Opinion
Case No. 02 B 02474
February 6, 2004
MEMORANDUM OPINION
This matter is before the court on the Motion of TPI Acquisition Subsidiary, Inc. ("TPI") to Have its Proofs of Claim Deemed Timely Filed, or in the Alternative, to Extend Bar Date to Date Same Were Filed with Trumbull Bankruptcy Services (the "Motion"). TPI seeks relief on due process grounds or, alternatively, on the basis of excusable neglect.
BACKGROUND
On January 22, 2002 (the "Petition Date"), Kmart Corporation and thirty-seven of its subsidiaries and affiliates filed voluntary Chapter 11 petitions in this court. Kmart continued to operate as debtor in possession after the filing of the petitions.
Sometime prior thereto, Kmart had done business with certain entities known as Mark IV Industries, Inc., and Dayco. Products, Inc. On or about October 16, 2001, Tekni-Plex, Inc., by and through its wholly-owned subsidiary, TPI, acquired certain assets from Mark IV and/or Dayco. These assets included receivables owed to Mark IV and/or Dayco. by Kmart, as well as some product lines, including garden hoses sold to Kmart. According to the affidavit of Scott Gilbert, a Divisional Vice President for Kmart's Accounting Operations, Kmart did not receive notice of the acquisition (prior to the tiling of the instant Motion) from TPI, Dayco, or Mark IV,
An affidavit attached to TPI's Motion, referring to "Mark IV Industries, Inc., also known as Dayco. Products," suggests that they are one and the same entity. However, an affidavit attached to Kmart's objection states that Kmart did business with "both Dayco. Products, Inc. and Mark IV Enterprises, Inc." The Court will refer to the entities as Mark IV and/or Dayco, inasmuch as their organizational status has no effect on this decision.
After the asset purchase, Kmart did business with TPI on certain of the same product lines on which it had previously dealt with Mark IV and/or Dayco. However, as of the Petition Date, Kmart's records showed that it was not indebted to TPI or Tekni-Plex; in fact, its records showed that TPI owed Kmart $19,313.40,
On March 26, 2002, this Court entered an order fixing July 31, 2002 as the deadline for filing prepetition proofs of claim in these cases. The order provided, inter alia, that any claim not filed by the July 31 deadline would be forever barred and discharged.
On April 1, 2002, Trumbull Services, LLC, the court-approved noticing agent in this case, mailed copies of the bar date notice to Mark IV Enterprises, Inc., at an address in Rogers, Arkansas, and to Dayco Products, Inc., at a P.O. Box in Chicago, Illinois. Neither mailing was returned to Trumbull as undeliverable.
Kmart did not list either TPI or Tekni-Plex on its schedules filed in this case. As a result, Trumbull did not mail notice of the bar date to TPI or Tekni-Plex at either of their Somerville, New Jersey or Coppell, Texas addresses. According to the affidavit of James E. Condon, chief financial officer for Tekni-Plex, TPI and Tekni-Plex learned of the bar date on August, 13, 2002, when someone in Condon's office brought to his attention a report in a business publication concerning Kmart's claims review activities, TPI immediately contacted Kmart, obtained a proof of claim form, and sent two completed proofs of claim, aggregating almost $2 million, by overnight courier to Trumbull, The proofs of claim, which designated the creditor as "TPI Acquisition Subsidiary, Inc. (F/K/A Dayco. Products, LLC)," were received by Trumbull on August 15, 2002, fifteen days after the bar date. The instant Motion, seeking an order deeming the claims timely, was not filed until April 23, 2003, the day after this Court confirmed Kmart's plan of reorganization.
DISCUSSION
A. Due Process
The first of TPI's contentions is that its claims should be allowed as timely on constitutional due process grounds. The Supreme Court has held that a fundamental requirement of due process is "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 Co., 339 U.S, 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950) (citations omitted). Accordingly, unless a creditor is given reasonable notice of the bankruptcy case and the relevant bar dates, his claim cannot be constitutionally discharged. In re O'Shaughnessy, 252 B.R. 722, 729 (Bankr. N.D. Ill. 2000) (citations omitted); see also Chemetron Corp, v. Jones, 72 F.3d 341, 346 (3rd Cir. 1995), cert. denied, 517 U.S. 1137, 116 S.Ct. 1424, 134 L, Ed.2d 548 (1996).
The court reviews the totality of circumstances to determine whether reasonable notice was given, O'Shaugnessy, 252 B.R., at 730. The court should consider, among other things, whether any inadequacies in the notice prejudiced the creditor and whether notice is given in enough time to afford a creditor sufficient opportunity to respond to "the impending deprivation of its rights," O'Shaugnessy, 252 B.R., at 730 (citing In re Walker, 149 B.R. 511, 514 (Bankr, N.D. Ill. 1992)),
For purposes of bankruptcy law, the adequacy of notice depends upon whether a creditor is "known" or "unknown." Chemetron Corp., 12 F.3d at 346 (citation omitted). Known creditors must be given actual written notice of the filing of a reorganization case and the claims bar date. See City of N.Y. v. N.Y., N.H. H.R. Co., 344 U.S. 293, 296, 735 S.Ct. 299, 97 L.Ed. 333 (1953); In re Chi, Milwaukee, St. Paul Pac. R.R. Co., 974 F.2d 775, 788 (7th Cir. 1992) (citation omitted). In contrast, when a creditor is "unknown" to the debtor, publication notice of the claims bar date usually satisfies the requirements of due process. Chi., Milwaukee, St. Paul Pac. R.R. Co., 974 F.2d at 788 (citation omitted); In re S.N.A. Nut Co., 198 B.R. 541, 543 (Bankr. N.D. Ill. 1996) (citing Mullane, 339 U.S. at 317-18).
It is therefore necessary to determine whether TPI was a "known creditor" when Kmart compiled its bankruptcy schedules, A "known" creditor is one whose identity is either known or "reasonably ascertainable" by the debtor. Tulsa Prof'l Collection Servs., Inc. v. Pope, 485 U.S. 478, 490, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988); In re Envirodyne Indus. Inc., 206 B.R. 468, 473 (Bankr. N.D. Ill. 1997) (citation omitted). Thus, known creditors are not only those that a debtor knows of, but also those that the debtor should know of, when serving notice of the claims bar date. In re Drexel Burnham Lambert Group Inc., 151 B.R. 674, 681 (Bankr. S, D, N, Y. 1993). Often, a creditor has communicated with a debtor regarding the existence of the creditor's claim. Id. However, actual knowledge based on a demand for payment is not required in order for a claim to be deemed "known." Id. Rather, "[a] known claim arises from facts that would alert the reasonable debtor to the possibility that a claim might reasonably be filed against it." Id, Conversely, an "unknown" creditor is one whose identity or claim is not "reasonably ascertainable" or whose claim is "merely conceivable, conjectural, or speculative," In re Charter Co., 125 B.R. 650, 655 (M.D. Fla. 1991). As stated in Chemetron Corp., "[a]n `unknown' creditor is one whose `interests are either conjectural or future or, although they could be discovered upon investigation, do not in due course of business come to knowledge [of the debtor].'" Chemetron Corp., 72 F.3d at 346 (quoting from Mullane, 339 U.S. at 317); see also Envirodyne Indus, 206 B.R. at 473,
A creditor's identity is "reasonably ascertainable" if it can be identified through "reasonably diligent efforts," Chemetron Corp., 72 F.3d at 346 (citation omitted); Envirodyne Indus., 206 B.R. at 473 (citation omitted). Reasonable diligence does not necessitate "impracticable and extended searches . . . in the name of due process." Mullane., 339 U.S. at 317-18, That is, a debtor does not have a "duty to search out each conceivable or possible creditor and urge that person or entity to make a claim against it," Charter, 125 B.R. at 655 (citing In re Chi., Rock island Pac. R.R. Co., 788 F.2d 1280, 1283 (7th Cir. 1986)). Rather, all that is necessary is that the debtor "make `reasonably diligent efforts' to uncover the identities of creditors." Tulsa Prof'l Collection Servs., 485 U.S. at 490 (citing Mennonite Ed. of Missions v, Adams, 462 U.S. 791, 798 n. 4, 103 S.Ct. 2706, 77 L.Ed.2d 180 (1983)).
While "reasonable diligence" varies, depending on the context of the case, Envirodyne Indus, 206 B.R. at 473, the required search centers on the debtor's own books and records. Chemetron Corp., 12 F.3d at 347. Efforts beyond a thorough inspection of these documents are usually not required. Id. While a debtor must conduct more than a superficial review of its records to ascertain known creditors, "[p]recedent demonstrates that what is required is not a vast, open-ended investigation." Chemetron Corp., 72 F.3d at 346 ( citing Mullane, 339 U.S. at 317).
Based on the record made in this contested matter, TPI was, with respect to the receivables it had purchased from Mark IV and/or Dayco, an "unknown" creditor entitled only to publication notice. Kmart alleges in its Objection that "[a]s of the Petition Date, [it] had no reason to know, and did not know, that TPI was a creditor of the Debtors." In the affidavit submitted by Kmart in support of its Objection, Scott Gilbert avers that
[p]rior to TPI's filing of the Motion, Kmart never received notice from TPI, Dayco, or Mark IV that TPI had purchased certain assets from Dayco, and Mark TV, The Debtors had no knowledge that TPI wished to hold Kmart liable for debts it allegedly incurred through the ordinary course of business with either Dayco, or Mark IV.
Although TPI states in its Motion that Kmart was "very much aware of TPI's acquisition of some of the assets of Dayco, including receivables owed from the Debtor," TPI has failed to provide any evidence that Kmart was notified or otherwise made aware, in any way, of the transfer of the Mark IV/Dayco. receivables. TPI relies upon the affidavit of James Condon, which merely avers as follows in this regard:
3. The acquired assets included TPI's acquisition of some receivables owed to Dayco. by K-Mart, and some product lines including garden hoses sold to K-Mart. After the October 16, 2001 acquisition of those assets, K-Mart was of course aware of the asset acquisition and of the fact that it was now dealing with Tekni-Plex rather than Dayco.
4. As a result, on and before the petition date, K-Mart was very much aware of TPI's acquisition of some of the assets of Dayco, including receivables owed from K-Mart, and K-Mart had also been doing business with TPI on new sales. . . .
Nowhere in the affidavit does Condon state how Kmart might have become aware of the sale of receivables or that anyone from TPI or elsewhere had advised Kmart of same. He merely states that Kmart was "of course" aware of the acquisition, offering no facts in support of that conclusion.
Perhaps Condon intended to suggest that because Kmart continued to do business, after the acquisition, on some or all of the same product lines, — and was then dealing with TPI rather than Dayco, — Kmart should have known that the product lines had been sold to TPI. However, even assuming arguendo that Kmart was aware of the sale of product lines to TPI, it is unreasonable to assume that Kmart was thereby alerted to the fact that the receivables had been sold as well. A sale of product lines does not necessarily entail a transfer of the pre-existing receivables related to such products, and where information about any such transfer does "`not in due course of business come to knowledge [of the debtor],'" the debtor is not required, under the rubric of `due process,' to seek it out. See Chemetron Corp., 72 F.3d at 346 (quoting from Mullane, 339 U.S. at 317).
Again, while "reasonable diligence" varies from case to case, Envirodyne Indus., 206 B.R. at 473, the required search centers on the debtor's own books and records. Chemetron Corp., 72 F.3d at 347. Kmart's books showed that as of the Petition Date, it was not indebted to TPI, and there is nothing in the record of this contested matter to indicate that a search of Kmart's books would have revealed the transfer of the Mark TV/Dayco. receivables or indeed anything else putting Kmart on inquiry notice thereof.
TPI further contends that Kmart's assertion of its $19,313.40 claim against TPI is somehow inconsistent with its assertion that TPI is an "unknown creditor." TPI believes that because Kmart was "very much aware of TPI's existence prior to the Petition Date," (TPI's Response to Kmart's Objection, at ¶'s 5-6; emphasis added), TPI cannot be characterized as an "unknown creditor" for notice purposes. However, a creditor is not a "known" creditor merely because the debtor is aware of the creditor's existence (and/or correct name and address); the debtor must be aware of the entity's interests, i.e., its status as a creditor. See, e.g., In re XO Communications, Inc., 301 B, R. 782, 794 (Bankr. S.D.N.Y. 2003) (long-standing business relationship with debtor did not by itself make creditor, — which was itself in Chapter 11 and held preference claim against debtor, — a "known creditor" for notice purposes).
For all of these reasons, the Court finds that TPI was an "unknown creditor" at the time Kmart compiled its bankruptcy schedules. As such, it was entitled only to publication notice. Neither party disputes that Kmart provided such notice of the claims bar date in satisfaction of both bankruptcy law requirements and due process considerations, Kmart published notice, pursuant to the Court's March 26, 2002 order, in nationally circulated editions of The Wall Street Journal, The. New York Times, and USA Today, Publication in national newspapers is an accepted method of notifying unknown claimants, in cases such as this, that they need to act or potentially lose their rights against the estate, Chemetron Corp., 72 F.3d at 348-49 (citations omitted).
In light of the Court's disposition, it is unnecessary to address the further issue raised by the parties, as to whether the transmission of notice to Mark TV and Dayco. constituted notice to TPT.
B. Excusable Neglect
Finally, TPI asserts that if "Due Process issues do not decide this Motion, . . . TPI still prevails under the Pioneer excusable neglect balancing test." (Motion, at ¶ 23) In Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), the Supreme Court considered the meaning of the phrase "excusable neglect" as used in Rule 9006(b)(1) of the Federal Rules of Bankruptcy Procedure. That rule provides in relevant part:
[W]hen an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion . . . (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.
Prior to the Supreme Court's decision in Pioneer Investment Services Co, v, Brunswick Associates Ltd, Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), there was a disagreement among the circuits as to the meaning and scope of "excusable neglect." Robb v. Norfolk'd Western Railway Co., 122 F.3d 354, 358 (7th Cir. 1997). The Seventh Circuit was among those that interpreted the phrase narrowly. Id. That narrow approach was rejected in Pioneer, and the Supreme Court made it clear that neglect could be excusable even where it was the result of carelessness on the part of a litigant or his attorney.
Of course, not all carelessness is excusable. The Supreme Court concluded in Pioneer that the determination of whether neglect is "excusable"
is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission. These include . . . 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. The four factors cited by the Court are, however, not exclusive. As the Seventh Circuit has noted, the Supreme Court "specifically rejected an approach that would `narrow the range of factors to be considered.'" Robb, 122 F.3d at 362. As a result, "[i]t is difficult to draw bright lines in this inquiry." U.S. v. Brown, 133 F.3d 993, 996 (7th Cir. 1998), cert. denied, 523 U.S. 1131,118 S.Ct. 1824, 140 L.Ed.2d 960 (1998). The determination required by Pioneer is a balancing test, and "[b]alancing tests naturally produce indeterminacy; focusing on one factor may change the balance, and, in turn, the result." Brown, 133 F.3d at 997.
In this case, the only "excuse" offered for the delay in filing the proofs of claim is Kmart's alleged failure to transmit to TPI actual written notice of the bar date. Inasmuch as the Court has found that publication notice is all that was required, there is, in effect, no valid "excuse" for the untimely tiling. However, even assuming that actual written notice by mail was required to be sent to TPI in this case, TPT still docs not prevail on excusable neglect grounds. Although TPI filed its proofs of claim only fifteen days after the bar date, it did not file the instant Motion, seeking an order deeming the claims timely, until more than eight months later, after confirmation of Kmart's plan of reorganization. The only excuse offered for this delay is that TPl's claims had been selected by Kmart to participate in a reconciliation process, and TPI therefore believed that a motion would not be required. TPI attaches an e-mail memorandum from Kmart inviting TPI to participate in the reconciliation process in order to come to an agreement as to prepetition amounts outstanding. The memorandum, however, specifically reserves Kmart's rights, inter alia, under any and all court orders; that reservation would of necessity include its rights under this Court's March 26, 2002 order fixing the bar date and providing that all claims not timely filed would be barred. Moreover, the memorandum is dated November, 14, 2002, i.e., a full three months after TPI learned of the bar date. No explanation is given for the failure to file any motion during that initial three month period.
Accordingly, although the Court has no reason to doubt TPl's good faith, under all the circumstances of this case, the neglect was not excusable. Indeed, setting a contrary precedent would not only prejudice the Debtors but would also undermine the integrity of the bar date and prejudice those creditors who timely filed their claims.
CONCLUSION
For all of the reasons set forth above, the court denies the Motion of TPI Acquisition Subsidiary, Inc. to Have its Proofs of Claim Deemed Timely Filed, or in the Alternative, to Extend Bar Date to Date Same Were Filed with Trumbull Bankruptcy Services. This opinion constitutes the court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. A separate order will be entered pursuant to Bankruptcy Rule 9021.