Providing proper notice to existing and potential creditors is an important consideration for debtors’ counsel. A seminal Supreme Court decision established that due process for “unknown” claimants is generally satisfied by publication notice, so long as it is reasonably calculated to reach such creditors under the circumstances. As covered extensively on this blog here, here and here, sufficiency of publication notice is a fact-specific inquiry that can make a difference in whether the debtor is or is not liable for certain claims. 
Several of the recent decisions we’ve covered have delved into what type of publication satisfies due process, how many times the notice should be published, and how electronic forms of notice may supplement (or even replace) print notice. But when is a creditor “unknown,” so that the debtor can notice that creditor by publication? A recent decision from the Bankruptcy Court for the Eastern District of Virginia goes back to basics and discusses who exactly should be reading their newspaper to avoid having their claims barred by a debtor’s confirmed plan.
In Board v. AMF Bowling Worldwide, Inc. (In re AMF Bowling Worldwide, Inc.), the bankruptcy court considered the motion of a claimant, Emiko Board, to file an administrative claim against the reorganized debtors approximately nine months after confirmation of the debtors’ chapter 11 plan and seven months after the deadline set by the court for filing administrative claims in the reorganized debtors’ bankruptcy cases.
In January 2013, Board was struck by a vehicle operated by an intoxicated minor who was allegedly served alcohol at a bowling alley that AMF operated in Texas. The incident occurred after the commencement of AMF’s bankruptcy cases and before the effective date of AMF’s chapter 11 plan. In March 2013, the Texas Alcoholic Beverage Commission (“TABC”) launched an investigation into the Texas bowling alley to determine whether AMF sold alcohol to a minor and, if so, how the incident might impact the bowling alley’s liquor license. TABC visited the bowling alley three times before closing its investigation in April 2013. The investigator later testified at deposition that at one of the visits, he informed the bowling alley’s general manager of Board’s identity and the nature of the injuries she sustained. The information, however, did not appear anywhere in the investigator’s contemporaneous notes, or in the report he prepared at the conclusion of his investigation. The investigator also testified that at no point did he provide any AMF representative with any other information about Board, nor did he ever tell an AMF representative that Board was considering suing AMF. In addition, the investigation did not concern any liability the intoxicated minor or AMF’s bowling alley might have to Board.
Almost a year later (and after the chapter 11 plan became effective), Board filed suit against AMF in Texas state court alleging several causes of action arising out of the January 2013 accident. AMF sought to have the suit dismissed, arguing that Board’s claims should be deemed discharged because she failed to file an administrative claim prior to the administrative claims bar date. The Texas court stayed the action until the bankruptcy court determined whether Board was entitled to assert her claims against AMF.
The issue before the bankruptcy court was whether Board was an “unknown” creditor who received constitutionally sufficient publication notice of the administrative claims bar date in the case, and, therefore, was enjoined from asserting her untimely-filed administrative expense claim against the reorganized debtors.
At the outset, the court distinguished between known and unknown claimants: “‘[k]nown creditors . . . include claimants whose identities are actually known to the debtor, as well as claimants whose identities are ‘reasonably ascertainable’ to the debtor.’” A creditor is “reasonably ascertainable” if the debtor can uncover the identity of that creditor through “reasonably diligent efforts,” which should focus on a careful examination of the debtor’s books and records. On the other hand, “unknown” creditors are those claimants “whose identity or claim is wholly conjectural” or “whose interests or whereabouts [the debtor] could not with due diligence” ascertain. Distinguishing between known and unknown creditors involves a fact-intensive analysis of the totality of the circumstances in each case.
In its analysis, the bankruptcy court looked to a concurrence in a Fourth Circuit decision, In re J.A. Jones, Inc., which provides a number of factors to consider when determining if a creditor is known or unknown: (1) whether the litigation was filed against the debtor prior to the bar date; (2) whether the creditor and its attorneys ever mentioned to the debtor that the creditor might bring suit; (3) whether there was any communication of any sort between the creditor and debtor; and (4) whether the creditor had any pre-existing relationship with the debtor “through contract, correspondence, or course of dealing.”
Here, Board did not file her state court action until after the administrative claims bar date, which weighed in favor of the reorganized debtors. There was also no evidence that Board or any of her attorneys had any type of contact with AMF before the bar date, let alone to apprise AMF that she might file suit. Thus, the second and third factors also weighed in favor of the reorganized debtors. The only communication regarding Board’s identity came from the TABC investigator, but the court found it highly speculative whether the investigator’s passing comment to the bowling alley’s general manager made AMF aware of Board’s identity. Even so, there was no reason for the general manager to have concluded that AMF might have any liability to Board as a result of the incident, and the investigator never mentioned that Board intended to sue AMF. The court determined its conclusion might have been different if the investigator had delivered a letter to an AMF representative identifying and/or describing Board and her claim against AMF. The fourth factor – the absence of any preexisting relationship between Board and the reorganized debtors (i.e., no mention of her name anywhere in the debtors’ books and records) – also weighed in favor of the reorganized debtors. Thus, Board was not able to satisfy any of the J.A. Jones factors, and due process did not require that she receive actual notice.
Finally, the court emphasized the need to balance notification of potential claimants with the prompt and effectual administration and settlement of the estate. Requiring the type of sweeping investigation that would have been necessary in order to ascertain Board’s identity would have been costly, time-consuming, and detrimental to existing creditors and the bankruptcy process as a whole. Under the circumstances, publication notice was appropriate and struck a balance between the needs of potential claimants and the interests of existing creditors.
As an alternative, even if she received constitutionally sufficient notice, the court could have given Board an extension of time to file an application for payment of her administrative expense claim if the court found her failure to timely file a claim was a result of excusable neglect. In considering whether Board met the factors for excusable neglect, the court found the balance of equities strongly supported not delaying distributions to unsecured creditors in favor of the unliquidated personal injury claim of one creditor. The court cited Board’s delay in filing suit (which was entirely within her control), the prejudice the reorganized debtors would suffer if they had to litigate the claim, and the length of delay that would transpire if Board were permitted to file her administrative claim. Accordingly, Board could not prove excusable neglect, and her application for payment of her administrative claim was denied.
The outcome in this case is not surprising, but serves as a helpful guide to some of the issues that can arise when litigating objections to late-filed claims. It is also interesting to note that the reorganized debtors published notice once in each of the Wall Street Journal and the Richmond Times Dispatch. Board argued that notice to unknown creditors served via publication in a nationally circulated newspaper is no longer sufficient to satisfy due process, but does not appear to have argued that the reorganized debtors should have published notice more broadly in locations where unknown creditors might be located — for example, in a Texas newspaper with circulation in the county where AMF’s bowling alley was located.
As other posts here have cautioned, notice under the circumstances must be carefully planned to minimize any issues that may arise with potential claimants in the future.