Summary
stating that “[t]he statutory term ‘cause’ gives the bankruptcy court the widest possible discretion” to accept belated requests for administrative expenses
Summary of this case from Law Offices of Kotlarsky v. RosenOpinion
CASE NO. 1:03-cv-802-DFH
December 16, 2003
ENTRY ON APPEAL FROM BANKRUPTCY COURT
This action is an appeal from an order of the United States Bankruptcy Court for the Southern District of Indiana allowing as an administrative claim the payment of a retention bonus to appellee Milton E. Blankenship. Blankenship had been the vice president of technology for debtor Heartland Steel, Inc. He continued to work for Heartland for about six months after it filed its bankruptcy petition. The liquidating agent for the debtor has appealed, raising several objections, but none has merit. In fact, this is an appeal that never should have been filed. It is telling that the appellant's strongest argument on appeal is that the bankruptcy court abused its discretion by allowing Blankenship to file his administrative claim after the deadline the court had set, so that the claim could be decided on the merits rather than rejected as too late.
Factual Background
Blankenship began working for Heartland in August 1997. On January 24, 2001, Heartland filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. At the same time, Heartland filed an emergency motion for authorization to pay officers. At page three of that emergency motion, Heartland identified Blankenship as one of three officers it wished to compensate, and referred to him as "critical to the Debtor's efforts . . . to confirm a Chapter 11 plan." Heartland also told the court that it would later file a motion with the bankruptcy court to get approval to pay retention bonuses to the three listed officers, including Blankenship.
The bankruptcy court found, as Blankenship testified, that in a meeting on January 15, 2001, he was informed by Heartland and its attorneys that he would receive a retention bonus as an incentive to remain with the company after the bankruptcy petition was filed. At that meeting, Blankenship received a copy of an unsigned motion that was to be filed with the bankruptcy court requesting that Heartland be permitted to pay to certain officers and employees, including Blankenship, a retention bonus. See Hearing Ex. C-2. On March 29, 2001, Heartland filed the motion formally asking the bankruptcy court to approve retention bonuses for certain officers and employees. Contrary to the earlier statements, Heartland did not include Blankenship in that motion.
On July 11, 2001, Blankenship asked whether he was being retained in connection with a bankruptcy sale of the business and was told no. His last day of work was July 13, 2001. He was never paid a retention bonus for his post-petition work for Heartland.
On September 27, 2001, Blankenship filed a proof of claim as an unsecured creditor seeking the bonus and other payments. Judge Otte later issued an order confirming a plan of reorganization for Heartland. In that order, Judge Otte set a final date for filing administrative claims: January 3, 2002, thirty days past the effective date of the confirmation order. Nearly ten months later, on October 29, 2002, Blankenship filed a Request for Payment of Administrative Expenses pursuant to 11 U.S.C. § 503(a), which allows the court to consider "for cause" administrative claims that were filed past a deadline.
After an evidentiary hearing, the bankruptcy court approved Blankenship's administrative claim. Judge Otte's order cited (1) the January 24, 2001 compensation motion filed by Heartland; (2) the January 15, 2001 meeting where Blankenship was informed that he would receive a retention bonus; and (3) the copy of the draft motion that listed Blankenship for a retention bonus. Order Approving Claim of Milton E. Blankenship at 1-2. Judge Otte concluded that Blankenship had been "purposely excluded" from the final retention bonus motion filed by Heartland. Judge Otte further held that Blankenship had performed the duties required by his office and more under the assumption that he would receive the retention bonus. Judge Otte decided that Blankenship had met the requirements for filing an administrative claim and was therefore entitled to receive the retention bonus. Id. at 3-4.
Discussion
I. Allowing the Late Claim
Administrative claims have first priority under bankruptcy law. See 11 U.S.C. § 507(a)(1). Blankenship filed his administrative claim after the deadline the bankruptcy court had set for filing administrative claims. Section 503(a) of the Bankruptcy Code states: "An entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause." Pursuant to this provision, Judge Otte allowed the belated filing of Blankenship's administrative claim for cause. Tr. 37. The liquidating agent contends that Blankenship failed to show sufficient cause to satisfy section 503(a). The court disagrees and finds that Judge Otte did not abuse his discretion by finding cause and allowing the late claim.
The deadline in question was not jurisdictional, and the broad term "cause" gives the presiding court wide discretion to allow such belated filings in the interests of justice. See Troxell v. Fedders of North America, Inc., 160 F.3d 381, 383 (7th Cir. 1998) (whether "good cause" exists to extend time for service of process is entrusted to district court's discretion); Panaras v. Liquid Carbonic Indus. Corp., 94 F.3d 338, 340-41 (7th Cir. 1996) (same). Accordingly, the liquidating agent faces the high burden of showing that the bankruptcy court abused its discretion by deciding Blankenship's claim on the merits rather than rejecting it as late. The bankruptcy court would not have abused its discretion if it had enforced the deadline strictly, but when a judgment is discretionary, a reasonable decision either way can and should be affirmed.
The liquidating agent has identified only one case in which a reviewing court held that a bankruptcy court had actually abused its discretion under section 503(a) by allowing a tardy administrative claim. See West Delta Oil Co. v. Hof, 2002 WL 506814, *5-6 (E.D. La. 2002). The liquidating agent suggests that because the term "cause" is not defined, the court should have borrowed and applied the "excusable neglect" standard from Bankruptcy Rule 9006(b), as the West Delta Oil court and some others have done. See, e.g., West Delta Oil, 2002 WL 506814, at *5; In re Gurley, 235 B.R. 626, 631-32 (Bankr. W.D. Tenn. 1999).
This court disagrees with that approach, at least as applied in a reviewing court. The bankruptcy statutes and rules use words carefully. Different words ordinarily communicate different meanings. In fact, in the federal court rules dealing with extensions of time, the term "excusable neglect" has been held to have a narrower scope than the phrase "good cause." Redfield v. Continental Casualty Corp., 818 F.2d 596, 601 (7th Cir. 1987) ("good cause" for extension of time to file notice of appeal demands a lesser showing than "excusable neglect").
For example, Rule 4(a)(5) of the Federal Rules of Appellate Procedure deals with extensions of time for filing notices of appeal in civil cases. Before 1979, the rule had allowed an extension if the appellant showed "excusable neglect." The rule was amended in 1979 to allow such extensions upon a showing of "excusable neglect or good cause." The 1979 Rules Advisory Committee Notes explain that the change "expands to some extent the standard for the grant of an extension of time," showing that excusable neglect should not be equated with "good cause," much less with the broader concept of "cause." In 1998, a similar amendment was made applicable to extensions in criminal cases under Rule 4(b)(4) of the Federal Rules of Appellate Procedure. In fact, the Committee Notes to the 1998 amendment state: "The rule gives the district court discretion to grant extensions for good cause whenever the court believes it appropriate to do so," provided the extension does not exceed 30 days. (Emphasis added.)
This view of the two terms is not universal. See Lorenzen v. Employees Retirement Plan of the Sperry and Hutchinson Co., 896 F.2d 228, 231 (7th Cir. 1990) (stating: "As an original matter we might think it so much hairsplitting to try to distinguish excusable neglect from good cause, or even that, if the hairs must be split, excusable neglect connotes a laxer standard than good cause"; but adhering to precedent under Fed.R.App.P. 4(a)(5)). While a bankruptcy judge applying 11 U.S.C. § 503(a)has every right to consider Rule 9006(b) cases for guidance in exercising that discretion in the first instance, the different language should not be mechanically equated so that a reviewing court effectively applies the different language of Rule 9006(b), as if section 503(a) had been re-drafted to require a showing of "excusable neglect."
The difference in language is also significant in light of the close parsing of the phrase "excusable neglect" in the Justices' opinions in Pioneer Investment Services Co. v. Brunswick Assoc. Ltd. P'ship, 507 U.S. 380 (1993), which held that the "excusable neglect" standard under Bankruptcy Rule 9006(b) gave bankruptcy courts broad discretion to exercise in light of all relevant circumstances. In fact, even Bankruptcy Rule 9006(b)(1) itself uses the terms "cause" and "excusable neglect" differently. The Rule provides:
Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given there under or by order of court, the court for cause shown may at any time in its discretion (1) with or without motion or notice order the period enlarged if the request therefor is made before the expiration of the period originally prescribed or as extended by a previous order or (2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect
(Emphasis added.) Rule 9006(b) uses the broad standard of "cause" in allowing extensions of time when the extension is requested before the applicable deadline has expired. The rule deliberately uses the distinctly different and somewhat narrower standard of "excusable neglect" when the extension is requested after the deadline has expired. Thus, contrary to the approach in West Delta Oil, the two phrases were not intended to have identical meanings, and the "excusable neglect" standard of Rule 9006(b) should not be imposed on 11 U.S.C. § 503(a). The statutory term "cause" gives the bankruptcy court the widest possible discretion
When considering whether the bankruptcy court abused its discretion, it is useful to consider the similar problem that arises when deciding whether to set aside an entry of default or a default judgment. Rule 55(c) of the Federal Rules of Civil Procedure applies a "good cause" standard, which is also an element under Rule 60(b)(1) applying to default judgments. See United States v. DiMucci, 879 F.2d 1488, 1495 (7th Cir. 1989); Breuer Elec. Mfg. v. Toronado Sys. of America, 687 F.2d 182, 185 (7th Cir. 1982). The Seventh Circuit has made it clear that in such cases, the presiding court has broad discretion to see that justice is done, and it is extremely rare for a reviewing court to find that a presiding court abused its discretion in finding good cause and excusing a missed deadline. For example, in Dimmitt Owens Financial, Inc. v. United States, 787 F.2d 1186 (7th Cir. 1986), the district court had set aside an initial default judgment against the United States and eventually ruled in favor of the United States on the merits. The Seventh Circuit affirmed, holding that the district judge did not abuse his judgment "merely because the mistake that had led to the default judgment was a particularly stupid one." Id. at 1193. As Judge Posner pointed out, in such cases, decisions excusing blown deadlines are rarely appealed, and then only when a full trial has shown that it would have been unjust to enforce the deadline because the party who missed the deadline has won on the merits. Id. at 1192.
That's the case here. Blankenship proved his administrative claim to the satisfaction of the bankruptcy court. Allowing that claim was in the interest of justice and did no violence to other interests in procedural regularity. Long before Blankenship filed his administrative claim, he filed papers claiming his right to the retention bonus. His mistake was that he failed to designate that part of his claim as an administrative claim to give it the proper priority among competing creditors. When Blankenship filed the claim, however, he put the interested parties on notice of his claim. Heartland has identified no prejudice to it or reliance by it as a result of Blankenship's initial failure to label the claim properly as an administrative claim. There also is no indication or evidence that Blankenship acted strategically or in bad faith by delaying his filing. See generally Pioneer Investment Services, 507 U.S. at 395 (identifying factors relevant in evaluating the more stringent standard for "excusable neglect").
Further, even on an examination of the cold transcript, it is clear that Judge Otte, based on his supervision of the entire Heartland Steel bankruptcy, believed — very firmly — that he should allow the tardy filing so that justice could be done. He found that Blankenship had been misled. Judge Otte's order specifically referred to the January 24, 2001 emergency compensation motion filed by the debtor. That motion told the court that Heartland would soon be filing a motion to allow payment of retention bonuses to three officers, including Blankenship, just as the draft motion shown to Blankenship had indicated. When the motion was actually filed, though, it sought permission to pay retention bonuses to only two of those officers, excluding Blankenship. Judge Otte obviously thought he had been misled, as well. See Tr. 60 ("It borders on wrong doing, and had I known this had happened when that order was in front of me, we would have had a full blown hearing on all those people who were left out of it."). Section 503(a) gave Judge Otte broad discretion to allow Blankenship to file his administrative claim late, and that discretion was not abused.
II. Validity of the Claim
To have his claim treated as a proper administrative claim, Blankenship was required to show that his claim arose from a post-petition transaction with the bankruptcy estate and that he provided some demonstrable benefit to the bankruptcy estate. In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir. 1984). Judge Otte did not clearly err by finding that these standards were met.
The evidence before the bankruptcy court supported a finding that Blankenship continued to provide post-petition services to Heartland, rather than leaving to look for other work with more solvent employers. Also, as Judge Otte said, Blankenship was actually out on the plant floor, doing what he was supposed to be doing. Tr. 61. In response to former CEO Harold Coker's criticisms of Blankenship's performance, Judge Otte noted that if there were problems, Coker should have dealt with them. Coker had not reprimanded or criticized Blankenship for his work performance at the time he was doing the work. Also, there was evidence that Blankenship took on substantially more duties after the bankruptcy filing because the other officers were busy with the bankruptcy, the lawyers, and the bankers.
III. Other Issues
The liquidating agent has raised two other points that do not have even arguable merit.
She contends that Blankenship relied on inadmissible hearsay to prove that Heartland had promised him a retention bonus. The objection overlooks two elementary aspects of hearsay law. First, a promise is not a "statement" at all; it falls outside the definition of hearsay. Fed.R.Evid. 801(c). Second, even if the evidence in question had dealt with a statement, it would have been a statement by Heartland's CEO and attorneys on matters plainly within the scope of their agency relationships with Heartland. Any such statement would have been a party admission. See Fed.R.Evid. 801(d)(2)(D).
The liquidating agent also claims, without offering any authority for such an extraordinary proposition, that the bankruptcy court had no power to hear post-hearing evidence concerning the exact amount of money needed to "gross-up" the promised bonus so that its after-tax amount would be the promised amount. The liquidating agent has not identified any substantive error with respect to the final calculation. The bankruptcy court acted well within its discretion and used its inherent powers to manage its own docket to allow the record to be supplemented in a manner that allowed objections to be considered.
The liquidating agent has raised no issue concerning the accuracy of the ultimate calculation of the "gross-up" amount.
Accordingly, the order of the bankruptcy court allowing appellee Blankenship's administrative claim is AFFIRMED.