In re: O'Brien Environmental Energy, Inc. , 188 F.3d 116 ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
9-13-1999
In re: O'Brien Environmental Energy, Inc.
Precedential or Non-Precedential:
Docket 98-6331
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In re O'BRIEN ENVIRONMENTAL ENERGY, INC., Debtor
Manus Corporation
v.
NRG Energy, Inc.; NRG Generating (U.S.) Inc.; Official
Committee of Unsecured
Creditors (Newark, New Jersey Civil No. 97-cv-4312)
In re O'Brien Environmental Energy, Inc., Debtor
Manus Corporation
v.
Official Committee of Unsecured Creditors (Newark, New Jersey
Civil No. 97-cv-
4992)
Manus Corporation, Appellant
No. 98-6331.
United States Court of Appeals,
Third Circuit.
Argued: May 18, 1999
Filed Sept. 13, 1999
On Appeal From the United States District Court, For the District of New
Jersey Appeals. Consolidated Under District
Court Docket No. 97-cv-4312 District Judge: Honorable Maryanne Trump
Barry.
Edgar M. Whiting, III, Esq. (ARGUED), GREINER & LANGER, Parsippany, NJ,
Counsel for Appellant.
Douglas E. Ernst, Esq., Troutman Sanders, Esq., Atlanta, GA, Counsel for
Appellees NRG Energy, Inc. and NRG
Generating US. Mitchell A. Karlan, Esq., Gibson, Dunn & Crutcher, New
York, N.Y.,
Counsel for Appellee NRG Energy, Inc.
Craig J. Donaldson, Esq. (ARGUED), Riker, Danzig, Scherer, Hyland &
Perretti, Morristown, NJ,
Counsel for Appellee NRG Generating US.
Mark N. Parry, Esq., Moses & Singer, New York, N.Y.,
Counsel for Appellee Official Committee of Unsecured Creditors.
Before: BECKER, Chief Judge, RENDELL, and ROSENN, Circuit Judges
OPINION OF THE COURT
RENDELL, Circuit Judge.
This case requires us to apply the test for "excusable neglect" outlined
in Pioneer Investment Services Co. v. Brunswick
Associates Limited Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d
74 (1993). Appellant, Manus
Corporation, urges that the Bankruptcy Court erred in refusing to grant
relief from a judgment entered in the bankruptcy
proceedings of O'Brien Environmental Energy, Inc.1 under principles of
excusable neglect. The District Court affirmed the
Bankruptcy Court's refusal to grant relief. Because we conclude that Manus
was entitled to relief because of excusable
neglect on its part, we will reverse.
_______________________________________________
1. O'Brien, the debtor in this case, changed its name to NRG Generating
(U.S.), Inc. as of April 30, 1996, the effective date of the
reorganization plan at issue in this case. NRG Energy, Inc., is a
corporation which, under the successful reorganization plan, acquired
41.86% of the stock of the reorganized debtor and 100% of the stock of the
debtor's subsidiaries which operated certain energy projects.
For the purposes of this opinion, appellees in this case are referred to
as "O'Brien" or "the debtor" prior to its reorganization, and as
"NRG" or "the reorganized debtor" after the reorganization.
_______________________________________________
I. Facts
Manus Corporation and O'Brien Environmental Energy, Inc. were parties to a
landfill gas purchase and sales agreement
dated April 2, 1986 (the "Gas Purchase Agreement"). After disputes arose
concerning the Gas Purchase Agreement, the
parties entered into a permanent consent decree on August 15, 1994, which
provided that O'Brien owed Manus
$124,094.99. 2
Soon thereafter, on September 28, 1994, O'Brienfiled a petition for relief
under Chapter 11 of the Bankruptcy Code in
the District of New Jersey. On Schedule F to the schedules it filed in its
Chapter 11 proceeding, O'Brien indicated that
Manus was the holder of an undisputed, unsecured, non-priority claim in
the amount of $124,095.00 arising out of the
Gas Purchase Agreement. After several reorganization plans were
considered, the debtor's Fourth Amended and
Restated Plan was confirmed on February 13, 1996 ("the Plan"). It is fair
to characterize the Plan as sophisticated, written
more in legal and technical terminology rather than layman's parlance. The
Plan contains numerous definitional sections
and provisions for dealing with many specific claims. It makes numerous
references to "cure" payments relating to secured
claims, has a very detailed system for classifying different types of
claims, and establishes separate reserves for different
classes of claims. In the definitional section, the term "Administrative
Claim" is defined to include, among other things,
amounts required to be paid under § 365 upon assumption of executory
contracts. The Plan provides in § 8.2 that all
executory contracts that were not rejected were to be assumed, and that
"[a]ll payments required by Bankruptcy Code
section 365(b)(1)(A) or (B) shall be made by Reorganized O'Brien on the
Effective Date ... in such amount as may be
determined, in each instance, by agreement between NRG and the non-debtor
party to the contract or, in the case of any
dispute, by Final Order of the Court."3 The Gas Purchase Agreement
between Manus and the debtor was not rejected
and, therefore, was to be assumed in the reorganization. Manus voted in
favor of the Plan, and the effective date of, and
closing under the Plan, was April 30, 1996.
_________________________________________________________
2. Although Jack Blanton, President of Manus, asserted in his
Certification that the consent decree provides that O'Brien owed Manus
$125,586.32 plus interest, this figure does not appear anywhere in the
consent decree. Instead, the consent decree states at ¶ 6 that
O'Brien owes Manus $124,094.99.
3. Section 365(b)(1)(A) of the Bankruptcy Code provides:
If there has been a default in an executory contract or unexpired
lease of the debtor, the trustee may not assume such
contract or lease unless, at the time of assumption of such contract
or lease, the trustee--
(A) cures, or provides adequate assurance that the trustee will
promptly cure, such default.
_________________________________________________________
Following confirmation of the Plan, on February 20, 1996, debtor filed an
application with the Bankruptcy Court entitled:
"Application for Order Establishing (i) Administrative and Priority Claims
Reserve (ii) Disputed Claims Reserve (iii) Cure
Amounts with Respect to Claims Arising Pursuant to Bankruptcy Code
Sections 365(b)(1) and 1124(iv) Reserve for
Claims Subsequently Asserted with Respect to Executory Contracts or Leases
to be Rejected and (v) Additional
Procedures with Respect to Final Fee Applications" (the "Application"). As
the Application is central to our resolution of
this case, it is necessary to detail its contents and format.
The Application is twelve pages long and consists of twenty-four
paragraphs. It does not mention Manus, nor is it
directed to any specific respondent. Rather, it is directed to "The
Honorable Rosemarie Gambardella, United States
Bankruptcy Court." The first several paragraphs of the Application note
that under certain sections of the Plan, NRG is
responsible for funding the payment of Administrative Claims and Priority
Claims, and provides for the establishment of an
Administrative and Priority Claims reserve in an amount to be determined
prior to the effective date of the Plan. It also
notes that pursuant to § 1.155 of the Plan, the Reserved Administrative
and Cure Claim Cash Amount is fixed at
$14,468,000.
Paragraph 6 of the Application notes that "by this Application, the Debtor
seeks a determination by the Court, and the
entry of an appropriate Order, establishing the amount of the
Administrative and Priority Claims reserve." At paragraph 8,
the Application states that "by this Application, the Debtor seeks the
entry of an appropriate Order, determining the
maximum amount of each Disputed Claim...." In Paragraph 9, the debtor
speaks to the reader in the second person,
stating:
If your claim has been objected to but not resolved by Final Order, is
objected to prior to the Effective Date of the Plan,
or is the subject of an amendment to the Debtor's schedule of liabilities
..., the amount of the Disputed Claims Reserve
established for your Disputed Claim will at this time be the amount of the
unsecured claim.
At paragraph 10, the Application lists certain specific creditors, and the
amounts to be paid to each on the effective date
to cure pre-Chapter 11 defaults and, under paragraph 11, notes that "[b]y
this Application, the Debtor seeks the entry of
an Order establishing that the above amounts are the amounts required to
be paid ... on the Effective Date to cure existing
defaults and reinstate the maturity of these Secured Claims." Similarly,
at paragraph 12, the Application lists certain
specific creditors and claim amounts, and at paragraph 13, indicates that
by the Application, it seeks the entry of an order
that the amounts stated are the amounts necessary to cure existing
defaults and reinstate these guarantees as obligations of
the reorganized debtor, and declaring that the payment of these amounts
will satisfy the cure requirements of § 1124.
Paragraph 14 references § 8.2 of the Plan, and states that all executory
contracts and unexpired leases to which the
debtor is a party that have not been rejected shall be assumed on the
effective date. Paragraph 14 also states that all
payments required by the Bankruptcy Code under § 365(b)(1)(A) or (B) are
to be made by the reorganized debtor on
that date. The Application does not reference the name of any party to
these executory contracts, except that in
paragraph 15, it states that "the only amount[the debtor] is required to
pay pursuant to Section 365(b)(1)(A) or (B) to
cure existing defaults or to compensate lessors for actual pecuniary loss
resulting from default is the payment of $123,000
to MDFC Equipment Leasing Corp."
We quote the next paragraph, paragraph 16, verbatim:
By this Application, the Debtor seeks an Order establishing that the
payment of $123,000 to MDFC Equipment Leasing
Corporation is the only payment required to assume the Assumed Contracts
and declaring that payment of this amount to
MDFC Leasing Corporation will satisfy the requirements of Section
365(b)(1)(A) and (B) with respect to all of the
Assumed Contracts. Any party to an Assumed Contract that fails in
connection with this Application to assert a claim
which arises under such Assumed Contract or with respect to which such
party could otherwise require payment under
Bankruptcy Code Section 365 in connection with the assumption of such
Assumed Contract (an "Assumed Contract
Claim") shall be deemed to have waived such Assumed Contract Claim and
shall be precluded from later asserting such
Assumed Contract Claim. The Debtor has served copies of the Application
and the Notice of Motion filed herewith on all
known parties to Assumed Contracts.
When filing the Application, O'Brien also sought entry of an order
shortening the time period for notice with respect to the
Application and setting a hearing. The Bankruptcy Court entered an order
on February 22 shortening the time for notice
and setting a hearing on the Application for March 8.
Mr. Blanton, President of Manus, testified that he received the
Application, leafed through it to see if there was any
mention of the Manus claim or claim amount and, seeing none, figured that
the Application did not affect his rights or
interests. He continued to assume that, pursuant to the terms of the Plan,
his claim amount would either be agreed upon or
would be litigated if agreement could not be reached. As a result of
Blanton's review of the Application, he did not send it
to his attorney, nor did anyone from Manus attend the hearing on March 8.
Mr. Blanton later testified regarding his
understanding of the Application:
I looked at it and noted that it was addressed to 200 or so addresses and
then went through, page by page, looking for
the name Manus or $125,000. And I saw numerous references to other
companies and dollars in there but no reference,
whatsoever, to Manus or to the guarantee [Agreement]. And I concluded that
it was a routine paperwork process, if you
will for lack of a better term, of the bankruptcy proceedings. When the
Judge ruled on January, I think 17th, I breathed a
sigh of relief and thought the show is over I will get paid. And I dropped
my defenses rather. I thought O'Brien was a
large financially sound reasonable company, some kind of corporate
guidelines of my years of experience for working
with corporations. Did not work out that way.
Following the hearing on the Application, the Bankruptcy Court entered an
order, dated March 8, 1996, which includes a
declaration that: "With respect to all other Assumed Contracts, other than
those listed on Exhibit 'G', no amounts are
required to be paid pursuant to 11 U.S.C. Section 365(b)(1)(A) and (B) in
order for Reorganized O'Brien to assume
said Assumed Contracts." Exhibit G listed only MDFC Equipment Leasing
Corporation, Southern California Edison, and
County of Montgomery. The order provided for service on "all known parties
to executory contracts assumed by the
Debtor pursuant to the NRG Plan," but there is no evidence in the record
that this order was served upon Manus, and
Blanton attested that it was not.
Thereafter, in early April 1996, Manus received a document entitled
"Second Omnibus Objection of Official Committee
of Unsecured Creditors to Disallow Certain Claims Scheduled by or Filed
Against Debtor" (the "objection"). By way of
this document, the Creditors Committee sought to expunge Manus's claim as
listed in O'Brien's schedules. The objection
alerted Manus to the entry of the March 8 order deeming its claim waived.
Manus forwarded the objection to its counsel,
Edgar Whiting, III, who immediately reviewed the bankruptcy court docket
and files "to determine what other pleadings
and orders had been filed relevant to the motion resulting in the March 8
Order." Whiting contacted NRG's counsel by
telephone on April 23, 1996 "to explain Manus's position and to attempt to
resolve the matter consensually." Following
this conversation, Whiting faxed a letter to NRG's counsel, as well as its
in-house counsel, explaining Manus's position
with regard to its claim and its understanding of the Application. Whiting
and the Creditor's Committee agreed to adjourn
the deadline for response to the objection so that Manus had sufficient
time to respond. On May 17, 1996, Manus filed
its opposition to the Creditor's Committee objection and a cross-motion
for relief from the March 8 order under Federal
Rule of Civil Procedure 60(b), claiming that its failure to respond to the
Application was the result of excusable neglect. In
the meantime, the Plan took effect on April 30, 1996.
Following a hearing, the Bankruptcy Court ruled that Manus's failure to
respond to the Application was not excusable and
thus, denied Manus's cross- motion. It stated, first, that the court was
"satisfied that prejudice to the Reorganized Debtor
requires denial of Manus' cross motion." In so finding, the court noted
that it was undisputed that:
[N]one of the cash available from the effective date funding of the NRG
Plan, was allocated to pay the cure claim of
Manus and there appears to be no mechanism for paying any cure claim,
except by imposing a new obligation on the
Reorganized Debtor. This fact constitutes in this court's view prejudice
to the Reorganized Debtor.
The court next considered that "the impact of delay on judicial
proceedings is significant." Citing Trump Taj Mahal
Associates v. Alibraham (In re Trump Taj Mahal Associates), 156 B.R. 928(Bankr.D.N.J.1993), it stated that allowing
relief from the March 8 order after the effective date of the Plan "would
undermine the stability of the confirmation
process."
Referencing paragraphs 14, 15, and 16 of the Application, which stated
that failure to respond would constitute waiver of
any potential claims, the court then noted that Manus's "excuse" for not
responding to the Application was its failure to
comprehend the significance of the Application; therefore, the delay in
this case was caused by reasons within its
reasonable control. The court believed that any deficiencies with regard
to notice to Manus were different from those
deficiencies noted in the landmark Supreme Court case regarding excusable
neglect, Pioneer Investment Services Co. v.
Brunswick Associates Limited Partnership, 507 U.S. 380, 113 S.Ct. 1489,
123 L.Ed.2d 74 (1993), and also that,
although Manus acted in good faith, it must consider the fact that the
Court in Pioneer stated that the outcome would have
been different if it had found prejudice. The Bankruptcy Court concluded:
In the instant case, allowing relief from the March 8 order would clearly
prejudice the Reorganized Debtor. The length of
delay is significant and would impact adversely on the judicial
proceeding, and as previously found, it was Manus--in fact,
it was the actions of Manus itself that caused the delay. Given these
findings, combined with the Court's finding that
Manus received adequate notice of the cure claim application, that the
application was not ambiguous[,] this Court finds
that Manus has failed to establish excusable neglect.
The Bankruptcy Court also ruled that the mechanism of filing a motion to
establish cure claims was consistent with
Bankruptcy Rules 6006 and 9014.
On appeal, the District Court affirmed the ruling of the Bankruptcy Court,
finding that examination of the factors outlined
in Pioneer supported the decision below. It agreed that requiring NRG to
pay Manus's untimely claim would prejudice
NRG "because no funds were set aside for the payment of Manus's claim."
Such payment, it believed, would deprive
NRG "of the fresh start to which it is entitled." The District Court
acknowledged that the length of the delay in this case
was not great in an absolute sense, but considered significant the timing
of the delay, namely, that the Rule 60(b) motion
was filed after the Plan took effect. Finally, the court found most
convincing the fact that the cause of the delay was in
Manus's control. It stated that "the language of the [A]pplication and the
deadline included therein were not so
'dramatically' ambiguous as to justify Manus's failure to respond." The
District Court also affirmed the Bankruptcy Court's
decision that determinations of cure claim payments could properly be
sought by way of motion.
On appeal, Manus attacks the court's refusal to grant relief as an abuse
of discretion and argues that this case falls
squarely under Pioneer, in that it is a case of excusable neglect, where,
lacking prejudice, its requested relief should have
been granted. Manus also contends that the debtor should have proceeded to
litigate Manus's claim by way of an
adversary proceeding, rather than by motion.
II. Discussion
Because the District Court in this case sat as an appellate court
reviewing a final order of the Bankruptcy Court, our
review of its determination is plenary. Interface Group-Nevada, Inc. v.
Trans World Airlines, Inc. (In re Trans World
Airlines, Inc.), 145 F.3d 124, 130 (3d Cir.1998). In reviewing the
decision of the Bankruptcy Court, we exercise the
same standard of review as the District Court, that is, we review the
Bankruptcy Court's legal determinations de novo, its
factual findings for clear error, and its exercise of discretion for abuse
thereof. Id. A bankruptcy court abuses its
discretion when its ruling is founded on an error of law or a
misapplication of law to the facts. Marco v. Accent Pub. Co.,
969 F.2d 1547, 1548 (3d Cir.1992). In determining whether an error exists,
we review de novo the District Court's
application of the law to the facts. Id. The Bankruptcy Court had subject
matter jurisdiction pursuant to 28 U.S.C. §
1334. The District Court had appellate jurisdiction over the final order
of the Bankruptcy Court pursuant to 28 U.S.C.
§ 158(a). We have jurisdiction pursuant to 28 U.S.C. §§ 158(d) & 1291. We
will first address the issue of whether
determinations of cure claim payments are properly sought by the filing of
a motion, and will then address the issue of
excusable neglect.
A. Form of Proceedings
Manus argues that the debtor should have sought the relief requested in
the Application by way of an adversary
proceeding, commenced by a complaint, pursuant to Bankruptcy Rule 7001.4
Appellees counter, and the Bankruptcy
Court and the District Court agreed, that proceeding by way of motion, as
opposed to a separate adversary proceeding,
was in accordance with the Bankruptcy Rules. We agree with the reasoning
of the Bankruptcy Court and District Court
on this issue and will affirm this aspect of the District Court's order.
___________________________________________________
4. Bankruptcy Rule 7001 states, in pertinent part, the following:
An adversary proceeding ... is a proceeding ... (2) to determine the
validity, priority, or extent of a lien or other interest in
property, other than a proceeding under Rule 4003(d), ... (7) to
obtain an injunction or other equitable relief, ... [or] (9) to
obtain a declaratory judgment relating to any of the foregoing.
___________________________________________________
The parties agree that the Federal Rules of Bankruptcy Procedure do not
explicitly prescribe a procedure for establishing
cure claim amounts payable upon the assumption of executory contracts.
They also agree that case law concerning this
issue is lacking. Appellant argues that the Application sought both
declaratory and injunctive relief concerning the debtor's
relationship with Manus and thus requires an adversary proceeding under
Rule 7001(7) and (9). Appellant also argues
that the purpose and effect of the Application was to determine the extent
of Manus's interest in the Gas Purchase
Agreement and thus falls under Rule 7001(2).
We do not agree with Manus that the relief sought in the Application falls
under the auspices of Rule 7001. We do not
read the Application as seeking "to determine the validity, priority, or
extent of a lien or other interest in property," since
the contract had already been assumed and thus, there was no property at
issue. Further, we do not view the relief as
equitable in nature, since the basic relief sought by the Application was
not classic equitable relief, such as specific
performance, but was the establishment of reserves and cure amounts. See
In re Robertson, 206 B.R. 826, 829
(Bankr.E.D.Va.1996) (determining that request for dismissal of bankruptcy
proceedings was properly made by motion,
and was not equitable relief, by looking at the essence of the basic
relief sought). While many court orders in bankruptcy
proceedings could arguably be considered as providing equitable relief, we
do not believe that this means that every filing
seeks "equitable relief" as referenced in Rule 7001(7), as appellant
suggests. See In re Vance, 120 B.R. 181, 191-92
(Bankr.N.D.Ok.1990) (stating that the distinction between an order and an
injunction is often unclear and a matter of
degree; holding that debtor's request to compel the trustee to conclude
the creditor's meeting was not equitable relief).
The reading of Rule 7001(7) appellant urges would render meaningless other
rules that require certain requests to the
court to be made by motion and application, contrary to general principles
of statutory interpretation. The Court of
Appeals for the Tenth Circuit came to a similar conclusion in State Bank
v. Gledhill (In re Gledhill), 76 F.3d 1070, 1078
(10th Cir.1996), where it applied principles of statutory construction to
reject a broad interpretation of Rule
7001(7),finding that such an interpretation would negate the specific
provision for making certain requests by motion in
Rule 60(b). The court in In re Gledhill held, therefore, that a request to
vacate relief from an automatic stay, even though
such a request invoked equity powers to revive a stay, was properly made
by motion. Id.We find appellees' argument that this situation is governed by Rules 6006
and 9014 to be a more logical and practical
application of the Bankruptcy Rules. Rule 6006(a) states that "[a]
proceeding to assume, reject, or assign an executory
contract or unexpired lease, other than as part of a plan, is governed by
Rule 9014." Bankruptcy Rule 9014 states, in
pertinent part, the following:
In a contested matter in a case under the Code not otherwise governed by
these rules, relief shall be requested by motion,
and reasonable notice and opportunity for hearing shall be afforded the
party against whom relief is sought.
Technically, the setting of cure claim amounts is "not otherwise governed
by" the Bankruptcy Rules, and thus falls under
the auspices of Rule 9014. Further, as stated by the District Court,
"determining the amount necessary to cure existing
defaults is necessarily related to the assumption or rejection of
executory contracts." We conclude that, viewing Rules
6006 and 9014 together, the Rules anticipate that this type of issue would
be resolved by motion practice. We view Rules
6006 and 9014 as suited to the instant situation and as providing a
betterfit than the procedural characterization urged by
appellant.
Aside from the Rules discussed herein, Manus has not referred us to any
authority stating that the setting of cure claim
amounts may not proceed by motion and must proceed by way of complaint as
an adversary proceeding. Manus has not
convinced us that a party must commence an adversary proceeding to set
cure claim amounts. We hold, therefore, that
proceeding by motion in these circumstances was proper.5
_________________________________________________________
5. Although the parties did not raise this point, we note that O'Brien
actually sought to set the cure claim amounts by neither adversary
proceeding nor a motion as such, but by application. There is no
definition of "application" in the current Bankruptcy Rules despite its
repeated use in the Rules. Prior to the 1983 amendments, however, the
Bankruptcy Rules contained a definition of "application," which
included "any request to the court for relief that is not a pleading or a
proof of claim." Bankr.R. 901(4). The Advisory Committee explained
that an application was appropriate "[w]hen the bankrupt or trustee or
other party seeks an order involving no adverse party." Advisory
Committee Note to former Bankr.R. 901(4). The current Bankruptcy Rules do
not appear to have disturbed this meaning and usage. The
Rules generally require a motion when notice to an opposing party is
necessary, and only allow an application if no such notice is
required. See 6 Norton Bankr.Law & Practice 2d § 138:14 (West 1999). For
example, the current rules allow a party to file an application for
permission to pay a filing fee in installments, Bankruptcy Rule 1006, for
an order of employment, Bankruptcy Rule 2014, and for a party
seeking compensation or reimbursement for services rendered, Bankruptcy
Rule 2016
_________________________________________________________
B. Excusable Neglect
As a result of the Bankruptcy Court's March 8 order, Manus was deemed to
have waived its claim in connection with the
Gas Purchase Agreement and was "barred from asserting it hereafter." It is
undisputed that Manus failed to assert its claim
prior to the deadline set in the Application, or prior to April 30, 1996,
the effective date of the Plan. Manus sought relief
from the March 8 order under Federal Rule of Civil Procedure 60(b), made
applicable to bankruptcy cases by
Bankruptcy Rule 9024.6 Rule 60(b) states, in pertinent part, "[o]n motion
and upon such terms as are just, the court may
relieve a party or a party's legal representative from a final judgment,
order, or proceeding for mistake, inadvertence,
surprise, or excusable neglect."
______________________________________________________
6. Rule 9024 provides:
Rule 60 F.R.Civ.P. applies in cases under the Code except that (1) a
motion to reopen a case under the Code or for the
reconsideration of an order allowing or disallowing a claim against
the estate entered without a contest is not subject to
the one year limitation prescribed in Rule 60(b), (2) a complaint to
revoke a discharge in a chapter 7 liquidation case may be
filed only within the time allowed by § 727(e) of the Code, and (3) a
complaint to revoke an order confirming a plan may be
filed only within the time allowed by § 1144, § 1230, or § 1330.
______________________________________________________
.
Manus asserts that its failure to respond to the Application was the
result of excusable neglect. Thus, we are to determine
whether the Bankruptcy Court abused its discretion in failing to find
excusable neglect. Our discussion of the issue of
"excusable neglect" must start with a review of Pioneer Investment
Services Co. v. Brunswick Associates Ltd.
Partnership.
In Pioneer, the Supreme Court determined that a Chapter 11 creditor was
entitled to file its proof of claim after the
deadline set by the bar date because its failure tofile timely was the
result of "excusable neglect" within the meaning of Rule
9006. 507 U.S. at 398-99. In so holding, the Court explicitly rejected the
argument that excusable neglect applies only to
those situations where the failure to comply is a result of circumstances
beyond the creditor's reasonable control. Id. at
388. It acknowledged that the mere use of the word "neglect" encompassed
"omissions caused by carelessness," but took
comfort in the fact that parties would still be deterred from ignoring
court ordered deadlines since the neglect must be
"excusable." Id. at 395. It stated that determining whether neglect is
excusable is an "equitable" determination that "tak[es]
account of all relevant circumstances surrounding the party's omission."
Id. Such an equitable determination, it reasoned,
is consistent with the policies underlying Chapter 11, as "Chapter 11
provides for reorganization with the aim of
rehabilitating the debtor and avoiding forfeitures by creditors." Id. at
389. "In overseeing this ... process, the bankruptcy
courts are necessarily entrusted with broad equitable powers to balance
the interests of the affected parties, guided by the
overriding goal of ensuring the success of the reorganization." Id. To
make the excusable neglect determination, the Court
listed four factors for courts to consider: "the 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." Id. at 395.
Under the facts of Pioneer, the Court noted that the failure to file on
time was inadvertent and in good faith, as counsel
was not aware of the bar date. It found that there was no danger of
prejudice to the debtor or the administration of
judicial proceedings, as the claim, though untimely, was accounted for in
the reorganization plan and was filed prior to the
plan's effective date. Finally, the Court found relevant that notice of
the bar date "was outside the ordinary course" in that
it was not, as it should be, "prominently announced and accompanied by an
explanation of its significance." Id. at 398.
Instead, the "inconspicuous placement" of the deadline--a single sentence
in a boilerplate document, that, according to its
title, related to a creditor's meeting--"left a 'dramatic ambiguity' in
the notification." Id. For these reasons, the Court found
that there was excusable neglect and allowed the late filing.
Although the Bankruptcy Court engaged in the Pioneer analysis to guide its
excusable neglect determination,7 we believe
it erred in its analysis of prejudice, the reason for the delay, and the
extent of the delay.8 We will analyze each of these
factors in turn, and start with the issue of prejudice, which seemed
paramount in the decision of the Bankruptcy Court and
the District Court.
________________________________________________________
7. The phrase "excusable neglect" appears not only in Rule 9006(b) but in
Federal Rules of Civil Procedure 6(b), 13(f), and 60(b), Federal
Rule of Criminal Procedure 45(b), and Federal Rule of Appellate Procedure
4(a). The Supreme Court referred to each of these rules in
construing the "excusable neglect" analysis in Pioneer. Pioneer,
therefore, is commonly understood to provide guidance not just with
regard to Rule 9006, but in other bankruptcy and non-bankruptcy contexts
discussing the issue of excusable neglect. See, e.g., Midwest
Employers Casualty Co. v. Williams, 161 F.3d 877, 880 n. 6 (5th Cir.1998);
Advanced Estimating Sys., Inc. v. Riney, 130 F.3d 996, 998 (11th
Cir.1997); Canfield v. Van Atta Buick, 127 F.3d 248, 250 (2d Cir.1997)
(per curiam); Pratt v. Philbrook, 109 F.3d 18, 19 (1st Cir.1997); Robb v.
Norfolk & Western Ry. Co., 122 F.3d 354, 359 (7th Cir.1997); Committee for
Idaho's High Desert, Inc. v. Yost, 92 F.3d 814, 825 n. 4 (9th
Cir.1996); Thompson v. E.I. DuPont de Nemours & Co., 76 F.3d 530, 533 (4th
Cir.1996). Thus, the Pioneer analysis applies in the context of
a Rule 60(b) motion, as in this case.
8. There is no dispute that Manus acted in good faith. The Bankruptcy
Court held that it did, and appellees do not argue to the contrary.
________________________________________________________
1. Prejudice
The Bankruptcy Court held that prejudice to the reorganized debtor
requires denial of Manus's motion for relief since
"none of the cash available from the effective date funding of the NRG
plan, was allocated to pay the cure claim of Manus
and there appears to be no mechanism for paying any cure claim, except by
imposing a new obligation on the
Reorganized Debtor." The Bankruptcy Court's prejudice analysis seemed to
hinge solely on the fact that by virtue of
Manus's failure to respond to the Application, its claim was not accounted
for in the funding of the Plan. We believe that
Pioneer requires a more detailed analysis of prejudice which would account
for more than whether the Plan set aside
money to pay the claim at issue. Otherwise, "virtually all late filings
would be condemned by this factor." Manousoff v.
Macy's Northeast, Inc. (In re R.H. Macy & Co.), 166 B.R. 799, 802
(Bankr.S.D.N.Y.1994) (holding that the depletion
of resources otherwise available for timely filed claims is not
prejudice).
Though Pioneer lists prejudice as a factor in the excusable neglect
analysis, it gives us little guidance as to what prejudice
actually is in this context, and we have not had occasion to explore this
issue. The Court of Appeals for the Fifth Circuit
and several bankruptcy courts, however, have considered the Pioneer
analysis and have grappled with what constitutes
prejudice in the bankruptcy context. In Greyhound Lines, Inc. v. Rogers
(In re Eagle Bus Mfg., Inc.), 62 F.3d 730 (5th
Cir.1995), creditors sought leave to file untimely proofs of claims.
Although these claims were allegedly not accounted for
in the confirmed plan, the court held that there was no prejudice since
the "plan was negotiated and approved after [the
debtor] had notice of these claims." Id. at 737. The court found the fact
that the debtor believed that the claims would be
barred as untimely insufficient to constitute prejudice. In In re Keene
Corp., 188 B.R. 903, 912-13
(Bankr.S.D.N.Y.1995), the court acknowledged that the determination of
prejudice involved "a certain amount of crystal
ball gazing," and then listed several factors to consider in a Pioneer
prejudice analysis, including: the size of the claim with
respect to the rest of the estate; whether allowing the late claim would
have an adverse impact on the judicial
administration of the case; whether the plan was filed or confirmed with
knowledge of the existence of the claim; the
disruptive effect that the late filing would have on the plan or upon the
economic model upon which the plan was based;
and whether allowing the claim would open the floodgates to other similar
claims. In In re Papp International, Inc., 189
B.R. 939, 945 (Bankr.D.Neb.1995), the court relied on a Webster's
dictionary definition of prejudice: a claim is
prejudicial if it will "injure or damage the debtor." The court considered
damage to other creditors in the form of a
reduced recovery as a consideration in determining prejudice. The court
determined in that case, however, that there was
no prejudice in allowing the late claim, stating:
If the IRS's proof of claim had been timely filed, the bankruptcy estate
would have had to either object to the claim or
provide for the claim in the plan of reorganization. If the claim is
permitted to befiled late, the debtor and other interested
parties are in the same position as if the proof of claim had been filed
on time.
Id.We find In re Pettibone Corp., 162 B.R. 791 (Bankr.N.D.Ill.1994), to be
especially informative, since, in that case, the
prejudice determination assessed prejudice to the reorganized debtor after
confirmation of the plan. In that case, the
reorganized debtor argued that it would be prejudiced by allowing a late
claim, since allowing such claims would cause it
to face increased insurance premiums and expend significant employee time.
The court rejected this argument, stating:
Pettibone is now a feisty, stable, publicly-held manufacturer and active
participant in the competitive commercial world.
The evidence did not show that rising insurance premiums would force
Pettibone back into bankruptcy, materially affect
its solvency, or adversely impact at all on consummation of its confirmed
Plan (which appears to be fully consummated
except for the continuing claims litigation). Indeed, it was not even
shown that a future increase in premiums would
comprise a significant increase in Pettibone's cost of doing business.
Moreover, the evidence did not establish that any
premium increase would materially differ from the usual impact that other
injury claims will have on its premiums for
liability insurance under normal business conditions. Nor did Pettibone
establish that the impact on employee time for
helping defend the ... claims would differ from the burden on any company
of its size to aid in defense of insured claims.
Id. at 805. The court was not concerned with the reorganized debtor being
saddled with costs from the bankruptcy since
the "fresh start" concept does not apply to corporate debtors. Id. at 804.
The court concluded that Pettibone had suffered
no "material prejudice," such as loss of the ability to defend against the
late claims. Id. at 805.
Determinations regarding prejudice in other contexts also shed light on
the prejudice analysis. In Feliciano v. Reliant
Tooling Co., 691 F.2d 653, 656- 57 (3d Cir.1982), in a Rule 60(b) non-
bankruptcy context, we stated that the cost of
enforcing a judgment later vacated and the delay in realizing satisfaction
on a claim "rarely serves to establish the degree of
prejudice sufficient to prevent the opening of a default judgment."
Instead, one must assert "loss of available evidence,
increased potential for fraud or collusion, or substantial reliance upon
the judgment." Id. at 657. Other circuits too have
held that prejudice is not merely the loss of an advantageous position,
but must be something more closely tied to the
merits of the issue. In Pratt v. Philbrook, 109 F.3d 18 (1st Cir.1997),
three weeks after a settlement order of dismissal
became final, plaintiff sought to have the dismissal vacated and the case
reopened. With regard to the issue of prejudice,
the court stated:
From our vantage point it is difficult to see what cognizable prejudice,
in the sense, for example, of lost evidence, would
come to the defendant from reopening the case. Of course, it is always
prejudicial for a party to have a case reopened
after it has been closed advantageously by an opponent's default. But we
do not think that is the sense in which the term
"prejudice" is used in Pioneer.
Id. at 22.
We note that, in the case before us, the opinions of the Bankruptcy Court
and the District Court contain no discussion of
a factual basis to support the finding of prejudice. As the cases we
reference demonstrate, prejudice is not an imagined or
hypothetical harm; a finding of prejudice should be a conclusion based on
facts in evidence. In assessing whether there
was prejudice in this case, certain facts of record are indeed relevant:
the debtor listed Manus's claim as an undisputed,
unsecured claim in the amount of $124,095.00 in its schedules; O'Brien's
contract with Manus was to be assumed, and
the Plan stated with regard to such contracts that all payments required
by § 365(b)(1)(A) or (B) were to be made on the
effective date; NRG's counsel was contacted prior to the effective date of
the Plan and advised of the nature of Manus's
claim and Manus's intent to pursue such claim. Thus, there is no question
that O'Brien and NRG were aware of Manus's
claim, and its amount, and that O'Brien had not contested its existence.
This is not a case where the debtor was surprised
or caught unaware by the assertion of a claim that it had not anticipated.
See Greyhound Lines, Inc., 62 F.3d at 738(stating that whether debtor had a reason to expect the claim was relevant
to the prejudice inquiry). To the contrary, since
the Plan obligated NRG to pay all past-due amounts under the Gas Purchase
Agreement, we can fairly assume that it
actually planned to pay this claim.
Also relevant are the fact that the debtor's operations--admittedly
healthy at the time of confirmation--were to continue
under the auspices of NRG, and the Plan's establishment of reserves was
merely a designation of sources of funds rather
than finite "pots" for payments to other creditors. Appellees have
acknowledged, both in oral argument and in a letter
submission to the court, that payment of Manus's claim would not force the
return of the amounts already paid out under
the confirmed Plan, or affect the distribution to creditors and equity
holders. The reorganized debtor is a large, successful
company with annual revenues and earnings in the millions and the payment
of this claim would not jeopardize the success
of the reorganization. Cf. In re Pennsylvania Truck Lines, Inc., 189 B.R.
331, 336 (Bankr.E.D.Pa.1995) (finding
prejudice where payment of the late claim could jeopardize the reorganized
debtor's survival). There has been no
allegation, let alone evidence in the record, that payment of the cure
claim of Manus by NRG would pose any problem,
actually or legally, or would adversely impact any of appellees. Finally,
to the extent NRG argues that allowance of this
claim would open the floodgates to other future claims against them, NRG
has not alleged that any other creditor
promptly sought to be excused from the March 8 order so as to now be
entitled to relief on the basis of excusable
neglect.
Considering all of these facts, we cannot see how any of the appellees
before us would be prejudiced, in the legal sense,
by NRG's having to pay Manus's claim--a claim which the debtor had already
planned to pay by the terms of its own
Plan.9 It seems instead that the only prejudice that would result from
allowing the reorganized debtor to assume the
contract with Manus without curing this claim as required by the
Bankruptcy Court would be the reorganized debtor's
loss of a windfall. Thus, wefind no real prejudice in this fact pattern.
______________________________________________________
9. We note, however, that our ruling is limited to the issue before us
regarding the court's refusal to grant relief from the order of deemed
waiver of Manus's claim. We do not rule as to the nature or amount of
Manus's cure claim.
______________________________________________________
2. Reason for Delay
The Bankruptcy Court was also influenced because the cause for delay was
within Manus's control, since it admittedly
received the Application advising of the hearing and Manus's need to
assert its claim, but chose not to read it carefully or
to ask counsel for guidance. While it is certainly relevant that the delay
in this case was due in part to this lack of care on
the part of Manus, the concept of excusable neglect clearly anticipates
this, i.e., neglect on the part of the one seeking to
be excused. See Pioneer, 507 U.S. at 388. Thus, this is not determinative
to the inquiry. The Bankruptcy Court should
not have limited its focus to Manus's conduct. An examination of O'Brien's
role in the mishap is also essential to a
determination of whether Manus's neglect was excusable. See Chemetron
Corp. v. Jones, 72 F.3d 341, 350 (3d
Cir.1995) (stating that the district court erred in failing to consider
the debtor's role in the creditor's delay); Atlantic
Richfield Co. v. Sharon Steel Corp. (In re Sharon Steel Corp.), 110 B.R.
205, 206 (Bankr.W.D.Pa.1990) (stating that
the debtor was just as much at fault as the creditor for failing to
consider its claim and thus was equally at fault for the
delay). As in Pioneer, the delay in this case resulted from a creditor's
lack of notice of a deadline. Having reviewed the
record, including the Application and the circumstances surrounding its
service upon Manus, we conclude that O'Brien's
modus operandi does not leave it blameless regarding Manus's failure to
appreciate the significance of the Application.
Before it sent out the Application, O'Brien knew that Manus's claim would
be impacted by it, and yet, in choosing the
format of the Application and in noticing the March 8 hearing, never
addressed a notice to it or referenced its claim. The
Application was addressed to the Bankruptcy Judge and sought a court order
establishing reserves and cure amounts.10
____________________________________________________
10. We note that, as discussed in footnote 5, an application is to be used
when there is no party to whom the pleading is directed. While
Manus does not rely on this as an excuse for its inadvertence, it would
have been entirely understandable if the debtor's proceeding by
way of application had caused it to assume that the Application would not
include an objection to its claim.
____________________________________________________
While it was not improper for the Bankruptcy Court to distinguish this
case from Pioneer, since, as opposed to the one
inconspicuous sentence announcing the bar date in Pioneer, the Application
addressed executory contracts in three
paragraphs, the Bankruptcy Court should have also considered that these
three paragraphs were paragraphs fourteen,
fifteen, and sixteen, that they were buried in the middle of a twelve page
document, and that neither the document nor any
attachment listed the relevant contracting parties' names or claims. The
title of the Application did not call attention to the
fact that it contained information critical to Manus's interests. Thus,
although three paragraphs of the Application
addressed the assumed executory contracts, we conclude that NRG did not
provide sufficient notice to Manus that the
Application was either an objection to Manus's claim or was seeking to
determine Manus's claim once and for all. One
would not normally assume that an "application" directed to the court
seeking to "establish reserves" would be the vehicle
by which the debtor would be seeking, as it said it would in the Plan, to
have the court resolve a dispute relating to a
claim.
Thus, although Blanton was careless in not reading the Application
carefully, and, specifically, paragraphs fourteen
through sixteen, his neglect is excusable since it was caused at least in
part by O'Brien's own failure to properly alert
Manus that this "application" was really an objection to its claim. At the
very least, the Application should have listed
those who obviously had executory contract cure claims that would be
affected, as it did in other paragraphs naming
creditors and amounts. Instead, with respect to executory contracts, it
listed only the one contract for which the debtor
was willing to concede the cure claim. We find that Manus's failure to
realize the impact of the Application on its claims
was the result, at least in part, of O'Brien's failure to properly alert
and notify Manus that O'Brien was objecting to
Manus's claim, and that Manus's claim would be waived if it did not act.
3. Length of Delay
Finally, we consider the length of the delay and its impact on the
judicial proceedings. The Bankruptcy Court declared the
delay and its impact "significant," because the requested relief in this
case occurred after the effective date of the Plan and
thus "would undermine the stability of the confirmation process." The
Bankruptcy Court, however, did not really address
the length of the delay. The actual delay was approximately two months,
and takes on significance mainly because of the
intervening occurrence of the effective date of the Plan on April 30,
1996. As the District Court noted, the delay
associated with Manus's requesting relief from the March 8 order--which
occurred approximately ten weeks after the
March 8 hearing, approximately four weeks after Manus was aware that its
claim was waived, and approximately two
weeks after the effective date of the Plan--is not significant in an
absolute sense. Further, it would have been only seven
weeks' delay if O'Brien or NRG had reacted to the problem immediately when
notified by Manus's attorney on April 23,
before the Plan became effective. In addition, the detrimental impact of
this delay is as much due to O'Brien's strategic
decision to not object to or litigate Manus's claim until the fairly tight
time frame between confirmation and the effective
date of the Plan. Here, the delay factor in the excusable neglect inquiry
should not be held to turn entirely on the urgency
created by the debtor's time line. Such an approach makes the two month
delay seem significant, whereas a similar delay,
or even a much longer delay in a case where the debtor proceeds more
expeditiously to resolve outstanding claims under
its contracts, or allows itself more time between confirmation and closing
under its plan, would be insignificant. See
Chemetron Corp., 72 F.3d at 350 (remanding to determine excusable neglect
where motion to file late claim occurred
two years after plan was confirmed); Greyhound Lines, Inc., 62 F.3d at 740(finding excusable neglect where delay was
six to eight months). Thus, although it is proper to consider the delay's
effect on the judicial proceedings, Pioneer teaches
that we should consider the length of the delay in absolute terms, which
the Bankruptcy Court did not do in this case.
We conclude that, considering the legal parameters of the applicable
tests--namely, prejudice, the reason for the delay,
and the extent of the delay--as well as the facts of this case and the
equitable nature of the determination as outlined in
Pioneer, the Bankruptcy Court erred in determining that Manus was not
entitled to relief from the March 8 order based
upon excusable neglect.
We will affirm the District Court's ruling that the debtor's request for
the establishment of a cure amount could properly
proceed by way of motion practice, but will reverse the District Court's
ruling denying Manus relief from the March 8
order. We will remand this case to the Bankruptcy Court for proceedings
consistent with this opinion.