In In re Arch Wireless,1 the United States Court of Appeals for the First Circuit held that a creditor who asserted claims against the debtor in various correspondence between the parties was a “known” claimant of the debtor’s estate entitled to direct notice of the bar date by which it must file a proof of claim. The Court of Appeals concluded that publication notice was insufficient to inform the creditor of the bar date or of the terms of the confirmed plan, even though the creditor was generally aware of the debtor’s bankruptcy filing. Accordingly, the Court held that the discharge injunction entered in connection with the confirmation of the debtor’s chapter 11 plan did not prevent the prosecution of the creditor’s pre-petition claim.
Arch Wireless, Inc. (“Arch”), a supplier of paging network air time and pagers, sold air time and pagers to Nationwide Paging, Inc. (“Nationwide”). Nationwide supplied its own customers with the pagers received from Arch. In September 2001, Nationwide sent multiple emails and letters to Arch complaining about billing errors. At that time, Nationwide also claimed that the pagers were defective. Nationwide asserted that the defective pagers were a separate issue from the billing errors, that the defects had caused financial loss to the company, and that Arch needed to do something to correct the problem.
In December 2001, Arch filed a petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Massachusetts. Arch did not list Nationwide as a creditor in its bankruptcy schedule and Nationwide was not notified that Arch was in bankruptcy. Nationwide did not file an appearance in the chapter 11 case. On February 5, 2002, the Bankruptcy Court issued an order setting March 29, 2002, as the bar date for all claims – the date by which all creditors would have to file proofs of their claims in Arch’s bankruptcy case. Publication of the bankruptcy filing and of the bar date was made in USA Today and The Wall Street Journal. Nationwide was not served with notice of the bar date and did not file a claim.
On May 15, 2002, Arch’s reorganization plan was confirmed. The Court’s confirmation order included a discharge provision barring all persons from asserting claims against Arch based on any transactions or activities occurring prior to the confirmation date. In June 2002, Nationwide filed suit in Massachusetts Superior Court seeking damages arising out of its earlier disputes with Arch. Arch then sent Nationwide a copy of the confirmation order discharging Arch’s pre-confirmation debts and demanded that Nationwide withdraw its claims. Nationwide refused, and Arch filed a motion for contempt in the Bankruptcy Court.
The Bankruptcy Court denied Arch’s motion to hold Nationwide in contempt for violating the discharge injunction. The Bankruptcy Court held that Nationwide was a “known creditor” who had not been provided adequate notice of the bar date, and that, accordingly, Constitutional due process required that the discharge injunction could not extinguish Nationwide’s claims. The United States District Court for the District of Massachusetts affirmed the holding of the Bankruptcy Court. Arch appealed the decision to the United States Court of Appeals for the First Circuit.
Known Creditors Versus Unknown Creditors
The Court of Appeals began by explaining that bankruptcy law distinguishes between “known creditors” and “unknown creditors.”2 Known creditors are entitled to personal notification of events in the reorganization proceedings. By contrast, unknown creditors are only entitled to constructive notice, such as notice by publication.
Arch had argued before the Bankruptcy Court that Nationwide was an “unknown creditor,” holding claims that were “conjectural or future” and did not come to the knowledge of the debtor in due course of business. The Bankruptcy Court rejected Arch’s contention, finding that Nationwide was a “known creditor” because its claim against Arch was “reasonably ascertainable” from the correspondences between the two companies. The Bankruptcy Court explained that “reasonably ascertainable,” as interpreted by the courts, refers to claims that can be discovered through “reasonably diligent efforts.”3 Such efforts generally include “a careful search of the debtor’s own records.”4 Based on the series of communications between Nationwide and Arch, the Bankruptcy Court determined that it “would have required no Herculean efforts, but merely a reasonable inquiry” into its own records for Arch to ascertain Nationwide’s claim, and hence its status as a creditor.5 The Bankruptcy Court also rejected Arch’s contention that Nationwide’s claims were speculative and conjectural, and that the correspondences between the two companies was more akin to a billing clarification with a customer than a claim by a creditor. Though no monetary amount was specified in the correspondence between Nationwide and Arch, the Bankruptcy Court found that specificity as to asserted damages was not required for Nationwide to be a known creditor.
The First Circuit Court of Appeals agreed with the holding of the Bankruptcy Court. The Court of Appeals found that the correspondence asserted a “claim” under the Bankruptcy Code, and that Nationwide’s status as a creditor was reasonably ascertainable from Arch’s books and records.6
Once it was established that Nationwide was a known creditor, the Court of Appeals considered whether Nationwide had received actual notice of the bar date sufficient to bar its claim. The Bankruptcy Rules require that in a chapter 11 case, known creditors receive: notice of deadlines for filing proofs of claims;7 a copy of the reorganization plan;8 and notice of the confirmation hearing.9 The Court of Appeals reasoned, however, that neither the Bankruptcy Code nor the Rules specify the consequences for failure to comply with these notice provisions; due process principles should thus govern the rights of creditors in their claims. Therefore, the Court of Appeals stated, the relevant inquiry was whether the notice provided to Nationwide was “of such a nature as reasonably to convey the required information” and whether a “reasonable time for those interested to make their appearance” was provided.10
The Court of Appeals found that Nationwide did not receive actual notice of the bar date, the confirmation hearing or the confirmed plan, and that Nationwide’s awareness of the bankruptcy case acquired through publication and elsewhere was insufficient to satisfy due process requirements. In reaching this holding, the Court of Appeals relied on City of New York,11 a United States Supreme Court case decided under the former Bankruptcy Act. Under section 77(c)(4) and (8) of the former Bankruptcy Act, publication notice was insufficient notice for a known creditor. The Court of Appeals rejected Arch’s argument that Bankruptcy Act cases are not applicable because statutory requirements of notice differ from Constitutional requirements. The Court of Appeals explained, “[t]he Court’s conclusion that the discharge provision was ineffective against an unnotified creditor ‘clearly is not grounded in goals unique to the former bankruptcy act.’”12 Instead, the Court of Appeals found Act cases relevant because “[t]he statutory notice requirement shapes the contours of that constitutional due process analysis because it informs the reasonable expectations of the creditors.”13
The Court of Appeals rejected Arch’s next argument, that general notice of a debtor’s filing is sufficient to bar a claim in a chapter 7 or 13 case and thus should bar Nationwide’s claim in this chapter 11 case. In chapter 7 and chapter 13 cases, the Court of Appeals noted the notice of the filing and the first meeting of creditors automatically sets the bar date 90 days thereafter. In contrast, in a chapter 11 case like that of Arch, the timing of the bar date is somewhat unpredictable and dependent on the debtor’s filing of a request from the court to establish a bar date.
The Court of Appeals also rejected Arch’s argument that section 523(a)(3) which governs the discharge of individual debtors, was applicable. Arch argued that because section 523(a)(3) excepts unlisted debts from discharge, unless the creditor had notice or actual timely knowledge of the case, Nationwide, which had knowledge of the case, could not except its claim from discharge. This argument ignored the limitation in section 523(a)(3), which by its terms is limited to bankruptcy cases of individual debtors. The Court explained:
[A] creditor of an individual debtor is on notice of the burden-shift that requires him to actively participate once he has general knowledge of the proceedings. No such statutory burden-shift is present for a creditor of a corporation. As a result, the due process requirements may vary as between creditors of individuals and corporations because the statute itself puts creditors on notice of this variance.14
Finally, the Court of Appeals dismissed Arch’s analogy to civil forfeiture and tax lien proceedings, finding that the due process inquiry was too closely linked to the statutory framework to make the comparison relevant.
As a result of the First Circuit’s holding in Arch, a debtor will need to be all the more vigilant about reviewing its books and records in order to identify potential claims. Correspondence between a creditor and debtor, whether the contents are vague or clear, may suffice to make the creditor a “known” creditor, entitled to actual notice of the bar date.
If a creditor is a known creditor, that creditor’s general knowledge of the debtor’s bankruptcy filing, together with publication notice of a bar date, will not be sufficient to bar the creditor’s later pursuit of an unfiled claim. Due process requires a more direct and thorough notice. Under these circumstances, a debtor trying to free itself of pre-petition claims may find that the discharge injunction contained in its confirmed plan of reorganization provides surprisingly little protection. Conversely, a creditor may find an unexpected opportunity when it is permitted to collect its claim from a reorganized debtor.