Creditors Take Heed

Three months later, in October 2001, American Classic filed for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Hefta's attorney received a notification of the Debtors that directed creditors to file proofs of claim with the appointed claims agent, Logan & Company (Logan). On Feb. 7, 2002, Hefta's counsel wrote a letter to Logan requesting a proof of claim form. The letter also stated that Hefta “worked on the S/S Delta Queen and was injured on June 29, 2000″ and that he “has a claim against the debtor.”

On March 18, 2002, the Bankruptcy Court entered an order setting a claims bar date for April 30, 2002 (the Bar Date). Logan then sent Hefta and his attorney a notice of the Bar Date and a proof of claim form on March 27, 2002. Neither Hefta nor his attorney filed the proof of claim form prior to the Bar Date.

Lower Court Proceedings

Hefta filed a motion for relief from the automatic stay with the Bankruptcy Court on Aug. 1, 2002 to pursue his personal injury claim against the debtor. The next day, the Debtors filed an objection to the motion on the grounds that that the Bar Date had passed, and that Hefta no longer had a claim to pursue. Hefta's attorney claimed that he first learned that the Bar Date had passed when he was served with the Debtors' objection. On Aug. 18, 2002, Hefta's counsel filed a motion seeking an extension of time to file a proof of claim for “excusable neglect” under Bankruptcy Rule 9006(b)(1). Hefta's counsel also asserted that his Feb. 7, 2002 letter to Logan constituted an informal proof of claim. The Bankruptcy Court denied both motions, and the District Court affirmed the Bankruptcy Court on both orders. at 130.

Third Circuit's Analysis

The Third Circuit reviewed de novo question of law as to whether Hefta's Feb. 7, 2002 letter constituted an informal proof of claim, and reviewed the Bankruptcy Court's ruling regarding the existence of excusable neglect on an abuse of discretion standard. Id.

The court first revisited First Nat'l Bank of Woodbury v. West (In re Thompson), 227 F. 981 (3d Cir. 1915), where the Third Circuit originally addressed the requirements of a proof of claim. Id. In Thompson, the court was asked to determine whether a letter from a bank to the receiver in bankruptcy, stating that the debtor was indebted to the bank for $20,000, was sufficient to constitute a valid proof of claim. The court found that the letter was only a statement that the bank was a creditor, and that no claim could have even been made against the estate because the estate had not yet come into being (the letter was sent 6 days before the debtor was adjudged bankrupt). The court held that the letter from the bank failed to qualify as a proof of claim because the letter failed to state a demand against the estate and failed to state the creditor's intention to hold the estate liable.

The court noted that subsequent to Thompson, a number of other Courts of Appeals have adopted a “slightly more exacting” five-part test for determining the sufficiency of a proof of claim. Id. (citing Barlow v. M.J. Waterman & Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604, 609 (6th Cir. 2000); Nikoloutsos v. Nikoloutsos (In re Nikoloutsos), 199 F.3d 233, 236 (5th Cir. 2000); In re Reliance Equities, Inc., 966 F.2d 1338, 1345 (10th Cir. 1992)). Under the five-part test, a document will qualify as an informal proof of claim only if a court finds the following: 1) the document is in writing; 2) it contains a demand by the creditor on the bankruptcy estate; 3) it expresses an intent to hold the debtor liable for the debt; 4) it is filed with the bankruptcy court, and; 5) given the particular facts surrounding the case, it would be equitable to treat the document as a proof of claim. Id. at 131. The Third Circuit found that the five-part test was consistent with the holding in Thompson and a “modern formulation” of the holding in that case, even if it was more comprehensive than the requirements set forth in Thompson. Id. The additional requirements are justified by the fact that cases today are “of a scale and complexity unforeseen in 1915″ at the time when Thompson was decided. Id. The Third Circuit further stated that the five-part test was consistent with the Bankruptcy Rules governing proofs of claims (including informal proofs of claim), and that Thompson would be superseded to the extent the five-part test was not consistent with Thompson. The Third Circuit reasoned that the five-part test was consistent with Rule 3001(a), which defines a proof of claim as “a written statement setting forth a creditor's claim”, and also consistent with Rule 5005(a)(1), which provides that, with certain exceptions, proofs of claim are to be filed with the clerk of the bankruptcy court. See Fed. R. Bankr. P. 5005(a)(1).

Before applying the five-part test, the Third Circuit noted that the substantive requirements of a proof of claim cannot be significantly relaxed for “informal” proofs of claims. Id. “The distinction between formal and informal proofs of claim refers only, as the terms suggest, to their form, not their substance.” Id. (quoting Fed. R. Bankr. P. 5005(a)(1)) The Third Circuit found that the Feb. 7, 2002 letter to Logan failed to satisfy the five-part test for an informal proof of claim. The court stated that the letter failed the second prong of the five-part test, ie, that the alleged claim contains a demand on the estate. It was not sufficient for Hefta merely to state that he had a claim against the Debtors arising from a work injury in order for the letter to qualify as a demand. The letter should have informed the Debtors as to “the existence, nature and amount of the claim (if ascertainable).” Id.

According to the court, the alleged “demand” contained in the February 7, 2002 letter failed to inform the Debtors of either the nature of Hefta's injury or the amount of the claim. Id. The court was not persuaded that Hefta's letters, viewed in their totality, qualified as an informal proof of claim. The court noted that although Hefta's July 2001 letter described the basic circumstances of Hefta's injury, there was no reason for Logan to read Hefta's Feb. 7, 2002 letter to Logan in connection with that pre-petition letter directed to Hefta's employer. Id. at 133.

The Third Circuit declared that the Feb. 7, 2002 letter would have been deficient even if it had referenced the earlier letter, because the 2001 letter would not have apprised the Debtors of the “true nature and magnitude” of Hefta's claim. The July 2001 letter simply notified American Classic that Hefta was represented by counsel. The Third Circuit found that the foregoing notices did not amount to an informal proof of claim.

Excusable Neglect

Hefta argued that even if the court did not find that the letters constituted an informal proof of claim, the court could still accept the late claim because of excusable neglect. Citing the Supreme Court's decision in Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380 (1993), the Third Circuit laid out the following four factors for courts to consider in determining whether a late claim may be permitted for excusable neglect: 1) prejudice to the debtors; 2) length of delay and its potential impact on judicial proceedings; 3) the reason for delay, including whether it was within the reasonable control of the movant; and 4) whether the movant acted in good faith. All four factors must be considered and balanced, with no factor taking precedence over another. In finding that no excusable neglect existed in this case, the Third Circuit relied most heavily on the third Pioneer factor, finding that Hefta's delay was entirely avoidable and within his control. Id. at 134. Also, in applying the first and second Pioneer factors, the Third Circuit concluded that the Debtors would be prejudiced by exposure to a late claim and that the length of the delay would have a substantial impact on the bankruptcy proceedings because Hefta filed his motion for relief from the automatic stay two days after the Debtors had filed their plan of reorganization. Thus, the negligence of Hefta and his counsel was inexcusable and the Third Circuit declined to allow Hefta to file a late proof of claim.

Conclusion

By its decision in Hefta, the Third Circuit has joined the Fifth Circuit, In re Nikoloutsos, 199 F.3d 233 (5th Cir. 2000), the Sixth Circuit, Barlow v. M.J. Waterman & Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604 (6th Cir. 2000), and the Tenth Circuit, In re Reliance Equities, Inc., 966 F.2d 1338 (10th Cir. 1992), in adopting the five part test for determining whether an informal proof of claim should be deemed to satisfy the requirements of Bankruptcy Rules 3001 and 5005. The Third Circuit's decision to adopt the five-part test previously adopted by the Fifth, Sixth and Tenth Circuits will provide greater guidance to debtors within the Third Circuit in determining whether an informal proof of claim should be accepted as a proof of claim. From the perspective of the unfortunate creditor who failed to timely file a proof of claim, the five-part test should provide better guidance as to whether the fight with the debtor to salvage the claim is worth the effort.

The United States Court of Appeals for the Third Circuit in Hefta v. Official Comm. of Unsecured Creditors (In re Am. Classic Voyages Co.), 405 F.3d 127 (3d Cir. 2005), recently addressed the issue of whether informal proofs of claim may satisfy a creditor's obligation to file a proof of claim under Rules 3001 and 5005 of the Federal Rules of Bankruptcy Procedure. The court held that a letter sent by the creditor's attorney to the debtor's claims agent stating that the creditor had sustained a workplace injury and had a claim against the debtor did not qualify as a proof of claim to satisfy Bankruptcy Rules 3001 and 5005. The court held that the bankruptcy court properly denied the employee's motion for relief from the automatic stay to prosecute his claim and the motion to file a late claim.

Background

Scott Hefta was an employee of the Delta Queen riverboat. While working on the riverboat in June 2000, he sustained personal injuries. 405 F.3d at 129. The vessel was owned and operated by American Classic or its subsidiary, Delta Queen Steamboat Company (“American Classic” or the “Debtors”). Hefta reported the injury to American Classic the day immediately following his injury. He then retained counsel, and the attorney sent American Classic a letter dated June 15, 2001, to advise it of Hefta's injury and claim. American Classic acknowledged receipt of the letter on July 19, 2001. Id.

Three months later, in October 2001, American Classic filed for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Hefta's attorney received a notification of the Debtors that directed creditors to file proofs of claim with the appointed claims agent, Logan & Company (Logan). On Feb. 7, 2002, Hefta's counsel wrote a letter to Logan requesting a proof of claim form. The letter also stated that Hefta “worked on the S/S Delta Queen and was injured on June 29, 2000″ and that he “has a claim against the debtor.”

On March 18, 2002, the Bankruptcy Court entered an order setting a claims bar date for April 30, 2002 (the Bar Date). Logan then sent Hefta and his attorney a notice of the Bar Date and a proof of claim form on March 27, 2002. Neither Hefta nor his attorney filed the proof of claim form prior to the Bar Date.

Lower Court Proceedings

Hefta filed a motion for relief from the automatic stay with the Bankruptcy Court on Aug. 1, 2002 to pursue his personal injury claim against the debtor. The next day, the Debtors filed an objection to the motion on the grounds that that the Bar Date had passed, and that Hefta no longer had a claim to pursue. Hefta's attorney claimed that he first learned that the Bar Date had passed when he was served with the Debtors' objection. On Aug. 18, 2002, Hefta's counsel filed a motion seeking an extension of time to file a proof of claim for “excusable neglect” under Bankruptcy Rule 9006(b)(1). Hefta's counsel also asserted that his Feb. 7, 2002 letter to Logan constituted an informal proof of claim. The Bankruptcy Court denied both motions, and the District Court affirmed the Bankruptcy Court on both orders. at 130.

Third Circuit's Analysis

The Third Circuit reviewed de novo question of law as to whether Hefta's Feb. 7, 2002 letter constituted an informal proof of claim, and reviewed the Bankruptcy Court's ruling regarding the existence of excusable neglect on an abuse of discretion standard. Id.

The court first revisited First Nat'l Bank of Woodbury v. West (In re Thompson), 227 F. 981 (3d Cir. 1915), where the Third Circuit originally addressed the requirements of a proof of claim. Id. In Thompson, the court was asked to determine whether a letter from a bank to the receiver in bankruptcy, stating that the debtor was indebted to the bank for $20,000, was sufficient to constitute a valid proof of claim. The court found that the letter was only a statement that the bank was a creditor, and that no claim could have even been made against the estate because the estate had not yet come into being (the letter was sent 6 days before the debtor was adjudged bankrupt). The court held that the letter from the bank failed to qualify as a proof of claim because the letter failed to state a demand against the estate and failed to state the creditor's intention to hold the estate liable.

The court noted that subsequent to Thompson, a number of other Courts of Appeals have adopted a “slightly more exacting” five-part test for determining the sufficiency of a proof of claim. Id. (citing Barlow v. M.J. Waterman & Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604, 609 (6th Cir. 2000); Nikoloutsos v. Nikoloutsos (In re Nikoloutsos), 199 F.3d 233, 236 (5th Cir. 2000); In re Reliance Equities, Inc., 966 F.2d 1338, 1345 (10th Cir. 1992)). Under the five-part test, a document will qualify as an informal proof of claim only if a court finds the following: 1) the document is in writing; 2) it contains a demand by the creditor on the bankruptcy estate; 3) it expresses an intent to hold the debtor liable for the debt; 4) it is filed with the bankruptcy court, and; 5) given the particular facts surrounding the case, it would be equitable to treat the document as a proof of claim. Id. at 131. The Third Circuit found that the five-part test was consistent with the holding in Thompson and a “modern formulation” of the holding in that case, even if it was more comprehensive than the requirements set forth in Thompson. Id. The additional requirements are justified by the fact that cases today are “of a scale and complexity unforeseen in 1915″ at the time when Thompson was decided. Id. The Third Circuit further stated that the five-part test was consistent with the Bankruptcy Rules governing proofs of claims (including informal proofs of claim), and that Thompson would be superseded to the extent the five-part test was not consistent with Thompson. The Third Circuit reasoned that the five-part test was consistent with Rule 3001(a), which defines a proof of claim as “a written statement setting forth a creditor's claim”, and also consistent with Rule 5005(a)(1), which provides that, with certain exceptions, proofs of claim are to be filed with the clerk of the bankruptcy court. See Fed. R. Bankr. P. 5005(a)(1).

Before applying the five-part test, the Third Circuit noted that the substantive requirements of a proof of claim cannot be significantly relaxed for “informal” proofs of claims. Id. “The distinction between formal and informal proofs of claim refers only, as the terms suggest, to their form, not their substance.” Id. (quoting Fed. R. Bankr. P. 5005(a)(1)) The Third Circuit found that the Feb. 7, 2002 letter to Logan failed to satisfy the five-part test for an informal proof of claim. The court stated that the letter failed the second prong of the five-part test, ie, that the alleged claim contains a demand on the estate. It was not sufficient for Hefta merely to state that he had a claim against the Debtors arising from a work injury in order for the letter to qualify as a demand. The letter should have informed the Debtors as to “the existence, nature and amount of the claim (if ascertainable).” Id.

According to the court, the alleged “demand” contained in the February 7, 2002 letter failed to inform the Debtors of either the nature of Hefta's injury or the amount of the claim. Id. The court was not persuaded that Hefta's letters, viewed in their totality, qualified as an informal proof of claim. The court noted that although Hefta's July 2001 letter described the basic circumstances of Hefta's injury, there was no reason for Logan to read Hefta's Feb. 7, 2002 letter to Logan in connection with that pre-petition letter directed to Hefta's employer. Id. at 133.

The Third Circuit declared that the Feb. 7, 2002 letter would have been deficient even if it had referenced the earlier letter, because the 2001 letter would not have apprised the Debtors of the “true nature and magnitude” of Hefta's claim. The July 2001 letter simply notified American Classic that Hefta was represented by counsel. The Third Circuit found that the foregoing notices did not amount to an informal proof of claim.

Excusable Neglect

Hefta argued that even if the court did not find that the letters constituted an informal proof of claim, the court could still accept the late claim because of excusable neglect. Citing the Supreme Court's decision in Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership , 507 U.S. 380 (1993), the Third Circuit laid out the following four factors for courts to consider in determining whether a late claim may be permitted for excusable neglect: 1) prejudice to the debtors; 2) length of delay and its potential impact on judicial proceedings; 3) the reason for delay, including whether it was within the reasonable control of the movant; and 4) whether the movant acted in good faith. All four factors must be considered and balanced, with no factor taking precedence over another. In finding that no excusable neglect existed in this case, the Third Circuit relied most heavily on the third Pioneer factor, finding that Hefta's delay was entirely avoidable and within his control. Id. at 134. Also, in applying the first and second Pioneer factors, the Third Circuit concluded that the Debtors would be prejudiced by exposure to a late claim and that the length of the delay would have a substantial impact on the bankruptcy proceedings because Hefta filed his motion for relief from the automatic stay two days after the Debtors had filed their plan of reorganization. Thus, the negligence of Hefta and his counsel was inexcusable and the Third Circuit declined to allow Hefta to file a late proof of claim.

Conclusion

By its decision in Hefta, the Third Circuit has joined the Fifth Circuit, In re Nikoloutsos, 199 F.3d 233 (5th Cir. 2000), the Sixth Circuit, Barlow v. M.J. Waterman & Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604 (6th Cir. 2000), and the Tenth Circuit, In re Reliance Equities, Inc., 966 F.2d 1338 (10th Cir. 1992), in adopting the five part test for determining whether an informal proof of claim should be deemed to satisfy the requirements of Bankruptcy Rules 3001 and 5005. The Third Circuit's decision to adopt the five-part test previously adopted by the Fifth, Sixth and Tenth Circuits will provide greater guidance to debtors within the Third Circuit in determining whether an informal proof of claim should be accepted as a proof of claim. From the perspective of the unfortunate creditor who failed to timely file a proof of claim, the five-part test should provide better guidance as to whether the fight with the debtor to salvage the claim is worth the effort.