Momentum Mfg. Corp., In re

• Decision Date: 06 June 1994
• Docket Number: D,No. 1168,1168
• Citation: 25 F.3d 1132
• Parties: , 25 Bankr.Ct.Dec. 1213, Bankr. L. Rep. P 75,943, 18 Employee Benefits Cas. 1571 In re MOMENTUM MANUFACTURING CORPORATION, Debtor. MOMENTUM MANUFACTURING CORPORATION, Appellant, v. EMPLOYEE CREDITORS COMMITTEE, Appellee. ocket 93-5090.
• Court: U.S. Court of Appeals — Second Circuit

Page 1132

25 F.3d 1132

63 USLW 2015, 25 Bankr.Ct.Dec. 1213,

Bankr. L. Rep. P 75,943,

18 Employee Benefits Cas. 1571

In re MOMENTUM MANUFACTURING CORPORATION, Debtor MOMENTUM MANUFACTURING CORPORATION, Appellant, v. EMPLOYEE CREDITORS COMMITTEE, Appellee.

No. 1168, Docket 93-5090.

United States Court of Appeals Second Circuit.

Argued March 4, 1994.

Decided June 6, 1994.

Martha L. Berry, Syracuse, NY (Hancock & Estabrook, Syracuse, NY), for debtor-appellant.

Lee E. Woodard, Syracuse, NY (Martin, Martin, Piemonte & Woodard, Syracuse, NY), for creditors-appellees.

Before KEARSE and LEVAL, Circuit Judges, and GLASSER, District Judge. ^*

LEVAL, Circuit Judge:

This is an appeal from an order of the United States District Court for the Northern District of New York, Frederick J. Scullin, J., affirming an order of the Bankruptcy Court for the Northern District of New York, Stephen D. Gerling, B.J., denying the Debtor's motion to amend its schedules, and dismissing the Debtor's objections to portions of its former employees' proofs of claim. The order is affirmed.

Background

Appellant Momentum Manufacturing Corporation ("Debtor" or "Momentum") was a manufacturer of electrical component parts. On May 3, 1990, it filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Secs. 1101 et seq. (1988) (the "Code"). The Debtor had dismissed approximately 260 of its 270 employees the day before filing its petition. Evidently hoping to continue operations, on May 14, 1990, Momentum rehired approximately 140 of the 260 recently-terminated employees.

On June 7, 1990, the Debtor's employees established an employee creditors committee pursuant to 11 U.S.C. Sec. 1102 (the "Committee"). Approximately two weeks later, the Debtor filed its schedule of liabilities pursuant to Section 521(1) of the Code and Fed.R.Bankr.P. 1007(b)(1). The Debtor submitted schedules of employee claims, which listed the amounts owed to employees for accrued wages, salaries, commissions, sick pay, severance pay and payment in lieu of termination. At issue in the instant appeal are employee claims for severance pay and payment in lieu of termination (hereinafter collectively referred to as "severance claims"). ¹ In listing the severance claims on the Schedules, the Debtor did not identify them as "contested."

By early September 1990, unable to continue operations, the Debtor released all but 25 employees. At approximately the same time, the Debtor filed its Original Disclosure Statement with the bankruptcy court. On November 5, 1990, pursuant to Sections 1121 and 1125(b) of the Code, the Debtor filed its Plan of Reorganization, together with an Amended Disclosure Statement. It then proceeded to solicit votes from its various creditors on its Plan of Reorganization.

The Amended Disclosure Statement, together with other company communications, led the current and former employees to believe that under the Plan the Debtor would pay approximately $500,000 for employee severance claims of up to $2,000 per employee. The Amended Disclosure Statement stated in pertinent part:

VI. (6) Priority Unsecured Wage Claims

Class Six consists of holders of claims for wages and other benefits earned while employees of the Debtor. Claims of the current and former employees of the Debtor that are entitled to priority under 11 U.S.C. Sec. 507(a)(3) (earned within 90 days pre-petition up to $2,000.00 per employee ) total approximately $500,000.00 as listed on Schedule A-1 prepared in May, 1990. These claims are required by law to be paid after the First National Bank of Boston's secured claim and all administrative claims have been paid, but ahead of all other priority and unsecured claims, as the Amended Plan provides. (emphasis added.)

In listing the severance claims on the Schedules, the Debtor did not identify them as "contested."

The Debtor also represented in intra-company communications that the employees would receive money from the estate as severance pay. For example, in a letter dated June 8, 1990, Momentum explained:

If you are terminated, then you have a claim to be paid according to company policies.... Please be aware that the Company may not have enough money to pay everybody in full. You have a Prior[ity] Claim under the law for a payout to you of up to $2,000. (This portion will hopefully be paid to former and qualifying current employees in the Fall.) (emphasis added.)

Several employees testified that Martin Zelbow, the former president of the company, reiterated the Debtor's intention to make severance payments during several meetings with employees.

The employees voted to approve the Plan. ² The bankruptcy court confirmed the Plan on November 25, 1991, after a confirmation hearing. Without the employees' approval, the Plan could not have been confirmed.

Motion to Amend the Schedules and Objections to Employee Claims

On January 14, 1992, soon after the court confirmed the Plan, the Debtor moved pursuant to Fed.R.Bankr.P. 1009(a) to amend its Schedules to delete the amounts allocated to employees' claims for severance pay. The Debtor also sought to file objections to those portions of the employees' proofs of claim seeking severance payments.

Although mere listing of liabilities on the Schedules filed under Section 521(1) does not amount to a concession that such claims are valid, the liabilities will be deemed "prima facie evidence of the validity and amount of the claims of creditors" unless they are listed as "disputed, contingent, or unliquidated." Fed.R.Bankr.P. 3003(b)(1). If a debtor does not list the liabilities as contested, it must prove the invalidity of the claims.

Because Momentum did not list the severance payments as "disputed, contingent, or unliquidated," it bore the burden of proving the invalidity of such claims. It therefore sought to amend its Schedules in order to shift the burden of proof back to the employees. The Debtor argued that it was entitled to amend the Schedules as a matter of right under Fed.R.Bankr.P. 1009(a).

In addition to seeking to amend the Schedules, the Debtor also filed objections to the employees' proofs of claim for severance payments. See Fed.R.Bank.P. 3007. The Debtor argued that it was entitled to object to the proofs of claim, even though the Plan had already been confirmed, because the court had set a deadline for filing objections 60 days after the confirmation.

Bankruptcy Court Decision

Concluding that the Debtor had represented in the Amended Disclosure Statement and in statements to its employees that the employees would receive payments from the estate as severance pay, and had procured the employees' vote in favor of the Plan through these representations, the bankruptcy court denied the Debtor's motion to amend the Schedules and to object to the proofs of claim on estoppel grounds. ³

Regarding the motion to amend the Schedules, the court recognized that Rule 1009(a) does provide that a schedule "may be amended ... as a matter of course at any time before the case is closed." The court emphasized, however, that the right cannot be exercised freely in all circumstances without regard to issues of bad faith and prejudicial reliance, see In re Williamson, 804 F.2d 1355, 1358 (5th Cir.1986); In re Blaise, 116 B.R. 398, 400-01 (Bankr.D.Vt.1990), and held that Momentum was estopped from amending its Schedules.

The bankruptcy court applied similar reasoning to the Debtor's motion to object to the proofs of claim. Just as there are equitable limitations on a Debtor's right to amend a schedule, there are also equitable limitations on a Debtor's right to object to proofs of claim. Thus, the bankruptcy court concluded that Momentum's conduct estopped it from objecting to the employees' claims.

The District Court Decision

On appeal, the Debtor argued that the bankruptcy court erroneously applied common law equitable principles to the case. It asserted that because its employee benefit plan was governed by the Employee Retirement Income and Security Act ("ERISA"), 29 U.S.C. Sec. 1001 et seq. (1988), ERISA pre-empted the bankruptcy court's application of common law principles to restrict the Debtor's discretion under its benefit plan. Momentum contended that its company severance policy gave it broad discretion to deny payment of severance benefits, and that it could exercise this power even after the Plan had been confirmed.

The district court rejected these arguments and affirmed the holding of the bankruptcy court. The Debtor brought this appeal.

Discussion

An order of a district court functioning in its capacity as an appellate court in a bankruptcy case is subject to plenary review. Thus, we "independently review the factual determinations and legal conclusions of the bankruptcy court." In re PCH Assoc., 949 F.2d 585, 597 (2d Cir.1991) (citation omitted). The bankruptcy court's legal conclusions are evaluated de novo; its findings of fact are subject to a clearly erroneous standard. Id.

Momentum contends that it was improper for the bankruptcy court to prevent it from a) amending its Schedules to delete employee severance claims, and b) objecting to the employee proofs of claim for severance payments. We disagree. In our view, the bankruptcy judge and district judge properly invoked their equitable powers and relied on the principle of equitable estoppel to bar the Debtor from taking these positions.

I. Use of Equitable Principles in Reorganization

It is well settled that bankruptcy courts are courts of equity, empowered to invoke equitable principles to achieve fairness and justice in the reorganization process. Section 105(a) of the Code provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title."

We have repeatedly emphasized the importance of the bankruptcy court's equitable power. In In re Prudential Lines Inc., 928 F.2d 565 (2d Cir.), cert. denied, ---...