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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - May 12, 1998
LOT$OFF CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-13076 74-2640559
(Commission File Number) (I.R.S. Employer Identification No.)
1201 AUSTIN HIGHWAY, #116
SAN ANTONIO, TEXAS 78209-4859
(210) 805-9300
(Address of Principal Executive Offices and Telephone Number,
Including Area Code)
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ITEM 5. OTHER EVENTS.
As announced by the Company in a press release, on May 12, 1998 a
decision and order was entered by Judge Leif M. Clark in the Company's
bankruptcy proceeding in the United States District Court for the Western
District of Texas, San Antonio Division effectively denying creditors in the
bankruptcy proceeding leave to file late proofs of claim or, alternatively,
excuse from filing proofs of claim by finding that the confirmation of the
Company's plan of reorganization, as amended and modified, operates as res
judicata to bar the allowance of any late claims that have been or might be
filed in the Company's bankruptcy case.
Copies of the press release and the decision and order referenced above
have been filed with the SEC as exhibits to this Form 8-K.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
Exhibit Description
------- -----------
20 Press Release announcing Decision and Order,
dated May 18, 1998
99 United States Bankruptcy Court Decision and Order,
dated May 11, 1998
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LOT$OFF CORPORATION
Date: May 18, 1998 By: /s/ CHARLES J. FUHRMANN II
-----------------------------------
Charles J. Fuhrmann II
President and Chief Executive
Officer
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EXHIBIT INDEX
Exhibit Description
------- -----------
20 Press Release announcing Decision and Order, dated
May 18, 1998
99 United States Bankruptcy Court Decision and Order,
dated May 11, 1998
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EXHIBIT 20
FOR IMMEDIATE RELEASE
For: LOT$OFF Corporation Contact: Jeff Seidel, CFO
1201 Austin Highway, #116 210-805-9300, ext. 926
San Antonio, Texas 78209-4859
LOT$OFF CORPORATION RECEIVES FAVORABLE COURT ORDER
SAN ANTONIO, TEXAS -- MAY 18, 1998 -- San Antonio based LOT$OFF Corporation (OTC
BB:LOTS) announced today that Judge Leif M. Clark has rendered his decision and
entered an order in the Company's favor effectively denying creditors in its
bankruptcy proceeding in the United States Bankruptcy Court for the Western
District of Texas, San Antonio Division leave to file late proofs of claim, or,
alternatively, excuse from filing proofs of claim by finding that the
confirmation of the Company's plan of reorganization, as amended and modified,
operates as res judicata to bar the allowance of any late claims that have been
or might be filed in the Company's bankruptcy case (the "Order"). The Company's
position was supported by the Class 7 Agent (representing unsecured creditors).
Charles "Hop" Fuhrmann, CEO and President of LOT$OFF, stated that "this Order
was a very important one for the Company, its stockholders and the holders of
Class 7 Allowed Claims as it reduces the potential amount of claims the Company
must satisfy (with cash and/or Common Stock to the extent the Company receives
net proceeds from judgments in its favor, or otherwise, from certain important
litigation brought by the Company) to the aggregate face amount of undisputed
claims and allowed claims represented by proofs of claims filed by February 6,
1997." The Company estimates that at least $5.9 million of claims have been
eliminated by the Order.
LOT$OFF, a regional extreme value retailer specializing in close-out
merchandise, currently operates 43 LOT$OFF stores (Texas - 31, Louisiana - 5,
Oklahoma - 3, New Mexico - 3 and Tennessee - 1; a new LOT$OFF store is scheduled
to open in San Angelo, Texas the first week of June) stocked with a broad mix of
products which fluctuates by category, by season and by store based on customer
needs and buying trends, demographics and the availability of products at
close-out prices. This merchandise concept is designed to appeal to
value-conscious shoppers and other bargain hunters.
# # #
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EXHIBIT 99
FILED
MAY 12, 1998
U.S. BANKRUPTCY COURT
BY /s/ DEPUTY
------
UNITED STATES BANKRUPTCY COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
In re Bankruptcy Case No.
50-OFF STORES, INC
A Delaware Corporation
50-OFF MULTISTATE OPERATIONS, INC. 96-5443-C through 96-54433-K
A Nevada Corporation
50-OFF TEXAS STORES, L.P.
A Texas Limited Partnership Jointly Administered Under
50-OFF OPERATING COMPANY Case No. 96-54430-C
A Nevada Corporation
Debtors Chapter 11
DECISION AND ORDER DENYING LEAVE TO
FILE LATE PROOFS OF CLAIM
CAME ON for hearing in the above-styled case (1) the Motion to Allow Late
Filing of Claim or, Alternatively, to Excuse Filing of Claim of Fashionland,
Inc.; (2) the Motion of Go Sales for Leave to File Proof of Claim After Bar
Date or, in the Alternative, to Excuse Requirement of Filing Claim; and finally
(3) the Joint Omnibus Response Opposing Motions to Allow Late Filing of Claim
or, Alternatively, to Excuse Filing of Claim Filed by Reorganized Debtors and
Class 7 Agent. The motions of Fashionland, Inc., and Go Sales seek leave of
this court to file proofs of claim after the expiration of the claims bar date
or, in the alternative, to be excused from the requirement to file proofs of
claim. The Debtors and the Class 7 Agent object on the grounds that the
now-confirmed plan of reorganization is res judicata as to the claims asserted
and that the proofs of claim are late for inexcusable neglect.
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FACTUAL AND PROCEDURAL OVERVIEW
The Reorganized Debtors initially filed their petition for chapter 11 on
October 9, 1996. The clerk of court issued on October 21, 1996 a standard order
setting February 6, 1997 as the bar date for the filing of proofs of claim(1).
Shortly thereafter, the Debtors mailed out a supplemental notice of the bar
date. Both notices emphasized that any creditors or interest holders whose
claims were listed as disputed on the Debtors' schedules would have to file
proofs of claim by February 6, 1997, else they would not be included for
purposes of distribution. The Debtors' schedules listed all debts in excess of
$10,000 as disputed, putting all creditors (including Fashionland and Go Sales)
to their proof(2). Fashionland and Go have averred that they placed proofs of
claim in the mail prior to the bar date. As of that date, however, their proofs
of claim were not on file with the clerk of court. Later, on or about March 27,
1997, the Debtors circulated a Disclosure Statement and a Joint Plan of
Reorganization ("Disclosure Statement" and "Plan"). The solicitation package was
served on these creditors and they had an opportunity to both vote and to object
to the plan. The plan included a provision (discussed in more detail later in
this opinion) which again excluded any creditors who had failed to timely file
claims. The Debtors' Plan was confirmed by this court on June 3, 1997.
In December 1997, Fashionland and Go contacted J.A. Compton & Co., the
Plan's specified disbursing agent, and first realized that, because the Debtors'
had scheduled their claims as disputed and because Fashionland and Go had not
filed proofs of claim, the two claims were not eligible for
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(1) The standard order is part of this court's notice of first meeting of
creditors in chapter 11 cases. By this order, a deadline for filing proofs of
claim is set in every chapter 11 case filed in this district.
(2) The schedules were prepared by an accounting firm hired by the estate.
The firm indicated that it had too little time to prepare the schedules given
the deadlines imposed by the U.S. Trustee (and the court). Unwilling to present
schedules verifying the accuracy of the company's payables, the firm instead
prepared the schedules showing all claims as disputed. The debtor's principal
signed the schedules as prepared and filed them.
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distributions under the plan. Upon learning this(3), Fashionland and Go filed
the motions that are the subject of this proceeding, seeking leave to file late
proofs of claim(4).
LEGAL ISSUES
I. IS THE CREDITORS' FAILURE TO FILE A CLAIM TIMELY THE RESULT OF
EXCUSABLE NEGLECT UNDER FEDERAL RULE OF BANKRUPTCY PROCEDURE 9006?
11 U.S.C. Section 1111 provides that "[a] proof of claim or interest is
deemed filed under section 501 of this title for any claim or interest that
appears in the schedule filed under section 521(l) or 1106(a)(2) of this title,
except a claim or interest that is scheduled as disputed, contingent, or
unliquidated." 11 U.S.C. Section 1111 (italics added). Federal Rule of
Bankruptcy Procedure 3003 sets the general parameters for filing of proofs of
claim listed in chapter 11 cases, while Rule 5005 addresses the filing of
"papers" generally(5). For those claims listed as disputed, contingent, or
unliquidated, a
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(3) Actually, the creditors "learned" of this when they received the plan
solicitation package, as the disclosure statement discussed the consequences of
failing to file claims on time. These creditors say they did not see this
language in the disclosure statement, and argue that the table of contents was
misleading. We discuss this contention infra in greater detail.
(4) Under the plan, unsecured creditors in the position of these movants
receive a distribution of equity in the form of convertible preferred stock in
the reorganized debtor. Interest in unsecured claims in this estate has grown
substantially since the company won a large judgment post-confirmation ($151
million, according to the jury), and settled with two other defendants for a net
to the company in excess of $4 million. Claims arbitrage firms are now offering
(as of this date) in the neighborhood of 50 cents on the dollar for unsecured
claims. Evidently, the company's litigation success has significantly enhanced
the apparent value of the company's stock, prompting the sudden interest in
having a valid proof of claim on file. See "LotsOff Creditors Big Gamble Pays
Off; Now Everybody Wants In," Weekly News & Comment at AL 31 BCD 25 (Feb. 17,
1998).
(5) Of specific interest to the instant proceeding is Rule 3003(c)(2),
providing:
Who Must File: Any creditor or equity security holder whose claim or
interest is not scheduled or scheduled as disputed, contingent, or
unliquidated shall file a proof of claim or interest within the time
prescribed by subdivision (c)(3) of this rule; any creditor who fails
to do so shall not be treated as a creditor with respect to such
claim for the purposes of voting and distribution.
FED.R.BANKR.P. 3003(c)(2).
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proof of claim must be filed by a date set by the court pursuant to Rule
3003(c)(3)(6). Section 502(b)(9) in turn authorizes the disallowance of an
untimely filed proof of claim, unless the claim is permitted to be filed
"tardily" as provided under the Rules. Rule 9006(b) permits the court to enlarge
the time frames for parties to file so-called late claims "where the failure to
act was the result of excusable neglect." FED.R.BANKR.P. 9006(b); FED.R.BANKR.P.
3003(c)(3).
Late claims are not, in the main, permitted in chapter 7 or chapter 13
cases, because Rule 9006(b)(2) expressly excludes application of the "excusable
neglect" standard to the deadlines set by Rule 3002(c). See In re Duarte, 146
B.R. 958, 962 (Bankr. W.D.Tex. 1992)(creditors may not file late claims;
debtors or trustees may however, under certain circumstances, file "late
claims" for creditors, upon showing of excusable neglect). The rule governing
the filing of claims in chapter 11 cases (i.e., Rule 3003), by contrast, is not
excluded by Rule 9006(b)(2), so that creditors in chapter 11 cases may be able
to file claims after a court-set bar date, provided they can demonstrate the
requisite "excusable neglect." Id., at 960 n.3; FED.R.BANKR.P.9006(b).(7)
- ----------
(6) In the Western District of Texas, a bar date is routinely set in all
chapter 11 cases, and notice thereof is given to all creditors in the Section
341 Notice, in a language, style, and prominence designed to meet the concerns
raised in Pioneer Investments. The debtor may (as it did here), seek an
adjustment in that date, or request that it be permitted to give additional
notices.
(7) Rule 9006(b) provides that
when an act is required or allowed to be done at or within a specified
period by these rules or by a notice given thereunder or by order of
court, the court...may...order the period enlarged...after the
expiration of the specified period permit the act to be done where the
failure to act was the result of excusable neglect.
FED.R.BANKR.PRO.9006(b). Rule 3003(c)(3) in turn provides that
[t]he court shall fix and for cause shown may extend the time within
which proofs of claim or interest may be filed. Notwithstanding the expiration
of such time, a proof of claim may be filed to the extent and under the
conditions stated in Rule 3002(c)(2), (c)(3) and (c)(4).
(continued...)
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The Supreme Court construed the meaning of the elusive phrase "excusable
neglect" in the context of late claims in Pioneer Investment Services Co. v.
Brunswick Assocs. L.P., 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993).
The Court explained that "the determination is at bottom an equitable one,
taking account of all relevant circumstances surrounding the party's omission."
Id. 507 U.S. at 395, 113 S.Ct. at 1498. No single circumstance controls, nor is
a court to simply proceed down a checklist ticking off traits. Instead, courts
are to look for a synergy of several factors that conspire to push the analysis
one way or the other(8).
But we are wordsmiths, not painters, so we must, of necessity, resort to
lists as one of the feeble tools with which to parse such problems. The Supreme
Court furnished us such a list in Pioneer, which we may find useful, so long as
we keep in mind that lists are rather blunt instruments as tools go when we are
trying to figure out what neglect is excusable and what neglect is not. The
Court's list included the following factors: (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
- ----------------
(...continued)
FED.R.BANKR.P. 3003(c)(3). Finally returning to Rule 9006(b), that rule further
opines that enlargement of the time period, as otherwise permitted by Rule
9006(b)(1) is expressly prohibited only as to "the time for taking action under
Rules 1007(d), 1017(b)(3), 2003(a) and (d), 7052, 9023, and 9024."
FED.R.BANKR.P. 9006(b)(2). Enlargement is limited under Rule 2002(c) "only to
the extent and under the conditions stated in [that] rule [ ]." FED.R.BANKR.P.
9006(b)(3). Because Rule 3003 is not mentioned in either of these two limiting
paragraphs, it is generally held that enlargement of time is permitted
vis-a-vis the filing of claims in chapter 11 cases, even though a colorable
argument could be made that Rule 3003(e)(3)'s "notwithstanding" language means
that such extensions are not permitted. See Eagle Bus. Mfg. v. Rogers, 62 F.3d
730 (5th Cir. 1995).
(8) This "synergistic" approach is likely to produce more accurate outcomes
that does the "checklist" approach for the same reason as an artist's rendering
of a criminal on a wanted poster is more likely to lead to the apprehension of
the criminal than will the written physical description found on the self-same
poster. Of course, we also have to trust that our judicial officers will, to
paraphrase Justice Potter Stewart, "know excusable neglect when they see it."
Cf. Jacobeltis v. State of Ohio, 378 U.S. 184, 198, 84 S.Ct. 1676, 1683, _____
L.Ed.2d _____ (1964)(Stewart, J., concurring) (in discussing what might
constitute "hard core" pornography, Justice Stewart says: "I shall not today
attempt further to define the kinds of material I understand to be embraced
within that shorthand description; and perhaps I could never succeed in
intelligibly doing so. But I know it when I see it, and the motion picture
involved in this case is not that").
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whether it was within the reasonable control of the movant; and (4) whether the
movant acted in good faith. Id. The Court disagreed with the lower court's
suggestion "that it would be inappropriate to penalize respondents for the
omissions of their attorney..." Id. at 396.
In applying these tools, the Court noted that there was no appearance in
Pioneer of bad faith on the part of the late claimant, of any prejudice to the
debtor, or of any disruption of the efficient administration of the proceedings
caused by the late filings. The Court then focused on the role that the form of
notice of the bar date played in the late claimant's failure to file timely.
We... consider significant that the notice of the bar date provided by the
Bankruptcy Court in this case was outside the ordinary course in bankruptcy
cases. As the Court of Appeals noted, ordinarily the bar date in a
bankruptcy case should be prominently announced and accompanied by an
explanation of its significance... We agree... that the 'peculiar and
inconspicuous placement of the bar date in a notice regarding a
creditors['] meeting' without any indication of the significance of the bar
date, left a 'dramatic ambiguity' in the notification.
Id. at 397-98 (internal cites omitted). In the absence of any other factors, the
Court found this ambiguity in notice controlling. This is the portion of Pioneer
usually cited, discussed, and critiqued. Yet it may not be the portion most
revealing of the Court's true sentiments, given its initial cautionary note that
the process of parsing the problem is both fact-sensitive and equitable in
nature. The Court indeed made it clear that, "were there any evidence of
prejudice to [the debtor] or to judicial administration in this case, or any
indication at all of bad faith we could not say that the Bankruptcy Court abused
its discretion in declining to find the neglect to be 'excusable.'" Id. at 398.
Thus, Pioneer Investments leaves ample room to courts to find a given creditor's
neglect to be inexcusable, given the totality of the circumstances.
The Fifth Circuit has recognized the necessarily elastic quality of the
Pioneer excusable neglect test, adverting to Pioneer's caution that
"inadvertence, ignorance of the rules, or mistakes
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construing the rules (do) not usually constitute excusable neglect." In re Eagle
Bus Mfg., Inc., 62 F.3d 730, 736 (5th Cir. 1995) citing Pioneer, 507 U.S. at
391, 113 S. Ct. At 1496. In Eagle Bus, the court distinguished between
situations in which reorganization plans are negotiated and concluded after
receipt and notice of late-filed claims and situations in which the plan has
been formulated, negotiated and consummated before late claims are presented,
finding that there might be a potential for prejudice in the later case (though
concluding that the former applied to the facts of that case.) Eagle Bus, 62
F.3d at 737-38. The court acknowledges in dicta that allowing late-filed claims
might prejudice creditors (as opposed to the debtor), because they may have
relied on the claims register as it stood at the time of confirmation in
deciding to support the plan. Allowance of late claims post-confirmation might
dilute creditors' distributions. Id. at 738.(9). The court in Eagle noted that
the general creditor body in that particular case would not be prejudiced(10),
as it had had notice of the potential late claims prior to confirmation so that
their allowance would not greatly upset creditor expectations. Indeed, the
creditor's committee in Eagle did not object to the allowance of these late
claims (as the Class 7 creditors have done here), and the size of the late
claims did not threaten to impair significantly the distributions to the timely
filed creditors.
Eagle Bus also addressed another of the Pioneer factors - the reason for
the delay in filing. There, the delay in filing was attributed to a combination
of factors which tended to induce the late filing claimants not to file. The
claimants were part of a class of creditors who were the subject of
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(9) See in re Robintech, 863 F.2d 393, 397-98 (5th Cir. 1989) (allowance
of late filing unfair to creditors who filed on time and who would receive less
as a result of such allowance).
(10) We note, as did the Eagle Bus court, that prejudice to creditors is a
critical factor in determining whether to reopen a case for filing of late
claims when the creditor has not received notice or has not even been listed by
the debtor. In the Matter of Smith, sub nom Omni Mfg., Inc. v. Smith, 21 F.3d
660, 664 (5th Cir. 1994); see also In re Stone, 10 F.3d 285 (5th Cir. 1994):
Robinson v. Mann, 339 F.2d 547 (5th Cir. 1964).
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a court-ordered alternative dispute resolution process. The debtor then
continued negotiations with the claimants for several months, objecting to the
late-filed claims only when their negotiations proved not to be fruitful. Id.
at 739-40. Under those facts, the "delay" factor cut in favor of allowing the
late claims.
Focusing on adequacy of notice, Eagle Bus cited In re Robintech, 863
F.2d 393, 396 (5th Cir.), cert. denied, 493 U.S. 811,110 S.Ct 55, 107 L.Ed.2d 24
(1989), for the proposition that due process requires notice that is "reasonably
calculated to reach all interested parties, reasonably conveys all of the
required information, and permits a reasonable amount of time for response," and
that allowing late claims is permissible if disallowance would violate due
process. See also Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70
S.Ct. 652, 94 L.Ed. 865 (1950). The court ruled that notice by mail is adequate
(as a means of delivery) if the notice is sent to the creditor's most recently
known address; once it is sent, the presumption is in favor of adequacy, and a
denial of receipt by the creditor does not rebut that presumption, although it
does raise a fact issue. In re Eagle Bus, 62 F.3d at 735; See also
FED.R.BANKR.PRO, 9006(e); In re Robintech, 863 F.2d 393 (5th Cir. 1989).
Eagle Bus is not our facts. Neither is Pioneer. But the approach both
cases take in applying the factors to the facts helps us decide this case. To be
sure, as to the possibility for length of delay to and complication of judicial
proceedings, we are not concerned that allowance of these two late claims would
pose significant problems(11). Nor are these particular two claims so large or
so complex that their allowance would disrupt substantially this court's
administration of the case. Finally, the
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(11) But allowing one late claim may precipitate the filing of many
more, especially if the reorganization, once underway, promises to distribute
more to creditors than previously anticipated.
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evidence does not confirm any bad faith on the part of the movants(12).
On the other hand, there may indeed be a danger of prejudice to both the
reorganized debtor and its existing creditors of record. The debtor and its
creditors of record saw a somewhat risky plan of reorganization through to
confirmation and consummation, based on the information furnished to them in
the disclosure statement, and in the provisions of the plan. A certain amount
of risk evaluation of necessity entered into the decision-making process for
both the debtor (which proposed the plan) and its unsecured creditors (who
chose to support it). We may liken a plan and its disclosure statement to a
kind of "public offering" in the underlying entreprenurial venture. Those who
supported the reorganization venture made rational decisions to do so based on
the information contained in the plan and disclosure statement. To permit the
rather untimely inclusion of additional liabilities at this late date, resulting
in a dilution of the expected return to those creditors who did timely file
proofs of claim threatens to "surprise" the parties who proposed and who
supported the plan, in a way that can only be described as prejudicial. Though
any one of these claims alone may not be particularly onerous, allowance of
such claims in general is disruptive of the reorganized debtor's rehabilitation
program and threatens to dilute the distributions to unsecured creditors who
properly participated in the claims allowance and planning process. We note in
this latter respect that, unlike the situation in Eagle Bus, the unsecured
creditor body in the instant case did not have notice of these as-yet-unfiled
claims prior to confirmation and, once the claims were filed late, were quick to
object via their committee representative.
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(12) The Committee and the Debtor did argue that the sudden appearance of
a spate of requests for allowance of late claims might be related to the news
of the company's recent litigation successes, and the resulting positive impact
on the company's share value. A reasonable inference could be drawn from the
facts of which this court can take judicial notice that this motivation might
indeed lie behind the filing of these two requests, but no positive proof was
put on to support that inference.
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Finally, we consider the cause for the delay in filing these claims, and
in doing so we first follow Pioneer's emphasis on the role played by the form
of the Debtor's notice. In Pioneer, the notice of the claims bar date provided
by the debtor was critical. There, the Court found that "the 'peculiar and
inconspicuous placement of the bar date in a notice regarding a creditors[']
meeting,' without any indication of the significance of the bar date, left a
'dramatic ambiguity' in the notification." Pioneer Investment Services Co. v.
Brunswick Assocs. L.P., 507 U.S. at 397-98. In the instant case, the first
notice of the bar date for claims was contained in a standard notice issued by
the clerk of court on October 21, 1996. While we note that the type-size is not
unusually large, and that the notice does contain information on at least four
major components of a bankruptcy proceeding (commencement, stay, creditors'
meeting, and bar date), all of this information is contained on one single
page, is broken down by issue under emboldened type, and, perhaps more
importantly, is not over-burdened with technical language.(13)
But even more important is the Supplemental Notice of Commencement of Case
and Notice of Bar Date to File Proofs of Claim provided by the Debtor shortly
after the clerk's notice. This one-page notice contains in 18-point bold
type(14) the statement "TAKE NOTICE: The Deadline for Filing Proofs of Claims
Against any of the Debtors Listed above is February 6, 1997". Immediately
below, the notice states "THIS DATE IS IMPORTANT," and goes on to explain, in
concise, non-technical
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(13) We once again emphasize that the standard notice language contained in
the clerk's notice was especially drafted by the judges of this court to comply
with the concerns raised by Pioneer.
(14) With regard at least to type-face, size does indeed matter: HERE IS WHAT
18 PT. TYPEFACE LOOKS LIKE.
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terms precisely why the date is important(15). To echo Pioneer, we note that,
while this form of notice may be somewhat dramatic, it is scarcely ambiguous.
Finally, the Debtors' Joint Plan of Reorganization, Section 9.12
provides that:
The Debtors and the Committee are relying on the formal proofs of
Claims on file and the Debtors' Schedules currently on file in seeking
confirmation of the Plan or, in the case of the Committee, in
endorsing such plan. No informal proof of Claim shall be deemed filed
in these Chapter 11 Cases... No proof of Claim may be filed, amended,
modified, or supplemented after the Confirmation Date without the
consent of the Debtors. Any filing prohibited by this paragraph shall
be void.
Debtor's Joint Plan of Reorganization, Section 9.12 (emphasis added). By this
provision, the debtor in effect provided a "bar date" for late claims in the
plan itself, anticipating the potential Eagle Bus problem. The late claimants
argue that, because this provision was not listed in the table of contents of
the Plan of Reorganization, the disclosure statement cannot be taken as adequate
notice that their positions might have been compromised. But this implies that
the scope of the creditor's inquiry when it reviews a plan does not extend
beyond perusing the table of contents, an implication we do not endorse.
Creditors who had not filed a proof of claim would, by the time they received
(and read) the Plan and Disclosure Statement, have realized that their failure
to get a claim on file prior to confirmation might have disastrous consequences.
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(15) The explanatory paragraph is as follows:
THIS DATE IS IMPORTANT because of the following reasons: First, if the
debtor which you believe owes you money does not schedule your claim
and you fail to file a proof of claim before the bar date, you will be
barred from receiving distributions or payment from such debtor.
Second, if the debtor which you believe owes you money schedules your
claim as disputed, contingent, unliquidated or is an unknown amount
and you fail to file a proof of claim before the bar date, you will be
barred from receiving distributions or payment from such debtor.
Third, if the debtor which you believe owes you money schedules your
claim in an amount with which you disagree and you fail to file a
proof of claim before the bar date, your claim will be fixed at the
amount listed in the schedules.
Because the late-filed claims here were scheduled as disputed, they would have
fallen under the second rubric, even if the claimants agreed with the amount
listed in the schedules.
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At any rate, with respect to notice, we find the notice provided by the
clerk and the Supplemental Notice provided by the Debtors paramount in
determining that the late claimants here received adequate notice of the claims
bar date and its significance to their rights and entitlements. Pioneer's
factors when applied to this case, then, militate against applying the
excusable neglect standard here to permit the untimely filing (and allowance)
of these late claims.
II. DOES THE MAILBOX PRESUMPTION APPLY TO THE FILING OF PROOFS OF CLAIM
UNDER RULE 3003(c)(2)?
The claimants next argue, and have submitted affidavits averring, that
they did in fact submit proofs of claim by U.S. mail before the bar date, but
that such proofs of claim apparently did not reach the clerk of court and so
were not listed on the claims register as of the time of confirmation. They add
that they did not learn of this "glitch" until after confirmation of the plan
and shortly before they filed their motions for leave to file late claims,
sometime in December of 1997. Thus, they argue, their claims were in fact not
late at all, but were instead "timely filed," by virtue of their having been
placed in the mails far enough in advance to be presumed to have been received
before the bar date set by the court. Movants seek to invoke the so-called
"mailbox rule" in order to raise a presumption of delivery, such that the
opponents of their motion would then shoulder the affirmative (and difficult)
duty of putting on evidence sufficient to rebut that presumption.
There is a division of opinion among the circuits regarding whether the
mailbox rule applies in the context of filing proofs of claim. Compare Chrysler
Motors Corp. v. Schneiderman, 940 F.2d 911 (3rd Cir. 1991) with In re Nimz
Transp., Inc., 505 F.2d 177 (7th Cir. 1974). The Seventh Circuit in Nimz held
that the mailbox rule does apply to claims filings, In re Nimz, 505 F.2d at 179,
while the Third Circuit ruled that it did not, Schneiderman, 940 F2d, at 912-13.
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In Schneiderman, the Third Circuit emphasized that "restrictiveness is
necessary in order to facilitate the expeditious administration of bankruptcy,"
and focused on the need for finality in plan administration and certainty in
the voting and distribution process under a chapter 11 plan of reorganization.
Schneiderman, 940 F.2d 912-13. The Third Circuit drew a distinction between
filing a proof of claim under Rule 5005 and the service of process and other
documents under Rule 9006(e) (the Bankruptcy Rules' codification of the mailbox
presumption), noting that "[t]he reference to the use of the mails for service
demonstrates that the framers of the rules knew how to provide for such use to
complete a delivery and thus gives rise to an inference that filing within
Bankr.R 5005(a) means actual filing.(16) Id. at 914.
The conflict between these cases has been addressed by the bankruptcy
court in In re Pyle, 201 B.R. 547 (Bankr. E.D.Cal. 1996). Although the Ninth
Circuit had thus far only applied the mailbox presumption to the mailing of the
notice of the bar date by debtors to creditors, the Pyle court chose to follow
Nimz in applying the presumption to the filing of the claim by the creditor.
Id. at 551. It distinguished Schneiderman, which was a chapter 11 case, noting
that, even without the mailbox presumption, that court could have enlarged the
time for filing the proof of claim, under the authority of Rule 9006(b) and
Pioneer Investment, without needing to resort to the mailbox rule. Id. The
court also noted Schneiderman's emphasis on the need for certainty and finality
in the chapter 11 plan confirmation and consummation process and the potential
of "any prejudice to either the Debtor or some other creditor," suggesting
that, under such circumstances, it would "closely question
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(16) This suggests that "filing" as used in Rules 3002 and 5005 and
"service" as used in Rule 9006(c) are distinct sub-species of "act" as used in
Rule 9006(b) for purposes of determining excusable neglect. Read this way, the
9006(e) mailbox presumption would apply to "service" but not to "filing," while
tardiness in either "act" could be accommodated for excusable neglect.
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the applicability of the mailbox presumption." Id. Pyle thus suggests that
perhaps Nimz' mailbox rule ought to be limited to chapter 7 and 13 cases.
The Fifth Circuit has not yet ruled on this issue, though in Robintech, it
may have given us some indicators. Oppenheim, Appel, Dixon & Co. v. Bullock
(Matter of Robintech), 863 F.2d 393, 398 (5th Cir. 1989). In that case, the
bankruptcy court had applied the Rule 9006(e) mailbox presumption to the notice
of claims bar date served on the creditor by the debtor. In considering the
propriety of that ruling, the Fifth Circuit noted in passing that "claims are
not considered filed until actually received by the clerk and filed." Id.
(emphasis added). While the main issue on appeal to the Fifth Circuit was the
adequacy of the debtor's service and its effect on the creditor's late filing
(late by three days), Robintech also emphasized the importance of the strict
application of the filing deadlines to the administration of the bankruptcy
case. Robintech seems, in its approach to the issue, closer to Schneiderman than
to Nimz.
This court is not inclined to carve out a rule for claims filing that
varies from chapter to chapter, as did the Pyle court, because Rule 5005,
unlike Rules 3002 and 3003 is not "chapter-sensitive."(17) The more
straightforward application of ordinary rules of statutory construction to the
plain language of the bankruptcy rules, employed by the Third Circuit in
Schneiderman, seems far more defensible (and sensible). Moreover, the
distinction which that court drew between "service" and "filing" seems consonant
with the tenor of the Fifth Circuit's decision in Robintech. We conclude
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(17) The need for finality and certainty in the chapter 11 plan process
and the potential for prejudice to the chapter 11 debtor and to the creditors
who are more vigilant in that process do of course weigh against an extension
of the mailbox presumption to the filing of proofs of claim in a chapter 11. In
addition, the bankruptcy rules already provide for a certain amount of
flexibility in the allowance of late claims in the chapter 11 context, a
flexibility that allows for the invocation of a degree of equity on the part of
the court -- but only if the claimant carries its burden. It seems
counterintuitive to reverse that burden for claimants who insist that they
really did file on time -- especially given how difficult it would be to rebut
the relatively small quantum of self-serving testimony that would be sufficient
to raise the presumption.
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that the "mailbox rule" does not apply to the filing of claims, and that no
presumption is therefore to be indulged in favor of the movants with regard to
their contention that they mailed their claims to the bankruptcy court in a
timely fashion. We are thus left with the admittedly self-serving evidence of
the claimants that they mailed their claims, and the controverting evidence that
neither of these claims appears in the files of the clerk's office. The
evidence does not, by a preponderance of the evidence, establish that movants
timely filed their claims.
III. DOES A CONFIRMED CHAPTER 11 PLAN OF REORGANIZATION SERVE AS RES
JUDICATA AS TO THE ALLOWANCE OF CLAIMS?
The Debtors and the Class 7 representative argue that the confirmed Plan acts
as res judicata to the allowance of any late proofs of claim. This issue, too,
has attracted the attention of courts in several instances, including the Fifth
Circuit. In In re Simmons, 765 F.2d 547 (5th Cir. 1985), a secured lien-holder
filed a proof of claim between the debtor's chapter 7 filing and its subsequent
conversion to chapter 13, but prior to the confirmation of the chapter 13 plan.
The debtor did not object to the proof of claim, but instead proposed a plan
that substantially marked down the amount of the secured claim, leaving the
creditor substantially under-secured. The creditor failed to object to the
plan's confirmation, but later sought to enforce his lien for the full value of
his debt. The Fifth Circuit indicated that "[t]he purpose of filing an
objection [to claim] is to join issue in a contested matter ... The parties are
put on notice that the objection will have to be resolved before a final
determination is made as to allowance or disallowance of the claim. In
contrast, the filing of a Chapter 13 plan does not initiate a contested
matter." In re Simmons, 765 F.2d 552. It seemed important to the court,
however, to note that the creditor's proof of claim was on file before the plan
was presented for confirmation, that the plan itself did not place the claim in
issue, and that there was
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no statement in the plan that it was intended as an objection to the proof of
claim. The court likened the proposal of a plan to the filing of a claim
itself, which in turn acts as an invitation to other parties to object, Id. at
554.
We thus know that, at the very least, a debtor cannot use a plan as a
substitute for lien avoidance in the chapter 13 context. We do not know how
much further Simmons goes, however. Does it apply to claims objections in the
chapter 11 context?
The Debtor invites us to sidestep the entire question, invoking Republic
Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987), which held that the
confirmation of a plan of reorganization has res judicata effect as to the
efficacy of an injunction against third-party actions, even though such
injunctions are otherwise barred as a matter of law. The creditor there had
notice of the plan, but failed to object, and the plan was confirmed. The
creditor later argued that section 524(e) made injunctions of the sort
contained in the plan unenforceable, but the Fifth Circuit found that
principles of res judicata were controlling. Said the court, "[r]egardless of
whether that [contested] provision [in the plan] is inconsistent with the
bankruptcy laws...it is nonetheless included in the Plan, which was confirmed
by the bankruptcy court without objection and was not appealed." Id.at 1050.
Shoaf did not discuss Simmons. How could res judicata apply in one
context, and not the other? The Fifth Circuit sought to resolve the apparent
contradiction in Matter of Howard, 972 F.2d 639 (5th Cir. 1992). Howard took
Shoaf to stand "for the proposition that a confirmed Chapter 13 plan is res
judicata as to all parties who participate in the confirmation process," and
regarded Simmons as carving out a limited exception for secured creditors who
rely on the certainty of their lien, notwithstanding the bankruptcy, when no
party in interest objects to their timely filed proofs of claim. Id. at 641.
Howard regarded the limited exception to the general rule of res judicata as
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necessary to balance the Bankruptcy Code's competing concerns for secured
creditors' interest in the security of liens and debtors' interest in the
finality of the confirmation process. The purpose of an objection to a proof of
claim (at least those of secured creditors) is, according to the court, to
notify the affected creditor that its claim is in issue and may be modified
by the plan. Id. at 642.
After Howard, then, we are left in the Fifth Circuit with a special
exception to the res judicata rules. What is less than clear is how much
further the circuit court is prepared to extend the exception (and why). Does
it extend to all claims objections, or is there something about the nature of
secured claims that merits their being insulated from the normally wide sweep of
the principles of res judicata? In February 1998, the Fifth Circuit issued a
decision which slightly expanded the "special exception" to include not only
secured claims but also nondischargeable tax claims. Matter of Taylor, 132 F.3d
256 (5th Cir. 1998).
In Taylor, the debtor tried to compromise an IRS tax penalty claim via his
plan. The claim was not secured, but it was apparently nondischargeable. The
Fifth Circuit noted that nondischargeable claims, like the liens of secured
creditors also "ride through" bankruptcy, so that an effort to use the plan
confirmation process to short-circuit that "ride-through" right should also not
be permitted. The formal objection to a claim (or, as in Taylor, a motion for a
determination of tax debt under 11 U.S.C. Section 505) puts the claim squarely
in issue and commences a dispute as to the claim in a way in which the plan does
not. Id. The court did not rule that all claims had to be adjudicated via the
formal claims objection process - indeed, the opinion seems to have found the
unique nature of nondischargeable and secured claims to be dispositive of the
issue.(11)
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(11) Still, there is disturbing language in Taylor that suggests that the
court, might be tempted to further extend its holding to all types of claims
objections. In view of the fact that this entire line of circuit court decisions
(continued...)
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Our case is distinguishable from the entire line of cases which
currently conclude with Taylor. First, while all but one (Shoaf) of the four
cases involved a "ride-through" kind of claim (either secured or
nondischargeable), the late claims we consider here are all ordinary unsecured
claims, which do not have the option of "riding through" the bankruptcy process.
Such claimants must participate in the bankruptcy process to get paid, and will
be bound by a plan's provisions regardless whether they participate or not. See
11 U.S.C. Section 1141. Second, in each of these four other cases,(19) the
debtor was attempting to rely on the res judicata effect of the confirmed plan
when the creditor had filed a claim prior to the plan confirmation hearing. In
other words, the debtor in each of those cases knew about the claim, and could
have placed the claims in contest through the more usual avenues -- claims
objections, lien avoidance actions, tax determination proceedings. In our case,
by contrast, the debtor could not "object" to these creditors' claims prior to
confirmation because it did not know which creditors would try to file late
claims and which ones would not. After all, a debtor (or committee, for that
matter) can only object to claims that are on file. In Simmons and Howard, the
debtor chose, in the view of the circuit court, to subvert the straightforward
claims objection process, attempting instead to utilize the plan process as an
indirect "end around" play. See 11 U.S.C. Sections 1327; 1141. The equities are
considerably more balanced in a case such as ours, where the debtor could not be
expected to file pre-confirmation claims objections to claims that had yet to
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(18) (...continued)
constitutes a judicially created exception to the general principles of res
judicata, however, this court will not speculate about what the final parameters
of the exception might be, and will read Taylor no more broadly than its actual
holding. See H. Gray Burks IV, "In re Taylor: A Misstep in the Right Direction
for the Effect of Plan Confirmation." NORTON BANKRUPTCY LAW ADVISOR, April 1998
at 6 (West Group 1998).
(19) We note that in Taylor, the IRS withdrew its claim prior to
confirmation. The debtor pointed to this, in conjunction with his plan's
mention of Section 505, its reference to Section 6672 tax liability, and its
reference to his debt to the IRS, in arguing that his plan sufficiently dealt
with the IRS' claim for purposes of res judicata, but to no avail.
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be filed. We are left with the much narrower question regarding the propriety
of a plan provision which purports to deal in advance with those creditors who
may attempt in the future to seek allowance of late-filed claims(20).
Finally, and perhaps most critically, the plan provision in question here
did not actually purport to adjudicate any present claims. To the contrary, it
provided one last clear chance, as it were, to creditors who might have already
missed the bar date to "get in under the wire" with a request for allowance of
late claims and the invocation of the "excusable neglect" rule. These creditors
had every opportunity in which to put forward their late-filed claims argument
prior to confirmation, without adverse impact. They simply squandered the
opportunity.
For these reasons, we find it appropriate to find that Shoaf, and not
Taylor, controls in this case. The confirmation of the Debtors' Plan operates
as res judicata to bar the allowance of these (and any other) late claims that
might be filed in this case.
III. SHOULD THE FILING OF CLAIMS BY FASHIONLAND, INC. AND GO SALES BE
EXCUSED?
Fashionland and Go Sales argue in the alternative that, as a matter of
equity, their claims should be allowed because it was inequitable for the
Debtor to place all of its unsecured claims in dispute in its original
schedules. The difficulty with this argument is that the Official Forms do
allow a debtor to dispute any claim. The real thrust of the late claimants'
argument, then, is that the wholesale disputation was unwarranted, i.e., it
violated Rule 9011. But the late claimants have not moved for relief under that
rule, nor have they offered any affirmative proof beyond the schedules
themselves that the Debtor filed its Schedules (with the wholesale disputation
of unsecured claims)
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(20) The facts of our case indicate, incidentally, that, even though
these late claimants did not have proofs of claim on file at the time of
confirmation, they would have received plan solicitation materials because they
were listed on the debtor's master service list.
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for an improper purpose within the meaning of the rule. The late claimants
would have the court infer from the wholesale disputation of claims just such
an improper purpose, but other facts of which this court is aware (and of
which it now takes judicial notice) countenance against such an inference. For
example, the decision to object to all unsecured claims was made in the first
instance not by the Debtor's management, but by the accountants who prepared
those schedules. The accountants, in turn, could as easily have made that
decision in an abundance of caution, being unwilling to ratify the bookkeeping
of the Debtor on the relative short notice that they had to prepare these
schedules (and unwilling to shoulder the resulting potential liability for such
a ratification). The Debtor, of course, might have elected not to follow the
advice of its accountants, but the Schedules were literally not ready for
signature until scant days before the first meeting of creditors. The
accountants were placed under a short deadline imposed by this court to
complete the schedules without further delay, in order to assure that the first
meeting of creditors could be timely held (and the United States Trustee was
adamantly insisting on not further delaying the first meeting of creditors,
which had been delayed once already). Under such circumstances, drawing the
inference suggested by the late claimants would be precipitous, especially in
light of the affirmative burden of proof laid on parties seeking sanctions
under Rule 9011 to establish a violation. See In re Mahendra, 131 F.3d 750 (8th
Cir. 1997); In re Collins, 1992 WL 190471 (Bankr. N.D. Ill. 1992).(21)
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(21) It is worth making two points here. First, the court does not lightly
approve of so-called "wholesale disputations" of claims in schedules. The
opportunistic gamesmanship that this tactic invites is simply inimical to the
general duty of good faith imposed on debtors who invoke bankruptcy's equitable
processes. Secondly, however, and just as important, the court is extremely
reluctant to adopt a per se rule prohibiting such "wholesale disputations,"
recognizing that, in more than a few cases, any other approach would simply be
irresponsible on the part of debtor's management. We make no findings one way or
the other regarding on which side of the line the Debtor in this case might find
itself, noting only that the burden which is placed on the party seeking
sanctions was not met here (to say nothing of the fact that sanctions were never
actually requested by motion by either of the creditors here).
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CONCLUSION
For the foregoing reasons, the request of the movants in this case to
permit the late filing of their claims is DENIED.
So ORDERED.
SIGNED this 11th day of May, 1998.
/s/ LEIF M. CLARK
-----------------------------------------
LEIF M. CLARK
U.S. Bankruptcy Judge
21
