A group of creditors learned the hard way that there may be no excuse for a late claim. U.S. Bankruptcy Judge James Peck of the Southern District of New York recently disallowed seven proofs of claim that had been filed late in the Lehman bankruptcies. Judge Peck held that the reasons cited by the parties for the late filing did not rise to the level of “excusable neglect” and he was thus disallowing their claims. This is of particular interest as it comes out of the Southern District of New York, which has one of the largest bankruptcy dockets in the country.
The Bankruptcy Code requires bankruptcy courts to set a bar date by which proofs of claim must be filed by creditors. Rule 9006(b)(1) of the Bankruptcy Rules does allow for late claims to be filed due to “excusable neglect.” Courts generally apply four factors in determining excusable neglect:
The Second Circuit (comprising the states of New York, New Jersey and Connecticut), in applying these four factors looks primarily at the third factor, most specifically whether the delay was in the reasonable control of the movant. This has been characterized as a “hard line” test in which the Second Circuit wants to know the circumstances surrounding the delay so that they may be evaluated.
Applying these standards to the seven movants who filed late proofs of claim and alleged excusable neglect in the Lehman bankruptcies, the Bankruptcy Court held that mistakes made by the parties’ counsel do not constitute excusable neglect. The Court also ruled that creditors who failed to carry out proper diligence in discovering or protecting their rights could not assert excusable neglect. In one party’s case, the creditor did not realize it might have a claim until too late because of its counsel’s flawed analysis of a contract; in another situation, a creditor’s confusion as a result of a proposed trade of certain notes between it and another party did not constitute excusable neglect. In these and other instances, the Bankruptcy Court ruled that proper diligence on the parties’ behalf would have discovered these issues and proofs of claim could have been filed timely; the fact that this was not done was under the control of the particular parties and the “inexcusable neglect” resulted from a lack of oversight and internal operational errors of the organizations.
Other Circuits are not as strict as the Second Circuit. For example, the Eleventh Circuit, comprised of Florida, Georgia and Alabama, has applied the four-part test to determine that there is excusable neglect when a party did not realize it had a claim until after the deadline, even though the claimant was aware of the underlying facts that constituted the proof of claim.
Claim filing can be treacherous. If the claim was not timely filed, the standards of determining excusable neglect vary significantly by jurisdiction. There are certain steps that a creditor should take to protect its interests. To discuss how to protect your rights please contact Don Workman (202.861.1602 or ), Chris Giaimo (202.861.1672 or ) or Adam Smith (202.861.1661 or ). If you’d like a copy of the Court’s opinion in Lehman, please let us know.
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