In re Walls & All, Inc.
| Decision Date | 24 May 1991 |
| Docket Number | Motion No. 90-563m.,Bankruptcy No. 89-2812,Civ. A. No. 90-1715 |
| Citation | 127 BR 115 |
| Parties | In re WALLS & ALL, INC., a/k/a Lebo Wallcoverings, Debtor. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Thomas E. Reilly, Pittsburgh, Pa., for Mellon Bank.
Gregory Harbaugh, Pittsburgh, Pa., for Trustee.
Bradley S. Gelder, Pittsburgh, Pa., for debtor.
Before this Court is the appeal of Mellon Bank, N.A., from a bankruptcy court order of July 20, 1990, denying Mellon Bank's motion to amend its proof of claim.
On October 23, 1989, debtor Walls & All, Inc., also known as Lebo Wallcoverings, filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701, et seq., and a trustee was appointed. Prior to filing for bankruptcy, debtor initiated a national sales campaign, resulting in numerous telephone and mail order sales for wallpaper. Customers were required at a minimum to make an initial deposit on merchandise they ordered which were charged to their respective MasterCard or Visa accounts. The balance of the purchase price, if any, was to have been charged against their cards upon delivery of the merchandise. During this campaign, debtor and Mellon Bank were parties to a membership agreement, whereby Mellon Bank agreed to honor credit and debit cards of MasterCard and Visa cardholders, and to act as a local depository. Debtor filed for bankruptcy after initiation of the sales campaign, leaving many of its customers without delivered merchandise, and resulting in Mellon Bank crediting the customers' accounts for undelivered goods.
On February 13, 1990, the bankruptcy court issued an order fixing a claims bar date of May 13, 1990. On May 2, 1990, appellant Mellon Bank filed a proof of claim with the bankruptcy court claiming an unsecured liability of debtor to Mellon Bank totalling $66,062.29 plus interest and attorney's fees. This figure represents charge-backs to debtor for refunds advanced by Mellon Bank on charge card sales which were later credited by Mellon Bank to debtor's customers' accounts, pursuant to the membership agreement between debtor and Mellon Bank. On June 8, 1990, Mellon Bank moved to amend its proof of claim in order to assert priority status on the $66,062.29, and the trustee objected.
In its motion to amend its proof of claim, Mellon Bank asserted that, since the time it filed the original proof of claim, Mellon Bank had completed an analysis of the amounts charged back by debtor. According to Mellon Bank, this analysis revealed that the $66,062.29 set forth in the original proof of claim represented refunds made to debtor's customers on charge card purchases for merchandise never delivered to debtor's customers, which merchandise was intended for personal, family, or other use. According to Mellon Bank, this amount is granted sixth place priority under the Code, pursuant to 11 U.S.C. § 507(a)(6). Title 11 U.S.C. § 507(a)(6) grants a sixth place priority to:
allowed unsecured claims of individuals, to the extent of $900 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.
11 U.S.C. § 507(a)(6). According to Mellon Bank, the monies set forth in their proof of claim represent such deposits made by consumers to debtor which have been refunded to the consumers by Mellon Bank; therefore, Mellon Bank now stands in the shoes of those consumers, by way of an implied assignment, and has a sixth place priority claim against the debtor for the full principal amount of $66,062.29.1
On July 17, 1990, the bankruptcy court held a hearing on Mellon Bank's motion to amend its proof of claim, and denied the motion. The bankruptcy court stated that Mellon Bank "has offered no acceptable and/or appropriate excuse or reason as to why it should be permitted to file an untimely claim." Mellon Bank moved for reconsideration of the order, and after a hearing on this matter, the bankruptcy court denied the motion on September 4, 1990.
On appeal, Mellon Bank argues that the bankruptcy court erred in requiring Mellon Bank to produce evidence to establish its priority status at the hearing on its motion to amend proof of claim. Mellon Bank further argues that the bankruptcy court erred as a matter of law in concluding that the unsecured claim of Mellon Bank is not entitled to the priority set forth in 11 U.S.C. § 507(a)(6). Contrary to Mellon Bank's contention, this Court finds that the bankruptcy court afforded Mellon Bank ample opportunity to persuade the court to allow its amendment. Instead, Mellon Bank chose to argue entitlement to priority status. Because this Court finds that the bankruptcy court properly denied Mellon Bank's motion to amend, this Court need not address Mellon Bank's second contention regarding assignment and subrogation.
In reviewing bankruptcy court decisions, this Court functions as an appellate court, and findings of fact shall not be set aside unless clearly erroneous. Bankr.R. 8013. See In re Owens, 84 B.R. 361, 363 (E.D.Pa. 1988). The decision to grant or deny an amended proof of claim is within the bankruptcy judge's discretion. Owens, 84 B.R. at 363. "On appeal, an abuse of this discretion will only be found where (1) the decision was based on an erroneous conclusion of law; (2) where the record contains no evidence on which the bankruptcy judge could have based his decision; or (3) where the supposed facts found are clearly erroneous as found." In re AM International, Inc., 67 B.R. 79, 81 (N.D.Ill.1986).
It is well settled that, absent contrary equitable considerations or prejudice to the opposing party, amendments to proofs of claim should be freely permitted. See Owens, 84 B.R. at 363; In re W.T. Grant Co., 53 B.R. 417, 420 (Bankr.S.D.N. Y.1985). In re Hanscom Retail Foods, Inc., 96 B.R. 33, 35 (Bankr.E.D.Pa.1988) (quoting In re Ungar, 70 B.R. 519, 521 (Bankr. E.D.Pa.1987)). However, such amendments are to be allowed only where the original claim prompted notice to the court of the existence, nature, and amount of the claim. In re International Horizons, Inc., 751 F.2d 1213, 1217 (11th Cir.1985); Owens, 84 B.R. at 363; see also AM International, 67 B.R. 79, 82. Amendments are also permissible to cure defects in a claim already filed, to describe a claim with greater particularity, or to plead a new theory of recovery on the facts of the original claim. In re Metro Transportation, 117 B.R. 143, 147 (Bankr.E.D.Pa.1990); In re Candy Braz, 98 B.R. 375, 380 (Bankr.N. D.Ill.1988). Amendments filed after the claims bar date, as in the present case, are to be scrutinized closely to ensure that the amendment is genuine rather than the assertion of an entirely new claim. Metro Transportation, 117 B.R. at 147; see International Horizons, 751 F.2d at 1215. The deadlines for filing proofs of claims are to be strictly construed to ensure the efficient administration of bankruptcy cases and to provide all parties with finality. Metro Transportation, 117 B.R. at 148, citing In re Pigott, 684 F.2d 239 (3d Cir.1982); see In re Vertientes, Ltd., 845 F.2d 57, 60 (3d Cir.1988).
In this case, Mellon Bank sought to amend its proof of claim to change its status from that of an unsecured creditor to that of a priority claimant. Mellon Bank contends that the basis for the attempted amendment is that the claim it holds was acquired by assignment instead of by subrogation. Under 11 U.S.C. § 507(d), a claim acquired by subrogation is precluded from asserting priority status, while a claim acquired by assignment may obtain priority status. The trustee asserts that this change in status from unsecured to priority amounts to the filing of a new claim, and is therefore barred absent a showing of excusable neglect on the part of Mellon Bank. See Vertientes, 845 F.2d 57.
Although case law has generally held that a post-bar-date proof of claim seeking to merely increase the amount of a timely-filed claim is not the assertion of a new claim, see, e.g., Candy Braz, 98 B.R. at 381; Hanscom Retail Foods, 96 B.R. at 35, where a claimant attempts to change the nature of the proof of claim, such amendments are generally disallowed. Metro Transportation, 117 B.R. at 148; see Candy Braz, 98 B.R. at 375; Hanscom Retail Foods, 96 B.R. at 35; In re Simms, 40 B.R. 186, 189 (Bankr.N.D.Ga.1984). Amending a claim to change status from unsecured to sixth place priority changes the nature of the proof of claim and, therefore, must be disallowed. See ...
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