While 90 percent of life may be just showing up, showing up late may be just as bad as never showing up at all. Just ask two creditors who were told for the second time they cannot file claims in the Lehman Brothers bankruptcy case because they filed their claims too late.
U.S. District Court Judge William H. Pauley III affirmed the Bankruptcy Court’s decision denying several creditors’ claims earlier this year because the District Court found that their reasons for missing the claim filing deadline did not constitute “excusable neglect.” Judge Pauley’s decision illustrates the standard used by courts in the Second Circuit (which includes bankruptcy and other federal courts in New York, Connecticut and Vermont) when deciding whether to allow a late-filed claim.
The Bankruptcy Code requires bankruptcy courts to set a claims bar date, the date by which creditors must file proofs of claim. Rule 9006(b)(1) of the Bankruptcy Rules allows certain late claims to be filed, but only if the creditor demonstrates missing the bar date deadline was due to “excusable neglect.” Courts generally consider four factors to determine excusable neglect:
- potential danger of harming the debtor,
- the length of the delay and its potential impact on administering the case,
- the reason for the delay, including whether missing the bar date was within “reasonable control” of the party seeking to file a late claim, and
- whether the late-filing party is acting in “good faith.”
In this case, Judge Pauley used the above standard to affirm the decision issued in May 2010 by U.S. Bankruptcy Judge James Peck of the Southern District of New York. Judge Peck found that the creditors’ reasons for not filing their claims on time did not meet the excusable neglect standard.
The creditors offered several explanations for missing the bar date, including not understanding the legal implications of a particular contract, and miscommunications and lack of coordination among creditors’ employees and their attorneys. Judge Peck ruled that these and other reasons demonstrated “a lack of care or thoughtful attention,” and did not meet the excusable neglect standard. By contrast, Judge Peck had previously let a small number of creditors file their claims late because they exhibited “a reasonable amount of diligence” to determine the effect of the claims bar date, but missed the deadline because of “justifiable confusion.” That small number of creditors “conscientiously” tried to comply with the deadline, Judge Peck found, but were justifiably confused as to which of two claims bar dates applied to their particular claims.
Two of the losing creditors appealed to the District Court, but the District Court did not find their arguments persuasive. These two creditors did not learn they had claims until after the claims bar date had passed, but the Bankruptcy Court ruled creditors “act at their peril when they fail to adequately investigate and pursue their rights.” The District Court rejected the losing creditors’ argument that the Bankruptcy Court used an excessively strict standard. Judge Pauley also rejected their argument that late-filed claims would not prejudice the debtor Lehman Brothers. Judge Pauley found that allowing the two creditors’ claims “could have induced another wave” of claims being filed, and further noted that the case is unprecedented in size and already includes more than 66,000 claims.
While creditors trying to bring claims in courts in the Second Circuit must abide by this standard, it is important to note that other circuits use their own particular standards. For example, the Third Circuit (which includes Delaware, Pennsylvania and New Jersey federal courts) did not find excusable neglect when a creditor had notified the claims agent about his claim, but failed to file the required proof of claim on time. By contrast, the Eleventh Circuit (comprised of Florida, Alabama and Georgia federal courts) found excusable neglect in a situation when a creditor knew about the circumstances giving rise to its claim but did not realize it actually had a claim until after the deadline had passed.
The process of filing a claim can be complex and confusing. Failing to meet a filing deadline can greatly imperil a creditor’s chance of collecting on an otherwise valuable claim. Because different courts use different excusable neglect standards, a creditor should take steps to protect its interests as soon as it learns it might have a claim.