Restructuring

Contributed by Doron P. Kenter.
To paraphrase Samuel Johnson, publication notice is, quite often, the debtor’s “last refuge.” Yet it is frequently a necessary feature of the notices provided in bankruptcy cases. Debtors rarely possess an accurate method for notifying the many unidentifiable potential claimants. And so enters publication notice. Pursuant to well-settled law, publication notice – if sufficient – may satisfy the requirement to provide due process to unknown creditors in a bankruptcy proceeding. Even though it is far from perfect, it is a necessary feature of due process where a debtor has no other means of reaching unknown creditors who are, by definition, unknown and incapable of being reached by direct modes of service. Publication notice, however, may not suffice where it is not reasonably calculated to reach unknown creditors.
Such was the case in the chapter 11 cases of New Century TRS Holdings, Inc. and its affiliated debtors. In that case, in June 2007, the bankruptcy court entered a bar date order establishing August 31, 2007 as the deadline for filings proofs of claim against the debtors. The bar date order provided that the debtors would cause notice of the bar date to be published in the national edition of the Wall Street Journal and “any such other local publications as [the] debtors deemed appropriate.” The debtors then published notice of the bar date in the Wall Street Journal and in the Orange County Register (the debtors were headquartered in Orange County).
Over a year later, two consumer mortgagors filed late claims against the debtors. The liquidating trustee for the debtors objected to those claims as untimely and then filed a “global constructive notice motion,” seeking a determination that the debtors had provided constructive notice of the bar date to all previously unknown creditors by issuing publication notice as set forth above. After an evidentiary hearing, the bankruptcy court concluded that the debtors had complied with the bar date order and that the publication notice was “reasonably calculated, under the circumstances, to apprise interested parties nationwide of the bar date and afford them an opportunity to file claims.”
On appeal, the district court reversed the bankruptcy court’s decision as it pertained to unknown creditors (neither court reached any conclusions regarding whether specific creditors – such as mortgage borrowers – were known or unknown). The district court first discussed the evidence introduced in support of the debtors’ argument that publication notice was sufficient. The debtors had argued that the Wall Street Journal has a national audience and is a customary forum for publication of legal notices. They further argued that the Orange County Register was calculated to reach the debtors’ former employees, most of whom would have been based in the area, and that the Register had been providing ongoing coverage of the debtors’ bankruptcy cases, reaching readers beyond the immediate Orange County area. Notwithstanding these arguments (or perhaps because of them), the district court concluded that the publication notice was insufficient because the debtors maintained business operations throughout the United States and had more than a million borrowers, any of whom might seek to assert claims. Indeed, the evidence before the court reflected the fact that the debtors had considered their former employees to be potential unknown creditors (which was one reason for publishing notice in Orange County), but specifically had not considered the mortgage borrowers to be a “source of potential claims.” Accordingly, because the debtors never took account of mortgage borrowers across the country in determining where to publish notice of the bar date, publication notice in the Wall Street Journal and the Orange County Register alone was not “reasonably calculated” to provide constitutional due process to all unknown creditors.
Notably, the bar date order did not set forth the specific publications in which the debtors would publish notice that would suffice to reach any unknown creditors. Had the debtors decided where to publish notice of the bar date before the court entered the order, the bankruptcy court could have entered an order specifically finding that the proposed publication notice would satisfy any due process requirements for unknown creditors. Because, however, the discretion was left to the debtors, that discretion could subsequently be challenged more readily and with a greater likelihood of success.
In issuing publication notice, it is important to recognize where any unknown creditors may be located and to show that a reasonable attempt was made to reach those unknown creditors in some manner – such as the conventional method of issuing notice in publications reasonably calculated to reach these unknown creditors. Even if the debtor believes that certain sources of claims may lack merit, they may be more likely to benefit from the bar date for claims if such notice is overbroad and if they obtain a court order approving the full form and manner of notice. Though publication notice is still “ a poor and sometimes a hopeless substitute for actual service of notice[,]”some advance planning may help to make it more likely to be the best possible form of notice under the circumstances and therefore more likely to satisfy due process, thereby making it possible to enforce the bar date order against such claimants in the future.