A known creditor, which was aware of a debtor’s pending bankruptcy but did not receive legally required notice of the debtor’s chapter 11 case, was not barred from bringing a state action following bankruptcy discharge.

The U.S. Court of Appeals for the First Circuit held that actual knowledge of the pending chapter 11 case did not satisfy due process requirements; therefore, the known creditor’s subsequent claim was not barred by the debtor’s discharge injunction. Arch Wireless, Inc. v. Nationwide Paging, Inc. (In re Arch Wireless, Inc.), 534 F.3d 76 (1st Cir. 2008).

The debtor, Arch Wireless, Inc. (“Arch Wireless”), supplied pagers and paging network airtime to Nationwide Paging, Inc. (“Nationwide”). Prior to the petition date, Nationwide corresponded with Arch Wireless regarding certain billing and defective product issues. Arch Wireless filed its voluntary petition for chapter 11 relief Dec. 6, 2001 in the U.S. Bankruptcy Court for the District of Massachusetts. Arch Wireless did not include Nationwide as a creditor on its bankruptcy schedules, and Nationwide did not file an appearance in the bankruptcy case.

Accordingly, Nationwide did not receive any notices from Arch Wireless or the bankruptcy court regarding the bankruptcy proceedings. On May 15, 2002, the bankruptcy court confirmed Arch Wireless’s chapter 11 reorganization plan and entered a confirmation order that included a discharge injunction precluding the assertion of any claims that arose prior to the confirmation date.

‘Known Creditor’

Following confirmation of the debtor’s reorganization plan, Arch Wireless began terminating Nationwide’s service for nonpayment. Thereafter, Nationwide commenced a state court action under the Massachusetts unfair business practices statute alleging harm for Arch’s overbilling and defective pagers. Almost two years later, Arch Wireless sent Nationwide a copy of the bankruptcy court’s confirmation order and demanded that Nationwide withdraw its state court claims against it.

The First Circuit affirmed the bankruptcy court’s determination that Nationwide was a “known creditor” that did not receive adequate notice sufficient to comport with the requirements of due process; thus, the discharge injunction contained in the confirmation order did not preclude Nationwide from asserting its preconfirmation claims.

The court determined that Nationwide was a known creditor because of the pre-bankruptcy correspondence regarding payment and defective product issues. The First Circuit found that Nationwide’s claim could have been reasonably ascertained from a review of the debtor’s own records—namely, the pre-petition correspondence that asserted “an entitlement to affirmative compensation.” Accordingly, Nationwide was a “known creditor,” and pursuant to the Federal Rules of Bankruptcy Procedure, entitled to notice of the claims bar date, a copy of the reorganization plan, notice of the confirmation hearing and a copy of the confirmation order.

Due Process Requirements

To satisfy due process requirements in the context of a chapter 11 discharge injunction, debtors must ensure that “‘required information’ [is] ‘reasonably conveyed’ to the creditor against whom the debtor wishes to enforce the discharge injunction.” Unlike a chapter 7, chapter 13 or a case against an individual debtor, in a chapter 11 case, neither publication notice nor a general awareness of the pending reorganization is sufficient to satisfy these due process notice requirements. In a chapter 11 case, something more is required before a known creditor’s claims will be barred forever.

In the case at hand, although Nationwide’s president generally was aware of Arch Wireless’s chapter 11 bankruptcy filing, the creditor did not have actual knowledge of the claims bar date or information regarding the debtor’s reorganization plan. Therefore, the First Circuit determined that the discharge injunction did not apply to Nationwide because such application would violate due process.

Creditors of chapter 11 debtors should be mindful that those that do not receive actual written notice of a debtor’s claims bar date and information regarding the reorganization plan may not be bound by a discharge injunction. To avoid application of the discharge injunction to a creditor’s claim, however, a creditor first must prove it was a “known creditor” of the debtor and, as a result, was entitled to receive written notice of such events sufficient to comply with constitutional due process requirements.