Opinion
Case No. 02 B 02474
January 7, 2004
MEMORANDUM OPINION
This matter is before the court on the Motion of Johnnie Brous ("Brous") for Enlargement of Time Pursuant to F.R.Bankr.P. 9006(b) to Permit the Filing of Her Administrative Proof of Claim. Brous, a personal injury claimant, failed to file an administrative proof of claim by the June 20, 2003 bar date. She now seeks entry of an order allowing her to file her 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 after the filing of the petitions.
On March 4, 2003, Johnnie Brous allegedly sustained personal injuries at a Kmart store in Bensalem, Pennsylvania. She retained Howard H. Soffer as her personal injury counsel, and Mr. Soffer sent a letter to Kmart on March 20, 2003, advising of the representation and stating that all future communications should be made through his office.
Approximately one month later, 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").
Sometime thereafter, Brous 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").
Brous did not understand the Notice and did not realize that it applied to her postpetition personal injury claim. Moreover, at the time she received the Notice, she was preoccupied with numerous personal responsibilities, including caring for her disabled mother and her two children during the day and working at a supermarket in the evenings. As a result of these responsibilities and the fact that Brous did not realize the time-sensitive nature of the Notice as it applied to her claim, she did not deliver the Notice to her counsel until Friday, June 27, 2003.
When Brous delivered the Notice to Mr. Soffer, he reviewed it, but there was nothing in the Notice to indicate that personal injury claims were subject to the Administrative Bar Date. Soffer did not learn that the bar date applied to Brous' claim until July 2, 2003, when his paralegal, Christina Chaffin, contacted Trumbull Services, the court-approved noticing agent in this case, Trumbull advised Ms. Chaffin that Brous' claim was indeed subject to the administrative deadline, and Soffer thereupon immediately sent the claim form by overnight mail to the court and to Trumbull. He also promptly contacted Debtors' counsel and learned that, in addition to the claim form, a motion would have to be filed with this court seeking relief from the deadline. Local bankruptcy counsel was then retained to prepare and present the instant motion, which was filed on July 24, 2003.
DISCUSSION
Brous contends, inter alia, that her 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. 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, 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, although Brous timely received the Notice, she did not deliver it to attorney Soffer until June 27, 2003, one week after the bar date. He reviewed the Notice upon receipt, but again, there was nothing in the Notice to indicate that the bar date applied to personal injury claims, He did not realize that the deadline applied to Brous' claim until July 2, 2003, when his paralegal contacted Trumbull.
It is understandable that Soffer, a non-bankruptcy practitioner, did not immediately apprehend the applicability of the Notice to Brous' claim, — and even more so that Brous, a lay person, did not perceive its significance. The Notice itself 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 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 file 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, 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.
As indicated above, the Notice in this case did not mention personal injury claims or define "Administrative Claims;" it simply referred, inter alia, to the definition contained in the Plan, However, the Plan's definition merely contains language similar to the language of § 503(b), including the "actual, necessary costs and expenses, incurred on or after the Petition Date, of preserving the Estates." Again, it is understandable that Soffer, a nonbankruptcy attorney, and even more so that Brous, a lay person, would not immediately apprehend the significance of the Notice. Under all the circumstances, including the lack of prejudice to the Debtors and the other factors discussed below, this court would find the neglect here to be excusable even assuming that notice to Brous was adequate in this case.
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,
Brous contends, however, that the Notice should have gone directly to her counsel, Mr. Soffer. As indicated above, Soffer had notified Kmart of his representation by letter dated March 20, 2003, directing Kmart to send all future communications to him.
Indeed, Softer might have filed the claim on time had he received the Notice directly from Kmart (inasmuch as it only took him five days to discover the applicability of the deadline and file the claim, once he received the Notice from Brous).
Kmart responds to this contention by asserting that Brous failed to file a request, as contemplated by Bankruptcy Rule 2002(g)(1), designating the address to which notices should be sent, and that her counsel failed to file an appearance pursuant to Rule 9010(b). Rule 2002(g) applies, however, only to those notices that are required by Rule 2002 to be mailed to "creditor[s]." That rule is inapplicable in this instance, because, inter alia, under § 101(10) of the Bankruptcy Code, a "creditor" is an entity that holds (with exceptions not relevant here) a claim that arose prepetition, Brous docs not hold such a claim. Kmart understandably omits from its discussion any reference to Rule 2002(g)(2), which makes it even more clear that the rule does not apply to administrative claimants. Rule 2002(g)(2) provides that if a creditor fails to file a request under 2002(g)(1), "the notices shall be mailed to the address shown on the list of creditors or schedule of liabilities, whichever is filed later." Clearly, a postpetition claimant will not be included on the Debtors' list of creditors or schedule of liabilities. Kmart's reliance on Rule 2002(g) is misplaced.
The Debtors themselves have taken a similar position in the context of Bankruptcy Rule 3003, which provides, inter alia, that the schedule of liabilities constitutes prima facie evidence of the validity and amount of the claims of "creditors," unless the claims are scheduled as disputed, contingent or unliquidated. Debtors have asserted (in their objection to the late-tiled claim of Sonela Novakov) that
Rule 3003 docs not apply to postpetition claimants. Rule 3003 applies to "creditors." Creditors are defined in 11 U.S.C. § 101(10) as being holders of claims that are afforded prepetition status. Novakov's claim allegedly arose postpetition. As such, she is not included in the definition of "creditor."
See Kmart's Omnibus Objection to Motions by Claimants for Leave to File Late Proofs of Claim (Docket No. 18824), at 13.
Kmart's reliance on Rule 9010(b) is also unfounded. That rule merely provides that an attorney appearing for a party in a bankruptcy case must file a notice of appearance (unless his appearance is otherwise noted in the record). An attorney for an administrative claimant in a Chapter 11 case, however, may not even be aware of the bankruptcy case until he receives a notice of administrative bar date. Moreover, Suffer sent a letter directing that all communications concerning Brous' claim go through his office. Outside of bankruptcy, opposing counsel would ordinarily have to comply with such a directive. Unless there is a provision in the Bankruptcy Code or Rules requiring otherwise, it would seem that Kmart, as a debtor operating under Chapter 11, should be held to the same standard. See, e.g., 28 U.S.C. § 959(b) (requiring a debtor in possession to manage and operate the property in its possession according to the requirements of the valid laws of the state in which such property is situated). The fact that Kmart's counsel sent the Notice to Brous rather than Soffer is, at a minimum, a factor weighing against Kmart in the excusable neglect inquiry.
It may be that, as to prepetition creditors, Rule 2002(g) constitutes such a contrary provision. But see, e.g., In re Grand Union Co., 204 B.R. 864 (Bankr. D.Del. 1997).
Applying the remaining Pioneer factors, it is clear that any delay resulting from the failure to timely file the claim is minimal and nonprejudicial. When the mistake was discovered, on July 2, 2003, attorney Soffer immediately filed Brous' claim and promptly retained local bankruptcy counsel to prepare and present the instant motion. The claim was filed less than two weeks after the Administrative Bar Date, and the motion was filed on July 24, 2003, only three weeks after discovery of the mistake. 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.
Clearly, the administrative claim review and objection process is far from complete. 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 her counsel's) obvious good faith, the lack of prejudice to the Debtors, the minimal delay, and the understandable nature of the mistake, it would appear that forfeiture of any claim, regardless of its merits, would be an excessive sanction. In Brown, discussed above, the court regarded dismissal of the late-tiled 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.
In light of the court's disposition, it is unnecessary to consider Brous' invocation of the informal proof of claim doctrine.
CONCLUSION
For all of the reasons set forth above, the court grants the Motion of Johnnie Brous for Enlargement of Time Pursuant to F.R.Bankr.P. 9006(b) to Permit the Filing of Her Administrative Proof of Claim. 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.