In the latest chapter of the New Century bankruptcy cases, the Court of Appeals for the Third Circuit vacated a district court’s decision on the sufficiency of the debtors’ publication notice and remanded the case back to the district court to determine the critical issue of whether the plaintiff-appellees were known creditors entitled to actual notice. 

Previously on this blog, we’ve covered both the bankruptcy court decision and the district court decision.  Those posts provide more detailed descriptions of the facts and procedural history.

As relevant to this post, pursuant to the debtors’ bar date order authorizing publication notice, the debtors published notice of the bar date in the Wall Street Journal and Orange County Register.  Plaintiff-appellees Molly and Ralph White were consumer mortgagors that asserted claims against the debtors in late-filed proofs of claim and also brought an adversary proceeding (currently pending before the bankruptcy court) seeking monetary damages, rescission and declaratory relief regarding their ongoing mortgage obligation based on the debtors’ alleged fraud and deceptive practices.

The liquidating trustee for the debtors objected to the Whites’ claims as untimely and sought a determination from the bankruptcy court that the publication notice in the Wall Street Journal and Orange County Register was sufficient to give constructive notice of the bar date to all previously unknown creditors.  The bankruptcy court conducted an evidentiary hearing and found that the debtors’ publication notice passed constitutional muster.  However, the district court reversed, finding that the debtors had not taken into account the mortgage borrowers across the country when calculating notice of the bar date, and, therefore, their publication notice was insufficient to provide constitutional due process to all unknown creditors.

Importantly, in ruling on the sufficiency of publication notice, neither the bankruptcy court nor the district court determined whether particular creditors such as mortgage borrowers were known or unknown.  However, in connection with the liquidating trustee’s motion to dismiss the Whites’ claims in the adversary proceeding, the bankruptcy court ruled that the Whites were properly classified as unknown creditors because the Whites had not alleged that a review of the debtors’ books and records would have revealed any potential claims held by the Whites; just because the Whites were known customers did not mean they were also known creditors.  Yet, the bankruptcy court declined to dismiss the case entirely because the trustee had not shown that the publication notice was reasonably calculated to provide notice to consumer mortgagors like the Whites.  The Whites indicated their intent to appeal the ruling that they were unknown creditors once the adversary proceeding is finally adjudicated, given that the bankruptcy court had deferred a decision on dismissal of the adversary proceeding until resolution of the propriety of the notice by publication.

As the Third Circuit pointed out, the New Century appeal presented a tangle of practical, procedural, and legal issues, the most important of which was standing.  If the Whites were unknown creditors and the notice by publication was sufficient to meet due process, then they would be barred from pursuing claims and their adversary proceeding would also be dismissed.  If the Whites were unknown creditors, and the notice by publication was not sufficient to meet due process, then the Whites’ adversary proceeding would proceed.  The Whites insisted at oral argument that they were known creditors entitled to actual notice, which called into question their standing to appeal the determination about notice to unknown creditors, thus leading to the Court of Appeals’ expressed concern that any opinion it issued about such notice would be advisory.

The Third Circuit held that the district court should have addressed whether the Whites were known or unknown creditors of the debtors, and therefore whether the Whites had standing to appeal the bankruptcy court’s ruling on the adequacy of publication notice to unknown creditors, because “only by doing so can it determine whether the Whites were parties aggrieved by the publication notice.”  If the district court ultimately decides that the Whites were known creditors, then the Third Circuit indicated that the appeal should be dismissed.  Accordingly, the Third Circuit vacated the district court’s ruling on the merits and remanded the case back to the district court for further proceedings.

More on this case is sure to come, as the district court will now consider whether the Whites were known creditors.  It also seems likely that the bankruptcy court will continue to defer its decision regarding dismissal of the adversary proceeding until the appeal is either dismissed for lack of standing or determined on the merits.