MEMORANDUM OF DECISION ON APPLICATION TO FILE LATE PROOF OF CLAIM
This matter is before us
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on Claimant’s motion for an order granting permission to
FACTS
Claimant, Upper State Street IMB Corporation (“IMB”), and I.M. Rehab, Inc. (“IMR”) entered into a limited partnership agreement on May 23, 1989, for the development of low to moderate income housing in Springfield, Massachusetts. The partnership agreement was amended in 1990 without Debtor’s knowledge. IMB and Claimant are both general partners. Claimant is the managing general partner, and IMR is a limited partner. IMR is a wholly-owned subsidiary of Debtor.
Under section 3.2 of the amended partnership agreement, IMR was obligated to pay capital contributions to the partnership in ten annual installments. This obligation was restated in the subscription agreement and was evidenced by a promissory note made in 1989, by IMR, to the order of the partnership. The promissory note was replaced with a new note in 1990.
On May 23, 1989, Debtor executed an unconditional guaranty of IMR’s obligations in favor of Claimant. The guaranty agreement provided that various forms of notice are acceptable to the parties, but the agreement did not expressly require Claimant to notify Debtor of IMR’s default to trigger debtor’s obligation as guarantor. The agreement stated that Massachusetts law governs all disputes concerning the guaranty.
IMR paid the first and second installment as well as an initial capital contribution. IMR, however, failed to pay additional installments and ultimately defaulted on October 22, 1990. The default triggered the partnership agreement’s acceleration clause, thereby making all installments due and owing at that time.
On February 13, 1990, Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101, et seq. Debtor did not list Claimant as a creditor in its filed schedules of assets and liabilities, nor did Debtor later amend its schedules to include Claimant as a creditor.
Bankruptcy Judge Buschman, by a June 20, 1990 order, fixed November 15, 1990 (“the Bar Date”), as the last day for all creditors and equity holders to file proofs of claim against Debtor. The order provided that known creditors would receive actual notice of the Bar Date and unknown creditors would receive notice by publication.
On August 15, 1990, Debtor mailed notice of the bar date to each known creditor listed in the schedules. All creditors not listed in the schedules received notice by publication, on three different dates, in 36 national and regional newspapers. Notice was issued in newspapers distributed in Massachusetts, including the Boston Globe, the New York Times, and the Wall Street Journal. Claimant did not file a proof of claim before the Bar Date. Claimant admits having general knowledge of Debtor’s bankruptcy before the Bar Date.
ARGUMENTS OF THE PARTIES
Claimant cites lack of actual notice of the bar date as the chief reason underlying its application to file a late proof of claim. Claimant argues that Debtor knew or should have known that Claimant held a contingent claim following Debtor’s unconditional promise to pay under the guaranty agreement. Although it had general knowledge of Debtor’s bankruptcy, Claimant argues that its status as a known creditor entitled it to actual notice of the bar date, rather than notice by publication.
Debtor argues that Claimant was an unknown creditor because Debtor’s accounting practices had not recognized the guaranty obligation as an existing debt. Debt- or also states that it was entitled to notice of default under the guaranty agreement, and that Claimant’s failure to provide notice excuses Debtor from its obligations as guarantor. Furthermore, assuming, ar-guendo, that Claimant was entitled to actual notice of the bar date as a holder of a known claim, Debtor argues that it was released from its guarantor obligation following the “substantial” amendment of the partnership agreement on May 23, 1990. Finally, Debtor argues that even if the guaranty obligation rises to the level of a contingent claim that should have been listed in its schedules, Claimant should not be permitted to enlarge the bar date because Claimant waited too long to step forward with its application to file a late proof of claim.
DISCUSSION
A. Notice standards.
The Supreme Court has repeatedly stated that .due process embodies a basic principle of justice, that federal and state adjudications are binding only when parties are provided with sufficient notice and an opportunity to be heard. The Fifth and Fourteenth Amendments protect against deprivation of “life, liberty or property, without due process of law....” A cause of action, here, a claim against the estate, constitutes property within the meaning of the Amendments and cannot be forfeited through proceedings lacking in due process. Notice must be “reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their [claims].”
Mullane v. Central Hanover Bank & Trust Co.,
Mullane’s
requirement that notice be “reasonably calculated ... under all circumstances” necessitates an inquiry into the particular facts of each case to determine if a given form of notice complies with due process.
See, Tulsa Professional Collection Services, Inc. v. Pope,
The issuance of the claims bar date is an essential feature of the reorganization process because it provides a date certain after which a plan can be negotiated, formulated, and eventually confirmed. The bar date is much more than a means to limit claims; it provides finality to a process that will ultimately lead to the rehabilitation of the debtor and the payment of claims under a plan of reorganization.
See, Florida Department of Insurance v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.),
Federal Rules of Bankruptcy Procedure 3003(c) and 9006(b) provide a mecha
There are three factors to be considered in determining whether a party’s failure to file a claim was the result of excusable neglect: the adequacy of the notice provided, the source of the delay and the sophistication of the creditor, and the prejudice that will inure to the debtor should the failure to act be overlooked.
See, In re Chateaugay Corp.,
In the rare cases in which courts have found excusable neglect, the failure to file in a timely manner was the result of “unique or extraordinary circumstances beyond the reasonable control of the delinquent party.”
Florida Department of Insurance v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.),
For purposes of determining constitutionally acceptable notice of an impending bar date, bankruptcy law divides creditors into two groups: known and unknown. According to well-established case law, due process requires that a debtor’s known creditors be afforded actual notice of the bar date.
City of New York v. New York, New Haven & Hartford R.R.,
For obvious reasons, debtors need not provide actual notice to unknown creditors. It is widely held that unknown creditors are entitled to no more than constructive notice (i.e., notice by publication) of the bar date.
In re Thomson McKinnon Securities Inc.,
Several basic principles underlie the determination of whether a creditor is known or unknown. Unknown creditors are creditors whose claims are not reasonably ascertainable or are speculative or conjectural.
In re Thomson McKinnon Securities Inc., supra,
Reasonable diligence in ferreting out known creditors will, of course, vary in different contexts and may depend on the nature of the property interest held by the debtor.
See, In re Thomson McKinnon Securities Inc., supra, citing,
Known creditors are defined as creditors that a debtor knew of, or should have known of, when serving notice of the bar date. Among known creditors may be parties who have made a demand for payment against a debtor in one form or another before the compilation of a debtor’s schedules. Typically, a known creditor may have engaged in some communication with a debtor concerning the existence of the creditor’s claim. This communication by itself does not necessarily make the creditor known. Direct knowledge based on a demand for payment is not, however, required for a claim to be considered “known.” A known claim arises from facts that would alert the reasonable debt- or to the possibility that a claim might reasonably be filed against it. 3
Claimant alleges that because of the guaranty it is a known creditor with a contingent claim and therefore was entitled to actual notice of the bar date by certified mail. The Bankruptcy Code supports this position. In bankruptcy, a claim is broadly defined as a 11 U.S.C. § 101(5). Similarly, a creditor is broadly defined as an “entity that has a claim against the debtor that arose at the time of or before the order.for relief.” 11 U.S.C. § 101(10). Applying the statutory language to the facts now before us, we find Claimant is clearly a holder of a contingent claim. Whether Debtor knew of the guaranty claim, or at least should have known, requires analysis outside the statutory definitions.
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; ....
We agree with Debtor that when a debtor has no knowledge of a claim and files its petition in good faith, with as thorough a schedule of debts as possible, the debtor has done all that is required under the Bankruptcy Code.
See, Brooks Fashion Stores, Inc. v. Michigan Employment Security Commission (In re Brooks Fashion Stores, Inc.),
Debtor argues that it did not know of Claimant’s contingent right to payment under the unconditional guaranty agreement because its “accounting principles” prevented it from listing the guaranty as a contingent claim. According to Debtor, its accountants do not list liabilities until it becomes probable or likely that a loss would occur. Debtor contends that it was not within reasonable accounting practices to give Claimant actual notice of the bar date until there was a probability of IMR’s default.
Debtor’s arguments concerning accounting principles, however, lie on the floor like pennies not worth picking up. While the cited financial reporting principles may have some practical appeal, Debtor cannot
Debtor cites
In re Flanigan’s Enterprises, Inc.,
Although the Flanigan’s decision resolves an issue similar to the one presented here, we decline to advance Flanigan’s argument to the specific facts of this case. The facts now before us indicate that Debt- or signed a contract that made it unconditionally liable, as a guarantor, for any default of IMR arising under the terms of the partnership agreement. The essence of the guaranty was Debtor’s obligation to pay Claimant in the event that IMR did not. Any guarantor knows, especially one as sophisticated as Debtor, that the day may come when it will be called upon to answer for the default of an obligor.
When comparing a guaranty to any other contract in which a debtor is a party, we conclude that the obligation under an unconditional guaranty puts the guarantor on continuing notice that a contingent claim exists for the payment of a debt. Our conclusion is based on the simple fact that an unconditional guaranty, by its very nature, notifies the guarantor that a debt may be owing at some later date. A guaranty, especially an unconditional guaranty, also puts the guarantor on notice that it may be called upon to pay without notice of default, subject, of course, to contract language to the contrary. We conclude that on the admittedly slippery slope between certainty and metaphysical possibility, an unconditional guaranty evidences a known contingent claim as defined under bankruptcy law.
Obviously, a debtor need not notify all entities with which it has had contractual relations.
See, Brooks Fashion Stores, Inc. v. Michigan Employment Security Commission (In re Brooks Fashion Stores, Inc.),
B. The merits of the guaranty claim.
A contract of guaranty is an obligation to answer for the debt of another. A guaranty creates a secondary, rather than a primary, liability because it re
Concerning the merits of Claimant’s claim, Debtor first argues that according to the guaranty contract, Claimant was required to provide Debtor with notice of IMR’s default before Debtor became liable to pay as guarantor. This argument, however, belies the meaning of the notice provision in the guaranty agreement. The guaranty agreement, in relevant part, merely states what constitutes sufficient notice and the employees authorized to receive notice. The agreement does not address the conditions under which notice must be given. Without rewriting the contract, we cannot say that the parties intended that notice would be a condition for payment under Debtor’s guaranty. We, therefore, look to the general law governing guaranty agreements.
Under guaranty law, absent a contract provision to the contrary, the beneficiary of the guaranty need not inform the guarantor of a default as a prerequisite to the guarantor’s obligation to pay. The guaranty agreement at issue contains no language that modifies this general rule. Moreover, Debtor executed an “unconditional” guaranty of payment in favor of Claimant. In an unconditional guaranty, the creditor, after default, need not pursue its remedy against the principal before looking to the guarantor for payment. Debtor thus cannot claim that it was entitled to specific notice of default without any contract language to substantiate its position.
We find Debtor’s second argument regarding the merits of the guaranty claim more persuasive. Debtor asserts that the amendment of the underlying partnership agreement rendered the guaranty unenforceable because Debtor did not consent to the amendment. The amendments altered the frequency of IMR’s installment payments owing to Claimant.
As a general rule, any material or substantial alteration of the terms of the contract made after execution of the guaranty agreement discharges the guarantor, unless the guarantor consents to the modification.
See, University Bank and Trust Co. v. Dunton,
Finally, Debtor states that under principles of laches, Claimant has waived its right to collect under the guaranty agreement because Claimant neglected to pursue its rights in a timely fashion. We agree. In the Second Circuit, the lach-es doctrine considers the following factors: (1) proof of delay in asserting a claim despite the opportunity to do so, (2) lack of knowledge on the defendant’s part that a claim would be asserted, and (3) prejudice to the defendant by the allowance of the claim.
Rapf v. Suffolk County of New York,
The two-year delay between the time that Claimant first became aware of IMR’s default and Claimant’s demand for payment from the Debtor evidences Claimant’s neglect in enforcing its right, if any, to payment under the guaranty agreement. Even with general knowledge of Debtor’s bankruptcy,
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Claimant failed without excuse to undertake any action that would preserve its right under the guaranty, such as filing a protective proof of claim. Allowing Claimant to file a late proof of claim would substantially prejudice Debtor’s attempts to pay claims according to the plan
Claimant’s failure to pursue its rights, coupled with the resulting prejudice to Debtor, necessitates invocation of our equitable powers. We hold that Claimant’s claim under the guaranty agreement is time-barred by laches.
CONCLUSION
Claimant was entitled to actual notice of the claims bar date because a possible right to payment under an unconditional guaranty agreement is a known contingent claim as defined in the Bankruptcy Code and related case law. The claim is, however, disallowed under the general rule that subsequent modification of an underlying partnership agreement, absent consent, discharges the guarantor. The claim is also disallowed as violative of the equitable doctrine of laches.
The parties shall settle an order on five days notice consistent with this Memorandum of Decision.
Notes
Sitting by special Designation.
. Our subject matter jurisdiction over this controversy arises under 28 U.S.C. § 1334(b) and the "Standing Order of Referral of Cases to Bankruptcy Judges” of the United States District Court for the Southern District of New York,
. King Solomon warned: "He .that is a surety for a stranger shall smart for it; and he that hateth suretyship is sure.” Proverbs, 11:15. See also, Proverbs, 17:18: "A man without sense gives a pledge, and becomes surety in the presence of his neighbor." To which we add: A surety who knows his obligation must give notice to the obligee when in bankruptcy.
. We hasten to add that the debtor’s obligation to give actual notice to known creditors does not completely absolve a creditor of its duty to file a proof of claim, or a least a protective proof of claim, to take part in the bankruptcy process. As Chief Justice Marshall stated in
The Mary,
. Our holding here is based only on the doctrine of laches and not upon any actual notice of bankruptcy theories expressed in opinions by this court or other judicial decisions.