Opinion
Case No. 02 B 02474
December 5, 2003
MEMORANDUM OPINION
This matter comes before the court on the motion of America First Insurance ("API") for leave to file a late proof of claim or, alternatively, to extend the July 31, 2002 bar date fixed by court order on March 26, 2002. According to AFT, Debtor Kmart Corporation ("Kmart" or "Debtor") failed to provide API with notice of the claims bar date, as required by Bankruptcy Rule 2002(a)(7), In response, Kmart contends that AFT was an unknown creditor at the commencement of the Debtor's bankruptcy cases and, as such, that AFT received timely and sufficient notice through publication of the bar date.
The motion is actually entitled "Motion of America First Insurance for Leave to File Late Proof of Claim or, Alternatively, to Extend Bar Date to File Proof of Claim Pursuant to Bankruptcy Rule 3003(c) for Leave to Participate in Claims Resolution Procedure and fur Relief to Limit Notice."
API argues in the alternative that if the court finds it was an unknown creditor, its failure to tile a timely proof of claim was the result of excusable neglect.
BACKGROUND
On December 30, 2000, Robert E. Lookingbill ("Lookingbill"), an employee of Lone Star Storage Trailer ("Lone Star"), was allegedly injured while making a delivery to a Kmart store in San Antonio, Texas. Lookingbill sought workers' compensation benefits, and API, Lone Star's workers' compensation insurance carrier, provided Lookingbill with a total of approximately $33,000 over the course of about one year following the accident.
On January 3, 2001, four days after the incident took place, API learned that Lone Star had contacted representatives from Kmart, who disclaimed any liability resulting from the accident. Over the next two days, Kmart sent Lookingbill a letter and left him a telephone message, inquiring whether he wanted to pursue a claim against Kmart and requesting that he contact Kmart if he wished to do so. Lookingbill never responded to either the letter or the voicemail message.
On January 22, 2002, Kmart and thirty-seven of its subsidiaries and affiliates filed voluntary Chapter 11 petitions in this court. The bar date for filing prepetition proofs of claim was set for July 31, 2002. Kmart published notice of the bar date and sent direct notice by mail to tens of thousands of its creditors, AFI was not listed as a creditor on Kmart's schedules of liabilities, and Kmart did not serve AFI with formal, written notice of the claims bar date. However, notice of the bar date and the § 341 meeting of creditors, together with a proof of claim form, was sent to Lone Star by Trumbull Services, LLC, the court-approved noticing agent in this case, on April 1, 2002. The notice and claim form were also sent by Trumbull to Lookingbill on May 20, 2002, even though Kmart had closed Lookingbill's file on May 2, 2002.
Almost seven months later, on December 19, 2002, William D. Mahoney ("Mahoney"), attorney for AFT, spoke with counsel for Kmart. Mahoney alleges that it was only on that day that AFI discovered the claims bar date. Subsequently, on January 7, 2003, AFI filed the instant motion for leave to file a late proof of claim or, alternatively, to extend the bar date. AFI contends that it has a right to bring a separate claim for subrogation under the Texas Workers' Compensation Code. According to AFI, it was a known creditor entitled to separate, actual notice of the bar date, Kmart contends that AFI was an unknown creditor and that publication notice therefore satisfied Kmart's obligation to notify AFI of the claims bar date.
DISCUSSION
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 [to] afford them an opportunity to present their objections." Mullane v. Cant. Hanover Bank Trust Co., 339 U.S. 306, 314 (1950) (citations omitted). Accordingly, unless a creditor is given reasonable notice of a bankruptcy case and its relevant bar dates, that creditor's claim cannot be constitutionally discharged. In re O'Shaughnessy, 252 B.R. 722, 729 (Bankr. N.D. Ill. 2000) (citation omitted); see also Chemetron Corp. v. Jones, 12 F.3d 341, 346 (3rd Cir. 1995), cert. denied, 517 U.S. 1137 (1996),
The court reviews the totality of circumstances to determine whether reasonable notice was given, O'Shaughneysy, 252 B.R. at 730. The court should consider, among other things, whether any inadequacies in the notice prejudiced the creditor and whether notice was given to afford the creditor sufficient opportunity to respond to "the impending deprivation of its rights." Id. (citing In re Walker, 149 B.R. 511, 514 (Bankr. N.D. Ill. 1992)). A. The Type of Notice Required
In the context of a bankruptcy reorganization, the adequacy of notice depends upon whether a creditor is "known" or "unknown." Chemetron Corp., 72 F.3d at 346 (citation omitted). Known creditors must be given actual written notice of the filing of a debtor's bankruptcy case and the claims bar date. City of N.Y. v. N.Y., N.H. H.R. Co., 344 U.S. 293, 296 (1953); In re Chi., Milwaukee, St. Paul Pac. R.R. Co., 974 K.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).
Given the established law concerning the respective notice requirements for known and unknown creditors, the determinative factor on this motion is whether AFI was a known creditor when Kmart compiled its bankruptcy schedules. If AFT was a known creditor, entitled to actual notice of the bar date, it will be permitted to file a late proof of claim, as it received only constructive notice. If, however, AFI was unknown, it was entitled only to publication notice, which was in fact provided in this case.
A "known" creditor is one whose identity is either known or "reasonably ascertainable" by the debtor. Tulsa Prof I Collection Servs., Inc. v. Pope, 485 U.S. 478, 490 (1988); In re Envirodyne Indus., Inc., 206 B.R. 468, 473 (Bankr N.D. Ill. 1997) (citation omitted). Thus, known creditors arc 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 is not "reasonably ascertainable" and whose claim is "merely conceivable, conjectural or speculative." Mullane, 339 U.S. at 317 (noting, in a case involving notice to beneficiaries of a common trust fund established under New York Banking law, that "beneficiaries . . . whose interests or whereabouts could not with due diligence be ascertained come clearly within this category"); EnvirodyneIndus, 206 B.R. at 473 (citations omitted).
Some courts have gone so far as to find that even if a debtor knows of the possibility of a claim, the debtor is not required to give actual notice to creditors with "merely conceivable, conjectural or speculative" claims. See Charter Co., 125 B.R. at 656 (citation omitted). The United States Supreme Court has found that not everyone "who may conceivably have a claim [is] properly considered a creditor entitled to actual notice" and that "it is reasonable to dispense with actual notice to those with mere[ly] `conjectural' claims." Tulsa Prof I Collection Servs., 485 U.S. at 490 (citations omitted).
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 Crude Oil Co. v. Petroleas Mexicanos (In re Charter Co.), 125 B.R. 650, 655 (M.D. Fla. 1991) (citing In re CM., 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 I Collection Servs., 485 U.S. at 490 (citing Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 n. 4 (1983)). "Reasonable diligence" varies, depending on the context of the case, Envirodyne Indus., 206 B.R. at 473. However, the required search invariably centers on the debtor's own books and records. Chemetron Corp., 72 F.3d at 347. Efforts beyond a thorough inspection of these documents arc 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, 339U.S.at317).
Here, the record demonstrates that AF1 was an "unknown" creditor entitled only to constructive notice. The parties do not dispute that Kmart officers and employees reviewed the Debtor's books and records in preparing the schedules and statements of financial affairs. No matter how carefully Kmart searched those documents, however, it would not have discovered the potential subrogation claim now asserted by AFI, because prior to the imposition of the claims bar date AFI had not asserted that Kmart was liable in any way,
Although communication by AFI with Kmart concerning the existence of AFI's claim is not required for the claim to be considered "known," AFI failed to provide Kmart with any reason to believe that it held or would pursue subrogation rights, AFT contends that it could not assert its rights until compensation benefits had been fully paid to Lookingbill. However, AFI did nothing to put Kmart on notice of any potential liability. Indeed, no action was taken prior to the bar date to alert Kmart to the fact that AF1 was Lone Star's workers' compensation carrier, — much less to the fact that it was paying workers' compensation benefits to Lookingbill, Some sort of action was necessary in order for AFI to be deemed a "known" creditor. See Berk v. Brooks Fashion Stores, Inc. (In re Brooks Fasion Stores, Inc.), 1994 WL 132280, at *3 (S.D.N.Y, Apr. 14, 1994).
Nonetheless, AFI contends that the "reasonably diligent" standard puts the burden on Kmart to determine, during the ordinary course of its business, whether Lookingbill was covered by workers' compensation insurance and whether he was receiving benefits, In support of its argument, AFI cites Houston General Insurance Co. v. Campbell, 964 S.W.2d 691 (Tex.App.Ct. 1998). In that case, Campbell was injured at work and subsequently sought medical care for her injuries. Id. at 693. Houston General, the workers' compensation insurance carrier for Campbell's employer, paid the medical expenses that she had incurred. Id. During the course of her treatment, Campbell was further injured as a result of purported medical malpractice. Id. Houston General argued that it was subrogated to Campbell's claims against both the treating doctor and the hospital because it had paid for all of her medical expenses. Id. The Texas Court of Appeals held that Houston General had a right of subrogation against the proceeds of Campbell's settlement of the malpractice claim, because the insurance provider had paid for the medical care required as a result of both the work-related injury and the medical malpractice that followed, Id . at 695-96.
Houston General is inapposite to the matter at bar. The state appellate court narrowly defined the issue as whether a workers' compensation provider has any subrogation interest in settlement proceeds received by an employee when such proceeds result exclusively from medical malpractice in the course of treatment for a compensable injury. Id. at 694. AFI cites the case for the proposition that "[w]hen an employee who has been receiving workers' compensation benefits is paid a settlement by a third-party tortfeasor, both the tortfeasor and the employee arc jointly and severally liable to the compensation carrier for its entire subrogation claim." Id. at 695 (citations omitted). This proposition, however, lends no support to AFI's further contention that it is Kmart that bears the burden of determining whether Lookingbill was covered by workers' compensation insurance or receiving workers' compensation benefits. In fact, this court's research reveals no case, in Texas or elsewhere, that states or suggests that there is an obligation on the part of the debtor to ascertain whether a relevant party is covered by such insurance.
Based on the foregoing, AFL was an "unknown" creditor at the time Kmart compiled its bankruptcy schedules. As such, it was entitled only to constructive 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 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 sum, AFI, as an unknown creditor, was entitled to constructive notice of the bar date, and notice by publication was, therefore, adequate. Thus, AFI must show that its failure to file a timely proof of claim was due to excusable neglect. B. Excusable Neglect
As the Supreme Court stated in Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S, 380 (1993), 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.
Id. at 395 (citation omitted).
Here, although AFI acted promptly after learning of the claims bar date, it did not discover the bar date for five months beyond the deadline, and AFI failed to establish the circumstances surrounding that discovery or to offer any reason as to why it took five months to learn of the bar date. Moreover, although the court has no reason to doubt AFI's good faith, the only "excuse" for the neglect in filing is the alleged inadequacy of the notice. Since the court has found that constructive notice was all that was required, the neglect under all the circumstances of this case was not excusable.
AFI's counsel, William D. Mahoney, merely states in his affidavit that he "did not have any knowledge of the claims bar date until speaking with counsel for K-Mart on December 19, 2002."
CONCLUSION
For the reasons set forth above, the court denies AFI's motion for leave to file a late proof of claim or to extend the bar date. This Opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate order will be entered pursuant to Federal Rule of Bankruptcy Procedure 9021,