JIM D. PAPPAS, Bankruptcy Judge.
Hoku Solar, Inc. ("Solar") is a corporation whose stock is wholly owned by Hoku Corporation ("Hoku"). Both companies filed chapter 7
In 2009 and 2010, in two transactions, creditor Solectria Renewables, LLC ("Solectria") sold goods to Solar on credit. Worden Decl. ¶¶ 2-3, Dkt. No. 119. Shortly after the goods were delivered to Solar, Solectria received payment in full on its two invoices, totaling almost $170,000. Id. Solectria's representative alleges that, after payment, it had no further contacts with Solar, other than those related to servicing the delivered products. Id. at ¶ 4.
In June, 2015, Hopkins, as Hoku's trustee, commenced an adversary proceeding against Solectria. Hopkins v. Solectria Renewables, LLC, Adv. No. 15-08122 (Bankr. D. Idaho June 19, 2015). In his complaint, Hopkins alleged that it was Hoku, not Solar, that had paid the two Solectria invoices, and that he was entitled to avoid the two payments as constructively fraudulent transfers, and to recover the amounts paid to Solectria for distribution to Hoku's creditors. In September, 2015, Solectria filed an answer, denying any liability for Hopkin's claims. The adversary proceeding remains pending. Unless settled, it is doubtful that the adversary proceeding will be resolved any time soon.
In the meantime, the deadline for Solar's creditors to file claims in its bankruptcy case was October 9, 2013. Am. Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines at 1, Dkt. No. 23. Because it was unaware of either the Solar or Hoku bankruptcy cases any earlier, after the deadline had passed, on September 14, 2015, Solectria filed a proof of claim in the Solar case. Solectria Mot. at 1-2, Dkt. No. 118; Claims Register at 16.
In addition to filing the proof of claim, on September 9, 2015, Solectria filed a "Motion re Late Filed Proof of Claim" (the "Motion"). Dkt. No. 118. In the Motion, Solectria asks the Court to "enter an order declaring that Solectria's proof of claim is entitled to treatment, under 11 U.S.C. § 726(a)(2)(C), on the same footing as creditors who filed timely proofs of claim in [Solar's] bankruptcy case." Id. at 4.
On October 13, 2015, Reynard filed an objection to the Motion, Dkt. No. 122, and an objection to allowance of Solectria's proof of claim ("Reynard's Claim Objection"), Dkt. No. 123. Hopkins promptly filed a joinder in Reynard's objection to the Motion. Dkt. No. 126.
On January 12, 2016, the Court conducted a hearing on both the Motion and Reynard's Claim Objection at which counsel for the parties appeared and argued. After taking the issues under advisement, this Memorandum disposes of the Motion and Reynard's Claim Objection. Fed. R. Bankr. P. 7052; 9014.
The Court first addresses Reynard's Claim Objection. In it, she generally asserts that Solectria's claim should be disallowed because Solar was not indebted to Solectria as of the date of the petition, or even now. The Court surmises that, through this argument, Reynard targets both Solectria's status as a creditor, and if so, whether its claim should be allowed.
In Solectria's view, while Solar owed it nothing at the time Solar filed for bankruptcy, or even at the time Solectria filed the proof of claim, it nonetheless holds a contingent, unliquidated claim against Solar. Id. Solectria Resp. to Obj. at 2-3, Dkt. No. 134. Because of this, Solectria contends that it is a "creditor" of Solar, and that its contingent, unliquidated claim should be allowed. Solectria Resp. 4, Dkt. No. 134.
The Court agrees with Solectria.
Only a "creditor" may file a proof of claim in a bankruptcy case. § 501(a). Under the Bankruptcy Code, "creditor" means an:
§ 101(10). In short, to be a creditor, Solectria must hold a "claim" that fits one of the statutory categories.
A "claim" is a right to payment or an equitable remedy "whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, or unsecured." § 101(5) (emphasis added). "What constitutes a "claim" in a bankruptcy case is a `straightforward issue of statutory construction to be resolved by reference to the text, history, and purpose of the bankruptcy code.'" In re Hoffman, 15.3 IBCR 65, 66 (Bankr. D. Idaho 2015) (quoting Johnson v. Home State Bank, 501 U.S. 78, 83 (1991)).
Through § 101(5), Congress employed an expansive definition of "claim". Indeed, in construing this provision, the Supreme Court has determined that the "right to payment" means "nothing more or less than an enforceable obligation." Pennsylvania Dept. of Pub. Welfare v. Davenport, 495 U.S. 552, 559 (1990); see also In re KM Allied of Nampa, 11.2 IBCR 69, 70-71 (Bankr. D. Idaho 2011). The Ninth Circuit has explained that "[t]he Code utilizes this `broadest possible definition' of claim to ensure that `all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.'" In re SNTL Corp., 571 F.3d 826, 838 (9th Cir. 2009) (quoting Cal. Dep't of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 929-30 (9th Cir. 1993)) (emphasis in original).
As to what constitutes a contingent or unliquidated claim, the Ninth Circuit Bankruptcy Appellate Panel has observed that:
In re Falk, No. BAP NC-12-1385-DJuPa, 2013 WL 5405564, at *6 (9th Cir. BAP Sept. 26, 2013).
Here, if Hopkins is successful in the adversary proceeding, Solectria could be ordered to disgorge the money it allegedly received from Hoku to Hopkins for the benefit of Hoku's creditors. It is also conceivable that Solectria and Hopkins could settle the avoidance claim via payment of a compromised sum. Either of these developments would constitute the sort of "extrinsic event" that will revive Solar's liability to Solectria to pay for the goods it received. Moreover, approval of a compromise, or entry of a money judgment against Solectria in favor of Hopkins, will also effectively liquidate the amount of Solar's revived liability to Solectria. Clearly, then, because it might have to disgorge a portion of the monies it received in payment for the goods it sold to Solar, Solectria holds a contingent, unliquidated claim in Solar's bankruptcy case.
Recall, to be a creditor, § 101(10)(A) also requires that an entity's claim arise "at the time of or before the order for relief concerning the debtor." Under § 301(b), "the commencement of a voluntary [bankruptcy] case . . . constitutes an order for relief . . . ." Here, the filing of Solar's voluntary bankruptcy petition constituted an order for relief.
The Ninth Circuit has addressed when a claim "arises" in this context in In re SNTL Corp., a case involving insurance companies.
In addressing the claim objection, the court first agreed with Centre that it held a contingent claim in the SNTL bankruptcy case: "Centre held a prepetition contingent claim inasmuch as the guaranty claim was subject to revival once the state court conservatorship had begun prepetition, giving rise to a possible (and foreseen) preference action by the commissioner." Id. at 838. Having concluded that the return of the preference revived SNTL's liability to Centre, the court next considered when Centre's claim "arose":
Id. at 839 (citations omitted). Noting that a provision in the settlement agreement had addressed the potential avoidance of the payment to Centre, and that SNTL's liability to Centre might in the future be revived, the court concluded that the parties could have reasonably contemplated, at the time of the filing of the SNTL petition, that Centre would have a claim against SNTL. Id. The court therefore concluded that Centre's claim arose at or before the filing of SNTL's bankruptcy case and should be allowed. Id.
The analytical model employed by the court in SNTL also applies in Solar's case. While here there was no "agreement" between Solectria and Solar contemplating the possible avoidance of the payments made by Hoku to Solectria for the goods it sold Solar, because Solectria accepted the payments from Hoku for a Solar debt, the parties could have reasonably and fairly contemplated that Solar's liability to Solectria might be revived should Hoku file for bankruptcy and its trustee seek avoidance of those payments. Even if Solectria's revived claim against Solar arguably did not "arise" at the time it accepted the payments from Hoku, at the latest, the parties could have reasonably contemplated Solectria may again hold a claim against Solar once Hoku and Solar both filed their bankruptcy petitions. Since that occurred on the same day, the Court concludes, under the SNTL test, for bankruptcy purposes, Solectria's claim in the Solar case arose "at or before" the time of the order for relief concerning Solar for purposes of § 101(10)(A).
In summary, applying the Bankruptcy Code, as interpreted by the case law, the Court concludes that Solectria is a "creditor" in the case as defined in § 101(10)(A) because it held a contingent, unliquidated claim that arose on or before the date Solar filed its bankruptcy petition.
The Court next turns to whether Solectria's claim in the Solar should be "allowed." Reynard and Hopkins both argue that it should not be allowed because, on the petition date, Solar owed nothing to Solectria, and Solectria had paid nothing to Hopkins. But, as discussed both above and below, this argument misses the mark.
Hopkins further argues that Solectria's claim should be disallowed pursuant to § 502(d). Hopkins Joinder at 1-2. Solectria responds that § 502(d) should not apply to a claim being filed in a different case from the one in which the avoidance litigation occurs. Solectria Resp. at 5. Once again, the Court agrees with Solectria.
Under § 502(a), "a claim or interest, proof of which is filed under section 501 of this title, is deemed allowed unless a party in interest . . . objects." If the proof of claim is filed in accordance with Rule 3001, it constitutes prima facie evidence of the validity and amount of the creditor's claim. Rule 3001(f). However, once a party in interest objects, in most cases, § 502(b) requires the Court to determine "the amount of the claim . . . as of the date the petition was filed," and to "allow such claim in such amount except to the extent that . . ." it falls within one of the listed reasons for disallowance in §§ 502(b)(1)-(9).
Reynard suggests that Solectria's claim should be disallowed under § 502(b)(1) because it was "unenforceable" against Solar at the time of the petition, and still is. But a careful reading of § 502(b)(1) reveals that it is inapplicable when a claim is unenforceable solely because it is contingent. As the Ninth Circuit has clearly stated, "[c]ontingent claims are allowed under section 502(b)." In re SNTL, 571 F.3d at 839.
It does not matter that the contingency for Solectria's claim has yet to occur. Recall, in In re SNTL, at the time of the bankruptcy, the settlement relieving SNTL of its guarantor liability was still in effect. However, it was clear that should the settlement payments be avoided, SNTL's liability to Centre would revive. In light of this, the Ninth Circuit held that, "a contingent claim should not be disallowed simply because the contingency occurs post petition, a consequence that is plainly at odds with the Bankruptcy Code." 571 F.3d 838.
Here, it was also clear on Solar's petition date that should Solectria be required to disgorge any of the payments it received to Hopkins, Solar's liability to Solectria on its contract to pay for the goods it received would be revived. Neither Reynard nor Hopkins has disputed that. Therefore, the fact this contingency has yet to occur is of no consequence. Solectria's claim is not disallowed pursuant to § 502(b)(1).
Section 502(d) provides that:
Here, Solectria is alleged to have received a transfer from Hoku that Hopkins is endeavoring to avoid and recover in the adversary proceeding under §§ 544(b), 548, and 550. Given its language, does § 502(d) require disallowance of Solectria's claim because it may have received an avoidable transfer from Hoku (not Solar)?
The BAP has explained that interpretation of the Code "begins with the language of the statute" and that "[a] court must consider the language itself, the specific context in which that language was used, and the broader context of the statute as a whole." In re Reswick, 446 B.R. 362, 367 (9th Cir. BAP 2011) (citations omitted); see also Dolan v. U.S. Postal Service, 546 U.S. 481, 486 (2006) ("Interpretation of a word or phrase [in a federal statute] depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis."). Since the provisions of § 502(d) arguably apply to the transfer from Hoku to Solectria, the Court must interpret the statute. To do so, the Court must consider the purpose of § 502(d).
Section 502(d) serves two purposes. First, it prevents an entity that has received an avoidable transfer from sharing in the distribution of assets while the entity remains indebted to the estate. See In re MicroAge, Inc., 291 B.R. 503, 511 (9th Cir. BAP 2002) (citing In re Mid Atlantic Fund, Inc., 60 B.R. 604 (Bankr. S.D.N.Y. 1986)). In this sense, § 502(d) "ensure[s] equality of distribution of estate assets." MicroAge, Inc., 291 B.R. at 511 (citing In re Davis, 889 F.2d 658, 662 (5th Cir. 1989); In re KB Toys Inc., 736 F.3d 247, 252 (3d Cir. 2013) (citing Enron Corp. v. Springfield Assocs., L.L.C. (In re Enron Corp.), 379 B.R. 425, 434 (S.D.N.Y. 2007)). The second purpose of § 502(d) stems from its "coercive effect of insuring compliance with judicial orders." MicroAge, Inc., 291 B.R. at 511 (citing Davis, 889 F.2d at 661); KB Toys Inc., 736 F.3d at 252.
Disallowing Solectria's claim in Solar's bankruptcy case serves neither of these purposes. In fact, in terms of equality of distribution, it works against it. If Solectria's claim is disallowed, and Solar's bankruptcy case closes before resolution of the adversary proceeding, Solectria will have no place to turn for payment should it be required to disgorge any sums to Hopkins. This inequality is exacerbated by the fact that Solectria would be put in this position without benefit to other Solar creditors because any funds Solectria disgorges would go to Hoku's creditors, not Solar's.
In contrast, allowing Solectria's claim promotes a more equitable distribution in the Solar case, regardless of the outcome of the adversary proceeding. If Solectria is successful in defending against Hopkins' avoidance action, and pays nothing to him, then it has no claim and will receive no distribution from the Solar estate. On the other hand, if Solectria repays Hopkins some or all of money it received for the goods sold to Solar, then Solectria will participate in a creditor distributions for that amount to the same extent as Solar's other unpaid creditors. Simply put, disallowing Solectria's claim contravenes the first purpose of § 502(d).
Moreover, disallowing Solectria's claim does little to fulfill its second purpose. Solectria cannot be coerced to comply with a judicial order that has yet to be entered.
The Court concludes that Solectria's claim is not disallowed under § 502(d).
Having concluded that Solectria's claim should be allowed in Solar's case, the Court next turns to the issues raised by Solectria's motion. In it, Solectria asks the Court to determine that, for purposes of any distribution, its claim should be treated as timely, on a par with other timely claims, pursuant to § 726(a)(2)(c). Solectria's Motion at 3. Reynard's only remaining argument against that relief is that because Solectria's claim arises from a possible avoidance judgment, it can only be deemed timely if Solectria filed its claim within the time limits set forth in Rule 3002(c)(3). Obj. to Mtn. at 2-3. Rule 3002(c)(3) provides that a proof of claim for "[a]n unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property . . . ."
Considering the relationship between § 726 and Rule 3002(c), this Court has observed:
In re Fleischman, 02.3 IBCR 139, 139-40 (Bankr. D. Idaho 2002). Summarizing, while Rule 3002(c), and its listed exceptions, determine whether a claim is filed timely or tardy, it is § 726 that determines the priority of distributions in a chapter 7 case.
Here, it is clear that Solectria filed its claim well after the claims bar date. Thus, under Rule 3002(c), that claim is tardy unless one of five exceptions apply. While there is some dispute as to the applicability of the exception found in Rule 3002(c)(3), for now, the Court may assume it does not apply, and that Solectria's claim was indeed tardily filed. However, even if Solectria's claim is deemed tardy under Rule 3002(c), if Solectria meets the requirements § 726(a)(2)(c), it can still receive distributions as if that claim were filed timely.
Section 726(a)(1) dictates that timely filed § 507 priority claims be paid first when funds are distributed in a chapter 7 case. Under § 726(a)(2)(A) and (B), claims that are timely filed by the creditor, or by another on behalf of the creditor, are paid. Importantly, however, § 726(a)(2)(c) provides that a tardily filed claim may be treated as if it were timely for distribution purposes if:
As there has yet to be a distribution in Solar's case, Solectria's claim was certainly filed in time to permit its payment. Thus the Court need only determine a "simple question of fact: Did [Solectria] have notice or actual knowledge of the case in time to allow [it] to file a timely claim?" In re Hannah Racing Products, Inc., 90 IBCR 222, 229 (Bankr. D. Idaho 1990).
The declaration of Solectria's representative submitted to support the Motion avers that Solectria did not have actual knowledge of Solar's bankruptcy case until May 18, 2015, when it received correspondence from another creditor regarding the Hoku case. Worden Decl. at ¶ 5, Dkt. No. 119; Solar's Motion at 2, Dkt. No 118. Of course, this date was well after the claims bar date had passed. Reynard and Hopkins have offered nothing to dispute this representation. There is also nothing in the Court's record to show that Solectria was ever notified that Solar had filed this bankruptcy case, nor was Solectria listed on Solar's schedules or mailing matrix. See Debtor's Schedule F at 12-26, 4-46, Dkt. No 1; BNC Cert. of Mailing, Am. Notice of Chapter 7 Bankruptcy Case, etc., at 3, Dkt. No. 32.
On this record, the Court accepts Solectria's proof and finds that it lacked any actual knowledge or notice of Solar's bankruptcy case in time to timely file its proof of claim. Thus, even assuming Solectria's claim is tardy, under § 726(a)(2)(c), that claim should be treated as if it were timely filed for distribution purposes in the Solar case. Under these facts, Reynard's argument about Rule 3002(c)(3) is of no consequence. That rule is simply one of the several exceptions under which a claim filed after the claims bar date is still considered to be "timely." But, failing to satisfy one of the exceptions in that Rule does not prevent a tardy claim from treatment as timely pursuant § 726(a)(2)(C).
One other topic deserves mention in this case. While it is not a basis to disallow Solectria's claim, the Court is mindful of Reynard's concerns expressed at the hearing that, if Solectria's claim is allowed, but remains contingent and unliquidated, she must delay any distribution to creditors, which in turn may lead to additional expense which may diminish the estate.
The Court is granted broad discretion when estimating the amount an unliquidated claim. Corey, 892 F.2d 829 (citing Addison v. Langston (In re Brints Cotton Mktg., Inc.), 737 F.2d 1338, 1342 (5th Cir. 1984); Bittner v. Boren Chem. Co., 691 F.2d 134, 136 (3d Cir. 1982)). As for how to calculate the ultimate value of the claim, one bankruptcy court has noted that:
In re Pac. Gas & Elec. Co., 295 B.R. 635, 642-43 (Bankr. N.D. Cal. 2003) (citations omitted).
Even though estimation of Solectria's claim is possible, Reynard may decide that the cost to the Solar estate involved in doing so may not justify the endeavor. However, estimation remains one option
For the reasons discussed above, Reynard's Claim Objection will be denied, and Solectria's Motion will be granted. Solectria holds a tardily-filed, allowed, but contingent and unliquidated, claim in this bankruptcy case. Under the Bankruptcy Code and the facts, that claim should be treated the same as timely filed claims when any funds are distributed.
A separate order will be entered.
