KEVIN J. CAREY, Bankruptcy Judge.
Before the Court is the objection by the Trustee for the New Century Liquidating Trust to the proof of claim filed by Helen Galope. The Court held an evidentiary hearing on December 13, 2011 on the threshold issue of whether the proof of claim should be disallowed because it was filed after the claims bar date. For the reasons set forth below, the Objection will be sustained and the proof of claim will be disallowed.
On April 2, 2007, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On June 8, 2007, the Debtors filed a motion pursuant to Fed.R.Bankr.P. 2002, 3003(c)(3) and 9007 asking the Court to fix the time within which proofs of claim may be filed (the "Bar Date Motion"). (D.I. 1173). After a hearing on the Bar Date Motion, by order dated June 28, 2007 (the "Bar Date Order"), this Court established August 31, 2007 at 5:00 p.m. (prevailing Pacific Time) as the deadline for filing proofs of claim in the chapter 11 case (the "Bar Date") (Trustee Ex. 2, D.I. 1721). On July 9, 2007, the Debtors' claims and noticing agent, Xroads Case Management Service LLC (the "Claims Agent") filed a Declaration of Service, stating that it mailed a copy of the Notice of Bar Date (the "Bar Date Notice") and a proof of claim form substantially similar to Official Form No. 10 to "parties listed on the Master Mailing Matrix as set forth on a list maintained by Debtors' counsel." (Trustee Ex. 3, D.I. 1861). On August 3, 2007, the Claims Agent filed affidavits of publication stating that it had published the Bar Date Notice in The Wall Street Journal (National Edition) and the Orange County Register on July 23, 2007. (Trustee Exs. 4 and 5, D.I. 2148 and D.I. 2149).
On November 20, 2009, the Court entered an Order confirming the Modified Second Amended Joint Chapter 11 Plan of Liquidation (the "Modified Plan") (D.I. 9905).
On or about July 29, 2011, Helen Galope filed proof of claim number 4131 in the amount of $350,000 (secured) plus unliquidated amounts (the "Galope Claim").
On August 26, 2011, the Trustee filed The New Century Liquidating Trust's Forty-Second Omnibus Objection to Claims Pursuant to 11 U.S.C. § 502(b) and Fed.R.Bankr.P. 3001 and 3007 and Local Rule 3007-1 [Non-Substantive] (D.I. 10562) (the "Claim Objection") asking the Court to disallow and expunge the Galope Claim. The Claim Objection also objects to the proof of claim 4132 filed by Tiphanie Goines on July 20, 2011, in the amount of $432,000 (secured) (the "Goines Claim") and proof of claim number 4133 filed by Karan J. Russell on July 20, 2011 in the amount of $880,000 (secured) (the "Russell Claim"). Ms. Galope and other claimants filed responses in opposition to the Trustee's Claim Objection.
On December 6, 2011, Ms. Galope filed an adversary proceeding against Debtors New Century TRS Holdings, Inc., NCMC and NC Capital Corporation alleging the following claims: (1) Fraud at Loan Origination, (2) TILA Violation, (3) Intentional Misrepresentation, (4) Fraudulent Conveyance, (5) Civil Conspiracy v. Homeowners, (6) Civil Conspiracy-Preferential Treatment Accorded Banks, (7) REMIC Fraud and Tax Evasion, (8) Fraudulent Misrepresentation,
The Trustee seeks an order disallowing and expunging the Galope Claim because it was filed almost four years after the Bar Date. Galope argues in response that her claim should be allowed, despite being filed long after the Bar Date, because: (1) she was not aware of her claim until after the Bar Date had passed, (2) notice of the Bar Date was not sufficient, and (3) she should be permitted to file a claim after the Bar Date based on excusable neglect.
The Bar Date Order provided that "any entity holding a prepetition claim against one or more of the Debtors must file a proof of claim in accordance with the procedures described herein by the General Bar Date (August 31, 2007)." (Trustee Ex. 2, at ¶ 5). The Bar Date Order also stated that "[a]s used herein, (a) the term `claim' has the meaning given to it in section 101(5) of title 11 of the United States Code . . ." (Id. at ¶ 2). The Bankruptcy Code broadly defines the term "claim" as follows:
11 U.S.C. § 101(5).
Ms. Galope first argues that she should not be bound by the Bar Date because she didn't realize she had a claim against the Debtors for fraud until after the Bar Date had passed. The Third Circuit considered the issue of when a claim arises for purposes of the Bankruptcy Code in the decision Jeld-Wen, Inc. v. Van Brunt (In re Grossman's Inc.), 607 F.3d 114 (3d Cir. 2010). The issue in Grossman's was whether an asbestos-related injury claim, caused by products purchased and used prior to the bankruptcy case, was discharged by the debtors' confirmed chapter 11 plan, even though the claimant was unaware of the injury until several years after the bar date and plan confirmation.
In the present case, the Galope Claim states that it is based upon the "Mortgage Note," and includes copies of the Truth-in-Lending Statement and Deed of Trust that were part of the December 2006 loan transaction. (Ex. E-2). Moreover, to the extent the Galope Claim is based upon allegations of fraud in connection with the Debtors' sale of the loan, the sale took place prior to the bankruptcy filing. (Tr. 12/13/11 at 48:10-48:21). Applying the Third Circuit's holding in Grossman's to the case at bar establishes that the Galope Claim arose out of the Debtor's conduct toward Ms. Galope that occurred prior to the bankruptcy filing and, therefore, is a pre-petition claim.
The Grossman's Court recognized that the test to determine whether a claim is subject to a claims' bar date must also be reviewed in light of due process considerations. Grossman's, 607 F.3d at 125. Determining whether the discharge of claims satisfies due process includes an inquiry into the adequacy of notice of the claims bar date. Id. at 127. The issue of adequacy of the Debtors' Bar Date Notice arose previously during oral argument on a motion to dismiss (see White v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), 450 B.R. 504, 511-514 (Bankr.D.Del.2011)), but I deferred ruling on the adequacy of the Bar Date Notice until completion of an evidentiary hearing on the matter. The legal analysis related to the Bar Date as set forth in the White decision is equally applicable here and I repeat a portion of the
The purpose and procedures for setting a claims bar date were aptly discussed by my colleague, Judge Gross, in In re Smidth & Co., 413 B.R. 161 (Bankr. D.Del.2009):
Id. at 165 citing, inter alia, City of New York v. New York, N.H & H.R. Co., 344 U.S. 293, 297, 73 S.Ct. 299, 97 L.Ed. 333 (1953), Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3d Cir.1995). For creditors who receive the required notice, the bar date is a "drop-dead date" that prevents a creditor from asserting prepetition claims unless he can demonstrate excusable neglect. Berger v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 96 F.3d 687, 690 (3d Cir.1996).
The Trustee asserts that Ms. Galope was not entitled to, and did not receive, actual notice of the Bar Date because she was an unknown creditor at the time the Bar Date Notice was being served. In Chemetron, the Third Circuit Court of Appeals articulated that a "known" creditor is one whose identity is either known or "reasonably ascertainable" by the debtor. Chemetron, 72 F.3d at 346 citing Tulsa Professional Collection Serv., Inc. v. Pope, 485 U.S. 478, 108 S.Ct. 1340, 1347, 99 L.Ed.2d 565 (1988). The Chemetron Court further explained:
Id. at 346-47. On the other hand, an "unknown" creditor is one whose "interests are either conjectural or future or, although they could be discovered upon investigation, do not in due course of business come to knowledge [of the debtor]." Chemetron, 72 F.3d at 346 quoting Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 317, 70 S.Ct. 652, 659, 94 L.Ed. 865 (1950). A debtor need not be omnipotent or clairvoyant, but need only do what is reasonable under the circumstances to provide notice to ascertainable creditors. Gentry v. Circuit City Stores, Inc. (In re Circuit City Stores, Inc.), 439 B.R. 652, 660 (E.D.Va.2010) citing In re J.A. Jones, Inc., 492 F.3d 242, 251 (4th
The Trustee testified that his review of the Debtors' books and records showed that Ms. Galope entered into a loan transaction with a Debtor that was sold prior to the bankruptcy filing. (Tr. 12/13/11 at 47:19-48: 21). The Trustee further testified he was unaware of any claim by Ms. Galope against the Debtors prior to receiving a copy of the Galope Claim in July 2011. (Id. at 49:2-49:5). There was no information in the Debtors' books and records indicating any complaints about the loan. (Id. at 49:6-49:17). In the White decision, I determined that the "availability of the Whites' names and address in the Debtors' loan files may have reflected that the Whites were known customers, but without more, it did not make them `known creditors.'" White, 450 B.R. at 512 citing Hebell v. NVR, Inc., 1997 WL 417363, *2 (N.D.Ill. July 21, 1997) (Holding that homeowner-mortgagors were not known creditors, even though their identities were "reasonably ascertainable" from the debtors' loan service records, when those records did not indicate that mortgagors were potential class members who could file suit in the future, thereby becoming claimants). Like the Whites, Ms. Galope was an unknown creditor at the time the Bar Date Notice was being served, and was entitled only to constructive notice by publication. Chemetron, 72 F.3d at 346-47.
The Bar Date Order in the present case provided that "[t]he Debtors shall cause the Publication Notice to be published once in the national edition of The Wall Street Journal and any such other local publications as the Debtors deem appropriate no less than 30 days prior to the General Bar Date." (Trustee, Ex. 2 at ¶ 18). The Debtors published notice of the Bar Date in The Wall Street Journal (National Edition) and the Orange County Register on July 23, 2007.
Ms. Galope, who resided in California at the time of publication of the Bar Date Notice, argues that publication of the Bar Date Notice in two newspapers does not meet due process requirements because the Debtors should have published notice in more local newspapers. She argues that most borrowers with claims against the Debtors would not read The Wall Street Journal or would not know about the Orange County Register. She offered evidence of the daily circulation of the top twenty-five daily newspapers in the United States as of September 30, 2007, showing that the Orange County Register's circulation was listed as one of the lowest— twenty-third on the list—with a circulation of 278,507. (Ex. E-23). She argues that the Debtors' decision not to publish the Bar Date Notice more widely demonstrates their intent to prevent borrowers from filing claims in the bankruptcy case. (Tr. 12/13/11 at 83-84).
At the evidentiary hearing on December 13, 2011, the Trustee presented testimony of former lead counsel for the Debtors regarding the decision-making process behind the publication notice. Counsel testified that the national edition of The Wall Street Journal was selected because:
(Tr. 12/13/11 at 40:11-41:3). Debtors' counsel also testified that supplementary notice of the Bar Date was published in the Orange County Register because New Century's main office was located in Irvine, Orange County, California. (See Tr. 12/13/11 at 24-25). At the time of the bankruptcy filing, New Century was the largest private employer in Orange County. (Id.). At the time the Bar Date Notice was being published, the Debtors considered the potential for unknown employee claims. (Id.) Since the Orange County Register was following the bankruptcy case in its reporting, the Debtors believed providing supplementary notice of the Bar Date in the Orange County Register would be likely to reach those individuals who were reading the Orange County Register to keep track of what was going on in the case. (Id. at 25-26).
It is well settled that constructive notice of the claims bar date by publication satisfies the requirements of due process for unknown creditors. Chemetron, 72 F.3d at 348. See also, e.g., Circuit City, 439 B.R. at 660, Brown v. Seaman Furniture Co., Inc., 171 B.R. 26, 27 (E.D.Pa.1994), In re U.S. Airways, Inc., 2005 WL 3676186, *6 (Bankr.E.D.Va. Nov. 21, 2005), In re Best Products Co., Inc., 140 B.R. 353, (Bankr.S.D.N.Y.1992). Despite its limitations, notice by publication has been recognized as constitutionally adequate. The United States Supreme Court has acknowledged that:
City of New York v. New York, N.H. & H.R. Co., 344 U.S. 293, 296, 73 S.Ct. 299, 97 L.Ed. 333 (1953) (deciding, however, that because the City of New York was a known creditor, it was entitled to actual notice). See also Mullane, 339 U.S. at 317, 70 S.Ct. 652 ("[I]n the case of persons missing or unknown, employment of an indirect and even a probably futile means of notification [by publication] is all that the situation permits and creates no constitutional bar to a final decrees foreclosing their rights." The Mullane Court determined that notice by publication was sufficient for unknown beneficiaries of a common trust fund, but insufficient for known beneficiaries with a known place of residence).
Due process concerns are satisfied if the published notice is "reasonably calculated to reach all interested parties, reasonably conveys all the required information, and permits a reasonable time for response." Chemetron, 72 F.3d at 346. "The proper inquiry in evaluating notice is whether a party acted reasonably in selecting means likely to inform persons affected, not whether each person actually received
The testimony at the December 13, 2011 hearing established that the Debtors' business was nationwide. New Century had more than a million borrowers. (Tr. 12/13/11 at 27:15-20).
Moreover, publication in newspapers in "dozens of locations" in which a Debtor is conducting business can be "onerous, cumbersome and unduly expensive." Best Products, 140 B.R. at 358. The Fourth Circuit has written:
Vancouver Women's Health Collective Soc. v. A.H. Robins Co., 820 F.2d 1359, 1364 (4th Cir.1987). At the time notice of the Bar Date was being published, the Debtors were also concerned with costs. (Tr. 12/13/11 at 26:4-11). Debtors' counsel testified that there were "certainly limited resources ... it was a tight liquidating case." (Id. at 26:10-11). Further,
(Id. at 26:14-18).
Here, the record reflects that additional publication in local or regional newspapers would have consumed a disproportionate share of the Debtors' resources. Based upon consideration of relevant case law and the record made at the hearing on December 13, 2011, I conclude that the Debtors' publication of Bar Date Notice in the national edition of The Wall Street Journal, supplemented with notice in the Orange County Register, was reasonable and constitutionally adequate notice for unknown creditors. Accordingly, the Galope Claim is subject to the Bar Date Order.
"Even when notice satisfies constitutional requirements, a creditor who does not receive actual notice—or who receives it but for some reason does not timely act upon it—may seek leave to file a late claim based on `excusable neglect.'" U.S. Airways, 2005 WL 3676186 at *6. The Trustee argues, however, that allowing Ms. Galope to file a claim nearly four years after the Bar Date and after substantial distributions of the Trust's assets would be significantly prejudicial to the Trust and all unsecured creditors that complied with the Bar Date Order. Fed.R.Bankr.P. 9006(b)(1) provides in relevant part:
Courts considering a request for an enlargement of time based on excusable neglect consider four factors, as set forth by the United States Supreme Court in Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd. P'ship, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993): (1) the danger of prejudice to the debtor, (2) the length of the delay and its potential impact on judicial proceedings, (3) the reason for the delay, including whether it was within the reasonable control of the movant, and (4) whether the movant acted in good faith. Manus Corp. v. NRG Energy, Inc. (In re O'Brien Envtl. Energy, Inc.), 188 F.3d 116,
The first Pioneer factor, prejudice, does not refer to an imagined or hypothetical harm; a finding of prejudice should be a conclusion based on the facts in evidence. O'Brien Envtl, 188 F.3d at 127. When addressing the issue of prejudice under the Pioneer test, the O'Brien Court discussed several relevant considerations, including: (i) whether the debtor was surprised or caught unaware by the assertion of a claim that it had not anticipated, (ii) whether the payment of the claim would force the return of amounts already paid out under the confirmed plan or affect the distribution to creditors; (iii) whether payment of the claim would jeopardize the success of the debtor's reorganization; (iv) whether allowance of the claim would adversely impact the debtor actually or legally; and (v) whether allowance of the claim would open the floodgates to other future claims. Pro-Tec Serv., LLC v. Inacom Corp. (In re Inacom Corp.) No. 00-2426, 2004 WL 2283599 at *4 (D.Del. Oct. 4, 2004) citing O'Brien Envtl, 188 F.3d at 126-28.
Here, the Trustee testified that allowing the Galope Claim would cause significant prejudice. First, the Debtors and the Trustee had no reason to anticipate a claim by Ms. Galope since the Debtors' books and records did not reflect any complaints by Ms. Galope about the loan. (Tr. 12/13/11 at 49:2-17). Cf. O'Brien Envtl, 188 F.3d at 128 (finding that there was no question that the debtors were aware of the claim, which had been scheduled and had been discussed by the parties prior to the plan's effective date), Pro-Tec, 2004 WL 2283599 (finding no surprise when the debtor had listed claimant on its schedules), In re Garden Ridge Corp., 348 B.R. 642, 646 (Bankr.D.Del.2006) (same). Second, the Trustee testified that the Trust has already made two interim distributions. (Tr. 12/13/11 at 46). The Trustee testified credibly that, depending on the amount of the claim—as well as numerous other pending late-filed claims—there is a substantial likelihood that the Trustee would have to go back to the Plan's distribution model and recalculate distributions. (Id. at 50:18-24).
New Century's liquidating plan is confirmed, so there is no reorganization to jeopardize. However, allowance would jeopardize the Trustee's efforts to liquidate assets for distribution to creditors with timely-filed claims. As the Court is already aware from this and other, similar matters now before it in the New Century case, allowance of late-filed claims in this case unquestionably will open a floodgate to similar claims by other borrowers. In fact, as evidenced by the number of pending objections to "late claims" and motions to allow "late claims," the flow has already begun. The Trustee testified that the costs and delay caused by litigating the expected flood of claims would harm the Trust by preventing him from making final distributions to creditors and from closing the case in a timely manner. (Tr. 12/13/11 at 51:3-52:7). This bankruptcy case was filed in April 2007. Such prejudice was discussed by the U.S. Airways Court:
U.S. Airways, 2005 WL 3676186 at *7-*8. These considerations are equally applicable to the case at bar. The record before me supports the conclusion that the Trust would suffer substantial prejudice from excusing the late-filing of the Galope Claim.
Another Pioneer factor to consider is the length of the delay. Here, the Galope Claim was filed almost four years after the Bar Date and eighteen months after confirmation of the Modified Plan. In O'Brien Envtl, the Court noted that the significance of a delay should not be considered in absolute terms, but will depend upon the facts of the case. O'Brien Envtl, 188 F.3d at 130. For example, a delay of two months may be significant if the debtor proceeds expeditiously to resolve outstanding claims, while a much longer delay may seem less important when the debtor allows itself more time between confirmation and closing under the plan. Id. See Pro-Tec, 2004 WL 2283599 at *6 (delay of nine months after plan confirmation was not significant when the debtor was still litigating disputed claims and distributions to creditors would be based upon the debtor's progress in resolving claims), Garden Ridge, 348 B.R. at 646 (late claim had minimal impact on judicial proceedings when the Committee was "in the midst of bringing their objections (e.g. late filed, amended, and duplicate) and a distribution was not expected for some time.").
Here, the four year delay is significant. The Trustee has already completed two interim distributions and is finalizing administration of the Trust assets. (Tr. 12/13/11 at 46:21-47:18). This factor weighs heavily in favor of the Trustee.
Ms. Galope testified that she was aware of the New Century bankruptcy filing as early as 2007, but was unaware of her claim against the Debtors until she filed her own chapter 7 bankruptcy case,
Upon consideration of the facts of this case in light of the Pioneer factors, particularly the substantial prejudice to the Trust and the significant delay in filing the Galope Claim, I conclude that the Galope Claim is not entitled to relief from the Bar Date. While this result to a consumer borrower may seem harsh, I must be mindful of the importance of a bar date in a chapter 11 case, as stated by the Best Products Court:
Best Products, 140 B.R. at 360.
For all of the above reasons, the late-filed Galope Claim will be disallowed and expunged. An appropriate order follows.
As I said in the Carr decision (Carr v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), Adv. No. 09-52251, 2011 WL 6097910, *3 (Bankr.D.Del. Dec. 7, 2011)), the Trustee claims no interest in this or other similar loans, long since either transferred, sold or repossessed by non-debtor counter-parties. Apart from the payment of money damages, the remedies that Ms. Galope and others similarly situated truly seek, are the rescission of their mortgage loans and/or the right to remain in or regain title to and/or possession of their residences.
If a final judgment has been entered in state court foreclosure proceedings, the Rooker-Feldman doctrine prevents this Court from determining that a state court judgment was erroneously entered or taking action to render a state court judgment ineffectual. See Edwards v. New Century Mortgage Corp. (In re New Century TRS Holdings, Inc.), 423 B.R. 467, 472 (Bankr.D.Del.2010) citing Madera v. Ameriquest Mortg. Co. (In re Madera), 586 F.3d 228, 232 (3d Cir.2009). The remedies for claimants seeking more than monetary damages do not lie with this Court, but elsewhere—most likely, in a court with jurisdiction over those parties who currently claim rights pursuant to various loan documents. Id. See also White, 450 B.R. at 510, in which I determined that this Court "is without subject matter jurisdiction to order rescission or cancellation of the Mortgage Loan, now held by an unrelated third party. Moreover, any modification or adjustment to the Mortgage Loan would have no effect or impact on the Debtors' estate or the Liquidating Trust." See Scott v. Aegis Mortgage Corp. (In re Aegis Mortgage Corp.), 2008 WL 2150120, *5 (Bankr. D.Del. May 22, 2008) (A declaration as to the rights of parties under a mortgage that was transferred prior to the bankruptcy filing will not alter the debtors' rights, liabilities, options or freedom of action because the debtors are no longer a party to it.). See also In re Resorts Int'l, Inc., 372 F.3d 154, 168-69 (3d Cir.2004) (Post-confirmation, a bankruptcy court's jurisdiction is limited to matters in which "there is a close nexus to the bankruptcy plan or a proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement.").
