In re Best Products Co., Inc.

• Decision Date: 15 May 1992
• Docket Number: Bankruptcy No. 91B10048 (TLB) — 91B10053.
• Parties: In re BEST PRODUCTS CO., INC., et al.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

140 B.R. 353 (1992)

In re BEST PRODUCTS CO., INC., et al.

Bankruptcy Nos. 91B10048 (TLB) — 91B10053.

United States Bankruptcy Court, S.D. New York.

May 15, 1992.

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Weil, Gotshal & Manges by Kevin Barrett, New York City, for debtors.

Backenroth & Grossman by Mark Frankel, New York City, for movant.

Stroock & Stroock & Lavan by David Botter, New York City, for creditors committee.

DECISION ON MOTION TO FILE LATE PROOFS OF CLAIM AND TO LIFT THE AUTOMATIC STAY

TINA L. BROZMAN, Bankruptcy Judge.

At issue is whether creditors unknown by the chapter 11 debtor and therefore unscheduled by it are entitled to file late proofs of claim despite the fact that the debtor published notice of the last day to file claims in the national editions of two newspapers and a number of other regional publications, none of which is a local newspaper in the creditors' home state. The creditors here, Thomas and Joan Hutchinson, individually and on behalf of their son Justin, urge that the debtor, Best Products Co., Inc. (Best), should have published in local newspapers in each of the dozens of locations where it did business.

I.

Best filed its chapter 11 petition in January 1991. Best and its affiliates constitute one of the nation's largest discount retailers. It currently operates 153 catalog showrooms, a nationwide mail-order service and a chain of 15 discount jewelry and giftware stores. In accordance with Federal Rule of Bankruptcy Procedure 3003(c)(2), by order dated August 22, 1991, I established October 31, 1991 as the last date upon which proofs of claim could be filed against Best (the Bar Date). Notice of the Bar Date was mailed to all known creditors and published in the national editions of The Wall Street Journal and The New York Times as well as in the The Chicago Sun-Times, the Los Angeles Times and The Richmond Times-Dispatch.

In January 1992, the Hutchinsons sued Best and a toy manufacturer in the U.S. District Court for the District of Maryland (Maryland Action) alleging that in January 1989 Justin had sustained loss of hearing and neurological damage due to defects in a toy sold by Best in one of its catalog showrooms. The Hutchinsons, however, never filed a proof of claim with the bankruptcy court. They acknowledge that until their complaint was served, Best had no notice of the existence of their claims. After service of the complaint, Best advised the Hutchinsons that because they had failed to file timely proofs of claim, continued prosecution of the Maryland Action was barred. The Hutchinsons now seek authorization to file late proofs of claim and modification of the automatic stay to allow prosecution of the Maryland Action to judgment. As Best had no knowledge of the Hutchinsons' claims at the time the petition was filed or at the time the order setting the Bar Date was entered, it did not mail the Hutchinsons a notice. The Hutchinsons contend that their failure to file a timely proof of claim is attributable to "excusable neglect" because the debtor's notice by publication was inadequate.

II.

The claims allowance process is an integral component of the court's equitable power to restructure debtor-creditor relationships. Langenkamp v. Culp, ___ U.S. ___, 111 S.Ct. 330, 331, 112 L.Ed.2d 343 (1990), reh. denied, ___ U.S. ___, 111 S.Ct. 721, 112 L.Ed.2d 709 (1991); In re Standard Insulations, Inc., 138 B.R. 947 (Bankr.W.D.Mo.1992). Indeed, a chief purpose of the bankruptcy laws is to secure a prompt and effectual administration and settlement of the debtor's estate within a limited period. Katchen v. Landy, 382 U.S. 323, 328, 86 S.Ct. 467, 472, 15 L.Ed.2d 391 (1966). Under Chapter 11 of the Bankruptcy Code, certain claimants against an estate in bankruptcy must file proofs of claim in order to participate in a reorganization. Fed.R.Bankr.P. 3003(c). In order to safeguard the finality of the proceedings, Rule 3003(c) provides that "the court shall fix . . . the time within which proofs of claim or interest may be filed." The bar order in a chapter 11 case serves the important purpose of enabling the parties in interest to ascertain with reasonable promptness the identity of those making claims against the estate and the general amount of the claims, a necessary step in achieving the goal of successful reorganization. First Fidelity Bank, N.A. v. Hooker Investments, Inc. (In re Hooker Investments, Inc.), 937 F.2d 833, 840 (2d Cir. 1991). After the passage of the bar date, the claimant cannot participate in the reorganization unless he establishes sufficient grounds for the failure to file a proof of claim. Certified Class in Charter Securities Litigation v. Charter Co. (In re Charter Co.), 876 F.2d 866 (11th Cir.1989). The bar order then is not a mere procedural gauntlet, but an integral step in the reorganization process. Hooker, 937 F.2d at 840. A personal injury claimant is given no special dispensation. The claimant must comply with the Code, the Federal Rules of Bankruptcy Procedure, and court orders for claims handling procedures before there is a valid bankruptcy claim ripe for liquidation by the district court or the court where such claim arose. In re Standard Insulations, supra 138 B.R. at 955; see also Charter International Oil Co. v. Ziegler (In re Charter Co.), 113 B.R. 725 (M.D.Fla.1990) (no basis to require more stringent notice requirement for unknown tort claimants than for unknown trade creditors).

The law respecting notice of the bar date to which a creditor is entitled differs in a Chapter 11 case like this one from a Chapter 7 case. That is so because the bar date in a Chapter 7 case is fixed by the Federal Rules of Bankruptcy Procedure; anyone with knowledge of the case can ascertain the date fixed for the meeting of creditors under 11 U.S.C. § 341 and then calculate the bar date. Thus, in a chapter 7 case, a creditor who is not scheduled and therefore does not receive notice but nonetheless had actual knowledge of the case in time to file a timely proof of claim will have his claim subordinated to timely filed claims of other creditors. 11 U.S.C. § 726(a)(2)(C). See Zidell, Inc. v. Forsch (In re Coastal Alaska Lines, Inc.), 920 F.2d 1428, 1430-31 (9th Cir.1990); cf. Lompa v. Price (In re Price), 871 F.2d 97 (9th Cir.1989).

In a corporate chapter 11 case, on the other hand, more is required. See In re Pine Associates, Inc., 35 B.R. 49, 51 (Bankr.D.Conn.1983). The requirements of due process set forth in New York v. N.Y., N.H. & H.R. Co., 344 U.S. 293, 73 S.Ct. 299, 97 L.Ed. 333 (1953) a railroad reorganization case under the former bankruptcy act, retain their vitality; a known creditor must receive proper, adequate notice before its claim is barred forever. See also Spring Valley Farms, Inc. v. Crow (In re Spring Valley Farms, Inc.), 863 F.2d 832, 834 (11th Cir.1989).

In New York, the Court distinguished between known and unknown creditors, stating that necessity may require resorting to notice by publication where the names, interests and addresses of persons are unknown. New York, 344 U.S. at 296, 73 S.Ct. at 301 (citing Standard Oil Co. v. New Jersey, 341 U.S. 428, 71 S.Ct. 822, 95 L.Ed. 1078 (1953)); see also Tulsa Professional Collection Services Inc. v. Pope, 485 U.S. 478, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988) (for creditors who are not `reasonably ascertainable' publication notice can suffice); Sheftelman v. Standard Metals Corp., 839 F.2d 1383, 1386 (10th Cir.1987).

Even before it was faced with the question of proper notice in a railroad reorganization case, the Supreme Court grappled with the demands of due process, recognizing that "in the case of persons missing or unknown, employment of an indirect and even probably futile means of notification is all that the situation permits and creates no constitutional bar to a final decree foreclosing their rights." Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 317, 70 S.Ct. 652, 658, 94 L.Ed. 865 (1950).

The proper inquiry in evaluating notice is whether the party giving notice acted reasonably in selecting means likely to inform persons affected, not whether each person actually received notice. Weigner v. New York, 852 F.2d 646, 649 (2d Cir.1988), cert. denied, 488 U.S. 1005, 109 S.Ct. 785, 102 L.Ed.2d 777 (1989). Whereas a debtor must review its own books and records to ascertain the identity of creditors, a debtor is not required to search elsewhere for those who might have been injured. In re Waterman Steamship Corp., 59 B.R. 724, 727 (Bankr.S.D.N.Y. 1986).

When notice by mail is possible, it is surely preferable to notice by publication. However, Best had no knowledge of the Hutchinsons' claims and could not have been expected to provide actual notice to them. Instead, Best published notice of the Bar Date in the national editions of The Wall Street Journal and The New York Times, as well as in the three somewhat more local papers mentioned earlier.

The Hutchinsons argue that since they do not read any of these newspapers, and since no notice was published in a newspaper in the Lanham, Maryland, area nor any newspaper of general circulation in Maryland, the notice was not "meaningful" to them. It is impracticable however, to expect a debtor to publish notice in every newspaper a possible unknown creditor may read. As the Supreme Court stated in Mullane, "impracticable and extended searches are not required in the name of due process." 339 U.S. at 317-18, 70 S.Ct. at 658-59. See also Wright v. Placid Oil Co., 107 B.R. 104 (N.D.Tex.1989) (publication in The Wall Street Journal of notice of order setting bar date was sufficient notice to unknown creditor injured at debtor's location in Louisiana); In re Charter Co., 113 B.R. at 727 (reversing bankruptcy court's decision that debtor had to publish in newspapers to which unknown tort claimants were likely to subscribe and finding, instead, that notice by publication in national and local newspapers...