Opinion
Case No. 02 B 02474.
August 11, 2004
MEMORANDUM OPINION
This matter is before the court on the Motion of Jack Thomas ("Thomas") for Leave to File a Late Filed Administrative Expense Claim Instanter. Thomas, 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 May 28, 2002, after the filing of the petitions, Thomas allegedly sustained personal injuries at a Kmart store in Willowbrook, Illinois. The next day, Jon Benner, a claims adjuster at the Kmart Customer Incident Center, sent Thomas a letter indicating that Kmart was investigating the matter. Thomas thereafter retained Ronald Kalish, of the firm Steinberg, Polacek Goodman, as his personal injury counsel. On November 11, 2002, Kalish sent a Notice of Attorney's Lien to Benner, and Benner acknowledged Kalish's representation by letter dated November 19, 2002, which also requested medical bills and reports and directed that any future correspondence be sent to Benner's attention. Kalish responded on December 23, 2002, advising that he would provide Benner copies of all medical records when Thomas concluded his treatment.
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").
Kalish acknowledges receipt of the Notice, and according to his affidavit appended to the Motion, he thereafter placed a call to Kmart's bankruptcy counsel to determine whether Thomas had an administrative expense claim subject to the bar date. He was directed to Trumbull's website for further information. He also left a voicemail message for Benner. Although Kalish avers that Benner did not return the call, Benner states in an affidavit attached to Kmart's objection that he received Kalish's call at about 5:30 p.m. on June 19, 2003 and left Kalish a return message on June 20, 2003.
According to the affidavit of Mare Orfitelli, a case analyst at Trumbull, the Notice was mailed to the Steinberg firm on May 9, 2003 and again on May 19 (this time with an administrative expense claim request form).
Kalish reviewed the Administrative Bar Date Notice, the Administrative Expense Claim Request Form, and the instructions for preparation of same. Although the claim form contained a small font check-box for "personal injury/wrongful death," he did not believe it applied to unliquidated claims; the form indicated that supporting documents should be attached, such as, inter alia, court judgments, promissory notes, or evidence of security interests. Since none of the categories listed on the form applied to Thomas' claim, Kalish concluded that Thomas did not have an administrative expense claim within the purview of the Notice.
In light of the Court's disposition (discussed below), it need not consider either Kalish's further averment that he spoke to a gentleman at Trumbull, who agreed with Kalish's conclusion that Thomas' claim did not constitute an administrative expense, or the affidavit of Carrie Kagan, Trumbull's Case Administration Manager, submitted in opposition thereto.
In early September, 2003, Kalish left a voicemail message for Benner advising that he would be sending Benner a partial compilation of Thomas' medical records. On September 15, 2003, before Kalish had sent the records, he received a letter from Benner indicating that Thomas' claim was barred for failure to file the claim form by the bar date. Kalish then placed a call to Benner, who referred him to Michael Collins, Kmart's supervisor of public liability. Collins, in turn, directed Kalish to the Trumbull website and also said that he would investigate whether anything could be done for Thomas.
Kalish then began looking for a bankruptcy practitioner to prepare a motion for leave to file the late claim. He placed calls to two bankruptcy attorneys in Chicago, but neither call was returned. On November 21, 2003, in an effort to determine how to proceed in this matter, Kalish attended a bankruptcy seminar in Chicago. Another attendee, who had filed a late claim motion in this case and was awaiting a ruling, suggested that he check the Court's website. Kalish did so and located Kevin Keating, bankruptcy counsel for Gladys Sewald, an administrative claimant whose late claim motion had been granted on November 20, 2003.
Keating was thereupon retained and filed the instant Motion on December 18, 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 Kalish acknowledges receipt of the Notice. However, while he noted that the bar date set forth therein applied to "Administrative Claims," he mistakenly concluded that unliquidated personal injury claims did not constitute expenses of administration. 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. Although Kalish reviewed the form and noticed the check-box, he believed that it did not apply to an unliquidated claim like Thomas', because the form called for supporting documentation such as "court judgments."
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 Kalish 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. Kalish 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;" rather, it referred to the definitions in the Plan and Confirmation Order, neither of which were served with the Notice. Even if Kalish ultimately received or obtained a copy of the Plan and read the definition contained therein, that definition would not have indicated to him that unliquidated personal injury claims were included in "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."
Indeed, prior to the Notice, Kalish had not been served with any documents in the bankruptcy case, — not even the disclosure statement or the proposed plan.
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.
Under these circumstances, Kalish's mistaken belief that Thomas' personal injury claim was not subject to the Administrative Bar Date is understandable. In addition, any delay resulting from Kalish's failure to timely file the claim is minimal and nonprejudicial. Kalish began looking for bankruptcy counsel promptly after learning of his mistake. When he initially had difficulty securing bankruptcy assistance, he attended a seminar, ultimately resulting in the retention of experienced bankruptcy counsel, who filed this Motion less than four weeks after retention.
In light of the claimant's (and Kalish's) obvious good faith, the lack of prejudice to the Debtors, the modest delay, and the understandable nature of Kalish'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 Thomas' Motion for Leave to File a Late Filed Administrative Expense Claim Instanter. 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.