What Constitutes 'Proper' Notice?

Proper notice is a hallmark of all bankruptcy proceedings. If a creditor or party-in-interest has no notice of a particular matter, many courts have ruled that the creditor or party-in-interest will not be bound by a particular court's determination. The Fifth Amendment to the Constitution provides that “no person shall … be deprived of life, liberty, or property, without due process of law … .”

Thus, without providing creditors and parties-in-interest with adequate notice of, say, the bar date or the deadline to file a proof of claim, those creditors and parties-in-interest may not be bound by the bar date and their rights will not be cut off. Similarly, in connection with a sale of assets under section 363 of the Bankruptcy Code, if creditors, including lienholders, were not provided sufficient notice of a sale motion, such creditors may not be bound by the sale approval order.

Known vs Unknown Creditors

The requirements for constitutional notice to creditors in a bankruptcy case may be satisfied in several distinct ways, depending on whether a particular creditor is known or unknown. With respect to known creditors, courts have held that a creditor's constitutional right to due process is not violated if the creditor received actual notice of the action to be taken. Additionally, due process may be satisfied by providing “notice reasonably calculated under all of the circumstances, to apprise the interested parties of the pendency of the action and afford them an opportunity to present their objections.” United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 272 (2010). The courts have made clear that “process that may be constitutionally sufficient in one setting may be insufficient in another.” SLW Capital LLC v. Mansaray-Ruffin (in re Mansaray-Ruffin), 530 F.3d 230, 239 (3rd Cir. 2008). This article discusses what “notice reasonably calculated” means.

The foregoing applies to known creditors, for example where the debtor knows the identity and mailing address of the creditors. Conversely, unknown creditors are those with claims that are “not readily ascertainable” or are merely “conceivable, conjectural or speculative.” In re BGI, Inc., 476 B.R. 812, 823 (Bankr. S.D.N.Y. 2012), appeal dismissed as equitably moot, 772 F.3d 102 (2d Cir. 2014). If creditors are unknown, a court can authorize alternative forms of constructive notice such as publication of the relevant relief sought, deadline, and/or hearing date in newspapers, on web pages or via social media. See Fed. R. Bankr. Pro. 2001(l) and 9008. Constructive publication notice has been held to be constitutionally permissible for unknown creditors. Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 317-18 (1950).

The Bankruptcy Rules

Bankruptcy Rule 9014(b) requires that notice of motions seeking various forms of relief under the Bankruptcy Code must be provided in the same manner as service of a summons and complaint provided for in Bankruptcy Rule 7004. Bankruptcy Rule 7004(b)(1) requires service upon an individual to be made by first-class mail postage prepaid to the individual's dwelling house or usual place of abode, or to the place where the individual regularly conducts business or a profession. Concerning a domestic or foreign corporation, Bankruptcy Rule 7004(b)(3) requires service to be sent by first-class mail postage prepaid “to the attention of an officer, a managing or general agent, or to another agent authorized … by law to receive service of process … .” Thus, although a creditor has a due process right to receive notice of a bankruptcy proceeding that would for example, implicate such creditor's property interest in a lien, a “[v]iolation of the Bankruptcy Rules does not … automatically create a due process violation.” Jacoby v. BAC Home Loans Servicing LP, 477 B.R. 533, 541 (D.N.J. 2012).

While best practice is to provide notice of the relief being sought to the President or Chief Legal Officer of a corporation impacted by such relief, and to list such person's name (where known) and not just his or her title, some courts have held that if the package does not contain the officer's name, service is still valid because such notice was reasonably calculated to advise the creditor of the relief sought. See, e.g., In re Braden, 516 B.R. 672, 676 (Bankr. S.D. Ga. 2014).

A related issue arises when an attorney appears on behalf of a client in a bankruptcy case — the question in such a scenario is whether service on just the attorney sufficient. The answer to date from courts is “it depends.” If the attorney appears through the bankruptcy court's electronic service system known as ECF, some courts have held it is adequate to serve only the attorney, and indeed some bankruptcy courts have enacted local rules that describe (but limit) the circumstances in which service on the attorney alone is adequate and instances where the client must also be served (in addition to the attorney) in accordance with Bankruptcy Rule 7004(b).

For instance, in In re C.P. Hall Company, 513 B.R. 546 (Bankr. N.D. Ill. 2014), the court held that “[i]n bankruptcy, an attorney's authority to accept service in an adversary proceeding can be implied from the level of his participation in the underlying bankruptcy case. Courts have held repeatedly that an attorney who has actively represented a party in the bankruptcy case is implicitly authorized to receive service for that party in a related adversary proceeding.” Id. at 552 (citation omitted).

A Recent Case

In a recent decision, In re Robert Alan Maizus and Beverly Rachel Porway, 2016 WL 7013462 (D.N.J. Nov. 30, 2016), Green Tree Servicing LLC (Green Tree) asserted that the debtors owed it in excess of $600,000. This debt was evidenced by a note secured by a mortgage executed in favor of Green Tree's predecessor. During the course of the bankruptcy case, Green Tree filed two separate proofs of claim, each designating that notice regarding the claim should be sent to a specific post-office box. Each proof of claim was also signed by an individual named Kara Taylor as Green Tree's “Bankruptcy Representative.” Id. at *1-2. Subsequently, an attorney appeared on behalf of Green Tree by filing a response to the debtor's objection to Green Tree's proof of claim. Id. at *2.

Several years later, the debtor filed a motion seeking to sell the underlying real property. Debtor's counsel filed a certification of service stating that Green Tree was served at both P.O. Boxes listed on its proofs of claim, as well as the P.O. Box set forth in the debtor's original schedules. Id. Green Tree's counsel also received electronic notice of the motion through the court's ECF system. Id. Green Tree failed to oppose the debtor's motion to sell the real estate and a subsequent motion filed by the debtor concerning how the proceeds from the sale should be distributed. Id. In connection with the second motion, debtor's counsel not only served Green Tree at the two P.O. Boxes identified in Green Tree's proofs of claim, but also sent the motion to Green Tree's counsel by email and facsimile. Id. Subsequently, Green Tree's counsel advised debtor's counsel that she no longer represented Green Tree in the matter, yet that attorney remained counsel of record and had never filed a substitution of counsel or a withdrawal of appearance as counsel for Green Tree in the debtor's bankruptcy proceedings. Id.

After the closing on the sale of the real property to unrelated good-faith purchasers, Green Tree filed a motion seeking to vacate the sale order, and asserted that because Green Tree's constitutional due process rights were violated by Green Tree failing to receive reasonable notice from the debtor of the relief sought, the sale order should be vacated. Id. at *4.

The bankruptcy court held that the debtor's efforts to serve Green Tree “while arguably not in compliance with Bankruptcy Rule 7004, were reasonably calculated to give Green Tree notice at two or more P.O. Box addresses that Green Tree provided to the Court and to counsel for the Debtor.” The bankruptcy court also noted that counsel of record for Green Tree was served. Id. at *3. The court also expressed real concern for the impact of Green Tree on the bona fide purchasers, and thus denied its motion. Id.

District Court Ruling

On appeal, the purchasers argued that the appeal was moot under Bankruptcy Code Section 363(m) because they were good-faith purchasers who had relied on the sale order, and Green Tree failed to request or seek a stay pending appeal. The district court held that Green Tree's appeal was in fact statutorily moot, but noted that because Green Tree collaterally attacked the sale order and argued that “constitutionally mandated due process requirements for notice and an opportunity to be heard” trumped the Bankruptcy Code's interest in finality, it would nevertheless address the merits of Green Tree's argument. Id. at *5.

The district court rejected Green Tree's arguments and affirmed the bankruptcy court's decision denying Green Tree's motion to vacate the sale order. The district court held that Green Tree was provided with proper service of process pursuant to Bankruptcy Rule 7004(b)(3) because the debtor mailed the notices to the address which the creditor voluntarily designated as the address upon which it was to be served. Id. at *6-7.

While those notices were not mailed to the attention of an “officer” or “agent” or a specific person by name on the package, the court held that in light of: 1) the notices mailed; and 2) Green Tree's counsel's receipt of the ECF notice of the filing of the motion, notice was reasonably calculated under all of the circumstances of the case to give Green Tree notice of the pendency of the motion and an opportunity to present any objections to the motion. Id. at *6.

Thus, the district court determined that the debtor's efforts to serve Green Tree with notice of the motion on distribution of the sale proceeds were reasonably calculated to provide Green Tree with notice of the pendency of the motion and, therefore, passed muster under applicable law and the Constitution. Id. *7-8.

Conclusion

The take-away from this decision is that when a creditor files a proof of claim listing its address for service, it needs to ensure that it promptly and effectively reviews all bankruptcy and other court-related notices received at the address (including P.O. boxes) listed in order to respond promptly. Likewise, the creditor and its counsel must be sure that counsel promptly provides its client with all notices of motions or other pleadings that may affect a creditor's property interests or other rights. Failure to provide such notice could result in the irreparable loss of potentially value rights and/or property interests.

*****
Bruce Buechler is a member of Lowenstein Sandler LLP. Reach him at [email protected]. The views expressed in this article are solely those of the author and do not reflect those of Lowenstein Sandler LLP or any of its clients.

Proper notice is a hallmark of all bankruptcy proceedings. If a creditor or party-in-interest has no notice of a particular matter, many courts have ruled that the creditor or party-in-interest will not be bound by a particular court's determination. The Fifth Amendment to the Constitution provides that “no person shall … be deprived of life, liberty, or property, without due process of law … .”

Thus, without providing creditors and parties-in-interest with adequate notice of, say, the bar date or the deadline to file a proof of claim, those creditors and parties-in-interest may not be bound by the bar date and their rights will not be cut off. Similarly, in connection with a sale of assets under section 363 of the Bankruptcy Code, if creditors, including lienholders, were not provided sufficient notice of a sale motion, such creditors may not be bound by the sale approval order.

Known vs Unknown Creditors

The requirements for constitutional notice to creditors in a bankruptcy case may be satisfied in several distinct ways, depending on whether a particular creditor is known or unknown. With respect to known creditors, courts have held that a creditor's constitutional right to due process is not violated if the creditor received actual notice of the action to be taken. Additionally, due process may be satisfied by providing “notice reasonably calculated under all of the circumstances, to apprise the interested parties of the pendency of the action and afford them an opportunity to present their objections.” United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 272 (2010). The courts have made clear that “process that may be constitutionally sufficient in one setting may be insufficient in another.” SLW Capital LLC v. Mansaray-Ruffin (in re Mansaray-Ruffin), 530 F.3d 230, 239 (3rd Cir. 2008). This article discusses what “notice reasonably calculated” means.

The foregoing applies to known creditors, for example where the debtor knows the identity and mailing address of the creditors. Conversely, unknown creditors are those with claims that are “not readily ascertainable” or are merely “conceivable, conjectural or speculative.” In re BGI, Inc., 476 B.R. 812, 823 (Bankr. S.D.N.Y. 2012), appeal dismissed as equitably moot, 772 F.3d 102 (2d Cir. 2014). If creditors are unknown, a court can authorize alternative forms of constructive notice such as publication of the relevant relief sought, deadline, and/or hearing date in newspapers, on web pages or via social media. See Fed. R. Bankr. Pro. 2001(l) and 9008. Constructive publication notice has been held to be constitutionally permissible for unknown creditors. Mullane v. Cent. Hanover Bank & Trust Co. , 339 U.S. 306, 317-18 (1950).

The Bankruptcy Rules

Bankruptcy Rule 9014(b) requires that notice of motions seeking various forms of relief under the Bankruptcy Code must be provided in the same manner as service of a summons and complaint provided for in Bankruptcy Rule 7004. Bankruptcy Rule 7004(b)(1) requires service upon an individual to be made by first-class mail postage prepaid to the individual's dwelling house or usual place of abode, or to the place where the individual regularly conducts business or a profession. Concerning a domestic or foreign corporation, Bankruptcy Rule 7004(b)(3) requires service to be sent by first-class mail postage prepaid “to the attention of an officer, a managing or general agent, or to another agent authorized … by law to receive service of process … .” Thus, although a creditor has a due process right to receive notice of a bankruptcy proceeding that would for example, implicate such creditor's property interest in a lien, a “[v]iolation of the Bankruptcy Rules does not … automatically create a due process violation.” Jacoby v. BAC Home Loans Servicing LP , 477 B.R. 533, 541 (D.N.J. 2012).

While best practice is to provide notice of the relief being sought to the President or Chief Legal Officer of a corporation impacted by such relief, and to list such person's name (where known) and not just his or her title, some courts have held that if the package does not contain the officer's name, service is still valid because such notice was reasonably calculated to advise the creditor of the relief sought. See, e.g., In re Braden, 516 B.R. 672, 676 (Bankr. S.D. Ga. 2014).

A related issue arises when an attorney appears on behalf of a client in a bankruptcy case — the question in such a scenario is whether service on just the attorney sufficient. The answer to date from courts is “it depends.” If the attorney appears through the bankruptcy court's electronic service system known as ECF, some courts have held it is adequate to serve only the attorney, and indeed some bankruptcy courts have enacted local rules that describe (but limit) the circumstances in which service on the attorney alone is adequate and instances where the client must also be served (in addition to the attorney) in accordance with Bankruptcy Rule 7004(b).

For instance, in In re C.P. Hall Company, 513 B.R. 546 (Bankr. N.D. Ill. 2014), the court held that “[i]n bankruptcy, an attorney's authority to accept service in an adversary proceeding can be implied from the level of his participation in the underlying bankruptcy case. Courts have held repeatedly that an attorney who has actively represented a party in the bankruptcy case is implicitly authorized to receive service for that party in a related adversary proceeding.” Id. at 552 (citation omitted).

A Recent Case

In a recent decision, In re Robert Alan Maizus and Beverly Rachel Porway, 2016 WL 7013462 (D.N.J. Nov. 30, 2016), Green Tree Servicing LLC (Green Tree) asserted that the debtors owed it in excess of $600,000. This debt was evidenced by a note secured by a mortgage executed in favor of Green Tree's predecessor. During the course of the bankruptcy case, Green Tree filed two separate proofs of claim, each designating that notice regarding the claim should be sent to a specific post-office box. Each proof of claim was also signed by an individual named Kara Taylor as Green Tree's “Bankruptcy Representative.” Id. at *1-2. Subsequently, an attorney appeared on behalf of Green Tree by filing a response to the debtor's objection to Green Tree's proof of claim. Id. at *2.

Several years later, the debtor filed a motion seeking to sell the underlying real property. Debtor's counsel filed a certification of service stating that Green Tree was served at both P.O. Boxes listed on its proofs of claim, as well as the P.O. Box set forth in the debtor's original schedules. Id. Green Tree's counsel also received electronic notice of the motion through the court's ECF system. Id. Green Tree failed to oppose the debtor's motion to sell the real estate and a subsequent motion filed by the debtor concerning how the proceeds from the sale should be distributed. Id. In connection with the second motion, debtor's counsel not only served Green Tree at the two P.O. Boxes identified in Green Tree's proofs of claim, but also sent the motion to Green Tree's counsel by email and facsimile. Id. Subsequently, Green Tree's counsel advised debtor's counsel that she no longer represented Green Tree in the matter, yet that attorney remained counsel of record and had never filed a substitution of counsel or a withdrawal of appearance as counsel for Green Tree in the debtor's bankruptcy proceedings. Id.

After the closing on the sale of the real property to unrelated good-faith purchasers, Green Tree filed a motion seeking to vacate the sale order, and asserted that because Green Tree's constitutional due process rights were violated by Green Tree failing to receive reasonable notice from the debtor of the relief sought, the sale order should be vacated. Id. at *4.

The bankruptcy court held that the debtor's efforts to serve Green Tree “while arguably not in compliance with Bankruptcy Rule 7004, were reasonably calculated to give Green Tree notice at two or more P.O. Box addresses that Green Tree provided to the Court and to counsel for the Debtor.” The bankruptcy court also noted that counsel of record for Green Tree was served. Id. at *3. The court also expressed real concern for the impact of Green Tree on the bona fide purchasers, and thus denied its motion. Id.

District Court Ruling

On appeal, the purchasers argued that the appeal was moot under Bankruptcy Code Section 363(m) because they were good-faith purchasers who had relied on the sale order, and Green Tree failed to request or seek a stay pending appeal. The district court held that Green Tree's appeal was in fact statutorily moot, but noted that because Green Tree collaterally attacked the sale order and argued that “constitutionally mandated due process requirements for notice and an opportunity to be heard” trumped the Bankruptcy Code's interest in finality, it would nevertheless address the merits of Green Tree's argument. Id. at *5.

The district court rejected Green Tree's arguments and affirmed the bankruptcy court's decision denying Green Tree's motion to vacate the sale order. The district court held that Green Tree was provided with proper service of process pursuant to Bankruptcy Rule 7004(b)(3) because the debtor mailed the notices to the address which the creditor voluntarily designated as the address upon which it was to be served. Id. at *6-7.

While those notices were not mailed to the attention of an “officer” or “agent” or a specific person by name on the package, the court held that in light of: 1) the notices mailed; and 2) Green Tree's counsel's receipt of the ECF notice of the filing of the motion, notice was reasonably calculated under all of the circumstances of the case to give Green Tree notice of the pendency of the motion and an opportunity to present any objections to the motion. Id. at *6.

Thus, the district court determined that the debtor's efforts to serve Green Tree with notice of the motion on distribution of the sale proceeds were reasonably calculated to provide Green Tree with notice of the pendency of the motion and, therefore, passed muster under applicable law and the Constitution. Id. *7-8.

Conclusion

The take-away from this decision is that when a creditor files a proof of claim listing its address for service, it needs to ensure that it promptly and effectively reviews all bankruptcy and other court-related notices received at the address (including P.O. boxes) listed in order to respond promptly. Likewise, the creditor and its counsel must be sure that counsel promptly provides its client with all notices of motions or other pleadings that may affect a creditor's property interests or other rights. Failure to provide such notice could result in the irreparable loss of potentially value rights and/or property interests.

*****
Bruce Buechler is a member of Lowenstein Sandler LLP. Reach him at [email protected]. The views expressed in this article are solely those of the author and do not reflect those of Lowenstein Sandler LLP or any of its clients.