Opinion
Bankr. No. 03-10194.
April 21, 2009
DECISION RE: MOTIONS FOR SUMMARY JUDGMENT ON FIRST DAKOTA NATIONAL BANK'S MOTION FOR PAYMENT OF BALANCE OF PRINCIPAL AND INTEREST
The matters before the Court are First Dakota National Bank's Motion for Payment of Balance of Principal and Interest and the two summary judgment motions related thereto filed by Trustee John S. Lovald and Tri-State Financial, L.L.C. These are core proceedings under 28 U.S.C. § 157(b)(2). This decision and order shall constitute the Court's findings and conclusions under Fed.Rs.Bankr.P. 7052 and 9014(c). As set forth below, the motions for summary judgment will be granted, and First Dakota National Bank's Motion for Payment of Balance of Principal and Interest will be denied.
I. MATERIAL FACTS
The facts herein reflect the record and the recitation of relevant matters "off the record" as set forth by First Dakota National Bank ("Bank") in its Motion for Payment of Balance of Principal and Interest and its responses and briefs regarding the summary judgment motions. The facts are viewed in the Bank's favor and are essentially undisputed.
Tri-State Ethanol Company LLC built and briefly operated an ethanol plant. Bank was its primary financier under two notes, one construction note for $9,000,000 and a second operating note for $600,000. Under the terms of the construction note, if a default occurred, the interest rate increased from 9.5% to 12.5%. Under the terms of the operating note, if a default occurred, the interest rate increased from 12% to 15%. Tri-State Ethanol Company LLC defaulted on both notes.
The Court is using the descriptive terms "construction" and "operating" to distinguish the two notes, not necessarily to conclusively define each loan's exclusive purpose.
Tri-State Ethanol Company LLC ("Debtor") filed a chapter 11 petition in bankruptcy on May 23, 2003. On September 25, 2003, Debtor filed a Motion to: (1) Approve Stipulation for Postpetition Financing, Use of Cash Collateral and Plan Treatment of First Dakota National Bank; (2) Incur Debt with Administrative Expense Priority over other Administrative Expenses (Super Priority); (3) Grant a Post-petition Lien on All of Tri-State Ethanol's Pre-petition Assets to Secure the Grant of an Administrative Expense Priority; and (4) Authorizing the Debtor to Contract for the Re-engineering and Reconstruction of the Plant (doc. 107) ("Motion to Approve") and an accompanying Stipulation and Agreement for Post-petition Financing, Use of Cash Collateral and Plan Treatment of First Dakota National Bank (doc. 107-1) ("First Stipulation"). The Motion to Approve was premised on the desire of Debtor and some related parties, including Tri-State Financial, L.L.C. ("Tri-State Financial") to re-engineer several aspects of the ethanol plant before reopening it. The Motion to Approve and First Stipulation reflected a significant role for the Bank in the re-engineering project and proposed to use the Bank's cash collateral in exchange for certain priority liens on existing and future assets. The First Stipulation stated the parties agreed the Bank was oversecured, the Bank held a pre-petition claim of $8,757,521.53 on the construction note plus accruing interest and attorneys' fees and a second claim of $627,577.88 on the operating note plus accruing interest and attorneys' fees, and the original notes would be recognized and assumed in Debtor's plan. The First Stipulation provided the Bank "agrees to continue to waive its right to assess the default rate of interest under its loan documents as long as [Debtor is] not in breach or default" of the First Stipulation. The First Stipulation also provided for certain releases and forbearance involving Debtor and its guarantors and the Bank and its participating lenders.
An evidentiary hearing on the Motion to Approve the First Stipulation was held. The Court denied the motion by decision and order entered December 12, 2003 (docs. 222 and 223), primarily because the far-reaching relief sought needed to be done through the plan confirmation process, not a pre-plan motion.
On January 30, 2004, Debtor and Bank entered into a Stipulation for Chapter 11 Plan Treatment of First Dakota National Bank (doc. 269) ("Second Stipulation"). Under the Second Stipulation, which was also wide-ranging and again encompassed financing of the re-engineering project, the Bank agreed to reduce its interest rate from the default rates on both notes down to 9% effective February 1, 2004, and past due interest was recapitalized as principal. When it was filed by Debtor, the Second Stipulation was linked to an earlier-filed disclosure statement (doc. 241) and attached plan (doc. 241-1). In both the plan and disclosure statement, Debtor stated the Bank would be paid in accordance with a stipulation to be filed later and made available to creditors upon request. Subsequent modified plans (docs. 286 and 314) and attendant amended disclosure statements (docs. 285 and 288) filed by Debtor still said a stipulation "will be filed" to reflect the proposed plan treatment for the Bank. A later proposed plan summarized the proposed treatment of the Bank's claim as set forth in the Second Stipulation (doc. 701). While one of Debtor's disclosure statements was approved (doc. 315), a plan was never confirmed. A separate motion to approve the Second Stipulation was never filed. The parties involved — the Bank, Debtor, and TriState Financial — nonetheless partially complied with the Second Stipulation for some months. The extent of that compliance is unknown.
On May 26, 2004, the Bank filed a proof of claim (claim no. 262-1). The Bank stated therein that it had a fully secured claim for $9,182,497.92.
The case was converted to Chapter 7 on July 29, 2004. John S. Lovald was appointed the case trustee.
Trustee Lovald filed a Motion for Authorization to Operate Business, Authority to Incur Secured Debt, and Request for Use of Cash Collateral and Request for Preliminary Hearing Thereon (doc. 946). Two requests for preliminary authority to use a certain amount of the Bank's cash collateral were granted (docs. 951 and 959), and a final use of cash collateral authorization was granted September 2, 2004 (doc. 989). The balance of the trustee's motion was deferred in the same order. Trustee Lovald later withdrew the balance of the motion (doc. 1261). Under these cash collateral orders, the Bank conceded it agreed to reduce its interest rate to 9% while the trustee made certain payments on its secured claim. The Bank said the trustee made a full payment in August 2004 and a partial payment in September 2004.
The ethanol plant was sold by Trustee Lovald. The Bank filed another proof of claim on November 24, 2004 (claim no. 326-1). This proof of claim did not state it was replacing or amending the previously filed claim. Under this second proof of claim, the Bank said it was owed $9,851,766.68 and was fully secured, and the "[c]laim is as of November 9, 2004, and excludes certain accrued fees, and includes $175,188.81 prepayment charge."
On January 28, 2005, Trustee Lovald filed a motion seeking authority to pay the Bank $9,591,630.40 plus interest to the date of payment (doc. 1220). The motion reserved the issue of whether the Bank was entitled to any administrative claims under 11 U.S.C. § 506(b). In the motion, Trustee Lovald also stated,
The parties listed on [the attached list of creditors and amounts to be paid] may also have claims for additional sums, and receipt of payment is without prejudice to such claims, so long as payments received are applied first to the principal balance of the obligations due from the Debtor.
The motion was granted on February 15, 2005 (doc. 1243), and Trustee Lovald paid the Bank $9,816,321.60 in principal and interest (the amount paid after the Bank refunded an overpayment). The interest reflected in that sum was calculated based on the 9% interest rate in the Second Stipulation.
On August 11, 2005, the Bank filed a Section 506(b) Motion for Allowance of Prepayment Charge (doc. 1457) ("pre-payment motion"). Therein, the Bank sought a determination it was entitled to an additional $173,253.27 from the bankruptcy estate based on a formula in the construction note because the note had been paid in full within the first seven years of the note. Trustee Lovald and Tri-State Financial objected. On December 2, 2005, Trustee Lovald filed a Motion for Approval of Settlement of Prepayment Penalty Request filed by First Dakota National Bank (doc. 1629) ("prepayment motion"). Tri-State Financial objected. At the evidentiary hearing held March 24, 2006, the Court advised the parties the Second Stipulation was not enforceable because it had not been approved by the Court. Trustee Lovald withdrew his settlement motion. Following this hearing, representatives for the Bank informed counsel for Trustee Lovald the Bank would seek additional interest based on the default rates in the notes.
An evidentiary hearing on the Bank's pre-payment motion was held May 4, 2006 and the Court thereafter received written closing arguments. On November 13, 2006, the Court granted the Bank's pre-payment motion, though under 11 U.S.C. § 502(b), not 11 U.S.C. § 506(b), as the Bank had requested (docs. 2022 and 2023). TriState Financial appealed. The United States District Court for the District of South Dakota (doc. 2297) and the United States Court of Appeals for the Eighth Circuit reversed this Court on their de novo reviews (docs. 2605 and 2607). In its opinion, the Court of Appeals said, "The Bank was paid the principal and interest it was due out of the proceeds from the sale of the plant." It concluded an ambiguity in the subject note would be construed against the Bank under South Dakota law and, therefore, the construction note did not provide for the imposition of a pre-payment penalty under any set of facts. The Bank thereafter returned the pre-payment penalty pursuant to an agreed order (doc. 2617).
On May 23, 2007, while the Bank's pre-payment motion was pending before the Court of Appeals, the Bank filed a Motion for Payment of Balance of Principal and Interest (doc. 2306) with this Court. Therein, it requested additional interest on both notes because the sum previously paid by Trustee Lovald following the ethanol plant sale had been calculated using 9% interest, not the default rates provided in the notes. The Bank withdrew this motion a couple weeks later at Trustee Lovald's request so the parties could attempt a settlement. Those efforts were apparently not fruitful, and on April 28, 2008, nearly a year later, the Bank filed a new Motion for Payment of Balance of Principal and Interest (doc. 2554). It again sought additional large sums on both notes because the amount paid to the Bank following the sale of the ethanol plant had included interest calculated at only 9%, rather than the higher default rates provided in each note. It also wanted accruing interest on this additional interest. The Bank argued it had not waived this issue and was not bound by the 9% rate in the Second Stipulation since the Second Stipulation had never been approved by the Court.
Paragraphs 11 and 12 on the Bank's motion are difficult to decipher. The Court believes the Bank is offering two different calculations of the sums due, depending on what starting date is used for the default interest rates. Paragraph 11 seems to provide a calculation from the note's acceleration date forward, while paragraph 12 seems to provide a calculation forward from February 1, 2004, the day after the Second Stipulation was signed.
Trustee Lovald and Tri-State Financial both objected to the Bank's motion (docs. 2559 and 2562) and both objectors moved for summary judgment on the Bank's motion (doc. 2575 and 2576). Between the two movants, they argued material facts were not in dispute and the Bank's claim should not be reconsidered because of the Bank's judicial admission in earlier documents that it had been paid in full, the issues raised by the Bank's motion are res judicata or have been waived, the motion has been made in bad faith, the Bank should be judicially estopped from seeking the additional funds, and the law of the case prevents re-litigation of this settled issue. Briefs were received, including supplemental briefs after the Court of Appeals entered its opinion regarding the Bank's pre-payment motion.
In its responses to the motions for summary judgment and supporting briefs, the Bank argued, in a nutshell, that it is entitled to the additional interest since the Court had ruled the Second Stipulation is not binding. The Bank said its earlier declarations on the record that it had been paid in full arose from its erroneous assumption it was obligated to abide by the Second Stipulation. Because this Court later ruled the Second Stipulation was not binding, the Bank argued its earlier declarations of being paid in full do not constitute judicial admissions. The Bank acknowledged some of its declarations that it had been paid in full were made after the March 24, 2006 hearing, when the Court concluded the Second Stipulation was not binding. It argued these statements, some of which were made in its pre-payment motion, were still not judicial admissions because payment of interest in full was not predicated on its seeking the pre-payment penalty.
As to any allegations it had not been diligent in seeking the additional interest, the Bank argued "any such suggestion ignores reality," apparently referencing the fact its attorneys had told Trustee Lovald's attorney on March 24, 2006 that it thought it was entitled to the higher interest rates and the trustee's attorney's apparent acquiescence to that intention. The Bank further argued neither Trustee Lovald nor Tri-State Financial had demonstrated any prejudice or reliance arising from the supposed delay.
As to judicial estoppel, the Bank argued it is appropriately applied in this situation because the Bank did not make a knowing misrepresentation, it did not succeed in maintaining its position that principal and interest had been paid in full, referencing the appellate Court's decisions regarding the pre-payment penalty.
As to res judicata, the Bank argued it did not apply because the Bank's pre-payment motion was not a prior action determining the same issue raised in its motions for additional interest. It also argued Tri-State Financial should not be able to argue the matter is res judicata and avoid the higher interest rate when it (Tri-State Financial) repudiated the Second Stipulation when objecting to the Bank's pre-payment motion.
As to Trustee Lovald's law of the case theory for denying the Bank's motion for additional funds, the Bank says the correct interest rate for its notes has not been previously resolved and so the theory is wholly inapplicable.
II. SUMMARY JUDGMENT
Summary judgment is appropriate when "there is no genuine issue [of] material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 7056 and Fed.R.Civ.P. 56(c). An issue of material fact is genuine if it has a real basis in the record. Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir. 1992) (quotes therein). A genuine issue of fact is material if it might affect the outcome of the case. Id. (quotes therein).
The matter must be viewed in the light most favorable to the party opposing the motion. F.D.I.C. v. Bell, 106 F.3d 258, 263 (8th Cir. 1997). Where motive and intent are at issue, disposition of the matter by summary judgment may be more difficult. Cf. Amerinet, Inc. v. Xerox Corp., 972 F.2d 1483, 1490 (8th Cir. 1992) (citation omitted).
The movant meets his burden if he shows the record does not contain a genuine issue of material fact and he points out that part of the record that bears out his assertion. Handeen v. Lemaire, 112 F.3d 1339, 1346 (8th Cir. 1997) (quoting therein City of Mt. Pleasant, Iowa v. Associated Electric Coop., 838 F.2d 268, 273 (8th Cir. 1988)). No defense to an insufficient showing is required. Adickes v. S.H. Kress Co., 398 U.S. 144, 161 (1970) (citation therein); Handeen, 112 F.3d at 1346.
If the movant meets his burden, however, the non movant, to defeat the motion, "must advance specific facts to create a genuine issue of material fact for trial." Bell, 106 F.3d at 263 (quoting Rolscreen Co. v. Pella Products of St. Louis, Inc., 64 F.3d 1202, 1211 (8th Cir. 1995)). The non movant must do more than show there is some metaphysical doubt; he must show he will be able to put on admissible evidence at trial proving his allegations. Bell, 106 F.3d at 263 (citing Kiemele v. Soo Line R.R. Co., 93 F.3d 472, 474 (8th Cir. 1996), and JRT, Inc. v. TCBY Systems, Inc., 52 F.3d 734, 737 (8th Cir. 1995)).
III. DETERMINATION OF A SECURED CLAIM
When a Chapter 7 trustee sells bankruptcy estate property, § 724(b) of the Bankruptcy Code directs him to pay, from the sale proceeds, creditors holding "an allowed claim secured by a lien on [the property sold] that is not avoidable[.]" Section 506(a) of the Code states an allowed claim is a secured claim to the extent of the value of the creditor's collateral. Getting a determination of both "allowed" and "secured," however, can be a bit cumbersome under the Code and rules. One court has deemed it a three-step process: (1) is there a claim or right to payment; if so, (2) is the claim secured by an encumbrance on property of the bankruptcy estate; and, if so, (3) what is the value of that collateral. In re Taylor, 289 B.R. 379, 383 (Bankr. N.D. Ind. 2003). Circumstances, however, sometimes do not permit these steps to be neatly sequential. Determining the amount of a claim, including any entitlement to "reasonable fees, costs, or charges provided for under the [security] agreement or State statute under which such claim arose" allowed by 11 U.S.C. § 506(b), if the claim is fully secured, may necessitate some steps being taken simultaneously.
A secured creditor may file a proof of claim. 11 U.S.C. § 501(a). If it does, the claim is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a); Fed.R.Bankr.P. 3001(f); Vantage Investments, Inc. v. Loc Nguyen Corp. (In re Vantage Investments, Inc.), 385 B.R. 670, 679 (Bankr. W.D. Mo. 2008) (citing Gran v. IRS (In re Gran), 964 F.2d 822, 827 (8th Cir. 1992)). If a party objects to the claim, the objector bears the initial burden of rebutting the claim. Gran, 964 F.2d at 827. If the objector meets that burden, the burden then shifts to the claimant to prove every item of its claim by a preponderance of the evidence. Id. (quoting therein California State Board of Equilization v. Official Unsecured Creditors' Committee (In re Fidelity Holding Co.), 837 F.2d 696, 698 (5th Cir. 1988)).
Since it is not necessary to a resolution of the matters before it today, the Court gladly leaves to another day a discussion of Fed.Rs.Bankr.P. 3002(a) and 3002(c) and whether a secured creditor in a chapter 7 case must timely file a proof of claim to have an "allowed" claim. See, e.g., In re Nwonwu, 362 B.R. 705, 708 (Bankr. E.D. Va. 2007), and In re Jurado, 318 B.R. 251, 254-55 (Bankr. D. Puerto Rico 2004), for a discussion of these provisions in a Chapter 13 context.
As one court has noted, an objection to a claim should allege facts which, if found true, would trigger one of the statutory reasons for disallowance or reduction of a claim under 11 U.S.C. § 502(b). If the objection does not do so, it should not be sustained, even if the creditor does not respond. In re Chalakee, 385 B.R. 771, 776-77 (Bankr N.D. Okla. 2008) (cites therein).
For a creditor to hold a secured claim, it must hold a lien or other valid encumbrance and that encumbrance must be on property of the bankruptcy estate. Taylor, 239 B.R. at 383, 386, and 386 n. 3. The collateral that is property of the estate must also have sufficient value that, after it is liquidated, the proceeds are sufficient to pay the creditor on account of its encumbrance. Id.
The proof of claim process only establishes the validity and amount of a claim, not the extent to which it may be secured. Fed.R.Bankr.P. 3001(f); Taylor, 289 B.R. 1t 383-84 and 386 n. 3 (cites therein). In other words, the proof of claim is prima facie evidence that the filing creditor has a right to payment for a certain amount, but the proof of claim does not create any presumption regarding the extent the claim may be secured, even if the claim form sets forth that information. Id. at 386 n. 3. Thus, something other than the claims process must be employed to determine whether a claim is secured.
The extent a creditor's claim is secured may be determined upon motion by the party seeking the declaration.
The court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity as the court may direct.
Fed.R.Bankr.P. 3012. Through this process, the Court values the collateral and thereby also determines the extent of the creditor's secured claim. Taylor, 289 B.R. at 386.
If more than the value of a creditor's secured claim is disputed, Fed.R.Bankr.P. 7001(1) states an adversary proceeding must be commenced. Through that process, the Court may determine the "validity, priority, or extent" of an encumbrance. "Validity" means the legitimacy or existence of the lien itself, "priority" means the relationship of the lien to other interests of claims in the collateral, and "extent" means the scope of the property described in the lien. In re Bennett, 312 B.R. 843, 847 (Bankr. W.D. Ky. 2004).
III. RECONSIDERATION OF A CLAIM
Once a claim has been allowed (or disallowed after resolution of an objection), the claim may be reconsidered for cause. 11 U.S.C. § 502(j); Fed.R.Bankr.P. 3008. Absent allegations of fraud, the movant bears the burden of proof by a preponderance of evidence. In re Rayborn, 307 B.R. 710, 720 (Bankr. S.D. Ala. 2002); see Kidd v. Dalkon Shield Claimants Trust (In re A. H. Robins Co.), 86 F.3d 1148, table at *2 (4th Cir. 1996), and Paige v. Sandbulte, 917 F.2d 1108, 1109 (8th Cir. 1990) (a party moving for relief under the fraud provisions of Fed.R.Civ.P. 60(b) must establish right to relief by clear and convincing evidence).
While no Code or rule specifically addresses the issue, a proof of claim may also be amended.
The decision to allow the amendment of a claim is committed to the discretion of the bankruptcy judge. Associated Container Transp. (Australia) Ltd. v. Black Geddes, Inc. (In re Black Geddes, Inc.), 58 B.R. 547, 553 (S.D.N.Y. 1983); In re Enron Corp., 298 B.R. 513, 520 (Bankr.S.D.N.Y. 2003). The claimant may amend a timely claim after the bar date to correct defects of form, provide more detailed allegations of fact relating to the timely claim, or plead a new theory of recovery under the facts set forth in the timely claim. Integrated Resources, Inc. v. Ameritrust Co. N.A. (In re Integrated Resources, Inc.), 157 B.R. 66, 70 (S.D.N.Y. 1993); Enron Corp., 298 B.R. at 520; In re McLean Indus., Inc., 121 B.R. 704, 708 (Bankr.S.D.N.Y. 1990); In re W.T. Grant Co., 53 B.R. 417, 420 (Bankr.S.D.N.Y. 1985); see In re G.L. Miller Co., 45 F.2d 115, 116 (2d Cir. 1930). The claimant may not, however, through the guise of an amendment, circumvent the bar date by asserting a new claim. Enron Corp., 298 B.R. at 520; In re Drexel Burnham Lambert Group, Inc., 151 B.R. 684, 694 (Bankr.S.D.N.Y. 1993); see G.L. Miller Co., 45 F.2d at 116. Accordingly, the bankruptcy court must examine the proposed post-bar date amendment closely to ensure that it amends a timely claim and does not assert a new claim. Integrated Resources, Inc., 157 B.R. at 70; Enron Corp., 298 B.R. at 520; Maxwell Macmillan Realization Liquidating Trust MCC GAO, Inc. v. Aboff (In re MacMillan), 186 B.R. 35, 49 (Bankr.S.D.N.Y. 1995); W.T. Grant Co., 53 B.R. at 422.
Courts have generally applied a two part test in making this determination. The bankruptcy court should "look first to whether there was a timely assertion of a similar claim or demand evidencing an intention to hold the estate liable." Black Geddes, Inc., 58 B.R. at 553; accord Integrated Resources, Inc., 157 B.R. at 70; Enron Corp., 298 B.R. at 520. If the claimant prevails on the first prong, the bankruptcy court must also determine whether it would be equitable to allow the amendment. Id. at 521; see Black Geddes, Inc., 58 B.R. at 553. The equitable considerations include "(1) undue prejudice to the opposing party; (2) bad faith or dilatory behavior on the part of the claimant; (3) whether other creditors would receive a windfall were the amendment not allowed; (4) whether other claimants might be harmed or prejudiced; (5) the justification for the inability to file the amended claim at the time the original claim was filed." McLean Indus., Inc., 121 B.R. at 708 (citations omitted); accord Integrated Resources, 157 B.R. at 70; Enron Corp., 298 B.R. at 521.
The first prong of the test permitting an amendment of a claim is basically the same as the test under Fed.R.Civ.P. 15(c) regarding the "relation back" of a later pleading to an earlier one. [Footnote setting forth Rule 15(c) omitted.] E.g., Integrated Resources, Inc., 157 B.R. at 70; McLean Indus., Inc., 121 B.R. at 710; Enron Corp., 298 B.R. at 521. The court must decide whether there is a sufficient commonality of facts between the allegations relating to the two causes of action to preclude the claim of unfair surprise. Benfield v. Mocatta Metals Corp., 26 F.3d 19, 23 (2d Cir. 1994). The court should also consider whether the defendant had notice of the claim now being asserted, and whether the plaintiff will rely on the same type of evidence to prove both claims. See id.; see generally 3 JAMES WM. MOORE, MOORE'S FEDERAL PRACTICE § 15.19[2], at 15-83 to 15-84 (3d ed. 2004).
In re Asia Global Crossing, Ltd., 324 B.R. 503, 507-08 (Bankr. S.D.N.Y. 2005); Vantage Investments, Inc. v. Loc Nguyen Corp. (In re Vantage Investments, Inc.), 385 B.R. 670, 690 (Bankr. W.D. Mo. 2008) (adopting the five equitable factors from the Southern District of New York).
Since the Bank filed a motion instead of an amended proof of claim, the motion will be considered as one filed under § 502(j).
Cause as required by § 502(j) is not defined by the Code or Rules. In re Ross, 373 B.R. 656, 660 (Bankr. W.D. Mo. 2007) (cites therein). Instead, the Court is given wide discretion in determining what constitutes adequate cause for the reconsideration of a claim. In re Smith, 290 B.R. 102, 106-07 (Bankr. E.D. Ark. 2003).
If cause exists to reconsider a claim, the equities of the case must then be considered. Id. Thus, it is two-step process: (1) a showing of cause for reconsideration, and (2) a determination of the claim according to the equities of the case. Americredit Financial Services v. Durham (In re Durham), 329 B.R. 899, 903 (Bankr. M.D. Ga. 2005); In re Enron, Inc., 325 B.R. 114, 117 (Bankr. S.D.N.Y. 2005).
Few courts, even those who acknowledge the two-step process under § 502(j), markedly differentiate between their assessment of "cause" — the first step — and their disallowance or allowance of the reconsidered claim "according to the equities of the case" — the second step. See, e.g., Orsini Santos v. Mender (In re Orsini Santos), 349 B.R. 762, 769-70 (B.A.P. 1st Cir. 2006), and Durham, 329 B.R. at 903; but see In re Rayborn, 307 B.R. 710, 720 (Bankr. S.D. Ala. 2002). Certainly, however, the equities of the case include a change in circumstances that substantially affect the claim or the existence of bad faith. Id. at 724-26. Further, while the Court of Appeals for this Circuit has not discussed at length specifically what a court should consider under § 502(j), it did conclude "[g]eneral equitable principles govern the exercise of discretion," and courts may consider
whether delay would prejudice the debtors or other creditors, the reason for the delay and its length and impact on efficient court administration, whether the creditors acted in good faith, whether clients should be penalized for counsel's mistake or neglect, and whether claimants have a meritorious claim.
Kirwan v. Vanderwerf (In re Kirwan), 164 F.3d 1175, 1177-78 (8th Cir. 1999) (cited in Durham, 329 B.R. at 903); Orsini Santos, 349 B.R. at 769-70.
If the motion under § 502(j) is made after expiration of the time to appeal the earlier determination of the claim, some courts treat the motion as one akin to a motion for relief from judgment under Fed.R.Civ.P. 60(b) and use those standards to define "cause." Amtech Lighting Services Co. v. Payless Cashways, Inc. (In re Payless Cashways, Inc.), 230 B.R. 120, 137 (B.A.P. 8th Cir. 1999); In re Coffman, 271 B.R. 492, 498 (Bankr. N.D. Texas 2002) (cites therein); and Shaw v. Easter, 25 B.R. 418, 421 (Bankr. Ohio 1982). Bankruptcy Rule 9024 states Rule 60 applies in bankruptcy cases except the "reconsideration of an order allowing or disallowing a claim against the estate entered without a contest is not subject to the one-year limitation prescribed in Rule 60(c)[.]" Though the Bank and Trustee Lovald apparently exercised some give and take on its claim because the Bank returned a portion as an overpayment, the record does not reflect an objection to the Bank's claim was ever filed or that the Bank's claim was otherwise litigated. See Jackson v. TLC Liquidation Trust (In re Tender Loving Care Health Services, Inc.), ___ F.3d ___, 2009 WL 779269 (2nd Cir. March 26, 2009). Accordingly, the one-year limitation under Rule 60(c) will not apply.
When Fed.R.Civ.P. 60 was amended on December 1, 2007, the one-year provision was moved from (b) to (c). The changes were essentially stylistic, see Advisory Committee Notes, 2007 Amendments, and so may be applied here without prejudice.
Relief under Rule 60(b) is an extraordinary remedy that may be granted only upon a showing of exceptional circumstances. Mitchell v. Shalala, 48 F.3d 1039, 1041 (8th Cir. 1995). It is committed to the Court's sound discretion. Id. The exceptional circumstances warranting relief are those that are new and unforeseen and that "cause extreme and unexpected hardship so that the decree is oppressive." Stokors S.A. v. Morrison, 147 F.3d 759, 761 (8th Cir. 1998) (quoting ARC v. Sinner, 942 F.2d 1235, 1239 (8th Cir. 1991) (quotes and cites therein)).
Rule 60(b) sets forth six basis for relieving a party from a final order. Of those six, only subsection (1) and (6) apply to the facts at hand. Rule 60(b)(1) allows a party to be relieved from an order for "mistake, inadvertence, surprise, or excusable neglect." The Bank has not claimed there has been any mistake or inadvertence by the Court or another party, accordingly the Court will focus on the Bank's actions.
Relief under Rule 60(b)(1) may be sought for both judicial errors or an error of a party. Any alleged judicial mistake, however, must reflect judicial inadvertence and the relief must be sought within the time for appeal. Lowry v. McDonnell Douglas Corp., 211 F.3d 457, 460-61 (8th Cir. 2000).
Most courts seemingly focus on "excusable neglect" under Rule 60(b) and seemingly collapse mistake and inadvertence into it. As defined by the Supreme Court, "excusable neglect" is an elastic concept. Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 113 S.Ct. 1489, 1496-97 (1993). The determination is essentially one of equity; all relevant circumstances surrounding the party's omission are considered. Id. These circumstances include the danger of prejudice to the other party, the length of delay and its 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 1498 (cite therein). Neglect by either the party or his counsel may be considered. Id. at 1499.
A mistake of law generally is not recognized as a basis for relief from a judgment. Ceridian Corp. v. SCSC Corp., 212 F.3d 398, 404 (8th Cir. 2000); Payless Cashways, 230 B.R. at 139. As noted by the Supreme Court in Pioneer, "inadvertence, ignorance of the rules, or mistakes construing the rules do not usually constitute 'excusable neglect[.]'" Pioneer Investments, 113 S.Ct. at 1496.
The present case involves counsel's error in failing to read the law, failing to present all of its arguments, and trying its case without determining all of the evidence that should be presented to present all possible theories. A party may not try its case on one theory, lose, and seek to relitigate on another.
Payless Cashway, 230 B.R. at 139.
Rule 60(b)(6) is a catch-all provision that allows a party to be relieved from an order for "any other reason that justifies relief" that is not covered by the earlier five subsections. Waste Conversion, Inc. v. Kelley, 19 F.3d 1435, table at *3 (6th Cir. 1994) (citing Liljeberg v. Health Services Acquisition Corp., 486 U.S. 847, 864 n. 11 (1988)). It allows the movant to be relieved from a final judgment if exceptional circumstances have denied the movant a full and fair opportunity to litigate his claim and have prevented the moving party from receiving adequate redress. Murphy v. Missouri Dept. of Corrections, 506 F.3d 1111, 1117 (8th Cir. 2007) (citations and quotes therein); Gaydos v. Guidant Corporation ( In re Guidant Corp. Implantable Defibrillators Products Liability Litigation), 496 F.3d 863, 868 (8th Cir. 2007). Rule 60(b)(6) is designed to enable a court to accomplish justice after weighing the equities. Watkins v. Lundell, 169 F.3d 540, 544 (8th Cir. 1999) (citations therein). Exceptional circumstances, however, "are not present every time a party is subject to potentially unfavorable consequences as a result of an adverse judgment properly arrived at." Atkinson v. Prudential Property Co., 43 F.3d 367, 373 (8th Cir. 1994). Relief under Rule 60(b)(6) is an extraordinary remedy since it intrudes on the sanctity of a final judgment. Id. As with a motion under any other subsection of Rule 60(b), a motion under Rule 60(b)(6) is also not a vehicle for re-argument on the merits, Broadway v. Norris, 193 F.3d 987, 990 (8th Cir. 1999), or a substitute remedy should a party fail to timely take an appeal.
IV. DECISION
The Court concludes cause does not exist to reconsider the Bank's claim at this juncture in the case. While a few circumstances weigh in the Bank's favor, the remainder do not.
Weighing in the Bank's favor is the fact that a final distribution of assets has not been made. The trustee has funds with which he could pay any additional interest to which the Bank may be entitled. Also weighing in the Bank's favor is the Code's predilection in favor of the accurate calculation and payment of claims.
That the estate's funds available for distribution will be lessened if the Bank's claim is reconsidered and allowed at a higher amount does not constitute legal prejudice against the other creditors. See In re McLauglin, 157 B.R. 873, 877 (Bankr. N.D. Iowa 1993).
The Court also notes the Court of Appeals' opinion regarding the pre-payment interest did not create any pertinent law of the case or other dispositive ruling on the interest issue presented by the Bank's present motion, contrary to Trustee Lovald's and TriState Financial's arguments. The Court's references in its opinion to the Bank's claim being paid in full were mere recitations of the record as it then stood, not a finding or conclusion following a pointed deliberation. The Court also does not find the Bank's request for payment of additional interest, when viewed alone, is made in bad faith. Errors regarding claims do occur, and certainly should be corrected when equitable to do so.
The remaining circumstances all tip the equity scales against the Bank. Foremost, the Bank was not vigilant in seeking a reconsideration. The Court advised parties in interest on March 24, 2006 that the Second Stipulation was not binding on the bankruptcy estate. The Bank itself acknowledged it immediately understood the implication of the Court's declaration because it says its counsel informed counsel for Trustee Lovald that day it might seek additional sums based on the higher default interest rates. However, the Bank waited over a year to bring its first motion for the additional sums. The Bank then withdrew that first motion two weeks after its filing, claiming Trustee Lovald asked them to withdraw it so a settlement could be reached on several pending matters. The Bank eventually filed the present motion on April 28, 2008. While the Court will accept for purposes of these motions for summary judgment that some of the Bank's delay in bringing the matter before the Court may be attributable to Trustee Lovald's desire to settle, that explanation fails to address the excessive delay between the March 24, 2006 hearing and the first motion on May 23, 2007 and is wholly insufficient to justify the nearly year-long delay between the two motions. When these delays, induced substantially by the Bank, are added to the fact that the record has reflected the Bank was paid in full, exclusive of any § 506(b) claim, since early 2005, the record leads to no other conclusion than that the Bank was not diligent in seeking a correction of any error regarding its claim. See Dilg v. Greenburgh (In re Greenburgh), 151 B.R. 709, 717 (Bankr. E.D. Pa. 1993).
In this circuit,
The four Pioneer factors do not carry equal weight; the excuse given for the late filing must have the greatest import. While prejudice, length of delay, and good faith might have more relevance in a closer case, the reason-for-delay factor will always be critical to the inquiry. We acknowledge, of course, that the Supreme Court has said that neglect need not be "caused by circumstances beyond the control of the movant" to be excusable, Pioneer, 507 U.S. at 392, 113 S.Ct. 1489, and that a finding of sufficient innocence on the part of the movant is not a condition precedent to our obligation to consider the other equitable factors, see id. at 395 n. 14, 113 S.Ct. 1489. But at the end of the day, the focus must be upon the nature of the neglect.
Lowry v. McDonnell Douglas Corp., 211 F.3d 457, 463 (8th Cir. 2000).
Had the miscalculation run in the estate's favor, the Court would not have granted Trustee Lovald a recalculation under these same circumstances. Too much time has passed — without justification — to litigate the issues raised by the present motion and correct any distributions made back in early 2005.
The Bank's present motion raises more than just the issue of whether it used the wrong interest rate to calculate its claim. It is also unknown whether the payment the Bank received in early 2005 reflected some unpaid interest being treated as principal, as the Second Stipulation proposed, to what time period or periods the default interest rate should apply, and whether the Second Stipulation, though not approved by this Court, is nonetheless enforceable to some extent under nonbankruptcy law due to the parties' partial or temporary operation under it.
Also weighing against reconsideration of the Bank's claim at this late date is the fact the present record indicates the error was solely the Bank's. No mutual mistake has been alleged. U.S. v. City of Fort Smith, 760 F.2d 231, 233-34 (8th Cir. 1985). Further, the sum received by the Bank was essentially an agreed sum, arising from its uncontested proofs of claim, and the Bank has not met its heavy burden of showing new and unforeseen conditions have produced such extreme or unexpected hardship that the agreed amount it has received can be considered oppressive. Id. at 233.
Finally, the Bank's mistake was essentially one of law. It did not recognize the legal import of the Second Stipulation's not being court-approved or timely request a legal determination of its impact on the amount of its claim. As discussed in Pioneer Investments, 113 S.Ct. at 1496, and Payless Cashway, 230 B.R. at 139, such mistakes of law do not constitute excusable neglect warranting a reconsideration of the Bank's claim on a new theory of law.
As to the establishment of cause for reconsideration in light of Fed.R.Bankr.P. 3008 and Fed.R.Civ.P. 60(b)(6), the Bank has not offered anything. It has not shown what evidence it can present to show exceptional circumstances have denied it a full and fair opportunity to litigate its claim and have prevented the Bank from receiving adequate redress. Murphy, 506 F.3d at 1117.
In sum, the movants have met their burden of showing no material facts exist and they are entitled to a ruling in their favor as a matter of law. The Bank has not gone forward and shown any specific facts, that it can prove at an evidentiary hearing, which will demonstrate cause for reconsidering its claim under Rule 3008. Therefore, Trustee Lovald's and Tri-State Financial's motions for summary judgment will be granted, and the Bank's second Motion for Payment of Balance of Principal and Interest will be denied. An appropriate order will be entered.