586 B.R. 95 | S.D. Ill. | 2018
Debtor-Appellant Queen Elizabeth Realty Corp. ("Queen Elizabeth" or "Appellant") brings this appeal from an interlocutory order granting Creditor-Appellee SMS Financial G, LLC ("SMS" or "Appellee") ) permission to file a late proof of claim pursuant to Federal Rule of Bankruptcy Procedure 9006(b)(1). Debtor's bankruptcy petition was filed in July 2013, and creditors were required to file notices of claim by October 28, 2013. SMS's predecessors-in-interest had not been given notice of the proceeding or its attendant deadlines; did not learn of it until December 2015; and filed a proof of claim four months later. After extensive discovery and briefing on this issue, United States Bankruptcy Judge Stuart M. Bernstein granted SMS's motion to file a proof of claim untimely on the basis of excusable neglect. Because Judge Bernstein's decision was not an abuse of his discretion, the order below is affirmed.
*99BACKGROUND
A. Factual Background
1. Foodmart-All Points Agreement
On June 25, 2009, Foodmart International II, Corp. ("Foodmart II") entered into a chattel mortgage with Sierra Credit Corp. ("Sierra"); the agreement was signed by Lewis Wu, President of Foodmart II. (Ex. A). The same day, Lewis Wu executed a guaranty agreement, whereby the entities Foodmart International V, Corp. ("Foodmart V"), Queen Elizabeth, and Farmer's Best Market Corp. ("Farmer's") agreed to guarantee the payments due to Sierra under the mortgage. (Id. ). Lewis Wu signed on behalf of all guarantor entities. (Id. ). That same day, Sierra executed a collateral assignment of contract documents wherein it assigned all rights under the Foodmart II contract to All Points Capital Corp. ("All Points"). (Id. ). Lewis Wu signed, on behalf of Foodmart II, a notice and acknowledgement of the assignment to All Points. (Id. ).
2. All Points State Court Litigation
On October 5, 2011, All Points filed suit in New York State Supreme Court, Nassau County, against Foodmart II, Foodmart V, Queen Elizabeth, Farmer's, and Lewis Wu to recover an unpaid sum due and owing of $1,594,682.96. (Ex. A). All Points was represented by Lee Mendelson of Moritt Hock & Hamroff LLP. (Id. ). In a short form order dated June 13, 2012, Justice Stephen A. Bucaria entered summary judgment in favor of All Points, and ordered that an inquest be held. (Id. ).
On February 13, 2013, the parties filed a stipulation with the Supreme Court in which the parties consented to a judgment against Foodmart V, Farmer's, Queen Elizabeth, and Wu in the amount of $1,500,000 in lieu of an inquest. (Ex. B). Lewis Wu signed the stipulation on behalf of himself, Foodmart V, and Farmer's; no representative of Queen Elizabeth signed the stipulation. (Id. ). Also on February 13, 2013, the Supreme Court entered judgment against Foodmart V, Farmer's, and Wu in the amount of $1,500,000. (Ex. A). The judgment explicitly excluded Queen Elizabeth. (Id. ("ADJUDGED, that Plaintiff sever and continue the action against Defendant, Queen Elizabeth[.] ) ). The last entry on the docket for this case is dated February 15, 2013, and reads "settled before trial." (Ex. B).
3. Bankruptcy Filing and All Points' Assignment to SMS
Queen Elizabeth filed for bankruptcy under Chapter 11 on July 17, 2013. (Bankr. Dkt. # 1). By Order dated September 13, 2013, Judge Bernstein set the deadline for filing proofs of claim (the "Bar Date") as October 28, 2013. (Bankr. Dkt. # 24). The September 13, 2013 Order required Queen Elizabeth to serve notice of the Bar Date on, inter alia , "all creditors and other *100known holders of claims as of the date of this Order," and "all parties to litigation with the Debtor." (Id. ). On January 14, 2016, Judge Bernstein held a confirmation hearing on Queen Elizabeth's Chapter 11 reorganization plan. (Bankr. Dkt. # 325). He then confirmed the plan on January 26, 2016. (Bankr. Dkt. # 322).
Meanwhile, on December 8, 2015, Capital One Equipment Finance Corp. ("Capital One," formerly known as All Points), had assigned its rights under the June 25, 2009 agreement with Foodmart II to distressed debt buyer SMS. (Ex. A). Schedule A to the general assignment and assumption agreement contains a list of litigation proceedings and judgments-on that list is an entry for Foodmart II as "borrower" and Queen Elizabeth as "judgment debtor." (Id. ). The entry includes the docket number for Queen Elizabeth's Chapter 11 proceeding and says "no disposition." (Id. ).
Discovery in connection with the instant litigation disclosed that in November 2015, Capital One had invited SMS to bid on the June 25, 2009 contract. (Ex. E). SMS conducted due diligence and asked that Capital One "run a search to disclose any bankruptcy filings related to the contemplated transaction." (Id. ). On December 2, 2015, Capital One became aware of Queen Elizabeth's bankruptcy case, and it was added to Schedule A of the assignment agreement. (Id. ).
Further insight into the relevant timeline was obtained in June 2016, when Queen Elizabeth deposed Daniel Shorr, a partner and managing director at SMS, in connection with this litigation. Shorr confirmed that Queen Elizabeth's bankruptcy case had been added to Schedule A following SMS's bankruptcy litigation due diligence. (Shorr Dep. 12:1-14:23). Shorr testified that a few days after the Capital One deal closed (at which point he owned the judgment against Queen Elizabeth), he "personally pulled the docket report ... to see what the bankruptcy was about." (Id. at 15:16-17). Shorr learned from the docket entries that Queen Elizabeth was "moving through their Fourth Amended Plan and they had financing in place, hadn't yet funded, but they were looking at some takeout financing on their building in Manhattan." (Id. at 16:23-17:1). Shorr saw that the Bar Date had passed, "and that All Points and Capital One [had never been] noticed as a [c]reditor in the bankruptcy." (Id. at 17:7-9). He did not learn (and, the Bankruptcy Court later determined, would not have learned) from the docket of the pending confirmation date of Queen Elizabeth's reorganization plan.
On December 14, 2015, Shorr retained Lee Mendelson-who was the attorney of record on the judgment-"to file the Assignment of Judgment and file an Appearance and a Motion for the Late Proof of Claim[.]" (Shorr Dep. 15:12-16:8). But, Shorr explained, Mendelson never filed anything in the bankruptcy case and lied when Shorr asked him about it. (Id. at 17:17-23). Shorr testified:
[H]e lied. With a string of phone calls and emails, Mr. Mendelson said he had filed the Assignment of Judgment, he said he had filed the late-the Motion for Late Proof of Claim, and he said he had spoken to opposing counsel. I later determined none of it was true and immediately terminated him in March.
(Id. ). Entries in a debt collection software program called Collect show that Shorr contacted Mendelson on December 14, 2015; December 15, 2015; January 4, 2016; January 6, 2016; January 18, 2016; February 1, 2016; and March 8, 2016. (Ex. J). An entry dated March 18, 2016 reads "Lee is unresponsive[.]" (Id. ). Shorr testified that he continued to review the docket for Queen Elizabeth's bankruptcy into late January and early February. He sent *101Mendelson the documents he pulled and implored him to act, but to no avail. (Shorr Dep. 19:11-20:15 ("We need to get our claim filed before the plan is confirmed, and it looks like it's too late.") ). At that point, Shorr terminated Mendelson and hired SMS's current counsel. (Id. at 23:16-17).
B. Procedural History
1. SMS's Motion in Bankruptcy Court
On April 5, 2016, SMS, through new counsel, filed a motion to file a late proof of claim. (Bankr. Dkt. # 349). SMS argued that it was a known creditor entitled to notice of the Bar Date and, having not received notice, sought leave to file on the basis of "excusable neglect." (Id. at 5). Queen Elizabeth filed an objection to the motion on April 28, 2016, but changed focus, arguing that Lewis Wu did not have authority to enter into the June 25, 2009 agreement on behalf of Queen Elizabeth and that, in any event, Queen Elizabeth never signed the stipulation in the Supreme Court action and never had any judgment entered against it. (Bankr. Dkt. # 350 at 2-3). In other words, Queen Elizabeth argued that All Points was not a known creditor, was not entitled to notice, and should be barred from filing a late claim under the doctrine of laches. (Id. at 4-5).
Following the filing of SMS's reply brief on May 3, 2016 (Bankr. Dkt. # 351), Judge Bernstein held a conference with the parties to discuss the motion; he ordered that the parties conduct discovery, and adjourned the case until June 14, 2016 (Bankr. Dkt. # 352). Shortly thereafter, Queen Elizabeth filed a supplemental objection on May 25, 2016 (Bankr. Dkt. # 353), and an amended supplemental objection on June 3, 2016 (Bankr. Dkt. # 355). In these filings, Queen Elizabeth acknowledged that "[o]n or about December 2, 2015, All Points became aware of the Debtor's chapter 11 case," but still asserted a laches defense, claiming that SMS "sat idly by while the Debtor confirmed the [reorganization p]lan[.]" (Id. at 3-4). On June 10, 2016, SMS filed a supplemental reply brief and argued that the fact-now known to the parties through discovery and acknowledged by Queen Elizabeth-that All Points did not learn about the bankruptcy until December 2015 "put the ... laches defense to rest, once and for all[.]" (Bankr. Dkt. # 357 at 2). Despite SMS's entreaties to close discovery, Judge Bernstein ordered further discovery on the motion. (Bankr. Dkt. # 358).
On October 25, 2016, SMS filed a memorandum in further support of its motion to file a late claim under Rule 9006(b)(1). (Bankr. Dkt. # 365). SMS argued that Queen Elizabeth had not met its burden to establish the unreasonable delay or lack of diligence by SMS needed to assert its laches defense and, further, that Queen Elizabeth had failed to show that it would be prejudiced by SMS's late claim. (Id. at 3-6). Queen Elizabeth filed a response to SMS's brief on October 31, 2016. (Bankr. Dkt. # 366). Here, Queen Elizabeth doubled down on its laches defense and argued that "mistake or inattention of a creditor's counsel to timely file a proof of claim does not justify allowance of a late-filed claim," because "if a clear deadline is missed due to a law office failure, including inattention or lack of oversight, an extension is not justified." (Id. at 5 (citations omitted) ). On November 1, 2016, Judge Bernstein held a conference with the parties and solicited supplemental briefing. (Bankr. Dkt. # 368).
SMS submitted its supplemental brief on November 9, 2016. (Bankr. Dkt. # 369). SMS argued that its due process rights had been violated by Queen Elizabeth's *102failure to issue notice of the Bar Date and that SMS's delay was excusable under the multifactor standard annunciated in Pioneer Investment Services Company v. Brunswick Associates Limited Partnership ,
2. The Bankruptcy Court's Decision
On March 24, 2017, Judge Bernstein issued a Memorandum Decision and Order granting SMS's motion to file an untimely proof of claim. In re Queen Elizabeth Realty Corp. , No. 13-12335 (SMB),
The Bankruptcy Court found it "immaterial" whether All Points was a known or unknown creditor because, either way, "the debtor did not provide notice consistent with due process." Queen Elizabeth ,
In weighing the Pioneer factors-"danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith"-the Court focused on the third factor and found that it "weigh[ed] heavily in SMS's favor" inasmuch as SMS immediately took action upon learning of the passed Bar Date and the delay was "not unreasonable under the circumstances." Queen Elizabeth ,
3. The Instant Appeal
Queen Elizabeth filed this appeal on April 11, 2017 (Dkt. # 1), and filed its designated record on appeal under Federal Rule of Bankruptcy Procedure 8009 on April 18, 2017 (Dkt. # 4). Queen Elizabeth *103filed its memorandum of law in support of its appeal on May 22, 2017 (Dkt. # 6), and SMS filed its opposition on June 20, 2017 (Dkt. # 10). This appeal became fully briefed when Queen Elizabeth filed its reply brief on July 3, 2016. (Dkt. # 11).
DISCUSSION
A. Applicable Law
1. Appellate Jurisdiction
Under
In the ordinary case, appellate jurisdiction does not arise until the entry of a final decision. See
The ruling below disposed of the discrete issue of whether SMS could file a claim against the Queen Elizabeth bankruptcy estate, and there is no indication that the Bankruptcy Court will reconsider its ruling. To be sure, there remained the issue of whether SMS's claim-predicated on a valid state-court judgment that recited *104a specific damages figure-would be deemed valid, but Queen Elizabeth has not appealed any subsequent ruling as to the validity or amount of SMS's claim. What is at issue here is whether the Bankruptcy Court fully resolved the dispute over whether SMS would be permitted into the litigation in the first instance, and it did. It is arguable that this appeal is at the periphery of the Court's jurisdiction. But recognizing the elastic standard of finality applied in the bankruptcy context and the fact that Queen Elizabeth has no further opportunity to present its objections to SMS's entry into the bankruptcy case, the Court will hear this appeal of the ruling below under
2. The Standard of Review for Bankruptcy Court Decisions
A district court may "affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." In re Bernard L. Madoff Inv. Secs., LLC , No. 15 Civ. 1151 (PAE),
"As the Second Circuit has held, '[a] bankruptcy court exceeds its allowable discretion where its decision [i] rests on an error of law (such as application of the wrong legal principle) or a clearly erroneous factual finding, or [ii] cannot be found within the range of permissible decisions, even if it is not necessarily the product of a legal error or a clearly erroneous factual finding.' " In re Tribeca Mkt., LLC ,
Queen Elizabeth argues that the Bankruptcy Court's conclusion was a "mixed finding of fact and conclusion of law" insofar as it rested on incorrect law and clear factual error. (Appellant Br. 5). Even assuming the Bankruptcy Court's ruling is so, the standard of review remains abuse of discretion. As the Supreme Court has very recently observed, "[m]ixed questions are not all alike"-those that rest primarily on the facts are reviewed for clear error and those that rest primarily on the law are reviewed de novo. U.S. Bank Nat. Ass'n ex rel. CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge, LLC , --- U.S. ----,
Where, as here, the Bankruptcy Court engaged a robust factual record to reach its legal conclusion, this Court reviews its factual findings for clear error and its legal conclusions de novo and, finding no error in either, holds that the Bankruptcy Court's order allowing SMS's late claim was not an abuse of its sound discretion. See In re AMR Corp. ,
3. The Standard for Filing Late Proofs of Claim
Federal Rule of Bankruptcy Procedure 9006(b)(1) permits a bankruptcy court to accept a late-filed claim if the delay was occasioned by "excusable neglect." In Pioneer , the Supreme Court resolved a circuit split over the meaning of "excusable neglect," and held that "the determination is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission."
The Second Circuit takes "a hard line" in applying the Pioneer test, and admonishes district courts to focus their inquiry on the third factor-the reason for the delay. In re Enron Corp. ,
B. The Bankruptcy Court's Allowance of SMS's Late Claim Was Not an Abuse of Discretion
Queen Elizabeth argues on appeal that SMS's "delay was not excusable neglect within the meaning of the applicable case law." (Appellant Br. 6). It makes clear, however, that it "does not argue that [SMS] is barred from filing its [p]roof of [c]laim because it missed the Bar [Date]" but, rather, takes issue with "what [SMS] did when it learned of [Queen Elizabeth's *106b]ankruptcy on December 2, 2015." (Id. at 5-6). Specifically, Queen Elizabeth claims that "[t]he Bankruptcy Court erred when it failed to emphasize [SMS's] reason for the delay" and "gave short shrift" to the argument that SMS's delay could not be excused on the basis of "law office failure." (Id. at 8). In opposition, SMS argues that SMS never raised the "law office failure" argument in the Bankruptcy Court, and that this Court should reject Queen Elizabeth's arguments on the merits because the delay-and any prejudice that flows from it-was occasioned by Queen Elizabeth's failure to notify SMS's predecessor of the bankruptcy proceeding and Bar Date. (Appellee Br. 11-19). SMS argues, further, that it was entitled to relief below under a due process standard, which would have obviated the need to consider the Pioneer excusable neglect standard. (Id. at 19-22).
1. The Pioneer Factors Favor SMS
To review, the Pioneer factors to be considered are "[i] the danger of prejudice to the debtor, [ii] the length of the delay and its potential impact on judicial proceedings, [iii] the reason for the delay, including whether it was within the reasonable control of the movant, and [iv] whether the movant acted in good faith."
Because there is no bright-line rule governing the length of delays, "courts consider the degree to which the delay might disrupt the judicial administration of that particular case." In re AMR Corp. ,
The Court finds that the period of delay attributable to SMS (four months) was not significant and did not inflict irreparable damage on the administration of Queen Elizabeth's bankruptcy. Notably, Queen Elizabeth placed a notice on the docket that failed to include the date of the confirmation hearing, leaving SMS in the dark as to its timing and, consequently, the urgency of filing its claim. Queen Elizabeth ,
What is more, permitting SMS's late claim will not "prejudice" Queen Elizabeth, as the term was used by the Pioneer Court. See In re Enron Corp. ,
But this does not end the inquiry-delay may be deemed inexcusable even where there is no prejudice, In re Keene Corp. ,
Before reaching the merits of Queen Elizabeth's argument, the Court addresses SMS's contention that this argument "was never offered or relied on by SMS before the Bankruptcy Court," and that it premised its motion for leave to file a late claim on the fact that Queen Elizabeth "failed to give [SMS's] predecessor-in-interest ... any notice of the Bankruptcy Case or the Bar Date." (Appellee Br. 11-12). The contention is not entirely accurate. SMS may not have relied on its attorney's failure as the basis for its neglect, but it recognized, in response to statements by the Bankruptcy Court at a conference, that "[t]he reason for the additional four months of delay was, as per the Court, the neglect of SMS'[s] prior counsel to submit a motion to file a late claim." (Bankr. Dkt. # 369). SMS even relied on its efforts to implore prior counsel to act as evidence that it had not acted in bad faith. (Id. ). Queen Elizabeth argued in response that the failure of SMS's counsel to file a motion could not be the basis for *108excusable neglect. (Bankr. Dkt. # 370). The Bankruptcy Court considered the arguments on both sides and found that "SMS ... immediately instructed Mendelson to file a motion to permit its late claim, and Mendelson negligently failed to do so, [such that] the resulting delay was not unreasonable under the circumstances." Queen Elizabeth ,
The Bankruptcy Court found that the full period of delay was occasioned by both All Points' lack of notice and SMS's counsel's failure to seek leave to file a late claim. Queen Elizabeth ,
Queen Elizabeth cites to several cases (see Appellant Br. 10) where attorneys who knew about a bar date or other deadline in the proceedings nonetheless failed to act. See, e.g. , Canfield v. Van Atta Buick/GMC Truck, Inc. ,
This case does not involve the "clear deadline" at issue in the cases Appellant cites. Here, SMS's then-counsel did not act in derogation of a clear court order, nor did he simply misread or fail to account for a known (or easily knowable) deadline. The Bankruptcy Court found that, by early December 2015, Mendelson knew of the bankruptcy proceeding and that the Bar Date had passed. Queen Elizabeth ,
The Pioneer inquiry is "at bottom an equitable one" that "tak[es] account of all relevant circumstances surrounding the party's omission." Pioneer ,
2. The Court Need Not Consider SMS's Contention That It Was Entitled to Relief Under Due Process
Appellee SMS asks the Court to affirm the Bankruptcy Court's ruling that it was entitled under the Pioneer factors to file its late claim, but offers alternatively that the Court could affirm on the basis that Queen Elizabeth's failure to provide SMS's predecessor with notice of the Bar Date violated the predecessor's due process rights. (Appellee Br. 19-22). SMS made this argument below, and the Bankruptcy Court rejected the argument because SMS had ultimately acquired knowledge of the bankruptcy proceeding and the passed Bar Date. Queen Elizabeth ,
Because it affirms the ruling below on the Pioneer analysis, the Court need not decide the issue of SMS's due process claim. That said, the Court agrees with the Bankruptcy Court's determination that, under Espinosa , a creditor with actual knowledge of a bankruptcy proceeding-even if the creditor did not receive the notice it was due-may not sit on its rights indefinitely. Espinosa ,
CONCLUSION
For the foregoing reasons, the Bankruptcy Court's order permitting SMS to file a late claim is AFFIRMED. The Clerk of Court is directed to terminate all pending motions, adjourn all dates, and close this case.
SO ORDERED.
The Court's consideration of this motion is limited to facts presented in the record below. See In re Ampal-Am. Israel Corp. ,
The parties are correct in conceding the inapplicability of interlocutory review. When considering whether to grant leave for an appeal of an interlocutory bankruptcy order under
The Court relegates to a footnote its discussion of the fourth Pioneer factor-whether the movant acted in good faith. That is because Queen Elizabeth did not argue bad faith before the Bankruptcy Court, and its opening appellate brief explicitly says, "[t]here is no argument that [SMS] acted in bad faith." (Appellant Br. 16). In a curious about-face, Queen Elizabeth argues for the first time in reply that SMS intentionally waited until after the reorganization plan was approved to file its claim and that SMS "[s]eiz[ed] upon the [p]lan's terms" in "bad faith." (Appellant Reply 7). The Court need not consider this belated claim. McBride v. BIC Consumer Prods. Mfg. Co., Inc. ,
Queen Elizabeth asserted a laches defense in the Bankruptcy Court; Judge Bernstein rejected it, and Queen Elizabeth does not challenge that finding on appeal. The Bankruptcy Court found that SMS's motion should be analyzed under the Pioneer test, not laches, because of the relief it sought. In re Queen Elizabeth Realty Corp. ,