Opinion
Case No. 02 B 02474
December 3, 2003
MEMORANDUM OPINION
This matter is before the court 011 the Motion of Pauline and William Edwards ("the Edwards") to Extend Bar Date to File Administrative Expense Claim and for Relief to Limit Notice. The Edwards, personal injury claimants, failed to file an administrative proof of claim by the June 20, 2003 bar date. They now seek entry of an order allowing them to file their claim and deeming it timely based on excusable neglect.
BACKGROUND
On January 22, 2002, 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.
On August 30, 2002, Pauline Edwards sustained personal injuries resulting from a fall at a Kmart store m Lantana, Florida. The Edwards retained Walter C Jones IV ("Jones"), of the firm Freeman, Maynor Jones, LLC, as their personal injury counsel. Jones filed an action on the Edwards' behalf in a Florida state court on January 29, 2003. Kmart answered the complaint, and discovery ensued.
Thereafter, on or about April 23, 2003, this court entered an order confirming the First Amended Joint Plan of Reorganization of Kmart Corporation and its Affiliate Debtors and Debtors-m-Possession, as modified (the "Plan"). The Plan became effective on May 6, 2003 (the "Effective Date"),
Jones was unaware of Kmart's bankruptcy case until May 14, when he received a copy of the "Notice Regarding (A) Entry of Order Confirming the First Amended Joint Plan of Reorganization of Kmart Corporation and its Affiliated Debtors and Debtors-in-Possession, (B) Occurrence of Effective Date, and (C) Notice of the Administrative Bar Date" (the "Notice"). Paragraph 7 on the fourth page of the Notice contained a section entitled "Administrative Claims Bar Date," That section stated that "Administrative Claims" (other than certain types of claims dealt with elsewhere in paragraph 7) had to be filed by June 20, 2003 (the "Administrative Bar Date"). Jones reviewed the Notice and noted that it related to administrative expenses. He mistakenly concluded that it did not apply to the Edwards' personal injury claim. Jones does not practice in the field of bankruptcy law. In addition, he was in the midst of preparation for two jury cases that were to be tried in the month of June, 2003.
Jones did not discover the missed bar date until July 23, 2003, when he received a letter from Kmart's counsel in the Florida action, advising that the claim was barred for failure to file timely proof thereof, Jones immediately took steps to ascertain the appropriate means of seeking relief from this court. He ultimately retained bankruptcy counsel in Chicago, who filed the present motion on August 29, 2003.
DISCUSSION
The Edwards contend that their failure to file an administrative claim by the bar date was the result of excusable neglect. Rule 9006(b)(1) of the Federal Rules of Bankruptcy Procedure provides in relevant part that
when 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. J489, 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 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.
In Robb, for example, the Seventh Circuit held that an attorney's "track record" may be considered as one of the circumstances bearing on whether his negligence constitutes "excusable neglect." Another factor that has been considered is the attorney's relative experience in the area at issue. In U.S. v. Brown, 133 F.3d 993 (7th Cir. 1998), cert. denied, 519 U.S. 875, 117 S.Ct. 196, 136 L.Ed.2d 133 (1996), the defendant's attorney in a criminal case filed an appeal one day late. He had miscalculated the 10-day deadline, believing that weekends find holidays tolled the appeal period. The trial court considered the attorney's inexperience in federal court, his good faith, and the lack of prejudice resulting from his mistake. The Seventh Circuit affirmed, stating, inter alia, that "[t]hese are reasonable factors to consider, and ones invited by the Supreme Court in Pioneer and this court in Prizevoits." Brown, 133 K3d at 997.
Although Robb Involved a motion under Fed.R.Civ.P. (50(b)(1) for relief from a judgment based on allegations of "excusable neglect," the Seventh Circuit has noted that "the tenor of [die Pioneer decision] is that the term hears the same or similar meaning throughout the federal procedural domain." Prizevoits v. Indiana Bell Telephone Co., 76 F.3d 132, 134 (7th Cir. 1996).
The attorney was a Wisconsin lawyer, and his excuse was that he had confused Wisconsin rules with the federal rules. He believed that weekends and holidays tolled the 10-day deadline, which they would have in Wisconsin, because the prescribed period was less than 11 days. However, under Fed.R.App.P, 26(a), which was applicable to the appeal, weekend days were only to be excluded if the period was less than seven days. Brown, 133 F.3d al 9%. The court noted that Brown was the attorney's only client in the federal courts. Id, at 997.
Prizevoits was a civil case where "experience within the federal courts worked against the attorney claiming excusable neglect." Brown, 133 F.3d at 997.
It must be remembered, however, that "[i]t is difficult to draw bright lines in this inquiry." Brown, 133 F.3d at 996. In U.S. v. Guy, 140 F.3d 735 (7th Cir. 1998), for example, the defendant's lawyer made a mistake identical to the one made in Brown. Nonetheless, the Seventh Circuit found the neglect inexcusable, noting that the attorney's level of experience was the "critical difference." In Guy, the defendant's lawyer was an experienced federal criminal appellate litigator who "must" have known how to compute the appeal deadline in a federal criminal case. Guy, 140 F.3d at 736.
The court also noted that the Brown decision had "probed the outer boundaries of excuse." Guy, 140 F.3d at 736.
Again, the fact-intensive and equitable inquiry required by Pioneer is a balancing test, and "[balancing] 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, attorney Jones acknowledges receiving the Notice, and he noted that the bar date set forth therein applied to "Administrative Claims." Although the Notice itself did not define "Administrative Claims," it included on the first of its seven pages a statement that capitalized terms and phrases would, unless otherwise defined in the Notice, have the meanings set forth in the Plan and Confirmation Order, neither of which were served with the Notice. The only definition of administrative expense claims actually included in the package was contained not in the Notice, but in the instructions on the back of the claim form itself, and the only mention of personal injury claims was in a small font check-box on the claim form,
The affidavit of Shannon L, Maloney, a Bankruptcy Assistant at Trumbull, submitted in connection with certain other motions for leave to tile late administrative claims, recites that the Debtors served notice of the cases, notice of the Administrative Bar Date, and a proof of" claim form on the potential claimants.
Section 503(b) of the Bankruptcy Code provides for the allowance, as "administrative expenses," of "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case" and certain taxes. It is not, of course, readily apparent that a postpetition personal injury claim might be a cost of "preserving the estate," and the types of claims that are specifically mentioned in the statute are of a totally different nature. Thorough research would reveal, however, that in 1968, the Supreme Court held that tort claims resulting from the negligence of a receiver in an arrangement proceeding under Chapter XI of the former Bankruptcy Act were entitled to administrative priority. Reading Co, v. Brown, 391 U.S. 471, 20 L.Ed.2d 751, SS S.Ct. 1759 (1968). The Court reasoned, inter alia, that "actual and necessary costs" of administration should be construed to include "costs ordinarily incident to operation of a business, and not be limited to costs without which rehabilitation would be impossible." Id. at 483. This case law doctrine survived enactment of the Bankruptcy Code and is sometimes referred to as the " Reading exception" to the usual requirements for administrative priority, e.g., that the expense benefited the estate. See, e.g., In re Jack/Wade Drilling, Inc., 258 F.3d 385, 387-88 (5th Cir. 2001); 4 L. King, Collier on Bankruptcy ¶ 503.06[3][c][i] (15th ed, rev. 2003).
The other categories included in § 503(b) relate, inter alia, to professional compensation and reimbursement of expenses, as well as to fees and mileage payable under chapter 119 of title 28.
The decision was driven by the statutory objective of "fairness to all persons having claims against an insolvent," the Court noting that the "petitioner did not merely suffer injury at the hands of an insolvent business: it had an insolvent business thrust upon it by operation of law," Reading Co. v. Brown, 391 U.S. at 477-478, The Court concluded that it would be unfair to exclude or subordinate "the claims of those on whom the arrangement is imposed to the claims of those for whose benefit it is instituted." Id. at 479.
Although Jones might have discovered the " Reading exception" had he carefully researched the relevant case law under § 503 and its predecessor provisions, his failure to do so is understandable, Jones is a personal injury lawyer, — not a bankruptcy attorney, — and the Notice transmitted by Debtors merely referred to "Administrative Claims." The Notice did not mention personal injury claims, and it did not set forth a definition of "Administrative Claims;" it merely referred to the definitions in the Plan and Confirmation Order, neither of which were served with the Notice. However, even if Jones had timely obtained the Flan and read the definition contained therein, or if he had gone on to review the small font definition on the back of the claim form itself, those definitions would not have indicated to him that personal injury claims were included in "Administrative Claims." The Plan's definition merely contains language similar to the language of § 5Q3(b), including the "actual, necessary costs and expenses, incurred on or after the Petition Date, of preserving the Estates." Under these circumstances, it is understandable that Jones, a nonbankruptcy attorney, believed that the Edwards' claim was not an "Administrative Claim" within the purview of the Notice.
Jones ultimately obtained a copy of the plan by letter request to Kmart's state court counsel.
The Plan's full definition of "Administrative Claim" is as follows:
a Claim for payment of an administrative expense of a kind specified in section 503(b) of the Bankruptcy Code and entitled to priority pursuant to section 507(a)(1) of the Bankruptcy Code, including, but not limited to, DIP Facility Claims, the actual, necessary costs and expenses, incurred on or after the Petition Date, of preserving the Estates and operating the business of the Debtors, including wages, salaries or commissions for services rendered after the commencement of the Chapter 11 Cases, Professional Claims, Key Ordinary Course Professional Claims, all fees and charges assessed against the Estates under chapter 123 of title 28, United States Code, and all Allowed Claims (including reclamation claims) that are entitled to be treated ns Administrative Claims pursuant to a Final Order of the Bankruptcy Court under section 546(c)(2)(A) of the Bankruptcy Code.
Although the arguments and allegations made by bankruptcy counsel are somewhat confusing as to the reason for Jones' failure to file the claim, Jones' affidavit makes clear that he reviewed the Notice, observed that it related to administrative expenses, and concluded that it did not apply to his client's claim. The court gives little weight to the additional reason given, i.e., Jones' preoccupation with preparation for and conduct of two jury trials during the month of June.
In addition, any delay resulting from his failure to timely file the claim is minimal and nonprejudicial. When Jones learned of the mistake, on July 23, 2003, he promptly undertook efforts to rectify it, ultimately retaining bankruptcy counsel in Chicago to prepare and present the instant motion. Bankruptcy counsel filed the motion on August 29, 2003, little more than five weeks after Jones discovered the missed bar dale and ten weeks after the bar date itself. Moreover, the Administrative Bar Date has already been extended once, — to August 22, 2003, — as to thousands of creditors who did not receive the initial Notice, including personal injury claimants, and the Debtors have filed a motion seeking an additional extension, scheduled for hearing in January, 2004.
It is clear that Debtors are far from completing the administrative claim review and objection process. In fact, Debtors have already sought and obtained one extension of the deadline for filing objections to claims (including administrative claims) — from November 3, 2003, to February 2, 2004. In addition, under the procedures established in this case (by order dated August 26, 2003) for resolution of postpetition personal injury claims, the questionnaires to be submitted by claimants are not even due until February 15, 2004 (or 45 days from the date mailed, as applicable).
Finally, in light of the claimant's (and their counsel's) obvious good faith, the lack of prejudice to the Debtors, the minimal delay, and the understandable nature of Jones' mistake, it would appear that forfeiture of any claim, regardless of its merits, would be an excessive sanction. Ln Brown, discussed above, the court regarded dismissal of the late-filed appeal as a "harsh sanction for a relatively minor legal mistake," and noted that "[p]roportionality has its appeal." Brown, 133 F.3d at 997 (citing a pre- Pioneer case, Lorenzen v. Employees Retirement Plan of the Sperry Hutchinson Co., 896 F.2d 228, 232-33 (7th Cir. 1990) for the proposition that "`[i]f the mistake is slight, nonprejudicial, easily understandable, could happen to the best of us, etc., then dismissal of the appeal, with prejudice, may be an excessive sanction.").
Accordingly, "[a]lthough inadvertence, ignorance of the rules, or mistakes construing the rules do not usually constitute `excusable' neglect," Pioneer, 507 U.S. at 392 (emphasis added), under all the circumstances of this case, the neglect was excusable.
CONCLUSION
For all of the reasons set forth above, the court grants the Edwards' Motion to Extend Bar Date to File Administrative Expense Claim and for Relief to Limit Notice. 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 902 1.