Promise Healthcare Group LLC v.
Matthew Sarna
DLA Piper
1201 N Market Street
Suite 2100
Wilmington, DE 19801
Boris J. Mankovetskiy
Andrew H. Sherman
Sills Cummis & Gross
The
One Riverfront Plaza
Newark, NJ 07102
Counsel for Appellant
William A. Hazeltine
William D. Sullivan
Sullivan Hazeltine Allinson
919 N Market Street
Suite 420
Wilmington, DE 19801
Robert K. Hill
Seitz Van Ogtrop & Green
222 Delaware Avenue
Suite 1500, P.O. Box 68
Wilmington, DE 19801
Counsel for Appellee
OPINION OF THE COURT
RENDELL, Circuit Judge.
Promise Healthcare Group, LLC and its affiliates (“Debtors“), the debtors in this appeal, operated various short and long-term hospital and nursing facilities throughout the country. Appellant Robert Michaelson (“Trustee“) filed this direct appeal in his capacity as liquidating trustee and debtor representative of the Promise Healthcare Group Liquidating Trust. The Trustee takes issue with the Bankruptcy Court‘s allowance of a medical malpractice claim that Appellee Patrick Wassmann filed during the Debtors’ Chapter 11 proceedings based on his treatment at one of Debtors’ facilities between March 15 and June 9, 2017. The Trustee urges that Wassmann‘s claim should not have been allowed because it is time barred. That is so, the Trustee reasons, because even though the claim was timely as of the petition date—November 5, 2018—it became untimely by the time the Trustee objected to it and it was evaluated. He urges that the latter date, and not the petition date, is the appropriate reference point for evaluating a claim‘s validity. The Trustee also urges that Wassmann‘s claim is barred because Wassmann failed to file a timely state court complaint in addition to his Chapter 11 proof of claim.
Judge Goldblatt concluded, in a well-reasoned memorandum opinion, that the Trustee‘s arguments have no basis in the Bankruptcy Code. We agree, and will therefore affirm the Bankruptcy Court‘s order.
I.
Debtors filed a Chapter 11 bankruptcy petition on November 5, 2018, triggering an automatic stay of all actions against them. The Bankruptcy Court set a bar date—that is, the deadline for filing proof of claims—of May 31, 2019. Wassmann filed a $10 million proof of claim on January 4, 2019 based on allegedly negligent care he had received in one of Debtors’ facilities between March 9 and June 15, 2017. The Court entered an order confirming Debtors’ reorganization plan on September 17, 2020, and the plan went into effect on October 1, 2020.1 Wassmann had until November 1, 2020 to proceed against Debtors in state court.2 He opted not to do
The Trustee filed a motion for summary judgment asking the Bankruptcy Court to disallow Wassmann‘s claim on February 17, 2023. The Bankruptcy Court denied the motion on April 20, 2023. The Trustee filed the instant appeal on May 4, 2023.3
In denying the Trustee‘s motion, the Bankruptcy Court reasoned that (1) the claims allowance process set forth under
The Trustee then moved for leave to appeal the Bankruptcy Court‘s interlocutory order directly to this Court. The District Court granted the motion and certified the Bankruptcy Court‘s Order for appeal to this Court pursuant to
We granted Debtors’ petition for leave to appeal and asked the parties to focus exclusively on (1) whether “unenforceability” under
II.4
“When a debtor declares bankruptcy, each of its creditors is entitled to file a proof of claim—i.e., a document providing proof of a ‘right to payment,’
In Travelers, the Supreme Court clarified that
The Trustee urges that Wassmann‘s claim should have been disallowed because at the time the Bankruptcy Court assessed the claim‘s allowance, the statute of limitations had expired, and Wassmann had not filed a timely complaint in state court. This argument rests on two propositions: (1) bankruptcy courts should assess whether a claim is allowed as of their evaluation date, rather than the date the petition was filed; and (2) a creditor must file a timely non-bankruptcy action prior to the expiration of the limitations period to protect its bankruptcy claim. We conclude that a plain read of the Bankruptcy Code belies both of the Trustee‘s positions. Thus,
we will affirm the Bankruptcy Court‘s order denying the Trustee‘s motion for summary judgment.
A. “Unenforceability” under § 502(b) is determined as of the petition date.
First, the Trustee urges that the Bankruptcy Court should have assessed
Wassmann‘s position is better supported by the Bankruptcy Code and persuasive authority. First, as the Bankruptcy Court explained, the plain text of
The text of other
This interpretation accords with principles underlying the Code. Bankruptcy law generally presumes that the petition date “fixes the moment when the affairs of the bankrupt are supposed to be wound up.” Sexton v. Dreyfus, 219 U.S. 339, 344 (1911) (Holmes, J.); see also Douglas G. Baird, The Elements of Bankruptcy 84 (7th ed. 2022) (explaining that a key concept underlying the Bankruptcy Code is that, as of the petition date, each creditor‘s non-bankruptcy right to the debtor‘s estate is “transformed” into a bankruptcy claim). As the Bankruptcy Court explained, “[t]he petition date is, in essence, a ‘day of reckoning,’ consolidating the debtors’ present and future obligations into one moment for prompt resolution.” J.A. 19.
We also observe that the Trustee‘s read of
Similarly, in In re Flanagan, 503 F.3d 171, 178–79 (2d Cir. 2007), the Court of Appeals for the Second Circuit rejected an argument that a post-petition settlement agreement, which included mutual releases of claims, rendered claims unenforceable in the bankruptcy proceeding. The Flanagan court reasoned that
Appellant cites Melikian Enters., LLLP v. McCormick, 863 F.3d 802 (8th Cir. 2017), for the proposition that courts may consider post-petition events when assessing the allowance of claims under
The relevant law in Melikian was Arizona‘s anti-deficiency law, which requires creditors to file a deficiency action within 90 days of a foreclosure sale in order to have a right to recover a deficiency.5 Id. at 807. The creditor, Melikian Enterprises, LLLP (“Melikian“), had commenced a deficiency action on August 2, 2012, prior to the August 29, 2012 petition date and prior to the October 9, 2012 foreclosure sale. Id. at 804. Following the post-petition sale, where Melikian purchased the property at issue, Melikian did not perfect service of its deficiency suit, and the Arizona court dismissed the suit on January 30, 2013. Id. Because Melikian did not file a deficiency action within 90 days of the trustee‘s sale, and because the August 2 deficiency suit was dismissed, the Melikian court concluded that Melikian‘s claim was disallowed. Id. at 806–08. As the Trustee points out, it appears
from the Melikian court‘s reasoning that post-petition events were relevant to the court‘s claim allowance determination. For instance, if Melikian had perfected service and pursued its deficiency action in October 2012 (after the August 29, 2012 petition date), it seems that the court would have considered those post-petition
Melikian does not undermine our conclusion here. First, the question presented before the Melikian court was whether “the Bankruptcy Code—specifically
squarely consider whether such events are invariably relevant to the claim allowance process. See id. at 808–09.
Next, Melikian at most suggests that it may be appropriate to consider post-petition events where the applicable law requires that a claim be accompanied by a separate action or event, and that separate action or event was or should have been commenced post-petition. This reading comports with the Bankruptcy Court‘s discussion of In re Benanti, No. 15-71018, 2018 WL 1801194 (Bankr. C.D. Ill. Apr. 13, 2018). Benanti reasoned that “in determining whether [a claim is] contingent, it is appropriate to consider all facts and circumstances—not just those in existence on the petition date” because “ignor[ing] the realities of a situation simply because they did not exist at the time of the petition would be unconscionable.” Id. at *7; cf. In re Rappaport, 517 B.R. 518, 537-42 (Bankr. D.N.J. 2014) (considering post-petition events in its estimation of a contingent, unliquidated claim). Under this reasoning, a court should not allow a bankruptcy claim where the creditor recovered the amount owed by the debtor in a post-petition foreclosure sale or where, as in Melikian, after the petition date, the creditor failed to comply with state procedures for recovering a deficiency judgment. On the whole, even if Melikian‘s holding finds support in the Bankruptcy Code, it does not guide our decision here. Unlike in Melikian, Wassmann‘s claim, and its enforceability under state law, was not dependent on any post-petition events. Melikian does not move the ball here; there is no reason we would not evaluate Wassmann‘s claim as of the petition date.
Similarly, the Trustee‘s citation to In re Ernst, 382 B.R. 194 (S.D.N.Y. 2008), is of no moment. The Ernst court concluded that “[w]hile section 502 requires that the amount of a claim be determined as of the date of the filing of th[e] petition, there is nothing in [section 502] that requires a court to ignore that the claim is no longer valid under state law.” Id. at 199. The Ernst court then explained that a claim was disallowed where, after the petition date, a state court decision altered the applicable law such that the claim was no longer permitted under state law. Id. at 198–99. But as the Bankruptcy Court explained here, Ernst does not compel courts to consider post-petition facts in claim allowance
All in all, the Bankruptcy Code and persuasive authority support the Bankruptcy Court and Wassmann‘s read of
B. There is no requirement that a creditor who has filed a proof of claim bring a separate, timely suit against the debtor to protect its claim.
The Trustee also urges that Wassmann should have filed a state court complaint before November 1, 2020 to protect his bankruptcy claim, as “timely filing a proof of claim is a necessary but insufficient step to preserve that claim where a statute of limitations subsequently expires.” Appellant‘s Br. 12. The Trustee contends that this reading must be correct because
Section 108(c)(2) provides that a limitations period that would otherwise expire during the automatic stay imposed in a bankruptcy proceeding shall not expire until “30 days after notice of the termination or expiration of the stay.”
In support of this argument, the Trustee relies on Rhodes v. C&G Excavating, Inc., No. CIV.A.98-6274, 1999 WL 820204 (E.D. Pa. Sept. 29, 1999). In C&G, as here, a claimant filed a proof of claim without filing a separate state court complaint. Id. at *1. The C&G court disallowed the claim, citing no precedent and reasoning that “[i]f, as [the claimant] suggests, a complaint is irrelevant following the filing of a proof of claim, then
Like the Bankruptcy Court, we find the C&G court‘s reasoning unpersuasive. To demonstrate the flaws in the C&G court‘s reasoning, the Bankruptcy Court offered the following hypothetical:
Consider a claim against an individual chapter 7 debtor that would be nondischargeable under
§ 523(a)(2) on the ground that the debtor had defrauded a lender into extending credit. Such a creditor may recover its pro rata share out of the bankruptcy estate by filing a timely proof of claim. To the extent the creditor seeks and obtains a determination from the bankruptcy court that the debt is nondischargeable, however, the creditor would typically be left to proceed outside of bankruptcy to obtain or enforce a judgment against the debtor to recover on the balance of the claim out of the debtor‘s post-bankruptcy assets. But without relief from the stay, that action could not be brought until after the conclusion of the chapter 7 case. The work done by§ 108(c) is that, if the statute of limitations would otherwise expire during the bankruptcy case, this extension of time permits the creditor to wait until after the bankruptcy case has concluded before bringing that non-bankruptcy litigation.
J.A. 29–30. This hypothetical demonstrates that
The Trustee also cites to Mamer v. Apex R.E. & T., 59 F.3d 780 (8th Cir. 1995), Bennett v. U.S. Lines, Inc., 64 F.3d 62 (2d Cir. 1995), and McKinney v. Waterman S.S. Corp., 925 F.2d 1 (1st Cir. 1991), in support of his contention that a creditor must file a separate timely action in addition to a proof of claim. But each of those cases involved a non-bankruptcy action that was dismissed as untimely, as it was not filed within the applicable limitations period, including the period allotted by
As these cases demonstrate,
III.
In sum, the Bankruptcy Court was correct in assessing the enforceability of Wassmann‘s claim with reference to the petition date. The Bankruptcy Court was also correct in concluding that Wassmann was not obligated to file a separate tort suit after the stay was lifted. Accordingly, we will affirm the Bankruptcy Court‘s order denying the Trustee‘s motion.
RENDELL
Circuit Judge
Notes
If no action is maintained for a deficiency judgment within the time period prescribed in subsections A and B of this section, the proceeds of the sale, regardless of amount, shall be deemed to be in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.