Opinion
Case No. 02 B 02474.
December 22, 2004
MEMORANDUM OPINION
This matter is before the court on the Motion of Jeannette K. Moon-Pease ("Moon-Pease") for Relief from Discharge Injunction and to Enlarge Time to File Administrative Expense Claim Request. Moon-Pease, 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 deeming her late-filed claim to be timely and permitting her to participate in the postpetition personal injury claim resolution procedures previously established in this case.
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 November 30, 2002, after the filing of the petitions, Moon-Pease allegedly sustained personal injuries at a Kmart store in Ocala, Florida. She subsequently retained the firm of Morgan, Colling Gilbert to represent her in connection with her claim for injuries. On January 9, 2003, Clement L. Hyland ("Hyland"), of the Morgan Colling firm, sent a letter to Kmart advising of the representation and requesting that Kmart provide certain insurance information. Hyland received a response, dated January 17, 2003, from Stacy Deon, a claims examiner at the Kmart Customer Incident Center. Deon acknowledged Hyland's representation, advised that Kmart was self-insured, stated that she would be handling the file, and directed that any further correspondence be sent to her attention. She also enclosed a Statement of Injured form for completion by Moon-Pease and requested copies of hospital, ambulance, and other medical bills.
On March 12, 2003, Hyland sent Deon a comprehensive demand package, describing the incident, detailing the injuries and treatment, and proposing a settlement amount of $150,000. The package was supplemented by letter dated April 11, 2003, enclosing additional medical bills and records.
Shortly 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-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").
Hyland avers in his affidavits, which are attached to the Motion and the reply, that he never received the bar date notice. He states that the first time he became aware of the need to file an administrative claim form was on July 2, 2003, during a telephone conversation with Deon in which she informed him of the June 20, 2003 deadline.
Kmart asserts, however, that the Notice was mailed to Moon-Pease, in care of Hyland, at the Morgan Colling firm. Kmart submitted as an exhibit to its objection the affidavit of Mare V. Orfitelli, a Case Analyst at Trumbull, stating that Trumbull sent the Notice on May 9, 2003 to "MOON-PEASE, PATRICIA C/O MORGAN, COLLING GILBERT CLEMENT L. HYLAND P.O. BOX 4979 ORLANDO, FL 32802." Orfitelli avers that the Notice was sent again on May 19, 2003, together with an administrative claim form, to the same address. According to Orfitelli, neither mailing was returned as undeliverable. He states that "Trumbull sent . . . the mailings via first-class mail service" and that the "mailing labels . . . had the exact names and addresses" as set forth in his affidavit. Finally, Orfitelli avers that the facts set forth in his affidavit are documented in Trumbull's records, which are maintained in the ordinary course of its business and which he personally reviewed.
Hyland, in denying receipt of the Notice, avers that it is his practice to have all mail date-stamped upon receipt and placed into the file. He states that he reviewed the Moon-Pease file after his July 2, 2003 conversation with Deon and found no copy of the Notice therein. He transmitted a completed claim form to Trumbull on or about July 8, 2003, and it was stamped by Trumbull as received on July 14, 2003. Moon-Pease thereafter retained bankruptcy counsel to prosecute the instant Motion, which was filed on November 13, 2003. The motion was continued from time to time and finally heard at the court's March 30, 2003 omnibus late claims hearing.
At the hearing, Moon-Pease's bankruptcy counsel challenged the competency of the Orfitelli affidavit and contended that the claim should be deemed timely for lack of notice. She further contended, in the alternative, that the filing should be allowed based on grounds of excusable neglect.
Moon-Pease's bankruptcy counsel essentially echoed and claborated upon the objection made, during argument on the first motion heard at the March 30 omnibus hearing, by counsel for another personal injury claimant. The other claimant's counsel had contended, inter alia, that Orfitelli's unqualified statement that Trumbull mailed the Notice was not accurate, because Trumbull had engaged a subcontractor to do the actual mailing.
DISCUSSION
A fundamental requirement of due process is "notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950) (citations omitted). Accordingly, unless a creditor is given reasonable notice of the bankruptcy case and the relevant bar dates, his claim cannot be constitutionally discharged. In re O'Shaughnessy, 252 B.R. 722, 729 (Bankr. N.D. Ill. 2000) (citations omitted); see also Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3rd Cir. 1995), cert. denied, 517 U.S. 1137, 116 S.Ct. 1424, 134 L.Ed.2d 548 (1996).
The court reviews the totality of circumstances to determine whether reasonable notice was given. O'Shaugnessy, 252 B.R., at 730. The court should consider, among other things, whether any inadequacies in the notice prejudiced the creditor and whether notice is given in enough time to afford a creditor sufficient opportunity to respond to "the impending deprivation of its rights." O'Shaugnessy, 252 B.R., at 730 ( citing In re Walker, 149 B.R. 511, 514 (Bankr. N.D. Ill. 1992)).
The Supreme Court has "repeatedly recognized that mail service is an inexpensive and efficient mechanism that is reasonably calculated to provide actual notice." Tulsa Professional Collection Services, Inc. v. Pope, 485 U.S. 478, 490, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988). Mail properly addressed, stamped, and deposited in the mail system is presumed to have reached its destination in the usual time and to have actually been received by the party to whom it was addressed. See, e.g., In re Bucknum, 951 F.2d 204, 207 (9th Cir. 1991); Hagner v. U.S., 285 U.S. 427, 430, 52 S.Ct. 417, 76 L.Ed. 861 (1932).
Kmart claims the benefit of this presumption based on the Orfitelli affidavit. Kmart contends that although the mailing label listed Moon-Pease as "Patricia" rather than "Jeannette," the presumption should nonetheless arise, since Hyland's name and address were correct, and the Notice was sent in care of Hyland. According to Kmart, the presumption would at most be weakened in this situation, and the presumption cannot be rebutted by the simple denial of receipt set forth in Hyland's affidavit.
It is true that while a simple denial of receipt may create a question of fact, it does not rebut the presumption. See In re Longardner Assoc., Inc., 855 F.2d 455, 459 (7th Cir. 1988), cert. denied, 489 U.S. 1015, 109 S.Ct. 1130, 103 L.Ed.2d 191 (1989); In re Pettibone Corp., 123 B.R. 304, 310 (Bankr. N.D.Ill. 1990); see also In re Ms. Interpret, 222 B.R. 409, 413 (Bankr. S.D.N.Y. 1998) ("a party must do more than merely assert that it did not receive the mailing; its testimony or affidavit of non-receipt is insufficient, standing alone, to rebut the presumption").
The court, however, is not inclined to indulge Kmart the benefit of a presumption in this case. While the court agrees with Kmart that use of the name "Patricia" in the mailing label would at most weaken, and not preclude, a presumption in this instance, Kmart's submissions are deficient in a more fundamental respect.
As indicated above, Moon-Pease's bankruptcy counsel echoed the objection made by the first claimant at the omnibus hearing, i.e., that the Trumbull affidavits are not competent because they lack the requisite personal knowledge. Kmart's counsel responded, in part, by referring to his argument on the first claimant's motion, which was a motion to alter or amend judgment under Rule 59(e). In that argument, he contended that the competency objection was based on a mere "technicality," i.e., the role of Bowne of Cleveland, a subcontractor that (as characterized by Kmart) "actually physically stuffs [the] envelopes" for Trumbull. (Transcript, at 16) He further contended that Trumbull's engagement of a subcontractor had, in any event, been disclosed at a hearing held on December 15, 2003 on the late claim motion of Linda and Joseph Joy (and could not, therefore, be raised as newly discovered or previously unavailable evidence on a Rule 59(e) motion). Finally, he contended (and reiterated in his argument on the Moon-Pease motion) that "[t]he law . . . does not require the service agent to . . . submit a declaration from a person who actually stuffed the envelopes. All that is required is testimony of the business practice by which the mailing was conducted." (Transcript, at 17).
It is true that if Trumbull had done the actual mailing, an affidavit from the specific employee who deposited the envelopes in the mail would not be necessary to establish the presumption; an affidavit from an appropriate employee with knowledge of the company's usual and customary mailing practices and procedures would suffice. Here, however, the mailing was accomplished by an entirely different organization, operating from its own, entirely separate, business premises in another part of the country. Under these circumstances, the Trumbull affidavits lack the requisite personal knowledge.
Indeed, testimony given by Wendy Cappola, Trumbull's director of operations, at the Joy hearing in December, 2003 makes this clear. Prior to that hearing, there had been certain discrepancies and ambiguities concerning the dates of service of the Notice, as provided in various Trumbull affidavits and certificates of service. For example, certain affidavits stated that the Notices and claim forms were mailed on May 15, 2003, while others stated that they were mailed on May 19, 2003. According to Cappola's testimony, the inconsistencies resulted from the fact that the dates in Trumbull's database were, at least initially, incorrect. She explained that the Notices were originally intended by Trumbull to be mailed on May 15, but because there were so many addressees, it took the subcontractor a few days to get the materials ready. As a result, the mailing did not actually go out until May 19. It was not until after Trumbull contacted Bowne and confirmed that the mailing actually took place on May 19, that Trumbull corrected the information in its system. Cappola testified: "Once we discovered that the system information was incorrect, we updated our system to reflect the correct dates." (December 15, 2003 transcript, at 20).
Kmart's counsel, in arguing the Moon-Pease motion, invited the court to review the transcript of the Joy hearing. (Transcript, at 150) The court has reviewed that transcript and summarizes the relevant portions below.
This testimony underscores the reason for the personal knowledge requirement and demonstrates that it is no mere "technicality." Moreover, Kmart, by implying that this "technical" requirement can be overlooked, is in essence advocating a double standard for the parties' affidavits in this case. While Kmart suggests that the presumption arises notwithstanding a technical defect in its own affidavits, it presses the insufficiency of the claimant's affidavit to rebut the presumption.
Finally, Kmart's attempt to downplay Bowne's role as that of a mere "envelope stuffer" is contrary to the testimony given by Wendy Cappola at the Joy hearing, as well as her affidavit filed several days prior thereto. Cappola refers to Bowne as the "third party print shop that handled the mailing" and explains that Trumbull provided Bowne the requirements for the mailing, including the name and address file to be used therefor and the documents to be served. Indeed, it has become clear through subsequent affidavits filed in this case with regard to other late-filed claims that Bowne itself did not mail the notice either, but further subcontracted the mailing to yet another entity, Northwest Mailing Services in Chicago.
Accordingly, the court declines to indulge Kmart the benefit of a presumption in this case and instead weighs the evidence presented, without consideration of any presumption, to determine whether the Notice was actually received by Moon-Pease's counsel. Under all the circumstances, including those recited above and the lack of any information regarding the return address used or the process for tracking returned mail, the court finds that the bar date notices allegedly mailed by Trumbull were not received by Hyland. Hyland did not become aware of the bar date until claims examiner Deon informed him of the deadline in a telephone conversation on July 2, 2003, and he acted promptly thereafter in filing a claim on Moon-Pease's behalf.
Moreover, even if the court were to assume that Hyland received the Notice, the court would nonetheless deem the claim timely on excusable neglect grounds. 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.
Here, Moon-Pease notes that the Notice did not identify personal injury claims as administrative expenses, and she urges that Hyland was led in any event to believe that his client's personal injury claim was being processed independently of the bankruptcy. Hyland was under this impression because of the communications between the parties and Kmart's course of conduct, i.e., the ongoing negotiations with claims examiner Deon as well as Deon's statement that she would be handling the file and that all correspondence should be directed to her attention. Moon-Pease argues that under these circumstances, any failure of Hyland, a nonbankruptcy attorney, to apprehend the applicable bar date and timely file the claim would be understandable.
The court notes, first, that 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.
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.
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.
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 XT 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. 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. 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).
Again, Hyland is a personal injury lawyer, — not a bankruptcy attorney. In light of his ongoing communications with claims examiner Deon and his justifiable impression that she was processing his claim, any failure to apprehend the applicable bar date and timely file the claim would be understandable and excusable, particularly since the delay was not unreasonable in the context of this case and is nonprejudicial in any event. As indicated above, Hyland did not become aware of the applicability of the bar date until July 2, 2003. He promptly transmitted the claim to Trumbull on or about July 8, and it was stamped as received on July 14, 2003. Moon-Pease ultimately retained bankruptcy counsel who filed this motion on November 13, 2003.
This delay has not prejudiced Kmart, because, inter alia, Kmart is still involved in the process of reviewing, reconciling, and litigating postpetition personal injury claims. Indeed, Kmart sought and obtained an extension of the claims objection deadline to February 2, 2004, i.e., almost three months beyond the date that Moon-Pease's motion was filed. Moreover, under the procedures established in this case for the resolution of postpetition personal injury claims (the "Postpetition PI Procedures"), the questionnaires to be submitted by claimants were not even due until February 15, 2004 (or forty-five days from the date mailed, if the questionnaire was not served by January 1, 2004), and Kmart's responses were not due until ninety days after receipt of the questionnaires. The claimants then may take up to ninety additional days to serve their replies. Even that does not end the litigation process, because where no agreements are reached, the claimants may obtain relief from the plan injunction to litigate their claims in nonbankruptcy fora. Clearly, the claims process for postpetition personal injuries is far from complete.
Moon-Pease submitted her completed questionnaire on or about March 4, 2003, to avoid any additional delay in the event of a favorable ruling on this Motion.
The court notes that scores of agreed orders have been entered over the past several months lifting the plan injunction to allow personal injury actions to proceed as to claimants who have exhausted the Postpetition PI Procedures or the similar procedures established earlier in this case for prepetition personal injury claims.
Kmart contends, inter alia, that if multiple late administrative claims are deemed timely filed, the value of Kmart's stock might be affected, thereby impairing the stock distributions made to prepetition creditors. However, allowing the late filing of this claim will not open the proverbial floodgates, because as time goes by (and delay in the filing of claimants' motions therefore increases), the likelihood of a favorable excusable neglect determination diminishes. Moreover, it must be remembered that each inquiry is fact-intensive and equitable in nature, and "focusing on one factor may change the balance, and, in turn, the result." Brown, 133 F.3d at 997.
In light of the good faith exhibited by claimant and counsel and the minimal (if any) prejudice to the Debtors resulting from the delay in this case, forfeiture of any claim, regardless of its merits, would 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, any neglect was excusable.
CONCLUSION
For all of the reasons set forth above, the court grants the motion of Jeannette K. Moon-Pease for an order deeming her late-filed administrative claim to be timely and permitting her to participate in the postpetition personal injury claim resolution procedures previously established in this case. 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.