Restructuring

Contributed by Rahul Sharma
While certain courts have been lenient over the past few years in allowing creditors to file pleadings and claims well after court-established or statutory deadlines for doing so, two recent decisions by courts in Delaware and the Seventh Circuit recognize that there are limits to the excusable neglect doctrine.
On February 21, 2013, in In re Majestic Holdco, LLC, Judge Kevin Gross, of the United States Bankruptcy Court for the District of Delaware, issued an opinion denying the motions of Entergy Mississippi, Inc., a utility provider to the debtors, for permission to file a proof of claim and a request for payment of administrative expenses well after the applicable bar dates had passed.  Entergy admitted it was late, but asserted that the delay was excusable under the standard established by the Supreme Court in Pioneer Investment Services Co. v. Brunswick Associates L.P..
Then, on February 28, 2013, in In re Canopy Financial, Inc., Chief Judge Frank Easterbrook, of the United States Court of Appeals for the Seventh Circuit, issued an opinion affirming the decisions of the district court and bankruptcy court, which had denied the motion of Buddha Entertainment, LLC, which owns the nightclub Tao in Las Vegas’s Venetian Hotel and Casino, to vacate a default judgment against it.  Canopy had entered bankruptcy in 2009 after its two co-founders had misappropriated over $90 million from investors and customers.  The bankruptcy trustee appointed to oversee Canopy’s estate had filed suit to recover, as constructively fraudulent transfers, over $80,000 spent at Tao by Canopy’s co-founders, arguing that Canopy itself had received no value in that “exchange”.  Buddha failed to answer the complaint or summons, or the motion for default judgment, and also failed to appeal the judgment, all of which were sent to its registered agent in Carson City, Nevada.  When the trustee began to collect from Buddha’s assets in Nevada, Buddha finally responded and filed a motion to vacate the default, asserting that it had not received any of the trustee’s or court’s filings and therefore its failure to respond was excusable neglect.
Excusable Neglect
The Supreme Court in Pioneer held that the time to file a proof of claim could be enlarged under Bankruptcy Rule 9006(b)(1) if it was a result of excusable neglect, and it listed four factors courts must consider when determining whether excusable neglect exists:

(1) the danger of prejudice to the non-moving party,

(2) the length of the delay and its potential impact on court proceedings,

(3) the reason for the delay, including whether it was within the movant’s reasonable control, and

(4) whether the movant acted in good faith.

Additionally, it stated that excusable neglect is an equitable standard that requires courts to take “account of all relevant circumstances surrounding the party’s omission”.
Majestic Holdco
Majestic and its related debtors had filed for chapter 11 bankruptcy on November 23, 2009.  On November 2, 2010, the court entered the bar date order establishing January 4, 2011 as the bar date.  On March 10, 2011, the court confirmed the chapter 11 plan, which went effective on December 1, 2011.  The plan established an administrative claims bar date of 45 days after the effective date – January 15, 2012.  This was extended to January 18, 2012, but no further.
Entergy provided electricity to Majestic’s casino in Robinsville, Mississippi since December 7, 2011.  In 2003, Entergy had installed a new meter there to measure the power consumption.  On April 17, 2012, long after both bar dates, Entergy discovered that the meter had been under-counting the casino’s power consumption since its installation in 2003, by a total of $1,102,864.09.  Five months after that (and just 3 weeks before the closing of many of the debtors’ cases), Entergy filed its motions.  It sought $421,417.23 for the under-charge in the three years preceding the Commencement Date (the statute of limitations in Mississippi was three years), and $218,670.39 for the under-charge in the postpetition period.  Entergy argued the neglect was excusable because it discovered the malfunctioning meter so late, but it also argued that it had suffered tremendous financial loss as a result and so it should be allowed to file its late claims to collect what it could.  The statute of limitations meant it would get nothing for the under-charge between April 2003 and November 2006, and the approximately 8% prepetition claim payout meant that it would not get more than approximately $34,000 for the undercharge between November 2006 and November 2009.
The court applied the Pioneer factors and denied the motions.  It found that to allow the claims at such a late date would prejudice the debtors.  The Debtors were weeks away from closing their cases and paying unsecured claims.  They had negotiated an aggregate unsecured claims pool of $1 million and adding Entergy’s unsecured claim of over $400,000, as well as its administrative expense claim (which would have to be paid in full) would significantly reduce the payments to other creditors. 
The court also concluded that the length of the delay and the reason for the delay made it inexcusable.  Not only were Entergy’s claims asserted long after the applicable deadlines, but the utility company also did not seek leave to file late claims until five months after discovery of the meter malfunction.  Additionally, during the nine years that the meter was malfunctioning, Entergy had sole control of the meter so it was the party in the best position to monitor it, and fix it, if need be. 
As to the final factor, the court did find that Entergy filed its motions in good faith, but this was not enough to overcome the damage of the other three factors, and so the motions were denied.
Canopy Financial
Canopy Financial had entered bankruptcy in November 2009 after it was discovered that its two co-founders had misappropriated over $90 million from investors and customers.  While the co-founders pled guilty to federal fraud charges and were sentenced to over 10 years in prison each (with one committing suicide the day before he was to report to prison), Canopy’s chapter 11 case was converted to a chapter 7 within months and the bankruptcy trustee attempted to recover what he could for the benefit of the estate’s creditors. 
First, he recovered over $50 million by seizing assets purchased by the co-founders with the misappropriated funds, including two 2010 Range Rover SUVs, two 2009 Bentleys, a 2008 Lamborghini, a 2010 Lamborghini, a 2009 Rolls Royce Phantom, a 2009 Aston Martin DBS, and a 2009 Ferrari 430, as well as the mansion they were stored in. 
Then, the trustee then turned to avoiding fraudulent conveyances.  The co-founders’ spending spree had encompassed not only extravagant cars, but also good times in Vegas, including over $80,000 they spent at the nightclub Tao, owned by Buddha.  The bankruptcy trustee did not seem to think that Canopy had received “reasonable value” (much less any value at all) in exchange for the money spent by the co-founders at Tao, and filed a complaint to avoid the over $80,000 in payments. 
Buddha failed to respond to the complaint or summons, or to the ensuing motion for default judgment, and Buddha also failed to appeal the ensuing default judgment.  Buddha asserted that it had not received any of these filings, all of which had been sent to its registered agent in Carson City.
Buddha’s motion was filed under Bankruptcy Rule 9024(b)(1) (incorporating Federal Civil Procedure Rule 60(b)(1)), which permits relief from a judgment due to excusable neglect.  The Seventh Circuit looked at “all relevant circumstances” for the delay and focused, as was the case in Majestic, on the length of the delay and the reason for the delay.  The court concluded that Buddha had the burden of providing evidence that its neglect was excusable and that it had failed to meet that burden.
The affidavits in support of Buddha’s motion were from two managers and described no “independent recollection” of receiving the complaint or summons, but were silent on whether they ever received the default motion.  Thus, the court determined that, for all it knew, Buddha had received the default motion and done nothing – and this neglect could not be excused.
Turning to the complaint and summons, as well as default judgment, the court stated that there were seven possibilities for what might have happened:

(1) they never reached the agent,

(2) they reached the agent, but he did not send them to Buddha,

(3) the agent sent them to Buddha, but they got lost,

(4) they reached Buddha, but were not routed to the right people,

(5) they reached the right people, but not those who wrote the affidavits,

(6) they reached the affiants, who did nothing but forgot, or

(7) they reached the affiants, who did nothing but lied about it.

The court found that the first, second, third, or fourth options might constitute excusable neglect, but only if Buddha provided further evidence to show that that is in fact what happened.  If the documents never reached the agent, that would be excusable, but Buddha provided no evidence that the agent never received the documents.  If the agent did not send them to Buddha, that might be excusable if Buddha had retained a competent service, but not “if it was trying to get by on the cheap”.  If the documents were sent to Buddha but got lost, that might be excusable if Buddha was requiring the agent to use a trackable shipping service.  Finally, if the documents reached Buddha’s mailroom and were addressed to the correct individual but were misrouted, then that might be excusable.
Having failed to provide evidence that any of these were the case, the court held that Buddha had not met its burden and its motion was denied.
Conclusion
These two decisions affirm that not every court will be lenient in finding excusable neglect.  They also serve as a reminder that any party seeking relief under the excusable neglect standard must act quickly to remedy a missed deadline once it is discovered and must support a request with evidence demonstrating why the mistake is excusable.