MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE.
Pending before the Court are objections to claims (each a "Claim," and collectively the "Claims") filed by Vivaro Corporation, STi Prepaid, LLC, Kare Distribution INc., STi Telecom, Inc., TNW Corporation, STi CC I, LLC, and STi CC II, LLC (collectively the "Debtors"). The Debtors filed objections to the Claims (each an "Objection" and collectively the "Objections") of Breezecom FZC ("Breezecom," and when referencing the Objection, the "Breezecom Objection")(ECF Doc. # 736), Call My Way N.Y. S.A. ("Call My Way," and when referencing the Objection, the "Call My Way Objection") (ECF Doc. # 737),
The Debtors seek to have the Claims disallowed and expunged under section 502(d) of the "Bankruptcy Code" because each Claimant received a preference payment avoidable under section 547 and has not returned the amount for which the Claimant is liable under section 550. For the reasons explained below, the Objections are
Section 502(d) of the Bankruptcy Code prevents an entity in possession of property of a bankruptcy estate, or that received an avoidable transfer from a debtor, from receiving any further distribution from the estate on a claim filed in such a bankruptcy case, unless the entity first turns over the property or repays the avoidable transfer. A request for disallowance under section 502(d) may be joined as a cause of action by the estate or its representative in an adversary proceeding to recover the property or the avoidable transfer.
If a section 502(d) cause of action is included in an adversary complaint, the case proceeds in the normal manner for any adversary proceeding. Service of the summons and complaint must be made under Rule 7004 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). For defendants domiciled in the United States, Rule 7004 usually permits service of the summons and complaint by U.S. Mail, an easy and inexpensive process.
A decision by the estate or the estate representative to file a claim objection rather than an adversary proceeding to recover an avoidable transfer may be a rational economic decision. Litigating a claim objection may be less expensive. The time required and the cost of prosecuting an adversary proceeding could easily exceed the amount of any judgment obtained. And judgments against foreign defendants that do not have property in the United States may be difficult to enforce. Procedures applicable to claims objections are often more streamlined, and disallowing and expunging a claim against the estate may provide greater net value to the estate than obtaining an unenforceable or uncollectable judgment. Subject to the applicable statute of limitations, prosecuting a claim objection under section 502(d) of the Bankruptcy Code also does not bar the estate or its representative from later filing an adversary proceeding to obtain a judgment in the amount of an avoidable transfer.
A decision by a creditor not to respond to a claim objection may also be a rational economic decision. Here, the claim objections were filed against foreign entities, each of which would be required to retain an attorney if it decides to oppose the objection. This may be expensive. Where the likely dividend to unsecured creditors is small, the cost of defending a claim objection could easily exceed the amount the entity could ultimately recover on its claim. If the entity repaid the avoidable transfer, it would be entitled to receive an allowed claim "the same as if such claim had arisen before the date of the filing of the petition." 11 U.S.C. § 502(h). But, again, if the percentage of the likely dividend is small, this allowed claim would be of little comfort to the entity that had received the preferential transfer, particularly if the estate has not filed (and is not likely to do so) an adversary proceeding to recover the preferential transfer.
Two issues are raised by the claim objections pending before the Court. First, may a claim objection against a foreign entity that allegedly received an avoidable transfer be served by U.S. Mail under Bankruptcy Rule 3007, as was done here, or must it be served in the same manner required for service of a summons and complaint under Rule 4(f) of the FRCP? Second, when a claim objection is based on section 502(d), what must the estate or estate representative establish about the receipt of an avoidable transfer before the court will disallow and expunge the claim?
While case law is not uniform whether a claim objection may be served by U.S. Mail, the Court concludes, consistent with the weight of authority, that Bankruptcy Rule 3007 applies to claim objections and permits service by U.S. Mail — including service by mail on foreign entities as was done in this case.
When a claim objection is filed to disallow and expunge a claim based on section 502(d), it is not enough for the estate or estate representative to simply allege the entity received an avoidable transfer. A
If the entity disputes receiving an avoidable transfer, or disputes the amount of the avoidable transfer, the Court will be required to resolve those issues. This does not necessarily require the same determination that would be made before a damages judgment for an amount certain can be entered under section 550 of the Bankruptcy Code since no affirmative recovery can be awarded on a claim objection. The Court may only need to determine that the entity received a preference in some amount that has not been repaid to the estate; section 502(d) requires that the entire claim be disallowed unless the full amount of the avoidable transfer has repaid. If there are disputed issues raised by a claim objection and response, the matter proceeds as a contested matter under Bankruptcy Rule 9014. The procedures applicable to contested matters are more flexible than litigating an adversary proceeding.
None of the Claimants filed a response to the Objections. Before sustaining the objections and disallowing and expunging the claims based on section 502(d), the Court must be satisfied that the estate or estate representative has established a prima facie basis that the Claimants received and have not repaid avoidable transfers. This standard is satisfied here.
On September 5, 2012 (the "Petition Date"), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (the "Chapter 11 Cases") (ECF Doc. # 1). The Chapter 11 cases are being jointly administered pursuant to Bankruptcy Rule 1015(b). On October 3, 2012, the Office of the United States Trustee (the "US Trustee") appointed an official committee of unsecured creditors (the "Committee"). By order dated January 21, 2013 (the "Sale Order," ECF Doc. # 288), the Court approved the sale of substantially all of the Debtors' assets to Next Angel, LLC (the "Purchaser"). On February 8, 2012, the sale transaction closed. On August 25, 2014, the Court approved a stipulation authorizing the Committee to pursue preference claims. The Debtors are currently liquidating assets that were not sold to the Purchaser, including collection actions and fraudulent conveyance and preference claims.
The Debtors filed their schedules on November 30, 2012, pursuant to section 521 of the Bankruptcy Code (ECF Docs. # 150 and 153). These schedules were amended on December 13, 2012 (ECF Docs. # 169 and 170). The Court entered an order on December 28, 2012 (ECF Doc. # 197), establishing the last date for filing proofs of claim (each a "Proof of Claim")
Each Claim addressed in the Objections was timely filed. Adversary proceedings were brought against the Claimants to clawback preferential transfers made by the Debtors during the 90-day period preceding the Petition Date (the "Preference Period"). The Complaints were not served as required under Rule 7004. After granting Debtors several extensions of time to serve the Complaints, the Court entered an order on May 6, 2015 in each of the adversary proceedings granting the Debtors one last 60-day extension of time to serve the Complaints, and providing that the Court would sua sponte dismiss the Complaints if service was not completed by July 6, 2015.
The Objections to the Claims were served by first class mail on each of the Claimants on June 3, 2015 at the address set forth in the Debtors' schedules or listed on each Claimant's Proof of Claim. See Affidavit of Service (the "Affidavit," ECF Doc. # 747). The Notice of Objection served on each Claimant attached a copy of the Debtors' Complaint. The Complaints and the Gund Declaration informed each Claimant that they were in receipt of an avoidable Preference Transfer (as defined herein) and, among other things, provided the standard for a preference payment under section 547 of the Bankruptcy Code ("Preference Transfer") and provided the Claimant with the Debtors' evidence — in the form of an itemized list of payments made by the Debtors during the Preference Period.
Breezecom FZC filed a proof of claim for $73,039.96 (Claim # 116). On September 2, 2014, the Debtors filed an adversary proceeding against Breeze Com FZC (sic) seeking a recovery of $41,824.82 for payments made during the Preference Period. The Affidavit lists Claimant Breezecom as having an address in Karachi, Pakistan. (Aff. Ex. B.)
Call My Way NY S.A. had a scheduled claim for $20,234.83 (Call My Way Obj. Ex. A). On September 4, 2014, the Debtors
Smartbox Equipment filed a proof of claim for $9,189.33 (Claim # 37). On September 3, 2014, the Debtors filed an adversary proceeding against Smart Box Equipment (sic) seeking a recovery of $20,025.64 for payments made during the Preference Period. The Smartbox Objection states in relevant part that,
(Smartbox Obj. at 7.)
Samitel Limited had a scheduled claim for $159,355.84 (Samitel Obj. Ex. A). On September 1, 2014, the Debtors filed an adversary proceeding against Samitel Ltd. (sic) seeking a recovery of $66,224.63 for payments made during the Preference Period. The Samitel Objection states in relevant part, "Claimant is a foreign entity with a last known address in London, United Kingdom." (Samitel Obj. at 7.)
Telecam/IP Network of the Americas Inc. had a schedule claim for $151,716.48. A Proof of Claim was also filed in the amount of $151,593.62 (Telecam/IP Obj. Ex. A). On August 31, 2014, the Debtors filed an adversary proceeding against Telecam seeking a recovery of $519,593.62 for payments made during the Preference Period. The Telecam/IP Objection states in relevant part that, "Claimant is a foreign entity which designated on its proof of claim an address in San Salvador, El Salvador as the address where notices should be sent." (Telecam/IP Obj. at 7.)
Americatel Peru, S.A. had a scheduled claim for $132,902 (Americatel Peru Obj. Ex. A). On September 2, 2014, the Debtors filed an adversary proceeding against American Peru seeking a recovery of $45,349 for payments made during the Preference Period. The Americatel Peru Objection states in relevant part "Claimant is a foreign entity with a last known address in Lima, Peru." (Americatel Peru Obj. at 7.)
Worldwide Telecom Xchange Carrier FZ LLC had a schedule claim for $355,550.85 (Obj. Ex. A). On September 1, 2014, the Debtors filed an adversary proceeding against Worldwide Telecom Exchange Carrier seeking a recovery of $171,097.43 for payments made during the Preference Period. The Worldwide Telecom Objection states in relevant part "Claimant is a foreign entity with a last known address in Dubai, United Arab Emirates." (Worldwide Telecom Obj. at 7.)
Maxcom Telecomunicaciones SA, a/k/a Maxcom Telecomunicaciones S.A.B. de C.V., had a schedule claim for $626,882.56. A Proof of Claim was also filed in the amount of $43,483.37 (Maxcom Obj. Ex. A, Claim 757). On September 1, 2014 the Debtors filed an adversary proceeding against Maxcom Telecommunicaciones seeking a recovery of $125,000 for payments
Generally, notice must be "reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank & Tr, Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). Notice of claims objections, including objections to claims by foreign claimants, are governed by Rule 3007, which provides that "[a] copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession, and the trustee at least 30 days prior to the hearing." FED. R. BANKR. P. 3007(a). On the other hand, under Rule 7004, the standard for service of a summons and complaint upon an individual in a foreign country is governed by FRCP Rule 4(f)(1), made applicable to adversary proceedings by Rule 7004(a). FED. R. BANKR. P. 7004(a). Unless the defendant waives service of process, service must be "by any internationally agreed means reasonably calculated to give notice, such as those means authorized by the Hague Convention...." FED. R. CIV. P. 4(f)(1).
The Second Circuit has not addressed whether Rule 7004 or Rule 3007 applies to service of claims objections. Lower courts in other circuits have split on this issue, although more recent and persuasive authority has applied Rule 3007 authorizing service of claim objections by mail. Courts applying Rule 7004 start their analysis by examining Rule 9014, the rule governing contested matters. Rule 9014(a) provides that "[i]n a contested matter not otherwise governed by these rules, relief shall be requested by a motion...." FED. R. BANKR. P. 9014(a). Rule 9014(b) provides that the motion "shall be served in the manner provided for the service of a summons and complaint by Rule 7004...." FED. R. BANKR.P. 9014(b). A claim objection initiates a contested matter, but the question then becomes, whether a claim objection is "a contested matter not otherwise governed by these rules...?" Put differently, is service of the claim objection "otherwise governed by these rules?" Rule 3007(a) specifically applies to claim objections and provides that "[a] copy of the objection shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession, and the trustee at least 30 days prior to the hearing." FED. R. BANKR. P. 3007(a) (emphasis added). Courts that have concluded that service of claim objections by mail is sufficient focus on the quoted language of Rule 3007. See Summit City Limits, LLC v. AMF Bowling Worldwide, Inc. (In re AMF Bowling Worldwide, Inc.), No. 12-36495, 2013 WL 5575470 at *4 (Bankr.E.D. Va. Oct. 9, 2013) ("Rule 3007 of the Federal Rules of Bankruptcy Procedure is the rule that pertains to claims objections, and it is this rule that applies as far as service of an objection to a proof of claim is concerned."); In re Wilkinson, 457 B.R. 530, 548 (Bankr.W.D.Tex.2011) ("This court is inclined to agree with those cases that have found that service of a claim objection is `otherwise governed by these rules' — in other words, because service is governed by Rule 3007, Rule 9014 (and thus Rule 7004) does not apply."); In re Franchi, 451 B.R. 604,
Other courts have held that Rules 9014 and 7004 govern the method of service required for claims objections. United States v. Levoy (In re Levoy), 182 B.R. 827, 834 (9th Cir. BAP 1995) (holding that Rule 9014 applies to objections to claims). In Levoy, the court determined that Rule 3007 does not provide the manner for service of the objection to a proof of claim because such a claim involves a "contested matter" that is governed by Rule 9014, which in turn makes applicable the provisions of Rule 7004. Id.; see also In re Lomas Fin. Corp., 212 B.R. 46, 52-53 (Bankr.D.Del.1997) (citing In re Levoy, 182 B.R. at 834) ("[A]s a bankruptcy appellate panel has recently noted, Rule 3007 does not provide the manner for service of the objection to a proof of claim.").
Most telling, however, in 2005, the Ninth Circuit Bankruptcy Appellate Panel that decided Levoy in 1995, rejected that court's earlier conclusion that Rule 7004 applies to service of claims objections. See Jorgenson v. State Line Hotel, Inc. (In re State Line Hotel, Inc.), 323 B.R. 703, 713 (9th Cir. BAP 2005). Distinguishing Levoy, the court in Jorgenson concluded that "Rule 9014 defers to Rule 3007 on the subject of claims objections: [Rule 3007] calls for an objection, not a motion, and authorizes notice, rather than requiring service." Id. According to the court in Jorgenson, that court's previous analysis in Levoy was not based on a thorough analysis of the structure of Rules 3007 and 9014. Id. Levoy failed to consider the "not otherwise governed" provision in Rule 9014(a) (then Rule 9014). Therefore, the court in Jorgenson concluded that it was not bound by stare decisis to follow Levoy — the the statement in Levoy regarding Rules 3007, 7004, and 9014 was "made casually and without analysis." Id. at 713-14 (citing United States v. Johnson, 256 F.3d 895, 915-16 (9th Cir.2001)). Jorgenson therefore held that Rule 9014 does not dictate that claims objections conform to the service requirements of Rule 7004. Id. Under Rule 3007, mailing or otherwise delivering a copy of the objection with a notice of hearing to the domestic or foreign claimant is sufficient. Id. at 711.
The Court agrees with Jorgenson and the other cases that have held that Rule 3007 governs service of claims objections and that service by mail is sufficient. While none of the earlier cases dealt with claims filed by foreign entities, there is no reason for requiring a different rule for service of claims objections on foreign entities so long as the estate or estate representative establishes that service by mail was made on the creditor. It would be anomalous if a foreign creditor could file a proof of claim by mail, obtain the benefit of a presumption of validity and amount of a properly prepared proof of claim, but then ham-string the estate or estate representative when it serves its claim objection by mail to the address the creditor supplied in its proof of claim (or the last known address
In these cases, the Debtors' established that the Objections were properly served by mail on each of the Claimants. Therefore, the Court proceeds to examine whether the Debtors have made the necessary showing that each of the Claimants received an avoidable preference that has not been repaid so that the claims should be disallowed and expunged under section 502(d) of the Bankruptcy Code.
Debtors brought adversary proceedings pursuant to section 547 of the Bankruptcy Code seeking to avoid preferential transfers. Each Complaint identifies each transfer and sets forth the necessary requirements to avoid a transfer under section 547(b) of the Bankruptcy Code: the transfers were "(i) to or for the benefit of a creditor; (ii) for or on account of an antecedent debt owed by the debtor before such transfer was made; (iii) made while the debtor was insolvent; (iv) made (A) on or within 90 days before the date of the filing of the petition; ... and (v) that enable[d] such creditor to receive more than such creditor would receive if (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title." 11 U.S.C. § 547(b). While the Complaints were not served under Rule 7004, copies of the Complaints and the Gund Declaration were included with the Objections and provided the Claimants with notice and evidence of the avoidable transfers.
The Court is satisfied that the Complaints and the Gund Declaration, copies of which were provided to the Claimants with the Objections, set forth the necessary and sufficient evidence to make a prima facie showing that the Preference Transfers are avoidable preferences under section 547 of the Bankruptcy Code. The service of the Debtors Objections shifted the burden to the Claimants to rebut the evidence that they received an avoidable preference, or, absent that, to provide notice that the value of the Preference Transfer will be returned to the Debtors estate. None of the Claimants filed a response to the Objections, none of the Claimants returned the amount of the Preference Transfer back to the estate.
Since the Court has concluded that the Claimants have an outstanding obligation to Debtors' estate in the amount of the Preference Transfers, the Court now turns to whether their claims can be disallowed under section 502(d) of the Bankruptcy Code.
Correctly filed proofs of claim "constitute [] prima facie evidence of the validity [and amount] of the claim. To overcome this prima facie evidence, the objecting party must come forth with evidence which, if believed, would refute at
Section 502(d) of the Bankruptcy Code provides in relevant part:
11 U.S.C. § 502(d).
The purpose of section 502(d) of the Bankruptcy Code is to prevent entities, which hold property subject to turnover or avoidance, from receiving a distribution of estate assets until such property is first returned to the estate. See In re Mid Atl. Fund, Inc., 60 B.R. 604, 609 (Bankr. S.D.N.Y.1986). This statute is a claims avoidance provision that requires bankruptcy courts to disallow claims to the extent that a creditor violates provisions of the Bankruptcy Code regarding voidable preferences and turnover actions. Chapman v. Charles Schwab & Co. (In re Chapman), 269 B.R. 201, 207 (Bankr.N.D.Ill. 2001) (citing section 502(d) of the Bankruptcy Code); accord Seta Corp. of Boca, Inc. v. Atl. Comput. Sys. (In re Atl. Comput. Sys.), 173 B.R. 858, 861 (S.D.N.Y. 1994); see also 4 COLLIER ON BANKRUPTCY ¶ 502.05[1] ("Section 502(d) is operative: (1) when the trustee has secured an order to the claimant for a turnover of property under sections 542 and 543; (2) when the trustee, having successfully avoided transfers under the sections dealing with the trustee's avoidance powers, may proceed under section 550; (3) when a set-off has been found avoidable and the amount of the property thus set-off is recoverable to the estate.").
Section 502(d) serves the policy goal of ensuring compliance with judicial orders. 4 COLLIER ON BANKRUPTCY ¶ 502.05[1] (citing Campbell v. United States (In re Davis), 889 F.2d 658, 661 (5th Cir.1989)); accord Enron Corp. v. Springfield Assocs., LLC. (In re Enron Corp.), 379 B.R. 425, 435 (S.D.N.Y.2007). However, section 502(d) is not intended to have a punitive effect. In re Davis, 889 F.2d at 661-63 (holding that section 502(d) is "designed to be triggered after a creditor has been afforded a reasonable time in which to turn over amounts adjudicated to belong to the bankruptcy estate," and that section 502(d) does not seek to penalize a claimant by voiding a claim before the expiration of a reasonable time after final determination of liability).
As touched upon in the policy discussion in In re Davis, a claim should not be disallowed pursuant to section 502(d) without first determining whether the claimant is liable to the estate. See In re Davis, 889 F.2d at 662; In re Atl. Comput.
Once a claimant's liability has been determined, the claimant must be provided with a reasonable opportunity to turn over the property to the debtor's estate in compliance with section 502(d) before the claims may be disallowed. In re Atl. Comput. Sys., 173 B.R. at 862; see also In re Davis, 889 F.2d at 662 (holding that "the creditor is still entitled to a reasonable time after the final determination [of the creditor's liability] until [the claims voidance provisions of] Section 502(d) [are] kicked into effect"). In Davis, the court did not define what a "reasonable opportunity" to comply would be; the court did, however, indicate that a court that orders a turnover in one instant and in the same instant disallows a creditor's claim for failing to comply with that order has not offered the creditor a reasonable opportunity to comply before dismissing its claims. In re Davis, 889 F.2d at 662.
But if the creditor is liable to the estate for having received an avoidable transfer in any amount, the creditor's entire pending claim must be disallowed in full. See 4 COLLIER ON BANKRUPTCY, ¶ 502.05[1] ("Section 502(d) of the Bankruptcy Code requires disallowance of a claim of a transferee of a voidable transfer in toto if the transferee has not paid the amount of turned over the property received as required under the sections under which the transferee's liability arises.").
Here, the Debtors have shown that the Claimants owe the estate funds equal to the amount of their respective Preference Transfers. The Claimants have had ample opportunity to return the value of the Preference Transfers to the Debtors and have failed to do so. None of the Claimants has complied with its obligation under sections 547 and 550 of the Bankruptcy Code. While the pending Claims are disallowed and expunged, the Claimants may seek reconsideration of this Order pursuant to section 502(j) within a reasonable time.
For all of the foregoing reasons, each of the Objections are
