Creditor Forward Progress Management Real Estate, Inc. ("FPM") appeals the order of the bankruptcy court disallowing FPM's proof of claim filed in The Yucca Group LLC's ("Yucca") chapter 11
We REVERSE that portion of the bankruptcy court's order concluding that FPM had not presented an adequate informal proof of claim. We AFFIRM the bankruptcy court's determination that FPM's failure to timely file a proof of claim was not occasioned by excusable neglect.
Yucca is a California limited liability company; its single purpose is to hold unsold units of a condominium complex located on Yucca Street in Los Angeles (the "Yucca Property"). Two of the managers and members of Yucca, Gabriel Tauber ("Tauber") and Avishay Weinberg ("Weinberg"), are also managers and members of another real estate holding company, The Whitley Investment Group, LLC ("Whitley"). Whitley owned a separate property ("Whitley Property"), also in Los Angeles.
In November 2007, Tauber and Weinberg entered into a loan agreement with FPM (the "Loan Agreement"). In it, FPM agreed to extend credit to Whitley in the sum of $400,000. To collateralize the loan, Weinberg and Tauber granted FPM a security interest in 50 percent of their membership interests in Yucca. The Loan Agreement also provided that FPM would receive a deed of trust on the Whitley Property.
Whitley failed to repay the loan by its maturity date of February 8, 2007. After FPM declared a default under the Loan Agreement, at Whitley's request, FPM agreed to enter into a Forebearance, Waiver and Modification Agreement (the "Forebearance Agreement"), in which FPM agreed to forebear collection for set times in exchange for payments of additional fees. After continued defaults under the Forebearance Agreement, FPM caused the trustee under the deed of trust to record a notice of default as to the Whitley Property trust deed on June 13, 2008. The same day, FPM commenced a civil action against Whitley, Weinberg and Tauber in the California Superior Court.
On a date not clear in the record, to avoid the foreclosure sale, Whitley, Weinberg, Tauber and (for the first time) Yucca entered into an amendment to the Forebearance Agreement ("Amendment One"). Under Amendment One, Yucca, Whitley, Weinberg and Tauber agreed that if the Whitley Property were sold at a loss under the Loan Agreement, FPM could demand that the other parties execute and record a deed of trust on two condominium units in the Yucca Property.
Over the next two years, FPM alleges that there were continuing defaults, a foreclosure sale of the Whitley Property, a failure by Whitley, Yucca, Weinberg and Tauber to honor their commitments to sign and record deeds of trust on the two Yucca condominium units, and a failure to pay the remaining debts owed under the parties' agreements.
On January 15, 2010, FPM commenced another civil action against Tauber, Weinberg and, this time, Yucca, in state court. The complaint sought an order awarding FPM an equity interest in Yucca, and $400,000 in damages for breach of contract by Yucca and the other parties under the Loan Agreement and Forebearance Agreements.
Apparently in response, Yucca filed its own chapter 11 petition on February 24, 2010. On its Schedule F and Statement of Financial Affairs, Yucca listed the contingent, unliquidated, and disputed claim of FPM for the lawsuit, and it listed the amount of the debt as $300,000.
The parties to this appeal agree that FPM was extremely active in many aspects of Yucca's bankruptcy case. Indeed, a review of the docket in the bankruptcy case shows FPM filed twenty-three different pleadings in connection with a variety of proceedings in the bankruptcy court. Among those were pleadings asserting that FPM was both an owner of an equity interest in Yucca, and that it was a secured creditor. In addition, on March 26, 2010, Yucca caused the state court action to be removed to the bankruptcy court as an adversary proceeding, and thereby, the pleadings filed thus far in that suit became matters of record in the bankruptcy court.
Although FPM filed various motions in the bankruptcy case and adversary proceeding, including a request that the bankruptcy court appoint a chapter 11 trustee, according to a Joint Status Report filed in the adversary proceeding on November 30, 2010, "A settlement agreement has been reached with The Yucca Group, LLC and [FPM]. . . . Pursuant to an agreement with The Yucca Group, LLC, [FPM] will be filing a stipulation dismissing The Yucca Group, LLC from the adversary proceeding with prejudice."
On December 8, 2010, Yucca filed a motion to set a bar date for creditors to file proofs of claim in the bankruptcy case. The bankruptcy court granted this motion and entered an order on January 10, 2011, fixing the deadline for filing proofs of claim as February 15, 2011. Yucca served copies of the bar date order on all parties, including FPM and its counsel. However, it failed to serve a "notice" of the bar date order on anyone.
On January 18, 2011, the bankruptcy court conducted a continued status conference in the bankruptcy case and adversary proceeding. No transcript of this conference was included in the excerpts of record, nor does one appear in the bankruptcy court's dockets. However, there are several indirect sources of information about the events at that conference in the record.
The bankruptcy court had issued a tentative ruling prior to the status conference, also on January 18. Apparently referencing its tentative ruling from a similar conference held on December 14, 2010, the court queried the parties: "Per the joint status report [of November 30, 2010, FPM] will be dismissing the Yucca Group from the complaint. The only other defendants in this removed action were "Does." Does the plaintiff wish it remanded or merely dismissed?" Tentative Ruling, January 18, 2011.
In addition, according to FPM's brief in this appeal, at the status conference "the Court stated that FPM could not obtain control of the Debtor by asserting the Equity Causes of Action in the Adversary Proceeding." Op. Br. at 12.
Because we do not have a copy of the transcript, we are unable to determine what other actions or discussions may have occurred at the January 18, 2011 conference. However, on January 28, 2011, the bankruptcy court entered an "Order Dismissing Adversary Proceeding Against the Yucca Group, LLC, Marcus Kimman, Gabriel Tauber and Avishay Weinberg." The order, prepared by counsel for FPM, provides that the dismissal of the FPM adversary proceeding against Yucca was "without prejudice," and "all defendants having been dismissed, the adversary proceeding is closed."
Nine days after the claims bar date, on February 24, 2011, FPM filed two proofs of claim, numbers 12 and 13. In Claim 12, FPM asserted an unsecured claim for $942,428.13. Claim 13 was later dismissed by stipulation of the parties as duplicative.
Yucca objected to, and sought the disallowance of, Claim 12 on March 31, 2011, because it was late filed. FPM responded to the objection on April 18, 2011, generally arguing that Yucca failed to follow local rules on objections to claims and asserting that Yucca had not provided a notice of the bar date to FPM.
The bankruptcy court conducted hearings on Yucca's objection to FPM's claim on May 3, June 7, and July 26, 2011. At the May 3 hearing, addressing FPM's argument that it had not been properly served with notice of the bar date according to the local rules, the bankruptcy court ruled that any violations of local rules were waived by the bankruptcy court. Further, the court noted that Ruvelson, the president of FPM, was physically present in the courtroom when the bankruptcy court set the bar date, and FPM thereby had actual notice of the bar date. Finally, the court observed that FPM's attorneys had been served with copies of the bar date order. However, on its own initiative, the bankruptcy court advised FPM that an adversary proceeding, under some circumstances, could constitute an informal proof of claim. When counsel for FPM indicated that he was not prepared to discuss whether FPM satisfied the requirements for an informal proof of claim, the bankruptcy court continued the hearing to June 7, 2011.
Before the hearing on June 7, 2011, the bankruptcy court issued a tentative ruling. As to FPM's argument that the notice of the bar date was inadequate, the court repeated its earlier finding that FPM had actual notice of the bar date. Regarding whether FPM qualified for an informal proof of claim, the court stated:
Tentative Ruling, June 7, 2011 at 2.
Finally, addressing whether FPM's late filing of Claim 12 might be allowed as the result of excusable neglect, the bankruptcy court discussed the factors outlined by the Supreme Court in
After hearing from counsel at the hearing, the bankruptcy court adopted its tentative ruling. But as to the excusable neglect question, the court offered FPM a continuance to provide additional evidence to show excusable neglect, because it was especially interested in considering any declarations FPM might submit from the FPM attorneys explaining why Ruvelson was not advised of consequences flowing from failure to submit the claim by the bar date.
FPM accepted the bankruptcy court's offer of a continuance. But rather than comply with the instructions of the court to submit detailed declarations, on June 21, 2011, FPM submitted another declaration of Ruvelson stating only that "I was advised and subsequently it was decided that for the purposes of collecting money, that there was no need to continue the lawsuit, but that a claim would suffice." Ruvelson does not give the name of the attorney who gave him that advice.
Before the continued hearing on July 26, 2011, the bankruptcy court issued yet another tentative ruling:
FPM did not appear at the continued hearing.
The bankruptcy court entered its order sustaining Yucca's objection to FPM's claim 12 on August 1, 2011. FPM filed this timely appeal on August 12, 2011.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(B). The Panel has jurisdiction under 28 U.S.C. § 158.
Whether the bankruptcy court erred in finding that FPM did not have a valid informal proof of claim.
Whether the bankruptcy court abused its discretion in finding that FPM's late filing of its claim was not the result of excusable neglect.
Whether a valid informal proof of claim exists in a bankruptcy case is a question of law reviewed
We review the bankruptcy court's decision declining to find excusable neglect for the late filing of a claim for abuse of discretion.
In this case, it is undisputed that FPM filed no formal proof of claim prior to the expiration of the deadline set by the bankruptcy court. However, FPM argues that the bankruptcy court should have decided that it had timely submitted an informal proof of claim. Reviewing the record
The informal proof of claim doctrine has been long recognized in the Ninth Circuit.
Over the years, numerous types of documents and pleadings have been deemed adequate by the Ninth Circuit to constitute an informal proof of claim.
In this appeal, the bankruptcy court found that FPM initially had met the case law requirements for establishing an informal proof of claim: "It would seem that the state court complaint, removed to this court by Debtor, is an explicit demand showing the nature and amount of the claim and even shows FPM's intent to hold Debtor liable and would constitute an informal proof of claim[.]" Tentative Ruling, June 7, 2011, at 2. We concur with the bankruptcy court's conclusion because, as the record and evidence show, the adversary proceeding pleadings, including FPM's complaint against Yucca and the others, were: (1) presented to the court; (2) within the time for filing of claims; (3) by the creditor FPM; (4) bringing to the attention of the court; (5) the nature and amount of claim asserted against the estate.
Despite the contents of the adversary proceeding file, however, the bankruptcy court found that, because the adversary proceeding had been dismissed, FPM's pleadings could not constitute an informal proof of claim. As it noted in its last tentative ruling: "In this case, but for the dismissal of the complaint prior to the bar date, the court would find that the complaint was an informal proof of claim. But the dismissal did take place and the result is [denial of the claim.]". It is with this conclusion that we part company with the bankruptcy court.
First, while FPM admittedly decided to forego its claim to an equity interest in Yucca, there is nothing definitive in the record to show that, by dismissal of the adversary proceeding, FPM intended to abandon its claims against Yucca for breach of the loan contracts as alleged in its complaint. According to the bankruptcy court, FPM had stated in its status report of November 30, 2010, that it had reached an agreement with Yucca, and would thereafter submit a stipulation dismissing Yucca from the adversary proceeding
Second, the bankruptcy court decided that, if the removal of the state court complaint to the bankruptcy court by FPM showed an intent to hold Yucca liable, then dismissal of that complaint must necessarily show Yucca's lack of intent to do so. However, this conclusion is at odds with the case law that holds that withdrawal of a filing constituting an informal proof of claim does not negate the intent to hold a debtor liable for a debt. For example, in
Similarly, in
A third reason for departing from the bankruptcy court's reasoning is that it is out of step with the treatment of formal proofs of claim in the Rules. Under Rule 3006,
9 COLLIER ON BANKRUPTCY ¶ 3006.01 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed., 2010);
Although the phrase "participated significantly in the case" is not defined in the Rules, courts have interpreted it to refer to "a creditor that enters a bankruptcy case and asks the court to act on its behalf in some substantive way."
Given the extent of its activities in Yucca's bankruptcy case, had FPM filed a timely formal proof of claim, it would not have been allowed to simply "withdraw" that claim absent notice of a request to Yucca and other major parties in the bankruptcy case, a hearing, and permission of the bankruptcy court. In light of this heightened procedural requirement to withdraw a claim, that an otherwise adequate informal proof of claim could somehow be extinguished without any further formalities by dismissal of an adversary proceeding without prejudice would seem contrary to the approach and philosophy evidenced by the Rules.
In summary, in this Circuit, the courts apply a rule of liberality to allow late-filed formal proofs of claim, under proper circumstances, to relate back to the filing of so-called informal proofs of claim. We agree with the bankruptcy court's finding that FPM's removal of the state court complaint to the bankruptcy court satisfied the traditional requirements for an informal proof of claim. However, we respectfully disagree with the bankruptcy court's conclusion that the later dismissal of the adversary proceeding without prejudice constituted a withdrawal of FPM's claim. We therefore REVERSE the decision of the bankruptcy court that FPM's informal proof of claim, which was later amended by FPM's formal proof of claim, should be disallowed.
The conclusion that FPM timely filed a valid informal proof of claim which was not later withdrawn is sufficient to dispose of this appeal. However, we feel it appropriate to comment on the alternative argument offered by FPM.
At one time, the Ninth Circuit followed a "strict standard" for application by trial courts faced with a claim of excusable neglect for failure to file timely pleadings.
In the current appeal, the bankruptcy court correctly identified the
Regarding the potential danger of prejudice to the debtor, the bankruptcy court found that allowing FPM's late-filed formal proof of claim could result in inclusion of an additional $942,428.13, which may have a deleterious effect on the proposed liquidation payout. As to the length of the delay and its potential impact on judicial proceedings, the bankruptcy court did not consider the nine-day delay in filing the FPM claim to be a significant factor.
The bankruptcy court linked the third and fourth
The court was also particularly interested in evidence from an earlier attorney for FPM, Brian Harvey. The court continued the hearing on Yucca's objection to FPM's claim twice to provide FPM an opportunity to supply evidence from the attorneys supporting the alleged excusable neglect. Finally, despite assuring the bankruptcy court that he would welcome the opportunity for a third continuance and would provide the requested evidence, neither Mr. Rothman nor any attorney for FPM attended the last hearing on July 29, 2011.
"The burden of presenting facts demonstrating excusable neglect is on the movant."
We REVERSE the decision of the bankruptcy court that, under these facts, FPM did not hold a valid, timely informal proof of claim which was amended by FPM's formal proof of claim.
We AFFIRM the bankruptcy court's finding that FPM's delay in filing a formal proof of claim did not result from excusable neglect.
Rule 3006 (emphasis added).