In Re Cendant Corp , 311 F.3d 298 ( 2002 )

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
11-21-2002
In Re Cendant Corp
Precedential or Non-Precedential: Precedential
Docket No. 01-3656
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PRECEDENTIAL
Filed November 21, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-3656
IN RE: CENDANT CORPORATION PRIDES LITIGATION
WELCH & FORBES INC., an institutional
investment manager, individually and on
behalf of all others similarly situated
v.
CENDANT CORPORATION; MERRILL LYNCH & CO.;
CHASE SECURITIES, INC.; HENRY R. SILVERMAN;
WALTER A. FORBES; COSMO CORIGLIANO; E. KIRK
SHELTON; ERNST & YOUNG
THE CHASE MANHATTAN BANK, as custodian
for Capital Income Builder, Inc.;
INCOME FUND OF AMERICA, INC. and
CAPITAL WORLD GROWTH & INCOME, INC.,
Appellants
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. No. 98-cv-02819)
District Judge: Honorable William H. Walls
Argued: September 9, 2002
Before: NYGAARD, ROTH, and WEIS, Circuit Judge s.
Filed November 21, 2002
Gerald T. Ford, Esquire (ARGUED)
Robert A. Kasuba, Esquire
Landman Corsi Ballaine & Ford
One Gateway Center, Suite 400
Newark, New Jersey 07102
Attorneys for Appellant
The Chase Manhattan Bank, now
known as J. P. Morgan Chase Bank
Michael M. Rosenbaum, Esquire
(ARGUED)
William M. D’Annunzio, Esquire
Budd Larner Gross Rosenbaum
Greenberg & Sade
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078-0999
Attorneys for Appellee
Cendant Corporation
OPINION OF THE COURT
WEIS, Circuit Judge.
We remanded this case to the District Court for
determination of whether Chase National Manhattan Bank
("Chase"), as custodian, had established excusable neglect
for late filing of documents confirming its right to
participate in the distribution of a fund created to settle a
class action. In re Cendant Corp. Prides Litig. , 234 F.3d 166(3d Cir. 2000) ("Chase I"). After reconsideration, the District
Court adhered to its previous ruling rejecting the
applicability of excusable neglect. We will reverse and
remand with directions to allow the claims.
The case is based on Securities Act violations with
respect to Cendant Corporation’s convertible securities
called "Prides." As we observed in one of the numerous
opinions in this complex litigation,1 "it is basically
_________________________________________________________________
1. See In re Cendant Corp. Prides Litig., 233 F.3d 188 (3d Cir. 2000); In
re Cendant Corp. Prides Litig., 234 F.3d 166 (3d Cir. 2000) ("Chase I");
2
undisputed that Cendant’s employees committed fraud." In
re Cendant Corp. Litig., 264 F.3d 201, 249 (3d Cir. 2001).
Chase I reviewed the issues here in some detail, but we
will only summarize the principal points that are relevant to
this appeal. Chase, custodian for three mutual funds -
Capital Income Builder, Inc., Income Fund of America, Inc.,
and Capital World Growth and Income, Inc. - timely filed
proofs of claim for each entity against the settlement fund
of $341,480,861. Capital Income’s claim was $4,684,000;
Income Fund, $16,394,000; and World Growth,
$2,576,200.
At the request of Valley Forge Administrative Services,
the claims administrator, Chase provided additional
information in August 1999 with respect to Income Fund
and World Growth. Although the cures were eight days late,
Valley Forge approved them. No information was supplied,
however, in connection with the Capital Income claim, and
Valley Forge rejected it on August 17, 1999.
In September 1999, Cendant moved to dismiss all late
cured claims, including Income Fund and World Growth. In
October 1999, the District Court granted a four day
extension of the deadline for curing claims as originally set,
but stated that it would accept no excuses for tardiness
that were filed with the Court after September 7, 1999.
In January 2000, the District Court rejected the Income
Fund and World Growth claims because they had failed to
file excuses for their untimely filing of cures. In April 2000,
Chase, invoking Federal Rule of Civil Procedure 60(b),
sought allowance of all three claims, including that of
_________________________________________________________________
In re Cendant Corp. Prides Litig., 235 F.3d 176 (3d Cir. 2000)
("Santander"); In re Cendant Corp. Prides Litig., 243 F.3d 722 (3d Cir.
2001); In re Cendant Corp., 260 F.3d 183 (3d Cir. 2001); In re Cendant
Corp. Litig., 264 F.3d 201 (3d Cir. 2001); In re Cendant Corp. Litig., 264
F.3d 286 (3d Cir. 2001); In re Cendant Corp. Prides Litig., 51 F. Supp.2d
537 (D.N.J. 1999); In re Cendant Corp. Prides Litig., 189 F.R.D. 321(D.N.J. 1999); In re Cendant Corp. Litig., 60 F. Supp.2d 354 (D.N.J.
1999); In re Cendant Corp. Prides Litig., 98 F. Supp.2d 602 (D.N.J.
2000); In re Cendant Corp. Prides Litig., 157 F. Supp.2d 376 (D.N.J.
2001).
3
Capital Income. The District Court denied the request and
Chase appealed. We concluded that the District Court had
failed to consider matters that might have constituted a
basis for establishing excusable neglect and remanded for
further proceedings.
In accordance with our instructions, the District Court
reconsidered Chase’s Rule 60(b) motion. After permitting
limited discovery and hearing oral argument, the Court
again denied the motion. Chase has appealed.
As Chase I made clear, the proper standard to be applied
in determining whether tardy claims were entitled to share
in the settlement proceeds is "excusable neglect." Chase I,
234 F.3d at 168 n.2. The inquiry, essentially equitable,
requires consideration of the entire situation. Pioneer Inv.
Servs. v. Brunswick Assoc., Ltd. P’ship, 507 U.S. 380, 395
(1993). Pioneer set out four factors to be considered: (1)
prejudice to the adverse party; (2) length of the delay and
its potential impact on the judicial proceedings; (3) reason
for the delay, including whether it was within the
reasonable control of the movant; and (4) whether the
movant acted in good faith. Id.With these general principles as the backdrop, we will
review the District Court’s rulings on remand as to the
respective claims under the abuse of discretion standard.
Ahmed v. Dragovich, 297 F.3d 201, 209 (3d Cir. 2002).
Because of a difference in material facts, we will discuss the
Capital Income claim after we have first considered the
other two.
I.
Many of the surrounding matters are in dispute, but the
controlling circumstances with respect to Income Fund and
World Growth are definitive enough to reach a conclusion
on the proper disposition. The crucial chronology follows.
Valley Forge sent separate letters dated July 15, 1999 to
Income Fund and World Growth and a duplicate one to
Income Fund dated July 16, 1999. The letters requested
further information about the previously submitted proofs
of claim. Chase responded by fax on August 12, 1999,
4
although this was four-days late as per the terms of the
settlement agreement and court order.2
The District Court found that after receiving the faxed
responses, Valley Forge approved those two claims. This
finding appears to be based on the unchallenged affidavit
submitted by Ms. Collins, a Chase employee who
telephoned Valley Forge after sending the fax on August 12,
1999. She averred that she was told that the Income Fund
and World Growth claims were now in order. She had also
given Chase’s fax and telephone numbers to Valley Forge
on that occasion.
Substantial dispute exists with respect to two other
mailings allegedly sent by Valley Forge. One letter dated
August 5, 1999 reminded Chase of the necessity for
information to cure the proofs of claim. Two form letters,
dated August 27, 1999 and addressed to "Claimant" rather
than Chase, stated that the cures were late, but that Valley
Forge and class counsel nevertheless believed the claims
should be accepted as valid. However, the letters urged the
"Claimant" to write to the court explaining why the cures
were tardy.
The District Court, relying on the presumption of mailing
and delivery, found that the notices of August 27, 1999 had
been received, despite Chase’s denial of receipt. Finding
that Cendant had not been prejudiced and Chase’s Rule
60(b) motion had been brought within a reasonable time,
the Court, however, refused to modify its January 14, 2000
order denying the Income Fund and World Growth claims.
The parties devoted much of their argument before the
District Court on remand and on this appeal discussing
whether the August 27, 1999 "Claimant" letters had been
received by Chase. We conclude, however, that that issue is
a distraction and is not material to a determination of
whether the delay in filing Income Fund and World Growth
cures falls within the ambit of excusable neglect. 3
_________________________________________________________________
2. Actually, it was eight-days late, but the District Court’s grant of a
four-day grace period for all cured claims reduced the tardy factor for the
Income Fund and World Growth to four days.
3. In our prior opinion we commented that the letters of August 27, 1999
were "critical." Chase I, 234 F.3d at 173. However, the District Court had
5
As stated in Chase I, Cendant could not establish
prejudice. The District Court had earlier reached that same
conclusion in granting the four-day grace period for filing
the cures, explaining that the "limits of Cendant’s
bargained--for financial obligations, $341,480,861, have
not been expanded." In re Cendant Corp. Prides Litig., 189
F.R.D. at 321, 325 (D.N.J. 1999). We agreed that,". . . the
only ‘prejudice’ Cendant would suffer by being forced to pay
Chase is the ‘loss of a windfall.’ " Chase I, 234 F.3d 171n.8.
On remand, the District Court also concluded that
Chase’s delay in filing its Rule 60(b) motion was reasonable
and had no actual negative impact on the judicial
proceedings. Notwithstanding the findings favorable to
Chase, the judge criticized it for lack of diligence following
disallowance of the Income Fund and World Growth claims
in the January 14, 2000 order and further commented that
Chase’s conduct indicated a lack of good faith in the claims
process.
In its defense, Chase pointed out that Cendant’s motion
in September 1999 to disallow these two claims along with
those of other parties was served on only class counsel who
failed to notify the claimants. Moreover, in a brief submitted
in response to Cendant’s motion, class counsel had
suggested that all late cures, including Chase’s, be
considered timely if filed by August 17, 1999.
In response to the District Court’s limitation of excuses to
those submitted before September 7, 1999, class counsel
filed a brief that listed extenuating circumstances for some
claimants, but proffered nothing with respect to Income
Fund and World Growth.
Although Chase’s lack of diligence in following the
progress of the Court’s proceedings is far from
commendable, it did not amount to a lack of good faith.
_________________________________________________________________
not mentioned the August 12th fax cures in its opinion of June 7, 2000
(the subject of Chase I). Nor did it acknowledge that Valley Forge had
approved the cures. Consequently, Chase I did not discuss whether the
District Court could have considered that Valley Forge’s approval made
it unnecessary for Income Fund or World Growth to file excuses.
6
Certainly, Chase could assume that during the period in
question, class counsel was looking after the interests of
the Funds as well as the other class members.
But most critical on remand was the District Court’s
failure to consider the length of the delay in sending the
cure information to Valley Forge -- four days. As we
commented in a companion case, "we agree with the Prides
Class that the District Court need not have scrutinized
claims meeting that extended date [September 7, 1999]
with the same exactitude as those claims missing even that
deadline." In re Cendant Corp. Prides Litig. , 233 F.3d 188,
197 (3d Cir. 2000). In another Prides case, In re Cendant
Corp. Prides Litig., 235 F.3d 176 (3d Cir. 2000)
("Santander"), we characterized the delay of five days, or
three business days, in filing the initial proof of claim by
another claimant in this same litigation as "trivial."
In the case now before us, we conclude that the four-day
delay in filing the cures by Income Fund and World Growth
was trivial as well. Indeed, the justification for imposing
unyielding time limits on perfecting a cure is even less
obvious than that for filing a proof of claim. In view of the
insignificant time lapse of only four days, and the
assurance given by Valley Forge that the claims were in
order, it would not be unreasonable for Chase to have
assumed that there was no need to submit an excuse to the
Court -- even if the August 27, 1999 form letter had been
received.
Given these circumstances, and recognizing the equitable
nature of the proceeding, we are persuaded that the record
demonstrates the existence of excusable neglect. Thus, the
District Court’s denial of the Income Fund and World
Growth claims did not constitute the exercise of sound
judicial discretion. Accordingly, those claims should be
allowed.
II.
Although the proof of claim for Capital Income was filed
at the same time as those for Income Fund and World
Growth, the chronology of significant events thereafter
varies substantially.
7
Cendant contends that Valley Forge sent a notice dated
July 19, 1999 to Chase as custodian for Capital Income
requesting additional information. Like all of the others, it
was addressed to "Chase Manhattan as TTEE, P.O. Box
1508 Church St. Station, New York, N.Y. 10008." Chase,
however, asserts that it never received that letter. On
August 5, 1999, Valley Forge mailed letters to Chase’s post
office box again requesting cure information on each of the
three funds, including Capital Income. Those letters did
reach Chase, but they were date-stamped as being received
in Chase’s Class Action Group on November 15, 1999. That
date-stamp does not establish, however, when the letter
actually arrived at Chase’s post office box.
Having received no response within a few weeks to its
earlier letters, Valley Forge sent a third notice dated August
17, 1999 rejecting Capital Income’s claim. Chase asserts it
never received this letter and, thus, never knew of the
denial. Because the Capital Income claim had been rejected
by Valley Forge, it was not called to the attention of the
District Court by class counsel in connection with
Cendant’s September 1999 motion to deny various claims.
Chase responded to the delayed letter of August 5, 1999
on January 4, 2000 by sending the requested data to Valley
Forge. No explanation exists in the record for the time-lapse
between November 15, 1999, when Chase’s Class Action
Group received the August 5th notice, and January 4,
2000, when it sent the information to Valley Forge.
On January 17, 2000, class counsel wrote to Chase that
the Court had denied the Income Fund and World Growth
claims and suggested that because of a possible conflict of
interest, separate counsel should be retained to appeal that
ruling. Chase admits losing that letter. However, it has little
bearing on the Capital Income issue because that claim had
not been submitted to the Court, and therefore was not
mentioned in the District Court’s January 14, 2000 order.
In early April 2000, after Chase had requested
information on its claims, class counsel sent a copy of its
January 17th letter. After further investigation, Chase filed
a motion under Rule 60(b) on April 24, 2000 seeking relief
from the order denying its claims, including that of Capital
Income.
8
In the remand proceedings, the District Court found that
the July 18, 1999 and the August 5, 1999 letters
requesting cure information from Capital Income, as well as
that of August 17th which denied the claim, had been
received by Chase. The Court relied on affidavits submitted
by Valley Forge describing its mailing procedures.
The Court noted, but did not place much stock in
Chase’s contention that it was not unusual for mail
addressed to Chase to be delayed ten to fifteen days by the
Post Office. The Court criticized Chase’s practice of using a
central mailroom, which processed all incoming
communications and employed a ten-step arrangement in
distributing them internally. This arrangement required
three days to transmit correspondence about class actions
to the Class Action Group within the bank. Only after
letters reached the Group were they date-stamped.
The Court concluded that Chase had lost the August 17,
1999, notice of disallowance because of its own fault in
maintaining an inefficient internal mail distribution system.
During the oral argument on the Rule 60(b) motion, the
District Court expressed its irritation with Chase’s internal
mailroom system, commenting that "even under the Pony
Express, delivery was better than that." The criticism was
understandable and well-deserved.
The Court also questioned the delay between November
15, 1999, when the August 5, 1999 letter was concededly
received, and January 4, 2000, when Chase finally
answered on behalf of Capital Income and the other two
funds. Finally, the Court explained that finding excusable
neglect here would provide a disincentive for diligence on
the part of claimants in future cases.
Despite Chase’s denial that it had received the
documents, the Court relied on the presumption that Valley
Forge, having produced evidence of its mailing procedures,
had established a presumption of timely delivery. The
common law has long recognized a presumption that an
item properly mailed was received by the addressee. Hagner
v. United States, 285 U.S. 427, 430 (1932) (citing Rosenthal
v. Walker, 111 U.S. 185, 193 (1884)); United States v.
Bowen, 414 F.2d 1268, 1272 (3d Cir. 1969).
9
The presumption arises upon proof that the item was
properly addressed, had sufficient postage, and was
deposited in the mail. Beck v. Somerset Technologies, Inc.,
882 F.2d 993, 996 (5th Cir. 1989). To invoke the
presumption, proof of procedures followed in "the regular
course of operations" gives rise to a strong inference that it
was properly addressed and mailed. Godfrey v. United
States, 997 F.2d 335, 338 (7th Cir. 1993).
The mailing and timely receipt presumption is rebuttable,
and at least one Court has held that testimony denying
receipt suffices to rebut the presumption. See In re The
Yoder Co., 758 F.2d 1114, 1118 (6th Cir. 1985). Although
the presumption of mailing rests on the dependability of the
U.S. Postal Service, human experience has shown that that
reliance has not always been justified.
In this case, application of the presumption is
troublesome. Valley Forge had to process approximately
8,000 claims under very tight time restraints. The record
shows that Valley Forge sent a letter to Income Fund on
July 15, 1999 and sent another identical one on the
following day, July 16, 1999. This would seem to indicate
some question by Valley Forge that it had included Income
Fund in the mailing of the previous day. If its record
keeping had been precise, there should have been no doubt.4
Chase’s mailing room handled the bank’s extensive
correspondence and distributed the mail in a manner that
almost guaranteed human error would creep in and result
in mishandling. However, it is curious that Chase
responded to two of the three requests to cure, but did
nothing about the letter to Capital Income requesting the
same information. One could reasonably assume that since
Chase took pains to answer the two letters, it must have
been inadvertence that led to its failure to do the same with
the third -- if it had been received.
_________________________________________________________________
4. According to Valley Forge, the second request pertaining to Income
Fund was sent to "insure that this large institutional claimant would
submit sufficient documentation for its claim." However, the later
mailings evidenced no such concern even though the Chase claims were
among the largest of those submitted.
10
Chase denied receipt of the August 17, 1999 rejection
letter for Capital Income, but at the same time, did receive
denials for 145 other claims that concededly were invalid.
It is quite possible that the Capital Income denial became
mixed in with the other 145 rejections.
Apparently, recognizing the problem of supplying
information to the proper persons in large organizations,
Valley Forge, in addition to mailing the letters, faxed them
to a number of Funds. Chase did not include a fax number
with its proof of claim, but did supply it to Valley Forge
before it sent the August 17, 1999 rejection letter. That
particularly important communication not only notified
Capital Income of the denial of its claim, but also advised
that a petition could be filed with the Court asking for a
reversal of the rejection.
We recognize that these troubling uncertainties were
within the province of the District Court to resolve, but they
nonetheless color other aspects of the case. For example, in
Santander, 235 F.3d at 183, the District Court refused to
excuse a late filing caused by delay in the claimant’s
mailing room, remarking that the reason was "internal to
[Santander’s] organization." We reversed, concluding that "a
mailroom which [does] not operate as it should have in the
ordinary conduct of business" is a mitigating factor in
weighing the existence of excusable neglect. Id . at 183.
Santander also pointed out that in three other instances
the District Court had accepted somewhat similar grounds
for finding excusable neglect. Id. at 183 n.10. In one case,
the mailroom was handled "contrary to custom" and in
another there were problems with an internal mailroom
procedure. Id.In an earlier opinion, the district judge allowed a claim
filed by Mellon Bank. In re Cendant Corp. Prides Litig., 98
F. Supp.2d at 606. In that case, Mellon had received four
letters from Valley Forge between June 22, 1999 and
August 17, 1999. Id. at 604. Mellon conceded that the clerk
in charge deliberately did not respond and did nothing until
he called Valley Forge in January 2000 to check on the
status of the claim. Id. The District Court accepted Mellon’s
excuse that the delay had been caused by a severe bout of
11
depression suffered by the clerk in charge. Id . at 606. We
have no quarrel with the Court’s ruling in the Mellon
matter, but fail to see a difference substantial enough to
account for a contrary result in Chase’s case.
Even assuming that Chase received the letters of July
and August 1999, we point out that the delay between the
due date of August 8, 1999 and January 4, 2000 when
Valley Forge was given the requested data is not beyond the
pale. In In re O’Brien Envtl. Energy, Inc., 188 F.3d 116, 130
(3d Cir. 1999), we observed that Pioneer teaches that delay
should be considered in absolute terms, and that two
months was not prohibitive. See also Chemetron Corp. v.
Jones, 72 F.3d 341 (3d Cir. 1995) (claim two years late
could be excusable). In re Orthopaedic Bone Screw Products
Liab. Litig., 246 F.3d 315 (3d Cir. 2001) (seven month delay
held excusable).
We think the determining factor in arriving at a proper
resolution in this equitable proceeding is Pioneer’s
admonition to consider the totality of the circumstances.
Insistence upon meeting time limitations is important in
the prompt disposition of litigation, and the record supports
the District Court’s view that Chase carelessly and
inefficiently handled its serious responsibilities. However,
given that Cendant was not prejudiced by the delay, and
the Court not hindered in any substantial degree in its
administration of the case, the issue is narrowed down to
the fundamental question of whether the party that
committed fraud should profit by the careless and inept
conduct of the party having a legitimate claim. In the
circumstances here, equity should, albeit with misgivings,
tolerate negligence rather than reward fraud.
After careful consideration of all the factors, we conclude
that the District Court chose the wrong path, and its ruling
in favor of Cendant and against Capital Income does not
represent a sound exercise of judicial discretion.
Accordingly, the order of the District Court will be
reversed and the matter remanded for allowance of the
claims of Capital Income Builder, Inc., Income Fund of
America, Inc., and Capital World Growth and Income, Inc.
12
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
13