Opinion
Case No. 02-13533 (AJG) Jointly Administered.
December 30, 2004
Marcia L. Goldstein, Esq., Lori R. Fife, Esq., Alfredo R. Perez, Esq., Of Counsel, New York, NY, WEIL, GOTSHAL MANGES LLP, Attorneys for Reorganized Debtors.
Daniel H. Golden, Esq., Ira S. Dizengoff, Esq., Of Counsel, New York, NY, AKIN GUMP STRAUSS HAUER FELD LLP, Attorneys for the Official Committee of Unsecured Creditors.
Katherine L. Billingham, Esq., Of Counsel, Centerville, Ohio, KATHERINE L. BILLINGHAM CO., L.P.A., Attorney for James and Debbie Billingham.
MEMORANDUM DECISION AND ORDER GRANTING JAMES AND DEBBIE BILLINGHAM'S MOTION FOR LEAVE TO FILE A LATE PROOF OF CLAIM
The issue before the Court is whether James and Debbie Billingham (the "Claimants") may file a late proof of claim against the debtors beyond the deadline established for filing proofs of claim. Upon consideration of the parties' pleadings and arguments made at the hearing regarding the Claimants' motion for leave to file a late proof of claim, the Court grants the relief requested based upon "excusable neglect."
I. Jurisdiction
The Court has subject matter jurisdiction over this matter under sections 1334(b) and 157(a) of title 28 of the United States Code and under the July 10, 1984 "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court for the Southern District of New York (Ward, Acting C.J.). This is a core proceeding within the meaning of section 157(b) of title 28 of the United States Code.
II. Background
A. The Debtor
On July 21, 2002 and November 8, 2002, WorldCom, Inc. and certain of its direct and indirect subsidiaries (collectively the "Debtor") commenced cases under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). By orders dated July 22, 2002 and November 12, 2002, the Debtor's chapter 11 cases were consolidated for administrative purposes. During the chapter 11 cases, the Debtor operated its businesses and managed its properties as debtor in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
On July 29, 2002, the United States Trustee for the Southern District of New York formed the Official Committee of Unsecured Creditors (the "Committee") of the Debtor.
By order dated October 29, 2002, the Court established January 23, 2003 as the deadline for filing a proof of claim against the Debtor (the "Bar Date"). By order dated October 31, 2003, the Court confirmed the Debtor's Modified Second Amended Joint Plan of Reorganization (the "Plan"). After the Plan's confirmation, the Debtor became MCI, Inc. The Plan became effective on April 20, 2004.
B. The Claimants' Proof of Claim
The Claimants brought a personal injury action in the Common Pleas Court of Montgomery County, Civil Division of the State of Ohio, against the Debtor and a former employee of the Debtor seeking relief jointly and severally for compensatory damages in the amount of $505,000, plus costs and pre-judgment and post-judgment interest. However, the state action was dismissed on August 15, 2002 following notice of the filing of the Debtor's chapter 11 petition. Thereafter, on March 24, 2003, the Claimants filed with the Court a Motion for Relief from Automatic Stay (the "Lift Stay Motion"), seeking relief from the automatic stay to proceed in state court and liquidate their damages. A hearing for the Lift Stay Motion was scheduled for April 15, 2003.
On April 10, 2003, the Claimants filed a Motion to Allow for Leave to File a Proof of Claim Beyond Deadline (the "Late Claim Motion"). At the April 15, 2003 hearing on the Lift Stay Motion, the Court reserved ruling on the Lift Stay Motion until the Late Claim Motion was heard or resolved.
On May 15, 2003, the Debtor filed an objection to the Late Claim Motion, and the Committee filed a Joinder in Support of the Debtor's objection. On May 28, 2003, the Court held a hearing regarding the Late Claim Motion. This memorandum decision and order addresses the Late Claim Motion.
III. Parties' Contentions
The parties' contentions were made prior to the filing of the disclosure statement and plan.
A. The Claimants
The Claimants initially maintained that they were not listed as a creditor of the Debtor; therefore, they were never given notice of the deadline to file a proof of claim. However, the Claimants noted at the May 28, 2003 hearing that according to an affidavit of Bankruptcy Services LLC ("BSL"), the Claimants were listed in the Debtor's schedule of creditors. Further, the Claimants noted that the Debtor sent out notice of the Bar Date to Debbie and James Billingham at the office address of the Claimants' attorney, Katherine L. Billingham (the "Claimants' Attorney"), but it was not sent "in care of" the Claimants' Attorney, nor was the Claimants' Attorney's name referenced at all in the address. The Claimants' Attorney unequivocally states that her office did not receive notice of the Bar Date from the Debtor.
Furthermore, based on Pioneer Investment Servs. Co. v. Brunswick Assoc., 507 U.S. 380 (1993), the Claimants argue that "there are excusable neglect factors here." The Claimants contend that, since they are only beyond the deadline by a few months, no prejudice would come to the Debtor by allowing their proof of claim. On the other hand, the Claimants argue that they would be significantly prejudiced if they were not allowed to file their proof of claim.
B. The Debtor
The Debtor maintains, although no longer disputed by the Claimants, that the Claimants were listed in the schedule of creditors. Furthermore, the Debtor asserts that notice of the Bar Date was sent to the office of the Claimants' Attorney of record at 7985 Washington Woods Drive, Centerville, Ohio 45459, on November 22, 2002 by BSL. Therefore, the Debtor argues that pursuant to the 1983 Advisory Committee Note to Bankruptcy Rule 2002 and Bankruptcy Rule 9006(e), notice of the Bar Date is presumed to have been mailed to the Claimants. Additionally, the Debtor asserts that the Claimants were also notified of the Bar Date because it was published in several publications in December 2002, including the Washington Post, the New York Times, the Wall Street Journal, and the Clarion-Ledger.
The 1983 Advisory Committee Note to Bankruptcy Rule 2002 generally states that the notice requirement is satisfied when the notice is mailed.
Bankruptcy Rule 9006(e) states in pertinent part that "[s]ervice of any paper . . . is complete on mailing."
Furthermore, the Debtor asserts that various of the "excusable neglect" factors cited in Pioneer are applicable here. Specifically, the Debtor states that if it constantly receives late claims, more time and expense will be required and potentially delay the plan process to the detriment of all creditors who timely filed their claims. The Debtor contends that they have sent over one million notice packages to potential creditors for a timely filing of proofs of claim by the Bar Date. If even one percent of the creditors, who received those notices, seek leave to file late claims that could mean as many as 10,000 late claims filed in these cases. This result would impede the proposal of a plan of reorganization.
The Debtor also contends that they rely on the Bar Date to provide a final deadline by which an accurate portrayal of their liabilities may be made for the purpose of formulating and proposing a plan of reorganization that will ultimately lead to the payment of allowed claims. If creditors are consistently permitted, without meeting the standards set forth in Pioneer, to file claims months after the Bar Date, the accuracy of the Debtor's liabilities will be skewed, further complicating and potentially delaying the plan process.
Further, the Debtor asserts that the reason for the Claimants' delay in filing a proof of claim beyond the deadline does not constitute "excusable neglect" under Pioneer; because, the Claimants presumably received notice of the Bar Date since it was mailed to the Claimants' Attorney, and it was published in various publications. In addition, the Debtor contends that the Claimants failed to substantiate their position or describe extenuating circumstances for their delay in filing a proof of claim beyond the deadline, or provide an affidavit supporting their allegations. Finally, the Debtor argues that the state law action was dismissed in August 2002, shortly after, the Debtor commenced these cases, and this suggests that the Claimants' Attorney was on minimum inquiry notice that a bankruptcy case was pending.
IV. Discussion
A. Bar Date
A fundamental purpose of bankruptcy law is to secure, within a limited period, a prompt and effectual administration and settlement of the debtor's estate. In re Best Products Co., 140 B.R. 353, 356 (Bankr. S.D.N.Y. 1992) (citing Katchen v. Landy, 382 U.S. 323, 328 (1966)). In furtherance of this purpose, Bankruptcy Rule 3003(c) mandates that a claimant file a timely proof of claim against a debtor's estate in chapter 11 bankruptcy in order to participate in the debtor's reorganization. In particular, Bankruptcy Rule 3003(c)(3) provides that a proof of claim must be filed by the claimant prior to a bar date established by order of a bankruptcy court.
Such a "bar [date] order in a chapter 11 case serves the important purpose of enabling the parties in interest to ascertain with actual promptness the identity of those making claims against the estate and the general amount of the claims, a necessary step in achieving the goal of successful reorganization." Id. at 357. After the bar date expires, "the claimant cannot participate in the reorganization unless [the claimant] establishes sufficient grounds for the failure to file a proof of claim." Id. Also, upon confirmation of a debtor's reorganization plan, a debtor is discharged from any debt that arose before the date of such confirmation. See 11 U.S.C. § 1141(d).
Before a debtor can obtain a discharge of a claim in bankruptcy, however, the Due Process Clause of the Fifth Amendment dictates that a debtor's creditors receive notice of the debtor's bankruptcy case and applicable bar date so that creditors have an opportunity to make any claims they may have against the debtor's estate. See generally In re Drexel Burnham Lambert Group Inc., 151 B.R. 674, 679 (Bankr. S.D.N.Y. 1993) (noting that "[t]he Fifth . . . Amendment protect[s] against deprivation of `life, liberty or property, without due process of law.' A . . . claim against the [bankruptcy] estate constitutes property within the meaning of the Amendment and cannot be forfeited through proceedings lacking in due process."). In particular, due process requires that "known" creditors be afforded notice reasonably calculated, under all circumstances, to apprise it of the pendency of the bar date. See Mullane v. Cent. Hanover Bank Trust Co., 339 U.S. 306, 314 (1950).
In Tulsa Prof'l Collection Servs., Inc. v. Pope, 485 U.S. 478 (1982), the Supreme Court stated that "mail service is an inexpensive and efficient mechanism that is reasonably calculated to provide actual notice." Id. at 490. "A presumption that proper notice was given arises once a debtor proves that the notice was mailed." In re Agway, Inc., 313 B.R. 31, 39 (Bankr. N.D.N.Y. 2004) (citing In re Bucknum, 951 F.2d 204, 207 (9th Cir. 1991); In re Treister, No. 84 Civ. 3508 (JFK), 1985 WL 2044, at *2 (S.D.N.Y. July 19, 1985)). A presumption of receipt of notice arises when mail is properly (1) addressed, (2) stamped, and (3) deposited in the mail system. In re La Roche Indus., Inc., 307 B.R. 774 (Bankr. D. Del. 2004) (quoting Hagner v. United States, 285 U.S. 427 (1932)).
The Debtor does not dispute that the Claimants are "known" creditors. The Debtor listed the Claimants in the Debtor's schedule of creditors. Therefore, since the Claimants are "known" creditors of the Debtor, the issue then becomes whether actual notice was given to the Claimants as required by the Due Process Clause of the Fifth Amendment.
Here, the Complaint filed by the Claimants against the Debtor in the state action listed "Katherine L. Billingham # 0030972, Attorney for [Claimants], 7985 Washington Woods Dr., Centerville, OH 45459" as the address for the Claimants. However, the affidavit provided by BSL lists the Claimants address as "Debbie and James Billingham, 7985 Washington Woods Dr., Centerville, OH 45459." The Claimants' Attorney states that the address used by the Debtor is not the address of Debbie and James Billingham but is her office address. Further, she "unequivocally" states that her office never received such notice.
The Court finds that the Debtor did not properly address notice of the Bar Date to the Claimants either directly to them or in care of their attorney, because the address used by the Debtor was incorrect for two reasons. First, the address used by the Debtor is not the proper address of the Claimants. Second, although the address used by the Debtor is the office address of the Claimants' Attorney, it did not include the Claimants' Attorney's name in the address, which would have been necessary to identify the party to whom notice of the Bar Date should have been delivered to at such address. The Court acknowledges that the Claimants and the Claimants' Attorney share the same last name, and arguably a letter carrier could have noted the similarity of the last name with that of the Claimant's Attorney and delivered it to the Claimants' Attorney. However, that did not happen, apparently, since the Claimants' Attorney represents that her office did not receive notice of the Bar Date. Accordingly, the Court finds that since actual notice is required to be given to "known" creditors, such as the Claimants, the Debtor's mailing of the Bar Date notice as described above did not provide such notice. As a result, the presumption of mailing or receipt did not arise.
The Debtor argues that even if actual notice was not given to the Claimants, they had publication notice because notice of the Bar Date was included in several publications in December 2002, including the Washington Post, the New York Times, the Wall Street Journal, and the Clarion-Ledger. The Court disagrees with the Debtor's argument because it has been well settled that "due process requires that a debtor's known creditors be afforded actual written notice of the bankruptcy filing and bar date." In re Brunswick Hosp. Ctr., Nos. 892-80487-20, 894-8283-346, 1997 WL 836684, at *3 (Bankr. E.D.N.Y. Sept. 12, 1997) (citing In re Drexel Burnham Lambert Group, Inc., 151 B.R. 674, 680 (Bankr. S.D.N.Y. 1993); Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3d. Cir. 1995); Waterman Steamship Corp. v. Aguiar, 141 B.R. 552, 557 (Bankr. S.D.N.Y. 1992); In re Brooks Fashion Stores, Inc., 124 B.R. 436, 443-44 (Bankr. S.D.N.Y. 1991)). The Court finds, as the court in Brunswick Hosp. Ctr., that "[s]tatutory notice by newspaper publication does not satisfy the minimum due process protections to which known creditors are entitled." Id. (citing Mullane, supra, 339 U.S. at 319-20; In re Allegheny Int'l, Inc., 158 B.R. 356, 359 (Bankr. W.D. Pa. 1993) (notice by publication in national newspapers is insufficient to give actual notice of bankruptcy filing to "known" creditors); In re Grand Union Co., 204 B.R. 864, 872 (Bankr. D. Del.) (published notice of claims bar date notice is inadequate for "known" creditors)).
In addition, the Debtor argues that the Claimants were at a minimum on inquiry notice once the state action was dismissed because of the Debtor's bankruptcy. The Supreme Court in City of New York v. New York, N.H. H.R. Co., 344 U.S. 293 (1953), stated that even though a "known" creditor may have general knowledge of the debtor's reorganization, a "known" creditor still has a right to assume that they will be given actual notice of the Bar Date. Id., at 297. Accordingly, this Court finds that even though the Claimants presumably had notice of the debtor's bankruptcy case, they were under no obligation to inquire for themselves what the bar date was for timely filing proofs of claim.
Although both parties have argued their respective positions under "excusable neglect" consistent with Rule 9006, the Court questions whether "excusable neglect" is the appropriate standard in a situation where a debtor has not satisfied the due process consideration of notice to a "known" creditor in the first instance. It appears to the Court that when a "known" creditor establishes that it actually did not receive notice because the debtor did not mail the bar date notice to the creditor's address as properly reflected in the debtor's books and records, the "excusable neglect" analysis, notwithstanding Rule 9006, may not be the appropriate analysis. Thus, failure to provide actual notice to a "known" creditor, by itself, provides the rationale for permitting that creditor to file a late proof of claim, subject to the debtor's right to establish that some conduct, or lack thereof, on the part of the creditor waived or otherwise estopped the creditor from being granted the relief sought. The Court questions whether a "known" creditor who has not "neglected" to file a proof of claim, as the term is defined in Pioneer, supra, but rather was not provided actual notice of the bar date by the debtor is still required to demonstrate "excusable neglect." Further, even if the "excusable neglect" analysis is implicated, under the circumstances described above, once a "known" creditor establishes that the reason for the delay was a result of the debtor's failure to provide constitutionally mandated notice of the bar date, the burden, arguably, should then shift to the debtor. In any event, as the outcome in the instant matter would be the same whether the "excusable neglect" analysis or a lesser standard were employed, the Court does not reach the issue described herein.
If a creditor fails to file a claim by the bar date, a creditor must resort to Bankruptcy Rule 9006(b)(1). See In re Enron Corp., No. 01-16034, 2003 WL 21756785, at *4 (Bankr. S.D.N.Y. July 30, 2003). Bankruptcy Rule 9006(b)(1) provides that a bankruptcy court in its discretion may deem a late filed proof of claim as timely where a claimant establishes "excusable neglect." The burden is on the claimant to prove that he or she did not timely file the proof of claim because of "excusable neglect." In re Andover Togs, Inc., 231 B.R. 521, 549 (Bankr. S.D.N.Y. 1999).
The seminal case interpreting the "excusable neglect" language of Bankruptcy Rule 9006(b)(1) is Pioneer, supra. In permitting a creditor's late filing under Bankruptcy Rule 9006(b)(1), the Supreme Court explained that Congress, "by empowering the courts to accept late filings `where the failure to act was the result of excusable neglect,' plainly contemplated that courts would be permitted, where appropriate, to accept late filings caused by inadvertence, mistake, or carelessness, as well as by intervening circumstances beyond the party's control." Id. at 388 (quoting, in part, Bankruptcy Rule 9006(b)(1)). The Supreme Court further clarified that whether a claimant's neglect of a deadline is excusable is an equitable determination taking into account all of the relevant circumstances surrounding the claimant's omission. See id. at 395. These equitable considerations include (1) "the danger of prejudice to the debtor," (2) "the length of the delay and its potential impact on judicial proceedings," (3) "the reason for the delay, including whether it was within the actual control of the movant," and (4) "whether the movant acted in good faith." Id.
The relative weight, however, to be accorded to the factors identified in Pioneer requires recognizing that not all factors need to favor the moving party. See In re Keene Corp., 188 B.R. 903, 909 (Bankr. S.D.N.Y. 1995). As one bankruptcy court concluded, "[n]o single circumstance controls, nor is a court to simply proceed down a checklist ticking off traits. Instead, courts are to look for a synergy of several factors that conspire to push the analysis one way or the other." In re 50-Off Stores, Inc., 220 B.R. 897, 901 (Bankr. W.D. Tex. 1998).
With Pioneer's four equitable factors in mind, the Court turns to the facts of this case to determine if the Claimants' failure to file a timely proof of claim was caused by "excusable neglect."
1. Reason For Delay And Whether Delay Was Within The Actual Control Of The Claimants
First, the Court will look to the reason for delay and whether the delay was within the actual control of the Claimants. This Court has previously decided in an unpublished opinion in In re Enron, No. 01-16034, 2003 WL 1889042, at *4 (Bankr. S.D.N.Y. April 8, 2003), that this factor incorporates the sufficiency of notice of the bar date. Id. The Claimants argue that their reason for the delay was that they did not receive notice of the Bar Date. Since, the Court finds that the Claimants were not given actual notice of the Bar Date, as discussed previously, the Claimants' reason for delay was a result of circumstances beyond their control. Therefore, this Pioneer factor weighs heavily in favor of the Claimants.
2. Whether The Claimants Acted In Good Faith
The Claimants' good faith appears to be disputed by the Debtor because they argue that the Claimants have failed to provide an affidavit in support of their allegations. The Court finds there is no indication in the record that the Claimants acted in a manner other than in good faith in filing their proof of claim. Therefore, this Pioneer factor weighs in favor of the Claimants.
3. Danger Of Prejudice To The Debtor
The Debtor essentially argues that allowing the Claimants' late claim would allow for a floodgate to many similar claims. The Debtor states that because of the size and complexity of this chapter 11 case, the Debtor must review and analyze over 34,000 proofs of claim; therefore, if it is constantly receiving late claims, the process will require more time and expense, and potentially, delay the plan process to the detriment of all creditors who timely filed their claims. The Claimants argue that no prejudice would come to the Debtor by allowing their proof of claim. However, significant prejudice would fall upon the Claimants if they were not allowed to file their proof of claim.
The Keene court noted that while Pioneer did not define "prejudice," the term goes beyond concern with harm to the debtor and also considers "the adverse impact that a late claim may have on the judicial administration of the case." Id., 188 B.R. at 910. The Keene court clarified that, subsequent cases have weighed a number of considerations, including (1) "the size of the late claim in relation to the estate," (2) "whether a disclosure statement or plan has been filed or confirmed with knowledge of the existence of the claim," and (3) "the disruptive effect that the late filing would have on a plan close to completion or upon the economic model upon which the plan was formulated and negotiated." Id.
The Court finds that there is no significant prejudice applicable here. Specifically, the Court finds that the Claimants' $505,000 claim is not substantial in relation to the rest of the claims filed against the Debtor's bankruptcy estate. In addition, when the claim was filed on April 11, 2003, no disclosure statement or plan of reorganization had been filed (the Debtor's disclosure statement and plan of reorganization were filed on April 14, 2003), and the claim would not have had a disruptive effect upon the then proposed plan. Furthermore, the circumstances surrounding the Claimants' claim are sufficiently unique — among other things, the address used by the Debtor was incorrect — to counter the Debtor's concerns of possibly opening up the floodgates to other late filed claims. Therefore, the Court finds that this Pioneer factor weighs in favor of the Claimants.
4. Length Of Delay And Its Potential Impact On Judicial Proceedings
The Claimants argue that they filed their proof of claim only two months after the Bar Date. The Debtor maintains that they rely on the Bar Date to provide a final deadline for an accurate portrayal of their liabilities in order to propose a plan of reorganization that will eventually lead to payment of claims under the plan. The Debtor, therefore, asserts that if creditors are consistently permitted, without meeting the standards set in Pioneer, to file claims months after the Bar Date, the accuracy of the Debtor's liabilities will be skewed, further delaying the claims process. The Court finds that since a plan or disclosure statement were not yet filed when the Claimants filed their proofs of claim, allowing the Claimants' proof of claim would have had a minimal impact on the proceedings. Therefore, this Pioneer factor also weighs in favor of the Claimants.
V. Conclusion
Based upon the foregoing, the Court finds that the Claimants have established "excusable neglect" under Rule 9006(b)(1) pursuant to the factors set forth in Pioneer. Thus, the Claimants are permitted to file their late proof of claim.
Therefore for the reasons set forth herein, it is hereby ORDERED, that the Claimants' Motion For Leave to File a Late Proof of Claim to enlarge the time to file the proof of claim to April 11, 2003 is granted; and it is further
ORDERED, that the parties will appear before the Court on January 25, 2005 at 10:00 a.m. for a status conference. The parties are directed to consult with one another regarding any outstanding issues prior to the status conference.