Opinion
Case No. 02 B 02474.
July 21, 2004
MEMORANDUM OPINION
This matter is before the court on the Motion of Hamad Al-Hatmi ("Al-Hatmi") for Relief from Discharge Injunction and to Enlarge Time to File Administrative Expense Claim Request. Al-Hatmi, a personal injury claimant, failed to file an administrative proof of claim by the June 20, 2003 administrative claims bar date. He now seeks entry of an order allowing him to file the claim and deeming it timely based, inter alia, 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 thereafter.
On August 31, 2002, after the filing of the petitions, Al-Hatmi allegedly sustained personal injuries at a Kmart store in Winter Park, Florida, when a Kmart employee knocked several "bars" off a shelf and onto Al-Hatmi's foot. Al-Hatmi retained Morgan, Colling Gilbert, P.A. as his personal injury counsel, and Joseph Shaughnessy, one of the attorneys at that firm, sent a letter dated September 6, 2002 to Kmart's Winter Park store, advising of the representation. On September 27, 2002, Shaughnessy sent another letter (dated September 25, 2002), this time to Edith Smith, a claims examiner at Sedgwick Claims Management Services, Inc., Kmart's third-party administrator for public liability claims. In that letter, Shaughnessy again advised of his firm's retention and also requested certain insurance information and copies of any statements obtained by Kmart from Al-Hatmi.
On or about October 1, 2002, Smith sent Shaughnessy a letter acknowledging his representation of Al-Hatmi and requesting information relating to the incident. In that letter, Smith further stated that she would be handling the file and that any future correspondence should be directed to her attention. Shaughnessy sent a reply on October 8, 2002, advising that he would provide all of Al-Hatmi's medical records when maximum medical improvement was achieved.
On November 22, 2002, Shaughnessy sent Smith a complete summary of Al-Hatmi's medical condition, together with a settlement demand Additional communications ensued, both written and verbal, including letters from Shaughnessy or his "Case Manager," Justin Cordoba, dated January 24 and February 26, 2003, and a letter dated March 20, 2003 responding to a March 19 letter from Smith. These communications related in large part to an automobile accident in which Al-Hatmi was involved sometime after the alleged incident at Kmart's Winter Park store.
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-in-Possession, as modified (the "Plan"). The Plan became effective on May 6, 2003 (the "Effective Date"). Shortly after the Effective Date, Trumbull Services, LLC, the court-approved noticing agent in this case, caused to be served a "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").
Al-Hatmi contends that Shaughnessy did not realize that postpetition personal injury claims might constitute expenses of administration within the purview of the Notice, and he therefore failed to timely file a claim form. Shaughnessy's primary area of practice is plaintiffs' personal injury litigation; he does not practice bankruptcy law. Al-Hatmi further contends that Shaughnessy's failure to appreciate the applicability of the bar date to his client's claim is understandable in light of Kmart's conduct; i.e., Kmart had engaged in settlement negotiations and investigation, through Smith, — all without any mention of the bankruptcy. Indeed, prior to receipt of the Notice, Shaughnessy had not received any document relating to the Chapter 11 case, — not even the Plan or confirmation order.
Kmart, in attempting to refute these contentions, asserts that in addition to the Notice, Shaughnessy was told by Smith of the need to file a claim one week before the Notice was mailed. Smith testified that Shaughnessy called her on May 1, 2003, asking if the claim could be settled, and she "told him that we could not do so at this time, that he would be receiving a packet in the mail that he needed to fill out and return before we can make any offers." (Transcript, at 39) Smith said this was "[t]he standard, I guess, statement that I made to all claimants that were calling in at that time." She later reiterated, "I said that he had to fill out the packet — he would receive a packet. He needed to fill that out and return it, and then we could try to resolve the claim." (Transcript, at 39-40)
On cross-examination, Smith was asked whether she had mentioned that Kmart was in bankruptcy. She replied, "I don't recall if — I told him he had to fill out the form." (Transcript, at 41). As cross-examination continued, Smith's account of her statement to Shaughnessy evolved, so that eventually she was testifying that she had advised him he would be receiving an "administrative expense claim form" and that he had to file it "with the bankruptcy court." (Transcript, at 41-42) Her contemporaneous notes, however, — in closer accord with her initial testimony, — indicate that she merely stated that Kmart could not settle any claims at this time and that Shaughnessy "would be receiving a packet in the mail." (See Kmart Exhibit 1)
Smith had, prior to the May 1st conversation, been considering settlement. Smith explained: "Before we knew we had to send out administrative expense claim forms, we were discussing how we would settle this." (Transcript, at 43). She had received Shaughnessy's March 20, 2003 letter granting an additional 30 days to consider his settlement offer and advising that suit would be filed if no response was received by April 18, 2003. On April 14, 2003, Smith made a note to the file stating, "Cheryl asked me to eval clm and pay as a fx toe. Evaluation — See eval . . . MEDS: $1,202.47 P/S: $2,000.00 FX TOE: $2,500.00 TOTAL: $5,702.47 . . ." The same day, "C. Peters" gave Smith settlement authority of up to $6,000. (Kmart Exhibit 1, and Transcript, at 43). Smith called Shaughnessy that day to communicate the $6,000 figure, but he was out of the office. According to Smith's notes, she left a message explaining that she would be unavailable but that he could call her supervisor.
After the May 1st conversation, Shaughnessy sent a letter to Smith indicating that Al-Hatmi had no option but to proceed with litigation. He filed suit on June 17, 2003 in the Circuit Court for Pinellas County, Florida. Thereafter, Shaughnessy received correspondence dated July 21, 2003 from Kmart's state court counsel, advising that the claim was time-barred and requesting dismissal of the action. Shaughnessy then filed the administrative claim on July 31, 2003. He thereafter sought the assistance of bankruptcy counsel in Chicago, and the instant motion was filed on November 13, 2003.
DISCUSSION
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. 1489, 123 L.Ed.2d 74 (1993), there was a disagreement among the circuits as to the meaning and scope of "excusable neglect." Robb v. Norfolk 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, 523 U.S. 1131, 118 S.Ct. 1824, 140 L.Ed.2d 960 (1998), the defendant's attorney in a criminal case filed an appeal one day late. He had miscalculated the 10-day deadline, believing that weekends and 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 F.3d at 997.
Although Robb involved a motion under Fed.R.Civ.P. 60(b)(1) for relief from a judgment based on allegations of "excusable neglect," the Seventh Circuit has noted that "the tenor of [the Pioneer decision] is that the term bears 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 at 996. 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 "[b]alancing tests naturally produce indeterminacy; focusing on one factor may change the balance, and, in turn, the result." Brown, 133 F.3d at 997.
In this case, attorney Shaughnessy acknowledges that he received the Notice. He contends, however, that because the Notice did not refer to personal injury claims, and because Kmart had engaged in settlement negotiations and investigation, — all without any mention of the bankruptcy, — he did not realize that the Notice applied to Al-Hatmi's claim.
The Notice did not define "Administrative Claims;" it merely 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 actually included in the package was contained not in the Notice itself, but in the instructions on the back of the claim form, and the only mention of personal injury claims was in a small font check-box on that form.
The affidavit of Marc V. Orfitelli, a Case Analyst at Trumbull, recites that the Debtors served the Administrative Bar Date Notice on May 9, 2003 and the same notice, together with an Administrative Expense Claim Request Form, on May 19, 2003.
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, 88 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 Shaughnessy might have discovered the " Reading exception" had he thoroughly researched the case law under § 503(b) and its predecessor provisions, his failure to do so is understandable. Shaughnessy is a personal injury lawyer, — not a bankruptcy attorney, — and the Notice transmitted by Debtors merely referred to "Administrative Claims." Again, the Notice did not mention personal injury claims, and it did not set forth a definition of "Administrative Claims;" rather, it referred to the definitions in the Plan and Confirmation Order, neither of which were served with the Notice. Even if Shaughnessy ultimately received or obtained these documents and read the definition in the Plan, or if he went on to read the definition contained on the back of the claim form itself, those definitions would not have alerted him to the fact that personal injury claims might be considered "Administrative Claims." The Plan's definition merely contains language similar to the language of § 503(b), including the "actual, necessary costs and expenses" of "preserving" the estates.
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 as Administrative Claims pursuant to a Final Order of the Bankruptcy Court under section 546(c)(2)(A) of the Bankruptcy Code.
As for Kmart's further contention concerning the purported "notice" given by Edith Smith, the Court finds not credible Smith's statement on cross-examination that she told Shaughnessy and others that they would be receiving an "administrative expense claim form" which had to be filed "with the bankruptcy court." The Court finds that Smith merely told Shaughnessy he would be receiving a packet in the mail and that she could not make any offers at that time. By no stretch of the imagination did this constitute notice of the Administrative Bar Date. Nor did it even constitute notice of the need to file a claim in the bankruptcy case (whether by the bar date or otherwise). It is not at all surprising that Shaughnessy would fail to recognize 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," together with "Administrative Expense Claim Request Form," as the "packet" to which Smith had referred.
Again, under all the circumstances, and in light of Kmart's conduct, — over a period exceeding six months, — of negotiation and investigation of the claim without mention of the bankruptcy, Shaughnessy's mistaken belief that Al-Hatmi's personal injury claim was not subject to the Administrative Bar Date is understandable. In addition, any delay resulting from Al-Hatmi's failure to timely file the claim is minimal and nonprejudicial. On July 30, 2003, promptly after Shaughnessy learned of the mistake, he sent the claim form to Trumbull. The form was received on July 31, 2003. Shaughnessy then undertook efforts to retain bankruptcy counsel in Chicago to prepare and present this motion, which was filed on November 13, 2003. Kmart was not prejudiced by these modest delays.
In light of the claimant's (and Shaughnessy's) obvious good faith, the lack of prejudice to the Debtors, the modest delay, and the understandable nature of Shaughnessy's mistake, forfeiture of any claim, regardless of its merits, would be an excessive sanction. In 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 will grant Al-Hatmi's Motion for Relief from Discharge Injunction and to Enlarge Time to File Administrative Expense Claim Request, to the extent that it seeks an order deeming his administrative claim as timely. The Court will deny without prejudice his request for relief from the discharge injunction but grant his alternative request to participate in the administrative claims resolution procedures established by prior order of this Court. This opinion constitutes the Court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. A separate order will be entered pursuant to Bankruptcy Rule 9021.