Restructuring

Overview

While the question of what constitutes sufficient notice of the bar date is by no means novel (in fact, we’ve previously written about several issues on the topic: see (i) Adjust Your Focus When Due Process Requirements Are Blurry: Third Circuit Finds Kodak’s Notice of Publication Sufficient for Unknown Tort Claimant, (ii) Notice over Science: Delaware Bankruptcy Court Enforces Bar Date Against Asbestos Creditor Based on Actual Notice Standard, and (iii) You’re on Notice: Publication Notice of the Claims Bar Date Satisfies Due Process Requirements),the critical importance of the enforceability of a bar date on a debtor’s ability to successfully and effectively reorganize makes it a question worth revisiting.  This is especially true in light of the increased use of chapter 11 as a tool for companies to address potential mass tort liabilities.  Setting a deadline for creditors to file proofs of claim is a powerful tool that allows debtors to fix their claims pools and ensure that assets are distributed fairly to creditors.  In two recent opinions¹, two separate courts considered whether a debtor’s bar date notice satisfied the requirements of due process and the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).  These cases provide useful insights on the requirements that notice must satisfy, both as to the form and manner of the notice, for a debtor to receive the maximum protections with respect to its discharge and fresh start under the Bankruptcy Code.

Legal Standard

The constitutional standard for due process requires that a debtor’s known creditors receive actual notice of the deadline for filing claims.  Known creditors are those creditors that can be ascertained with a reasonably diligent search of the debtor’s books and records.  Chemetron Corp. v. Jones, 72 F.3d 341, 346–47 (3d Cir. 1995).  Debtors typically provide actual notice by sending the bar date notice to creditors by first class mail; however, other forms of notice may satisfy the requirements of due process so long as such notice is “reasonably calculated, under all the circumstances, to apprise interested parties of the [bar date].”  Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314–15, 70 S. Ct. 652, 657, 94 L. Ed. 865 (1950).  In contrast, unknown creditors are those creditors “whose identities or claims are not reasonably ascertainable and those creditors who hold only conceivable, conjectural or speculative claims.”  In re Thomson McKinnon Sec. Inc., 130 B.R. 717, 720 (Bankr. S.D.N.Y. 1991).  Providing notice of the bar date by publication has historically been deemed sufficient to bind unknown creditors to a claims bar date.  

In addition to the requirements of constitutional due process, a debtor must also satisfy the notice requirements under the Bankruptcy Rules.  In particular, Bankruptcy Rule 2002(a)(7) provides that creditors shall receive  “at least 21 days’ notice by mail” of the time fixed for filing proofs of claim.  A creditor that does not receive sufficient notice of the bar date will not be subject to any bar date established in a debtor’s chapter 11 case and, as a result, will not be barred from asserting claims against a debtor’s estate after the bar date has passed.  

Navillus Tile, Inc.

Prior to the filing of its chapter 11 case in the Southern District of New York, the debtor in In re Navillus Tile, Inc., No. 17-13162 (SHL), 2021 WL 5984872 (Bankr. S.D.N.Y. Dec. 16, 2021), a construction company based in New York City, entered into a contract with the New York City Housing Authority (“NYCHA”) for roofing and other construction work at one of NYCHA’s housing complexes in the Bronx.  Over two years after the court-approved bar date for governmental entities to file claims and nearly two years after confirmation of the debtor’s chapter 11 plan, NYCHA commenced a state court action against the debtor for breach of contract and negligence related to the debtor’s performance under the contract.  NYCHA alleged that the debtor’s poor workmanship exacerbated deficiencies with the building facades at the property.  As a result of the state court action commenced by NYCHA, the debtor filed a motion with the bankruptcy court requesting that the court reopen the chapter 11 case for the limited purpose of enforcing the discharge and plan injunction and require NYCHA to discontinue its state court action against the debtor with prejudice.

Before considering whether there was cause to reopen the chapter 11 case, the bankruptcy court first addressed whether the debtor provided NYCHA with appropriate notice of the governmental bar date.  If notice to NYCHA was inadequate, the bankruptcy court noted that NYCHA could not be bound by the plan injunction or subject to the discharge, making reopening the case unnecessary.

First, the bankruptcy court considered the manner by which notice was provided by the debtor.  It was undisputed that the debtor served a physical copy of the bar date notice by mail on NYCHA at two of its registered offices as well as on outside counsel that NYCHA had used for an unrelated personal injury matter.  Notwithstanding this, NYCHA argued that the notices it received were inadequate because they were not addressed to any particular floor, department, division or employee and, therefore, the debtor’s noticing efforts were not reasonably calculated to apprise NYCHA of the bar date.  In rejecting NYCHA’s argument, the bankruptcy court held that there was no requirement to direct service of the bar date notice to a specific person or department at NYCHA.  The court noted that imposing such a requirement would have been inconsistent with the terms of the contract, which provided that notice should be served on NYCHA at “NYCHA’s principal office in New York City,” with no reference to an address, let alone an individual or department, to which notices should be directed.  The bankruptcy court also noted that, pursuant to Bankruptcy Rule 5003(e), NYCHA could have provided the court with its desired address for service of pleadings in the chapter 11 case, but failed to do so.

The court also rejected NYCHA’s argument at the hearing that service of the bar date notice was insufficient because the notice was sent via first class mail and not registered mail or by courier or delivery service as required under the notice provisions of the contract.  Despite the fact that NYCHA failed to raise this argument in any of its pleadings (which the court found alone was a sufficient basis to reject the argument), the bar date order only required that service be made by first class mail, which the court noted is the standard form of service in the Southern District of New York. 

Second, the court considered the form of the bar date notice provided by the debtor.  NYCHA argued that the bar date notice was insufficient to apprise NYCHA of the nature of the claims to be barred and, therefore, did not meet the requirements of due process.  The bankruptcy court, however, noted that the debtor did not have any knowledge of the investigation or report on the building structure that formed the basis of the state court litigation until the litigation was commenced nearly two years after the chapter 11 plan was confirmed.  Further, it was undisputed that, after the work under the contract was performed, the parties had no further communications with each other.  Accordingly, the bankruptcy court rejected this argument and found that NYCHA was in the best position to know of any potential claims it held against the debtor.  The court ultimately found that NYCHA received adequate notice of the governmental bar date, and, after analyzing the factors to determine whether cause existed to reopen a case, that the debtor’s case should be reopened for the limited purpose of barring NYCHA from continuing the state court litigation.

Cyber Litigation, Inc.

In In re: Cyber Litigation Inc., No. 20-12702 (CTG), 2021 WL 5047512 (Bankr. D. Del. Oct. 28, 2021), the Bankruptcy Court for the District of Delaware considered whether notice of the bar date by email, without more, was adequate to bar untimely claims.  The debtor in that case, a cybersecurity company whose business collapsed amidst allegations of financial fraud, objected to the allowance of a proof of claim filed by Hansen Networks, the debtor’s largest unsecured creditor, on the grounds that it was untimely as it was filed three months after the expiration of the claims bar date set by the court.  Following approval of the bar date, the debtor provided the bar date notice to David Hansen, the principal of Hansen Networks, by regular mail and email.  However, at a subsequent evidentiary hearing before the court, it was established that the physical copy of the bar date notice was mailed to Hansen at an address where he no longer resided.  The debtor also served notice on Hansen Networks by regular mail and email, but the parties stipulated that the addresses used for such notice were inaccurate, and that the debtor would not seek disallowance solely on that basis (the debtor, however, reserved the right to argue that any proof of claim filed by Hansen Networks was untimely on other grounds).  Accordingly, after Hansen Networks subsequently filed a proof of claim, the debtor objected to the claim on the basis that the service on Hansen, individually, was sufficient.  In response to the debtor’s claim objection, Hansen argued that he did not receive the bar date notice allegedly served on him and, therefore, Hansen Network’s claim could not be barred as untimely. 

To determine whether the notice provided by the debtor was sufficient to bar Hansen Network’s untimely proof of claim, the bankruptcy court first considered whether the notice provided to Hansen Networks complied with the requirements of constitutional due process.  While mailing the notice to Hansen Network’s last known address certainly would have satisfied the requirements of due process, the bankruptcy court noted that doing so was not the only means of satisfying due process.  Rather, the court noted that established case law required only that the notice provided be reasonably calculated, under all circumstances, to apprise Hansen of the bar date.  The bankruptcy court found that providing email notice of the bar date to Hansen satisfied the constitutional standard, since the notice was sent to an email address that Hansen actively used (and one that he previously used to communicate with the debtor).  In light of “the remote work environment brought on by the global pandemic, the well publicized challenges faced by the U.S. Postal Service, and the increased reliance on electronic communications”, the bankruptcy court noted that providing notice by e-mail was “at least as good [ ] as an envelope placed in the mail” in terms of the likelihood it would reach Hansen.

Notwithstanding this, however, the bankruptcy court found that the notice provided to Hansen failed to meet the requirements of Bankruptcy Rule 2002, which specifically requires 21 days’ notice by mail.  Here, the parties stipulated that Hansen did not receive notice by mail, as the bar date notice was mailed to Hansen’s old address which was not his or Hansen Network’s last known address.  Accordingly, the court found that, because the requirements for notice under the Bankruptcy Rules were not satisfied, the bar date could not be enforced against Hansen Networks absent a showing that the error was harmless (which the court found was not the case because Hansen testified that, had he been aware of the bar date, he would have filed a proof of claim).  

Take-Aways

These cases present several important considerations for practitioners to keep in mind when considering the form and manner of their proposed bar date notice.  Notice by regular mail to a creditor’s last known address is still a sound means of providing notice of the bar date for known creditors and courts generally will not impose more specific requirements to serve notice on a particular floor, department, division or employee where the underlying contract is silent on such matters.  If a debtor, however, is on notice of particular claims or types of claims that may be asserted then they may be required to include specific references to those claims in their notices to satisfy due process.  This could potentially be addressed by providing customized bar date notices to known creditors which include cross-references to scheduled claims or potentially including references to certain claims or types of claims in publication notices.  And finally, while email may seem like the preferred method of communication for many (or most) businesses and individuals and may even satisfy constitutional requirements of due process, bankruptcy courts continue to be slow to recognize email as a sufficient means of providing formal notice and it is not yet safe for debtors to rely on email alone.  All in all, these cases serve as a good reminder of the various issues, both new and longstanding, considered by courts to determine whether a debtor has provided proper notice of the bar date.