Opinion
Case No. 8:19-bk-03042-CPM
2021-04-15
IN RE: JARZ HOSPITALITY GROUP OF TAMPA, INC., Debtor.
Michael A. Friedman, Lisa M. Castellano, Attorney for Trustee, Genovese Joblove & Battista, P.A., Tampa, FL, for Trustee Stephen L. Meininger.
Michael A. Friedman, Lisa M. Castellano, Attorney for Trustee, Genovese Joblove & Battista, P.A., Tampa, FL, for Trustee Stephen L. Meininger.
ORDER DENYING GIPE'S MOTION FOR RECONSIDERATION OF ORDER DISALLOWING CLAIM
Catherine Peek McEwen, United States Bankruptcy Judge
An attorney who disregards a deadline to respond to an objection to his client's claim does so at his own peril — meaning the consequences of the ensuing order disallowing the claim are of his own making. The contested matter before the Court in this case demonstrates the folly of such inaction and the limits of Bankruptcy Code § 502(j)'s utility as a means to save the creditor from those consequences. Finality has its place when there is no good reason for the failure to respond.
The case came on for hearing to consider Creditor Gay Gipe's Motion for Reconsideration (the "Motion") (Doc. No. 18), asking the Court to vacate the order (the "Order") (Doc. No. 16) sustaining Debtor's Objection to [Gipe's] Proof of Claim No. 15 (the "Objection") (Doc. No. 10) and, instead, to allow Gipe's claim. At the hearing, the Court also considered separate responses to the Motion filed by Creditor Stephen Brown ("Brown") and the Chapter 7 Trustee (Doc. Nos. 23 and 24, respectively). The Debtor filed the Objection on July 1, 2019, using the Court's "negative notice" procedures permitted under Local Rule 2002-4. Gipe did not respond. The Court entered the Order without a hearing ten months later on May 1, 2020. Gipe filed the Motion promptly, ten days after that on May 11, 2020.
Entry of the Order was delayed because the Debtor did not submit a proposed order on its Objection until April 30, 2020 (as reflected in the Court's electronic order tracking system).
Claim Reconsideration Framework
Reconsideration of a claim that has been allowed or disallowed is expressly permitted by § 502(j) of the Bankruptcy Code. Under this provision, the allowance or disallowance of a claim may be reconsidered "for cause." A reconsidered claim then may be allowed or disallowed "according to the equities of the case." The term "cause," as used in this context, is not defined in the Code, and courts have taken a variety of approaches when interpreting and applying § 502(j). Having reviewed and considered this provision, other related statutes and rules, as well as numerous judicial opinions on the subject, this Court adopts an approach that bifurcates the decision process when the request for reconsideration follows entry of a court order allowing or disallowing a claim, the situation we have here. In that circumstance, the first step is to consider if "cause" exists to reconsider the order under either Rule 59(e) or Rule 60, whichever applies. If cause exists to reconsider the order, then the second step is to consider whether to allow or disallow the claim at issue based on "the equities of the case," which this Court determines should involve considering the totality of the circumstances.
11 U.S.C. § 502(j). See also Fed. R. Bankr. P. 3008 (requiring notice and hearing when reconsidering an order allowing or disallowing a claim.)
See In re Rayborn, 307 B.R. 710, 721 (Bankr. S.D. Ala. 2002) (describing generally the different approaches to applying § 502(j) taken by courts).
Fed. R. Civ. P. 59 and 60, are made applicable to contested matters in bankruptcy cases by Fed. R. Bankr. P. 9023 and 9024, respectively. Hereinafter, this opinion refers only to Rule 60 and its companion Rule 9024. However, where Rule 59 applies, a similar two-part analysis should be conducted.
See Nat'l Capital Mgmt. v. Herman, 2011 WL 4531736, *2, Case No. 6:11-cv-9 (Fla. M.D. 2011) (citations omitted) (reconsideration under § 502(j) is a two-step process: first to decide if cause for reconsideration is shown and then to decide whether the "equities of the case" dictate allowance or disallowance of the claim). See also Advisory Committee Notes to Rule 3008, which notes discuss two separate decision points ("If a motion to reconsider [an order allowing or disallowing a claim] is granted , notice and hearing must be afforded to parties in interest before the previous action on the claim taken in respect to the claim may be vacated or modified. After reconsideration, the court may allow or disallow the claim, increase or decrease the amount of a prior allowance, accord the claim a priority different from that originally assigned to it, or enter any other appropriate order.") (emphasis added).
But when reconsideration is sought with respect to a claim that was not the subject of an order — for example when a scheduled claim is deemed allowed in a chapter 11 case and no party in interest objects to the claim or when a claim is implicitly deemed allowed under a confirmed chapter 13 plan without objection — the decision under § 502(j) as to "cause" for reconsideration is subsumed by the determination of whether to allow or disallow the claim based on the "equities of the case." Under these circumstances, the Court, in effect, necessarily bypasses the decision as to whether any Rule 60 grounds exists and goes directly to the determining if the claim should be allowed or disallowed based on the totality of the circumstances.
See 11 U.S.C. §§ 502(a) and 1111(a).
See 11 U.S.C. §§ 502(a) and 1327(a). The Court notes that where, pursuant to local rules or procedures, a separate order allowing or disallowing claims is entered in chapter 13 cases, the claims identified in such order would not be "deemed allowed" but, rather, be the subject of a court order.
The Rationale
The majority of courts that have considered application of § 502(j) have taken the position, which this Court adopts, that when claim allowance or disallowance is the subject of a court order, it is appropriate to utilize the standards for review set forth in Rule 60. The reasoning behind this position is that an order dealing with claim allowance or disallowance should not be immune from the usual rules governing finality of court orders. This position is also supported by the language of Rule 9024, which speaks expressly of orders allowing or disallowing claims. In doing so, Rule 9024 alters some of the Rule 60 deadlines for seeking relief, depending on whether the order allowing or disallowing claims is entered without a contest or, instead, upon a contested matter. Rule 9024 states in part that Rule 60 applies in cases under the Code "except that ... a motion for the reconsideration of an order allowing or disallowing a claim ... entered without a contest " is not subject to the one-year limitation for bringing a request for relief from the order under subsections (b)(1)-(3) of Rule 60 (emphasis added). Notably, Rule 9024 makes no exception to the application of all other provisions of Rule 60 to an order allowing or disallowing claims entered without a contest . It also makes no exception to the application of Rule 60 in its entirety to other orders allowing or disallowing claims (i.e., those entered following a contest ).
See, e.g., Nat'l Bank of Texas v. West Texas Wholesale Supply (In re Colley), 814 F.2d 1008, 1010 (5th Cir. 1987) (notwithstanding court's broad discretion to reconsider allowance or disallowance of claims under § 502(j), where court had entered order overruling objection to claims and party seeking reconsideration elected not to timely appeal that order, court found that Rule 9024 requires application of the usual Rule 60 standards so as not to "encourage parties to avoid the usual rules for finality of contested matters."). See also In re Bicoastal Corp., 126 B.R. 613, (Bankr. M.D. Fla. 1991) (citations omitted) (construing § 502(j) in reconsideration of order sustaining claim objection, court opined that standards set forth in Rule 60, incorporated by Rule 9024, must control in light of strong policy of "encouraging prompt, final disposition of objections to proofs of claims.").
The Eleventh Circuit has interpreted "contest" as used in Rule 9024 to refer to a "contested matter" as that phrase is used elsewhere in the Code. Georgia Dept. of Rev. v. Mouzon Enterprises, Inc. (In re Mouzon Enterprises, Inc) , 610 F.3d 1329, 1333-34 (11th Cir. 2010) (citations omitted) (filing an objection to a proof of claim creates a contested matter; thus, even when an order resolving such objection results from settlement negotiations, as opposed to a determination on the merits by the bankruptcy court, the order may not be accurately described as having been "entered without a contest" for purposes of Rule 9024 ). Compare the example of an order allowing or disallowing a claim entered without a contest supra note 8.
See also Advisory Committee Notes to Rule 9024 ("For the purpose of this rule, all orders of the bankruptcy court are subject to Rule 60 F.R.Civ.P.") (emphasis added).
If a court finds "cause" under Rule 60 to reconsider an order allowing or disallowing a claim, the court must next decide whether to allow or disallow the claim "according to the equities of the case." Due to the broad nature of this last phrase, this Court finds that it is appropriate to consider the totality of the circumstances. Further, I find the four-factor test employed in In re Gomez provides a useful guide for this analysis, although given the facts of a particular case, other factors may come into play. In Gomez, where the court was asked to reconsider a claim that was deemed allowed through the chapter 13 confirmation process, the court looked at: "(1) the extent and reasonableness of the delay [in objecting to the allowed claim], (2) the prejudice to any party in interest, (3) the effect of efficient court administration, and (4) the moving party's good faith."
Several courts that consider the "totality of the circumstances" do so in connection with determining "cause" for reconsideration. See, e.g., In re Watson, 2011 WL 1769009, Case No. 10-10424, (Bankr. N.D. Ga. 2011) (court considered the "totality of the circumstances" and "balanced the preference for resolving disputes on their merits against the importance of finality in legal proceedings" and found cause to reconsider a claim disallowed by an order sustaining an unopposed objection to the claim); In re Yelverton, 2010 WL 1487850, Case No. 09-00414, *2 (Bankr. D.C. 2010) (court not limited solely by grounds for cause in Rules 59 and 60 but may examine the totality of the circumstances as to what may constitute cause under § 502(j) ). However, because I follow the line of cases finding that Rule 60 applies whenever allowance or disallowance of a claim is by court order (as opposed to the claim's having been "deemed allowed"), I find this analysis most appropriate with respect to determining how a ruling on a reconsidered claim should be modified, if at all, based on the "equities of the case" — i.e., the second step of the analysis.
In re Gomez, 250 B.R. 397, 401 (Bankr. M.D. Fla. 1999) (citations omitted) (where claims "deemed allowed" under § 502(a) after plan providing for the claims was confirmed without objection, movant not limited to the cause standards of Rule 60(b) standards and court looked to factors other courts have used to determine cause to allow or disallow a claim under § 502(j) ).
Application to the Facts Here
In this case, Gipe asked the Court to reconsider its Order sustaining the Objection and disallowing Gipe's claim. At the hearing on the Motion, I discussed the four-factor test applied in In re Gomez. However, upon a deeper review of the relevant statutes, rules, and case law, I find that, for the reasons stated above, I must first make an initial determination as to whether grounds exist under Rule 60 for me to reconsider the Order.
Gipe argues in the Motion that the Order should be reconsidered under Rule 60(b)(1) due to "excusable neglect." When a party seeks relief in a default situation based on "excusable neglect," the Eleventh Circuit requires that the movant show: "(1) it had a meritorious defense that might have affected the outcome; (2) granting the motion would not result in prejudice to the nondefaulting party; and (3) a good reason existed for failing to reply to the complaint." In the present case, Gipe's counsel's only reason for failing to respond to the Objection in the ten-month period between the filing of the Objection and entry of the Order was that he was in communication with counsel for the Chapter 7 Trustee regarding the extent of estate assets and a potential counterclaim against Gipe by the estate. The administration of estate assets and the allowance of a creditor's claim, however, are distinct issues. More important, though, is that the Objection was filed by the Debtor, not the Trustee. So Gipe's counsel's excuse for failing to respond to the Objection due to his reliance upon ongoing communications with the Chapter 7 Trustee's counsel gets no traction. Therefore, even if Gipe could establish a meritorious defense and lack of prejudice, she did not show a "good reason" for failure to respond to the Objection. And, hence, Gipe did not establish "excusable neglect."
Securities and Exchange Comm'n v. Simmons, 241 Fed. App'x 660, 663 (11th Cir. 2007) (citation omitted) (lack of diligence by both the attorney and his client insufficient to establish "excusable neglect"). See also In re Santiago, Case No. 6:10-bk-16771-KSJ, (Order at Doc. No. 44) (although court found a meritorious defense and that any prejudice would be minimal, party seeking reconsideration could not establish "excusable neglect" where "no valid reason, much less a ‘good reason’ " was given for failure to attend hearing or oppose entry of the order and judgment at issue).
Although Gipe's motion also cites as a basis relief Rule 59(e), she failed to argue how the facts at hand might support relief under that rule.
The Court's having reviewed the relevant papers, including Gipe's Claim No 15, and for the reasons stated orally and recorded in open court that shall constitute the decision of the Court, it is
ORDERED that the Motion is denied.
ORDERED.