Opinion
Case No. 02-B02474
November 20, 2003
MEMORANDUM OPINION
This matter is before the court on the Motion of Gladys Sewald ("Sewald") for Leave to File a Late Administrative Expense Claim Instanter. Sewald, a personal injury claimant, failed to file a proof of claim by the June 20, 2003 administrative claims bar date. She now seeks entry of an order allowing her to file the claim and deeming it timely based 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 6, 2002, Sewald sustained personal injuries resulting from a fall at a Kmart store in Festus, Missouri. Sewald is in her mid-eighties and alleges that as a result of the fall, she suffered, inter alia, a broken arm, concussion, and severely bruised legs. She further alleges that prior to the fall, she lived alone and needed no assistance with everyday affairs; after the fall, she was required to live in a nursing home,
Sewald retained Derrick R. Good ("Good") as her personal injury counsel. According to Good's affidavit, he began corresponding with John Brenner, a claims adjuster for the Kmart Customer Incident Center, in April of 2002. Good informed Brenner that as soon as Good received and reviewed copies of Sewald's complete medical records, he would send Brenner a settlement demand.
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").
On or about May 12, 2003, Good 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").
After Good received the Notice, he placed calls to Trumbull Services, LLC, the court-approved noticing agent in this case, as well as to Debtors' then counsel, Skadden, Arps, Slate, Meagher Flom ("Skadden Arps"), in an effort to clarify whether the Administrative Bar Date had any applicability to Sewald's claim. Good left messages, but he did not receive any return calls.
On or about June 4, 2003, Good received another copy of the Notice from Trumbull. That same day, he placed calls to Skadden Arps and to Brenner, but again he received no return calls. Good then placed a call to Trumbull and inquired whether the Notice applied to Sewald. He was advised by Trumbull that Sewald did not need to file an administrative expense claim.
Good also conducted his own research under § 503(b) of the Bankruptcy Code and mistakenly concluded that Sewald's personal injury claim was not entitled to administrative expense status. Good does not practice in the field of bankruptcy law.
Good ultimately received the last of Sewald's medical records. On or about July 10, 2003, he telephoned Brenner and left a message advising that he had all the records and would be forwarding a settlement demand. Good received, ironically, a prompt return call this time; Brenner telephoned the next day to inform Good that Sewald's claim was barred, as she had failed to file a proof of claim by the June 20 deadline.
Good thereupon sought the assistance of bankruptcy counsel in Chicago to prepare and present the present motion.
DISCUSSION
Sewald contends 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, 519 U.S. 875, 117 S.Ct. 196, 136 L.Ed.2d 133 (1996), the defendant's attorney in a criminal case filed an appeal one day late. He had miscalculated the 10-day deadline, believing mat 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 Good acknowledges receiving two copies of the Notice, and he noted that the bar date set forth therein applied to "Administrative Claims." Although the Notice itself did not define "Administrative Claims," it 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. According to Sewald, however, Debtors had not served the Plan on Sewald, and there is no indication that they served Sewald with a copy of the Confirmation Order: The only definition 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.
As indicated above, Good placed calls to Debtors' counsel, Skadden Arps, and to Brenner, the Kmart claims examiner that he had been dealing with, to inquire about the applicability of the Notice to Sewald's claim, but he received no return calls. He finally reached someone at Trumbull, who told him that Sewald did not need to file a proof of claim.
Good then attempted to confirm this advice by doing his own research under § 503(b), which provides for the allowance of "administrative expenses," According to § 503(b), "administrative expenses" include "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.
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.
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 expenses benefitted 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, Good's research did not unearth this doctrine, and he therefore mistakenly concluded, consonant with the advice received from Trumbull, that Sewald's claim was not an "Administrative Claim" within the purview of the Notice.
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 Good would have found the relevant case law had he conducted his research with greater care, his failure to do so is understandable. Good 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;" it merely referred to the definitions in the Plan and Confirmation Order, neither of which appear to have been served with the Notice. Even if Good 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 indicated to him that 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, incurred on or after the Petition Date, of preserving the Estates." Again, under all these circumstances, and in light of the fact that he had already been told by Trumbull that the bar date did not apply to Sewald, it is understandable that Good, a nonbankruptcy attorney, concluded that the claim was not an "Administrative Claim" within the purview of the Notice.
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 Instates 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.
In addition, any delay resulting from his failure to timely file the claim is minimal and nonprejudicial. When Good learned of the mistake, on July 10, 2003, he promptly undertook efforts to retain bankruptcy counsel in Chicago to prepare and present this motion. Bankruptcy counsel filed the motion on August 20, 2003, less than six weeks after Good discovered the missed bar date and only two months after the bar date itself. 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, scheduled for hearing in January, 2004,
Accordingly, Debtors are far from completing the administrative claim review and objection process. 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 Good's) obvious good faith, the lack of prejudice to the Debtors, the minimal delay, and the understandable nature of Good's 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-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, maybe 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 grants Sewald's Motion for Leave to File a Late 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 shall be entered pursuant to Bankruptcy Rule 9021,