Opinion
Case No. 02 B 02474.
November 23, 2004
MEMORANDUM OPINION
This matter is before the court on the Motion of Richard Hoyenga ("Hoyenga") for Entry of Order Granting Leave to File Administrative Expense Claim and to Deem Said Claim Timely Filed. Hoyenga failed to file an administrative proof of claim by the June 20, 2003 bar date. He contends, inter alia, that the late filing should be allowed on excusable neglect grounds.
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 January 19, 2003, after the filing of the petitions, Hoyenga allegedly sustained personal injuries at a Kmart store in Redlands, California. He thereafter retained Florentino Garza to represent him in connection with his claim for injuries. Garza filed an action on Hoyenga's behalf in the San Bernardino Superior Court in February, 2003. Kmart filed its answer, together with affirmative defenses, on or about April 11, 2003.
On 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").
Garza acknowledges that he received the Notice, together with an administrative expense claim form and instructions, in late May, 2003. Garza never received a copy of the Plan or Disclosure Statement.
Garza reviewed the Notice and filing instructions and concluded that the bar date did not apply to Hoyenga's claim, because, inter alia, the personal injury claim (unlike claims of trade vendors and other providers of goods and services) did not appear to constitute a "necessary" cost of administration.
Garza first became aware of the applicability of the Administrative Bar Date when he received an August 4, 2003 letter from Bridget Abram, a claims examiner at the Kmart Customer Incident Center. Abram advised in the letter that Hoyenga's claim was barred for failure to file the claim form by the June 20, 2003 deadline. Garza wrote to Abram on August 22, 2003 seeking an explanation and asserting that Kmart had clear notice of the claim prior to the bar date by virtue of the complaint filed in February, 2003. Garza thereafter received a letter, dated September 11, 2003, from Kmart's state court personal injury counsel, explaining that pursuant to the Plan and confirmation order, all post-petition, pre-emergence claims were to be filed by the June 20, 2003 deadline, and advising of their intent to seek dismissal of the state court action.
Garza immediately attempted to contact bankruptcy counsel and was referred numerous times before he finally spoke with counsel at Gould Ratner, who were then retained to prosecute this motion. The motion was filed on November 4, 2003. The claim that Hoyenga seeks leave to file is appended thereto as Exhibit 1.
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 Garza acknowledges that he was notified of the Administrative Bar Date. However, he mistakenly concluded that Hoyenga's postpetition personal injury claim did not constitute an expense 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. It did not mention personal injury claims. 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. 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 Garza 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. Garza is 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 Garza ultimately received or obtained a copy of the Plan and read the definition contained therein, that definition would not have indicated to him that postpetition 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, Garza was never served with the Plan or Disclosure Statement 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.
The definition contained in the instruction sheet accompanying the claim form likewise described "Administrative Expense Claim" as a "right to payment constituting a cost or expense of administration of any of the Reorganization Cases . . . allowed under sections 503(b) and 507(a)(1) of the Bankruptcy Code, including, without limitation, . . . any actual and necessary costs and expenses of operating one or more of the Debtors' businesses. . . ."
Under these circumstances, Garza's mistaken belief that Hoyenga's personal injury claim was not subject to the Administrative Bar Date is understandable. In addition, the delay resulting from Garza'a failure to timely file the claim was not unreasonable in the context of this case and is nonprejudicial in any event. As indicated above, Garza did not learn until August 4, 2003 of Kmart's position that the claim was barred. After seeking clarification, Garza received the September 11 letter from Kmart's state court personal injury counsel referencing the Plan and confirmation order. Garza thereupon immediately sought bankruptcy assistance and ultimately located Gould Ratner, who filed the instant motion on November 4, 2003.
Though not necessary to this decision, the Court notes that Garza's delay is even more understandable in view of the tragic events occurring around the time of the bar date in this case, including the death of his sister on June 4, 2003.
The Court agrees with Hoyenga's contention that his 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., three months beyond the filing of Hoyenga's motion on November 4. 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, 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.
Or forty-five days from the date mailed, if the questionnaire was not served by January 1, 2004.
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 carlier 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 this regard, the Court notes that while the delay here was longer than in In re Kmart Corp. (Appeal of Wilhemina Simmons) 381 F.3d 709 (7th Cir. 2004), there are critical distinctions which change the balance and require a different result. Not the least of these is the fact that Simmons involved a prepetition personal injury claim, which was automatically stayed under § 362 and clearly subject to the bankruptcy proceedings; no uncertainties as to the meaning of the term "administrative claim" or other issues concerning the scope of the Court's bar date order were implicated.
In light of the claimant's (and Garza's) obvious good faith, the minimal (if any) prejudice to the Debtors resulting from the delay in this case, and the understandable nature of Garza's mistake, 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, the neglect was excusable.
CONCLUSION
For all of the reasons set forth above, the Court will grant the Motion of Richard Hoyenga for Entry of Order Granting Leave to File Administrative Expense Claim and to Deem Said Claim Timely Filed. 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.