of the alleged surplus was to remain "in the Plan Surplus to pay any late discovered liability," and the "Participating Corporations," of which Kendavis apparently was one, would be exclusively responsible for any "late discovered liabilities such as omitted participants. . . ." On August 1, 1986, the bankruptcy court granted the motion to distribute a portion of the surplus assets of the American Plan to participants and beneficiaries.
It is undisputed that Kendavis never notified Christopher, or any other pension participant or beneficiary, of the Chapter 11 proceeding, or of any potential effect of the bankruptcy reorganization on their pension rights. No schedule in the bankruptcy case identified Christopher as a creditor or the pension plans as assets. Neither Christopher nor any other participant or beneficiary received any notice from Kendavis of the bar date, nor of the hearing date to confirm a plan of reorganization. No pension beneficiaries or participants ever made pension-related claims in the bankruptcy proceeding.
Christopher acknowledges that he read in the Tulsa newspapers that Kendavis was in bankruptcy and that he discussed that fact, casually, with his former co-workers at Unit Rig. There is no evidence that Christopher received any indication from the news articles, conversations or any other source, that the Kendavis bankruptcy would or could adversely affect his pension benefits.
Christopher received a single notice from Kendavis during the bankruptcy, which related to the American Plan's impending termination. Signed by K. W. Davis, President and Chair of Kendavis, the notice stated as follows:
As you know, as a former participant in the Kendavis Industries Pension Plan, you are entitled to a future retirement benefit from the company's pension plan. A decision has been made to terminate the Kendavis Industries Pension Plan . . . Let me assure you that your future retirement benefit for the pension plan is in no way affected.
(emphasis added). The letter contained no mention of the bankruptcy.
On November 24, 1986, the Bankruptcy Court confirmed the official Modified Joint Plan of Reorganization as to Kendavis and KIII. The Order of Confirmation in pertinent part states as follows:
Except as provided in the Committees' Plan, KHC [ i.e., Kendavis] and KIII shall be discharged from any debt that arose prior to the effective date of the Committees' Plan, whether or not a proof of claim was filed or deemed filed, whether or not such claim was allowed, whether or not the holder of such claim accepted the Committees' Plan, and whether or not the right to payment was reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, secured or unsecured. Any judgment obtained after the effective date of the Committees' Plan, to the extent that such judgment is a determination of the liability of KHC or KIII or any successor to KHC or KIII with respect to any debt discharged, is void. Except as provided herein, the commencement or continuation of any action, the employment of process or any act to collect, recover or offset any such debt as a liability of KHC, KIII or New KHC or from property of KHC, KIII or New KHC is enjoined.
The Plan of Reorganization confirmed by the Bankruptcy Court discharged "any and all Claims arising or incurred prior to the Effective Date" of the Plan, except as otherwise provided in the Plan or the Court's Order of Confirmation. The Plan of Reorganization defined "Claim" as:
any right to payment against one or more of the Debtors, or right to an equitable remedy against any Debtor for breach of performance if such breach gives rise to a right to payment, whether or not such right to payment or right to an equitable remedy is reduced to judgment, or whether liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, secured or unsecured.
The pension plans and their liabilities were not classified or expressly mentioned in the Plan or in the Court's Order confirming it. New Kendavis was created as a result of the confirmation of the Plan.
The Canadian Plan remained active and New Kendavis became its sponsor and administrator. In September 1987, post-bankruptcy, New Kendavis disclosed its intent to terminate the Canadian Plan, but Christopher received no notice of the impending termination. The final termination and distribution of the Canadian Plan occurred in 1989. Again, Christopher received no notice.
In 1989, Christopher elected to commence pension benefits under the American Plan's early retirement provision, and did so. However, in 1995, an actuary he retained informed him that he had been receiving less than he was entitled to under the American Plan.
Also in 1995, Christopher attempted to claim his benefits under the Canadian Plan, but was told the Canadian Plan had been terminated, no annuity had been purchased in his name, and apparently there were no funds with which to pay him. He never received any benefits from the Canadian Plan.
In light of his 1995 discoveries, on or about October 3, 1996, Christopher filed suit against Kendavis in federal court in Oklahoma, where he resided, seeking Canadian Plan benefits and additional American Plan benefits. New Kendavis responded by moving to reopen the Kendavis bankruptcy proceedings. The Bankruptcy Court reopened the case on April 30, 1997, and then Kendavis commenced an adversary proceeding against Christopher, claiming the Order of Confirmation discharged his claims under both the American and Canadian Plans and that the filing and pursuit by Christopher of the Oklahoma action violated the injunction in the Order of Confirmation. On March 13, 1998, the Bankruptcy Court found Christopher violated the injunction in the Confirmation Order, and sanctioned him $40,000, representing a portion of what New Kendavis claimed were its attorney fees in the adversary proceeding and the Oklahoma action.
STANDARD OF REVIEW
This Court reviews the bankruptcy court's factual determinations on a "clearly erroneous" standard, and its legal conclusions de novo. Matter of Christopher, 2 F.3d 512 (5th Cir. 1994); FED. R. BANKR. P. 8013. The issue in this case is a legal question — whether due process requirements of the Fifth Amendment to the United States Constitution were satisfied.
THE DUE PROCESS ISSUE
Christopher complains that his constitutional right of due process was violated when the Bankruptcy Court enforced its Order of Confirmation against him, finding that he was bound by the discharge contained therein and that the injunction prevented the pursuit of claims covered by the discharge. Christopher complains that his general knowledge that Kendavis was in bankruptcy was not sufficient notice to require him to take action in the bankruptcy case in order to protect his rights as a pensioner, and since he did not actually know that his rights would be affected by the Order of Confirmation, the Order cannot have that effect without violating the due process clause contained in the Fifth Amendment to the Constitution.
There is no question that "reasonable notice" is required before a person's claims may be adversely affected by a bankruptcy proceeding. Reasonable notice has been defined by the United States Supreme Court as "notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank Trust, 339 U.S. 306, 314 (1950). As the Court made clear in Mullane, and as the Fifth Circuit reiterated in In re Robintech, Inc., 863 F.2d 393, 396 (5th Cir. 1989) cert. denied sub nom Bullock v. Oppenheim, Appel, Dixon Co., 493 U.S. 811 (1989):
Whether notice to a creditor is adequate depends upon the facts and circumstances of a given case. In general, due process requires that reasonable notice is that which is reasonably calculated to reach all interested parties, reasonably conveys all of the required information, and permits a reasonable amount of time for response.
The issue here is whether Christopher received reasonable notice. The parties all agree that his only "notice" was general knowledge of the existence of the Kendavis bankruptcy gleaned from newspaper articles and conversations with former co-workers. Even if such information put him on some notice to inquire further, nothing in the bankruptcy proceeding would have caused him to believe his prospective right to pension benefits would be adversely affected by it in any way. The pension plans were not listed as estate assets, and pensioners were not creditors or participants in the reorganization. Most importantly, however, the only communication sent to Christopher by the debtor, during the course of the bankruptcy, described the impending termination of the American Plan, but reiterated that he would receive all he was entitled to under the Plan. Even if Christopher was on inquiry notice prior to receipt of that letter, the letter, in effect, advised Christopher that no further action was necessary for him to protect his interests. To conclude that, under these facts and circumstances, Christopher was "on notice" that his right to receive future pension benefits, in the correct amount, might be adversely affected by the bankruptcy is to minimize due process so significantly as to trivialize it. The only actual notice Christopher had was that his rights were intact. To urge that under these circumstances he was, in fact, on notice that his rights were in grave jeopardy, and that he was thus obligated to assert a claim, is to ignore constitutional process. See Chicago Cable Communications v. Chicago Cable Comm'n, 879 F.2d 1540, 1546 (7th Cir. 1989).
Although many federal courts have literally enforced the formal notice requirements of the Bankruptcy Code whether or not the creditor had actual notice of the proceeding, the Fifth Circuit has instead focused on whether an unjust result would occur in light of the creditor's actual awareness. For example, in Sequa Corp. v. Christopher, 28 F.3d 512 (5th Cir. 1994), the appellant was a post-petition corporate creditor who clearly knew of the bankruptcy, and who had asserted claims against the debtor which were pending during the bankruptcy. The Court found that under such circumstances, the creditor's actual knowledge was sufficient to compel further inquiry to prevent a discharge, and since the creditor did not take such steps to protect itself, its claims were barred. In In re Sam, 894 F.2d 778, 781 (5th Cir. 1990), the claimant's attorney received a Notice of Automatic Stay, and the claimant was listed on the debtor's amended schedule as a creditor. The claimant had filed litigation against the debtor in federal court which was pending during the bankruptcy. The court found that under those circumstances, the Notice of Automatic Stay, received prior to the bar date, put the claimant on sufficient notice to require that he inquire further to prevent his claims from being discharged. Since he did not do so, his claims were barred.
Although the Court certainly finds Sam and Sequa pertinent, it finds this case significantly different from both. Here, an individual pensioner, who is not an attorney and who was not then represented by one, read information in the newspaper that was not calculated to, and did not in fact, apprise him of necessary information. Furthermore, had he inquired, he still would not have learned of any risk that his future pension benefits would not be paid in full. He received notice from the debtor which should have allayed, and did allay, any concerns he might otherwise have had that the bankruptcy could negatively impact his future pension benefits, at least as to the American Plan, and in the Court's view, by inference, as to the Canadian Plan, as well.
In short, the Court concludes, based on the uncontested facts and circumstances, that the type of notice which Christopher had is not sufficient under the Fifth Amendment to bar his pension claims. Such notice did not convey information which reasonably should have caused Christopher to act. Thus, if the Order of Confirmation discharged Christopher's future claims that he was deprived of vested benefits under the American or Canadian Plans, as the Bankruptcy Court found it did, due process dictates that this Court hold that the Order could not constitutionally have such effect.
The Court's conclusion that due process has not been satisfied in Christopher's case ends the inquiry. The Court declines to reach the issue of whether the Order of Confirmation could have dealt with pension claims even if constitutionally valid notice had been given to Christopher. The Order of Confirmation and the injunction therein could not affect Christopher because to allow that to occur would be to ignore his right of due process under the Fifth Amendment. Therefore, he could not lawfully be held liable for violating the injunction contained in the Order of Confirmation, and the imposition of sanctions against him for doing so was, therefore, an abuse of discretion.
The Order of Bankruptcy Judge Harold Abramson entered on March 13, 1998, is therefore, REVERSED in its entirety and judgment is RENDERED for the Appellant. Although the stay of the Oklahoma action will presumably now be set aside, nothing in this Order otherwise impacts the case in Oklahoma. It will be for that Court to determine whether Appellant's claims therein have any substantive merit, and/or whether they are subject to valid defenses.
SO ORDERED.