Wu v. May Kwan Si, Inc.

• Decision Date: 04 February 2014
• Docket Number: No. 10 Civ. 5380 (SAS).,10 Civ. 5380 (SAS).
• Citation: 508 B.R. 606
• Court: U.S. District Court — Southern District of New York
• Parties: SHU LUN WU and Foong Oi Wong, Plaintiffs, v. MAY KWAN SI, INC. d/b/a Ollie's Noodle Shop & Grille, Tsu Y. Wang, Rong Lin Zhu, and Hang Cheng Chen, Defendants.

508 B.R. 606

SHU LUN WU and Foong Oi Wong, Plaintiffs,

v.MAY KWAN SI, INC. d/b/a Ollie's Noodle Shop & Grille, Tsu Y. Wang, Rong Lin Zhu, and Hang Cheng Chen, Defendants.

No. 10 Civ. 5380 (SAS).

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

Signed Feb. 4, 2014.

Vincent S. Wong, Esq., New York, NY, for Plaintiffs.

Joseph M. Labuda, Esq., Milman Labuda Law Group, PLLC, Lake Success, NY, for Defendant Tsu Yue Wang.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge.

On July 14, 2010, Shu Lun Wu and Foong Oi Wong commenced an action in this Court seeking damages for alleged violations of the Fair Labor Standards Act,¹ New York Labor Law,² and New York City labor regulations. ³ At that time, defendant Tsu Yue Wang was a debtor in the United States Bankruptcy Court for the Southern District of New York.⁴

Wang seeks dismissal of the claims brought against him. He argues that plaintiffs' claims were discharged pursuant to his confirmed chapter 11 plan of reorganization.⁵ Plaintiffs argue that their claims were not discharged because they did not have notice of the bankruptcy and move for sanctions against Wang's counsel under Federal Rule of Civil Procedure 11 for violating professional obligations.⁶ For the following reasons, Wang's motion to dismiss is denied without prejudice, and plaintiffs' motion for sanctions is denied.

I. BACKGROUND

Wang filed his bankruptcy petition on March 22, 2010.⁷ His case was assigned to Bankruptcy Judge Martin Glenn. Wang did not list plaintiffs as creditors on the schedules or statements filed with his petition.

On April 21, 2010, Wang sought an order in his bankruptcy case establishing a deadline for filing proofs of claim (the “Bar Date Motion”).⁸ The Bar Date Motion was not served on plaintiffs. On May 21, 2010, Judge Glenn entered an order establishing July 15, 2010 (the “Bar Date”) as the deadline for filing proofs of claim (the “Bar Date Order”).⁹

The Bar Date Order deems notice of the Bar Date “adequate and sufficient if served by first-class mail at least 35 days prior to the Bar Date” on certain parties, including known creditors and all parties to litigation with the Debtor.¹⁰ It does not provide for publication notice, or any other form of notice, to unknown creditors.

However, the Bar Date Order provides that:

[I]f the Debtor amends or supplements the schedules subsequent to the date hereof, the Debtor shall give notice of any amendment or supplement to holders of claims affected thereby, and such holders shall be afforded 30 days from the date of such notice to file proofs of claim in respect of their claims or be barred from doing so, and shall be given notice of such deadline.¹¹

The Bar Date Order also states that the entry of the Bar Date Order is “without prejudice to the rights of the Debtor to seek a further order of this Court fixing a date by which holders of claims ... not subject to the Bar Date ... must file proofs of claim ... or be barred from doing so.” ¹² The Bar Date Order was not served on plaintiffs.¹³

On September 10, 2010, nearly two months after the Bar Date and the filing of this action, Wang's counsel filed a letter in this case informing the Court and plaintiffs of the pendency of Wang's bankruptcy case, the chapter it was filed under, and the docket number.¹⁴ Based on the letter and the automatic stay provisions of the Bankruptcy Code, this action was stayed as to Wang. ¹⁵ The letter did not refer to the Bar Date or the Bar Date Order.

Wang did not amend his bankruptcy schedules or statements to include plaintiffs or otherwise disclose the pendency of this action in his bankruptcy case. Wang's disclosure statement was approved in January 2012, and his chapter 11 plan of reorganization was confirmed on February 29, 2012. ¹⁶ Neither the disclosure statement nor the plan of reorganization were served on plaintiffs.¹⁷

The confirmation order states, “upon completion of all payments required under the Plan, individual debtor [ ] Wang shall be discharged and/or deemed released from any and all debts which arose before the date of confirmation....” ¹⁸ It further provides that any creditor “whose debts ... were discharged ... by the Plan and this Order are jointly and severally restrained and enjoined from instituting or continuing any action in any court ... to collect such debts ... from [Wang].” ¹⁹

II. APPLICABLE LAWA. Governing Bankruptcy Law

At the outset of a bankruptcy case, a debtor must list all known claims on his schedules and statements.²⁰ If a debtor's initial filings are inaccurate or incomplete, they can “be amended by the debtor as a matter of course at any time before the case is closed.” ²¹ “Indeed, [a] [d]ebtor has an ongoing obligation to schedule assets and liabilities and to provide a statement of financial affairs.” ²²

In chapter 11 bankruptcies, a proof of claim is “deemed filed” if the creditor's claim is listed on the debtor's schedules, unless it is listed as disputed, contingent, or unliquidated.²³ If a creditor's claim is not deemed filed, and the creditor does not file a timely proof of claim, then the creditor “shall not be treated as a creditor with respect to such claim for the purposes of voting [on a chapter 11 plan] and distribution” under a confirmed plan.²⁴

However, individual chapter 11 debtors are subject to the discharge exceptions set forth in section 523 of the Bankruptcy Code. ²⁵ Accordingly, the claim of a creditor who is not listed on an individual chapter 11 debtor's schedules will not be discharged unless the creditor had notice of the bankruptcy case in time to file a timely proof of claim.²⁶

Furthermore, “[i]t is undisputed that a confirmation order cannot act to discharge and enjoin a claim unless the claimant has received adequate notice of the bankruptcy proceeding and any of the claims bar dates fixed therein.” ²⁷ “If a creditor is not bound by section 1141's discharge, that creditor retains all of his pre-petition rights against the debtor.” ²⁸

Although section 523(a)(3)(A) applies in both chapter 7 and chapter 11 cases, notice principles are applied differently depending on the chapter.²⁹ A central reason for this is that the time to file a proof of claim in a chapter 7 case is triggered by the meeting of creditors, whereas in chapter 11 cases a bar date for filing proofs of claim is set after application to the bankruptcy court, and can occur at any time. ³⁰ As explained by one court:

We treat creditors with actual knowledge differently in Chapter 11 because of procedural differences with Chapter 7. Unlike in a Chapter 7 case, the Chapter 11 bar date is not set by the Federal Rules of Bankruptcy Procedure. Thus, notice of the bankruptcy does not afford the creditor the information necessary to determine the applicable bar claims date.³¹

Regardless of the chapter, however, the notice given must provide the creditor with sufficient time to timely file a proof of claim.³²

When a creditor is not listed on a debtor's schedules pursuant to section 521, “[t]he burden of establishing that a creditor has received adequate notice rests with the debtor.” ³³ Courts “look ‘to the totality of the circumstances' in determining whether a creditor was adequately apprised of the” bar date.³⁴ A letter or motion informing the court and creditor's counsel of the bankruptcy proceeding can serve as notice sufficient to sustain the discharge of an unscheduled debt, ³⁵ provided such notice is timely.

Finally, under section 501(c), a debtor may file a proof of claim for a creditor who does not timely file a proof of claim.³⁶ Thus, section 501(c) provides a means for a debtor to ensure that all prepetition claims are dealt with in the bankruptcy case.

B. Rule 11 Sanctions

A pleading, motion, or other paper violates Rule 11 when it is submitted for “any improper purpose, or where, after reasonable inquiry, a competent attorney could not form a reasonable belief that the pleading is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.” ³⁷

The Supreme Court has cautioned that Rule 11 “must be read in light of concerns that it will ... chill vigorous advocacy.” ³⁸ Thus, “[w]hen divining the point at which an argument turns from merely losing to losing and sanctionable” courts must “resolve all doubts in favor of the signer of the pleading.” ³⁹ Sanctions should be imposed only “where it is patently clear that a claim has absolutely no chance of success.” ⁴⁰

In deciding a Rule 11 motion, a district court “must adhere to the procedural rules which safeguard due process rights.” ⁴¹Rule 11 requires that a motion for sanctions “be made separately from any other motion and ... describe the specific conduct that allegedly violates Rule 11(b).” ⁴² Furthermore, “[t]he motion must be served ..., but it must not be filed or be presented to the court if the challenged paper, claim, defense, contention, or denial is withdrawn or appropriately corrected within 21 days after service....” ⁴³

III. DISCUSSIONA. Motion to Dismiss

Plaintiffs argue that their claims should not be discharged because they were not listed as creditors in Wang's plan of reorganization and they were not provided with notice in accordance with the provisions of the Bankruptcy Code.⁴⁴ Wang argues that plaintiffs' claims were discharged under the plan.⁴⁵ He further argues that the September 10, 2010 letter provided adequate notice of the bankruptcy to plaintiffs, relying on Medaglia and other cases.⁴⁶

Wang has not sustained his burden of establishing that plaintiffs had notice of the Bar Date. The September 10, 2010 letter could not have provided plaintiffs with notice of their requirement to file claims by July 15, 2010. Medaglia does not control because the notice here was provided well after the Bar Date.⁴⁷ The controlling issue here is not the form of notice provided, but the fact that the notice Wang relies on was given well after the Bar Date. Wang does not argue,...