Menu    3 ABR 220 
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA


Case No. 3-86-00142-HAR
In Chapter 11

In re D & A SUPERMARKETS, INC.,

Debtor(s)     

ADV PROC NO 3-86-00142-001-HAR

(BANCAP No. N/A)

MEMORANDUM GRANTING PARTIAL SUMMARY JUDGMENT TO THE KPB

 

 

D & A SUPERMARKETS, INC.,

Plaintiff(s)     

v.

KENAI PENINSULA BOROUGH, a municipal corporation,

Defendants(s)     

KENAI PENINSULA BOROUGH, a municipal corporation,

Third-Party Plaintiff      

v.

RANDALL FRANK,

Third-Party Defendants      

1. PROCEDURE AND RULING - D & A Supermarkets, Inc., the reorganized debtor, filed this adversary proceeding to ask for: (a) a declaration that the discharge injunction under § 524(a) of the Bankruptcy Code was violated by the Kenai Peninsula Borough (the KPB) when it attempted, after confirmation of a chapter 11 plan, to collect certain post-petition, pre-confirmation (i.e., administrative expense) sales taxes, (b) an injunction against further collection activity by the KPB, and (c) sanctions. A little over $30,000.00 is involved. Cross-motions for summary judgment have been filed.

I will enter a partial summary judgment in favor of the KPB that it did not violate the discharge injunction under the facts of this case. Its administrative claim is not barred by the KPB's failure to request payment of an administrative expense claim or a proof of claim within 30 days of the effective date of D & A's confirmed plan as provided in the plan. Any failure to file such a request within the 30 day period provided in the plan is excusable neglect under FRBP   TOP      3 ABR 221  9006(b)(1) at a minimum.

2. FACTS- On February 23, 1988, D & A confirmed its Third Amended Plan after about six months of negotiating and contesting with its major creditors. In the original plan and all versions up to the Third Amended Plan there was a provision like Paragraph IX of the confirmed plan which provided:

    All persons having claims entitled to priority under 11 USC § 507(a)(1) shall file a proof of claim within thirty (30) days after the effective date of the plan; EXCEPT those claims which require approval of the bankruptcy court, which claims shall be deemed timely filed when approved by the court. Any claim not so filed will be a tardily filed claim pursuant to 11 USC § 726(a)(3).
>No notice of confirmation was sent by the court as required by FRBP 3020(c). No separate notice of confirmation or of the 30-day bar date provided in Paragraph IX of the confirmed plan was sent by the debtor or the court.

The plan provided that $100,000 would be set aside to pay all required administrative expense "prorata." KBP claims that unpaid administrative expenses for sales tax were due to it at the time of confirmation and have never been paid. The KPB did not file a "proof of claim" or a request for payment as provided in § 503(a) of the Bankruptcy Code. The debtor was aware of a claim for post-petition sales taxes which the KPB asserted prior to confirmation, but was uncertain as to the exact amount.

Over four years after confirmation, on May 13, 1992, the KPB filed a Superior Court action in Kenai, Alaska, Kenai Peninsula Borough v. D & A Supermarkets, Inc., Case No. 3KN-92-454 Civil, seeking to collect the taxes and penalties. After the KPB refused to drop the lawsuit, D & A brought the present adversary proceeding in bankruptcy court for an alleged violation of § 524(a)(2) of the Bankruptcy Code. D & A also sought a declaration that the debt was discharged, as well as punitive and exemplary damages.

The KPB, has brought a third-party action in this adversary proceeding against Randall Frank, a principal of D & A.

The parties filed cross-motions for summary judgment. The KPB alleged that it never had proper notice of the confirmation hearing and that it was immune from damages under the doctrine of sovereign immunity. It claimed that summary judgment should be granted on the issue of liability for the taxes. D & A moved for summary judgment on the grounds of discharge under §§ 524(a)(2) and 1141 of the Bankruptcy Code.

  TOP      3 ABR 222 

3. ANALYSIS- Although not specifically cited by the KPB, I find that it should have summary judgment on the grounds of excusable neglect under FRBP 9006(b)(1). Pioneer Investment Services v. Brunswick Associates Limited Partnership, 113 SCt 1489 (1993). The rule provides for enlargement of time:

    (b)(1) In General. Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of the court, the court for cause shown may at any time in its discretion (1) with or without motion or notice order the period enlarged if the request therefor is made before the expiration of the period originally prescribed or as extended by previous order or (2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.

See, Koger and True, The Final Word on Excusable Neglect?, 98 Comm LJ 21 (Spring 1993) for a discussion on the open questions left by Pioneer Investment.

D & A relies on the general rule that the confirmation of a chapter 11 plan discharges all pre-confirmation claims, including administrative claims. In re Benjamin Coal Co., Inc., 978 F2d 823, 827 (3rd Cir 1992). But, administrative claims are required to be paid in cash on the effective date unless there is another agreement. § 1129(a)(9)(A) of the Bankruptcy Code. Thus, the KPB is entitled to enforce its right to the payment equivalent to the discharged administrative claim which it was given by 11 USC § 1129(a)(9)(A). Whether it is the administrative claim or a mirror image created after the discharge of the administrative claim is of no real consequences. The question is whether the KBP lost its rights due to its own failure to take the necessary steps to keep its claim active.

Although I decide this matter on excusable neglect grounds, the deficiency of the notice to the KPB raises a due process question that merits some comment. An administrative claimant in this case would have had to have been extraordinarily diligent to know the precise bar date for requesting payment of administrative claims. The plan provides that the bar date for filing an administrative expense claim was 30 days after the effective date of the plan (or, about March 25, 1988). Prior to the confirmation order being signed in February, 1988, there were a number of hearings on confirmation in 1987 and 1988 and the process was dragged out many months while the debtor negotiated with its major creditors. To boot, no notice of the confirmation was given through the   TOP      3 ABR 223  fault of the court.

Even had a notice of confirmation been sent by the clerk, an administrative expense claimant would have thus had to astutely: (a) relate the plan provision in Paragraph IX stating the need to file an administrative claim by a certain date after confirmation which was buried in the bowels of D & A's plan which had been circulated months before the final confirmation hearing with (b) a subsequent notice sent by the clerk pursuant to FRBP 3020(c) which merely would have notified all interested parties that a plan had been confirmed. This is akin to no notice at all in the due process sense.

If the D & A wants to take advantage of a rule which relies in part upon proper notice, it is incumbent on it to assure that notice was given. Compare, Reliable Electric Co., Inc. v Olson Construction Co., 726 F2d 620, 622 (10 Cir 1984).

D & A's plan became effective under its terms when the order of confirmation became final, or sometime in early March, 1988. As an administrative claimant, the KPB was effectively denied due process by failing to receive some type of specific notice at the beginning of the running of the bar date and how long it had to respond. Cf, In re Hobdy, 130 BR 318, 320 (9th Cir BAP 1991).

There is a trend in recent cases holding that notices buried in the body of chapter 13 plans are not sufficient notice for res judicata purposes. See, for example, Matter of Howard, 972 F2d 639 (5th Cir 1992) and In re Hobdy. Both of these cases are chapter 13 cases which denied res judicata effect to confirmed plans which provided in their bodies for the reduction of the secured claims of certain creditors who had filed proofs of claims. Both courts found that just providing for such treatment in the plan was not sufficient notice of the intent to modify the secured claims. Rather, they were entitled to have a contested matter brought against them pursuant to rules like FRBP 3007 or 3012 in which the notice would be more individualized and likely to capture the creditor's attention.

The basis of my decision, however, is not the lack of due process, but that the KPB is entitled to claim relief for excusable neglect. The Supreme Court resolved a conflict among the Circuits regarding the proper standard to use in applying the excusable neglect exception under FRBP 9006(b)(1) in Pioneer Investment. One view was to strictly construe allowance of the exception unless the movant could show failure to meet the deadline was beyond the reasonable control of the movant. The Supreme Court, in a 5-4 decision, adopted a more liberal   TOP      3 ABR 224  standard, adopting a modified version of the test of In re Dix, 95 B.R. 134 (9th Cir BAP 1988).

Dix at 138 proposed a five part test to determine if excusable neglect existed:

    (1) whether granting the delay will prejudice the debtor; (2) the length of the delay and its impact on efficient court administration; (3) whether the delay was beyond the reasonable control of the person whose duty it was to perform; (4) whether the creditor acted in good faith; and (5) whether clients should be penalized for their counsel's mistake or neglect.
The Supreme Court adopted the Dix approach, except for the fifth factor. Pioneer Investment at 1499.

Applying the first four Dix factors to this case, I find that (1) the delay does not prejudice the D & A since it essentially got a $30,000+ loan from the KPB by not having to pay its administrative expense in cash shortly after confirmation, (2) although the delay was a long one (almost to the point of the statute of limitations running), it does not negatively impact efficient court administration; (3) it was, in a sense, beyond the reasonable control of the KPB since it never got proper notice of the deadline (which by itself might, on due process grounds, be sufficient to defeat D & A's complaint against the KPB); (4) the KPB appears to have acted in good faith since it was not trying to gain an advantage, but to merely get paid what was due it.

One of the basis for finding excusable neglect in the Pioneer Investment case was that counsel, who had filed a tardy claim, was excused because the notice of the bar date was not prominently displayed nor did it clearly explain the significance of the notice.   TOP      3 ABR 225  Id at 1500. This is analogous to the D & A situation where, if there was any notice at all, it was buried in the documents and required an extraordinary attention to the progress of the case. My experience is that many creditors mentally write-off claims in bankruptcy. An inconspicuous or boilerplate notice is easily missed.

    The Supreme Court cautioned, however, that

    This is not to say, of course, that respondents' counsel was not remiss in failing to apprehend the notice. To be sure, were there any evidence of prejudice to petitioner or to judicial administration in this case, or any indication at all of bad faith, we could not say that the Bankruptcy Court abused its discretion in declining to find the neglect to be "excusable." In the absence of such a showing, however, we conclude that the unusual form of notice employed in this case requires a finding that the neglect of respondents' counsel was, under all the circumstances, "excusable."

Id at 1500. Thus, there may be cases where the excusable neglect relief is not available if the delay unduly impacts other creditors or the debtor in a manner that would derail the reorganization or other equitable reasons exist to deny its application.

Summary judgment should be granted to the KPB that it did not violate the discharge injunction by bringing the Superior Court action to collect the unpaid taxes which accrued during the chapter 11 case. The taxes are not discharged, and the KPB is not enjoined from seeking to collect them.

All other matters raised by the motions for summary judgment are either mooted by this decision regarding excusable neglect (for example, the KPB argument about sovereign immunity), or are not ripe for summary judgment.

    DATED: August 4, 1993

                HERBERT A. ROSS
                Bankruptcy Judge