Opinion
Case No. 99-31737DWS
February 6, 2003
COUNSEL FOR DEBTOR, Aris Karalis, Esquire, CIARDI, MASCHMEYRE KARALIS, PC, Philadelphia, PA.
COUNSEL FOR AFG INDUSTRIES, INC., Kenneth F. Carobus, Esquire MORRIS ADELMAN, P.C., Philadelphia, PA.
COUNSEL FOR PACKAGING SVCS. OF MD. INC., Scott R. Lipson, Esquire, Allentown, PA.
COUNSEL FOR TRUSTEE, Jeffrey M. Carbino, Esquire, KLETT, ROONEY, LIEBER SCHORLING, Philadelphia, PA.
CHAPTER 7 TRUSTEE, Gary Seitz, Esquire, Philadelphia, PA.
UNITED STATES TRUSTEE, Dave P. Adams, Esquire, Office of the U.S. Trustee, Philadelphia, PA.
MEMORANDUM OPINION
Before the Court are two related motions: the Omnibus Objection of Gary F. Seitz, Chapter 7 Trustee (the "Trustee's Objection") to the proof of claim filed in this involuntary Chapter 7 case by Packaging Services of Maryland, Inc. ("Packaging"), and the Motion of AFG, Industries, Inc. ("AFG") to Allow Proof of Claim (the "AFG Motion"). For the reasons that follow, the Trustee's Objection is denied and the AFG Motion is granted.
BACKGROUND
On September 15, 1999, this Chapter 7 case was instituted by an Involuntary Petition filed by five creditors (the "Petitioning Creditors") of Cavalier Industries, Inc. (the "Debtor"), including Packaging and AFG. The Involuntary Petition form lists all of the Petitioning Creditors, along with the "Nature of Claim" and "Amount of Claim" of each. Both Packaging and AFG listed the nature of their claims as "goods sold and delivered" and asserted claim amounts of $96,988.59 and $714,793.09, respectively. Involuntary Petition at 2.
I shall take judicial notice of the docket entries in this case. Fed.R.Evid. 201, incorporated in these proceedings by F.R.Bankr.P. 9017.See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir. 1991); Levine v. Egidi, 1993 WL 69146, at *2 (N.D. Ill. 1993); In re Paolino, 1991 WL 284107, at *12 n. 19 (Bankr. E.D. Pa. 1991);see generally In re Indian Palms Associates, Ltd., 61 F.3d 197 (3d Cir. 1995).
While a court may not take judicial notice sua sponte of facts contained in the debtor's file that are disputed, In re Augenbaugh, 125 F.2d 887 (3d Cir. 1942), it may take judicial notice of adjudicative facts "not subject to reasonable dispute . . . [and] so long as it is not unfair to a party to do so and does not undermine the trial court's factfinding authority." In re Indian Palms Assoc., 61 F.3d 197, 205 (3d Cir. 1995) ( citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules)).
The first meeting of creditors was scheduled for February 24, 2000. Thus, pursuant to F.R.Bankr.P. 3002(c), proofs of claim were due no later than May 24, 2000 (the "Bar Date"). For unexplained reasons, both Packaging and AFG failed to file proofs of claim before the Bar Date. Packaging filed Proof of Claim No. 49 on September 21, 2001. On October 24, 2002, the Trustee filed the Trustee's Objection stating that Packaging's proof of claim was not timely filed pursuant to Bankruptcy Rule 3002. At that time, AFG had not yet filed a proof of claim. Perhaps recognizing the possible applicability of the Trustee's Objection to its own situation, it acted affirmatively and on November 12, 2002, filed the AFG Motion, asserting that the Involuntary Petition constitutes a judicially recognized "informal" proof of claim. AFG subsequently filed a "formal" proof of claim (Proof of Claim No. 54), i.e., in accordance with the requirements of Bankruptcy Rule 3001, on November 25, 2002.
The Trustee's Objection actually contests the allowance of twenty-two (22) separate proofs of claim, including the claim of Packaging. The other claims addressed by the Trustee's Objection have been resolved, leaving only the allowability of Packaging's proof of claim to be determined.
On November 25, 2002, at a hearing on the Trustee's Objection, Packaging raised the same argument as AFG did in its Motion, namely that the Involuntary Petition it submitted as a Petitioning Creditor constitutes an informal proof of claim. As both Packaging and the AFG raise this same defense to challenges to untimely filed formal proofs of claim, it was agreed that the two contested matters would be briefed and then considered together. The memoranda of law having been filed, the issue is ripe for adjudication.
The creditors are represented by the same counsel.
DISCUSSION
Proofs of claim must be filed, in Chapter 7 cases, "within 90 days after the first date set for the meeting of creditors called pursuant to § 341(a) of the Code" with certain exceptions not relevant here. F.R.Bankr.P. 3002(c). The limitations period, or Bar Date, for filing proofs of claim in this Chapter 7 case was May 24, 2000. The Bar Date may not be enlarged by the Court outside of the limitations of Rule 3002. F.R.Bankr.P. 9006(b)(3). An unsecured creditor who tardily files a proof of claim is relegated to a lower priority in the distribution of the property of the estate, that is after payment of timely claims. 11 U.S.C. § 726(a)(1)-(3). The Trustee now seeks to subordinate the claims of Packaging and AFG to those unsecured creditors that filed timely proofs of claim. While conceding that their formal proofs of claim are untimely, Packaging and AFG contend that the Involuntary Petition is an informal proof of claim. Being the first document filed in this bankruptcy case, if it is so treated, clearly it would be timely under Rule 3002(c).
That is the specific request in the Trustee's Objection, which addresses only the proof of claim of Packaging. The Trustee's response to the AFG Motion, filed before AFG's proof of claim, simply requests that the AFG Motion be denied. The consequence of such denial would be a judicial determination that the claim would not be allowed as requested (i.e. as a timely filed claim) and the Trustee would be able to successfully assert that ruling as an objection to AFG's subsequently filed proof of claim.
The concept of an informal proof of claim has been long recognized in this circuit, see In re Thompson, 227 F. 981 (3d Cir. 1915), and arises from the liberality that courts have accorded to amendment of proofs of claims that do not comply with the formal requirements of Bankruptcy Rule 3001. In re Ungar, 70 B.R. 519, 521 (Bankr. E.D. Pa. 1987). If there is a timely filed informal proof of claim, a formal proof of claim filed after the bar date may act as an amendment to the informal proof of claim and relate back to this filing and be deemed timely. Id. See also In re Petrucci, 256 B.R. 704, 707 (Bankr. D. N.J. 2001); In re Dauer, 165 B.R. 146, 147 (Bankr. D. N.J. 1994); In re Wilbert Winks Farm, Inc., 114 B.R. 95, 98 (Bankr. E.D. Pa. 1990). But what constitutes an informal proof of claim? In Thompson, the Court of Appeals for the Third Circuit enunciated two criteria:
Whether formal or informal, a claim must show (as the word itself implies) that a demand is made against the estate, and must show the creditor's intention to hold the estate liable.
227 F. at 983. The Court of Appeals has not specifically addressed the requirements of an informal proof of claim since Thompson. Nonetheless, I have no reason to believe it is not still the law of this circuit.
Nonetheless, at least as to one additional element, it can be implied from later cases that such a claim must also be written. In re Pigott, 684 F.2d 239, (3d Cir. 1982) (recognizing implicit rejection of oral statements as informal proof of claim in In re Supernit, 186 F.2d 130 (3d Cir. 1950)).
The Trustee, however, advances a five-part test recently utilized by one of my colleagues within this circuit, namely that an informal proof of claim must: (1) be in writing; (2) contain a demand by the creditor on the estate; (3) express an intent to hold the debtor liable for the debt; (4) be filed with the bankruptcy court; and (5) be justified in light of the facts and equities of the case. In re Petrucci, 256 B.R. at 706. See also Agassi v. Planet Hollywood Intern., Inc., 269 B.R. 543, 550 (D. Del. Nov 13, 2001) (following Petrucci). While this test had previously been adopted by some circuit courts, see, also In re M.J. Waterman Assoc., 227 F.3d 604 (6th Cir. 2000); In re Nikoloutsos, 199 F.3d 233 (5th Cir. 2000), the Trustee cites no authority for this circuit. See also 9 Collier on Bankruptcy ¶ 3001.05[2] at 3001-13 to 14 (Lawrence P. King, ed., 15th revised ed. 2002) ("Many courts have given five elements . . . while other courts have set an even less stringent standard, and have merely required an assertion of liability and an intent to hold the estate liable"). In any case, while I am not persuaded as to the correctness of the Trustee's proposed test, my decision does not turn on that issue since the Involuntary Petition qualifies as an informal proof of claim even under the expanded criteria.
It appears that this test was first articulated in In re McCoy, 44 B.R. 215, 217-18 and n. 11 (Bankr. W.D. Ky 1984), which compiled these factors from a review of cases in other jurisdictions, including Thompson, and cautioned that these factors "are not stricti juris . . . They merely state broad general guidelines, judicially formulated." Id. at 18. See also 9 Collier on Bankruptcy ¶ 3001.05[2] at 3001-13, n. 33 (Lawrence P. King, ed., 15th revised ed. 2002).
While the Petrucci court cites a number of cases in this circuit for support of the five part test, my review of those cases shows that they actually apply the two-part test of Thompson: See In re Penn State Clothing Corp., 205 B.R. 62, 64-65 (Bankr. E.D. Pa. 1997) ( citing In re Dauer, 165 B.R. 146, 147 (Bankr. D. N.J. 1994)); Grubb v. Pittsburgh Nat'l Bank, 169 B.R. 341, 347-48 (Bankr. W.D. Pa. 1994); In re Claremont Towers Co., 175 B.R. 157, 165-66 (Bankr. D. N.J. 1994); Wilbert Winks Farm, Inc., 114 B.R. 95, 97 (Bankr. E.D. Pa. 1990). I do note that inPenn State Clothing, Claremont Towers and Wilbert Winks, the courts agreed that the proper standard is the two-part Thompson test but nevertheless added the requirement that the claim be in the form of a pleading filed with the bankruptcy court. The authority for the additional requirement was not stated nor was the form of the claim an issue in the cases. In Thompson, a letter to the bankruptcy receiver was found not to qualify as an informal proof of claim not because it had not been filed with the court but rather because it was transmitted before the debtor was adjudicated a bankruptcy and the estate created. Accordingly, it could not be found to be a "demand against the estate" or evidence that the secured creditor (which could also rely solely on its lien) "intended to hold the estate liable," the two Thompson criteria. Because of the timing of the letter, the Court did not have to reach the acceptability of its form and offered no guidance on that issue. In any event, it is clear from those cases that the Petrucci factor five (justification in light of facts and equities) upon which the Trustee relies here has not been embraced in this circuit.
The Involuntary Petition is a written document and it was filed with the bankruptcy court, thus satisfying the first and fourth factors of the Trustee's test. The second and third factors are identical to theThompson criteria, namely a demand on the estate and an expressed intent to hold the estate liable. Here, Packaging and AFG are clearly listed on the Involuntary Petition as Petitioning Creditors, and the Involuntary Petition clearly states both the nature and amount of their claims. This information, along with the very fact that they are Petitioning Creditors who literally forced the Debtor into this Court, make it abundantly clear that a demand is being made against the estate and that the creditors making that demand intend to hold the estate liable. I am not alone in reaching this conclusion. See In re Wilbert Winks Farms, 114 B.R. at 97;Willard v. O'Neal (In re Willard), 240 B.R. 664, 667 (Bankr. D. Conn. 1999) (both finding an involuntary petition meets, among other things, the criteria enunciated in Thompson).
Thus, under Thompson, I need go no further since an Involuntary Petition meets its criteria of an informal proof of claim.
As to the fifth factor, in a case cited by the Trustee, In re M.J. Waterman Assoc., 227 F.3d 604 (6th Cir. 2000), the Court of Appeals for the Sixth Circuit noted that the first four factors "are indicative only of the proposed claim's validity, while the fifth factor deals with the question of whether the amendment should be allowed once the informal proof of claim is determined to be valid." Id. at 609 (citation omitted). The Waterman court then upheld the bankruptcy court's exercise of discretion under the fifth factor in refusing to consider a creditor's "voluminous" motions to constitute informal proofs of claim which could be amended. In doing so, the court noted:
The practice of bankruptcy law is built on a foundation of providing proper notice to creditors, debtors, and the court and it is fraught with the perils and pitfalls of missed deadlines for its practitioners. The informal proof of claims process is an exception to the formalities of the Bankruptcy Code, but it is one which must operate within the confines of a system whose ultimate goal is the equitable and timely distribution of bankruptcy estates. We certainly understand the bankruptcy court's unwillingness to allow Barlow to state his demands with such imprecision that the court and the parties must wade through his multiple and lengthy pleadings to frame his exact demands. The bankruptcy court further expressed its belief that to allow Barlow to go back and formalize his claim would result in undue delay and prejudice to the debtor, whose primary interest is to settle the debts of the bankruptcy estate. We further note that Waterman's other creditors, who have adhered to the procedural requirements, also have an interest in the outcome of this matter, for if Barlow's claim is allowed, it will take twice as long for Waterman to discharge its debt to them.
Id. at 610-11. In Petrucci, the court held that allowing an adversary complaint to serve as an informal claim was equitable, addressing the prejudices asserted by the trustee: (1) although the debtor had died, other avenues of discovery were available for the trustee to determine the validity of the claim, and in any case the ultimate burden of proving the claim lay with the claimant; (2) while the trustee was not served with the complaint, service was not one of the test's five elements; and (3) reduction of the pool available for other unsecured creditors was irrelevant absent proof of detrimental reliance on receipt of a particular percentage. 256 B.R. at 707.
Looking to these cases, it appears that the justification required to be found under the fifth factor of the Petrucci test involves an examination of the impact of allowance on the estate and creditors. Will the debtor, the estate, or other creditors suffer any prejudice or delay in the administration of the estate as a result of the surprise of the claim? Is it fair to slow the bankruptcy case up so that the court can try to find an informal claim to which the latecomer can attach his formal proof of claim? Will the trustee have to go back and investigate the validity of this heretofore unexpected claim, resulting in a delay in the administration of the estate? These are the concerns raised by the fifth factor. Although disclaiming an obligation to undertake this inquiry, I will nonetheless address the arguments made by the Trustee herein.
First the Trustee asserts that allowing the claims of Packaging and AFG would significantly reduce the distribution to other unsecured creditors. Trustee's Objection ¶¶ 1, 14, 17, and 19. However thePetrucci court rejected this exact argument, finding that there is no such prejudice absent detrimental reliance by other creditors on receipt of a particular percentage. 256 B.R. at 707. I agree. As a general rule unsecured creditors are claimants of equal legal rank entitled only to share pro rata in whatever remains after payment of secured and priority claims. In re 266 Washington Associates, 141 B.R. 275, 282 (Bankr. E.D.N.Y. 1992). Indeed to accept the Trustee's argument would swallow the rule that allows late filed claims to amend informal proofs of claim since late filed claims will always reduce the distribution to other creditors in an insolvent Chapter 7 case. Here the Trustee has asserted no detrimental reliance by any creditor on a particular percentage but merely that each creditor will receive a smaller dividend by reason of the participation of these additional creditors in the distribution.
The Trustee asserts for the first time in his memorandum of law another argument, i.e., that the claims of Packaging and AFG should not be allowed, or alternatively they should be reduced, by virtue of the fact that Packaging and AFG have benefitted from the estate's settlement of preference claims asserted against them in related adversary actions. Memorandum of Law of [the Trustee] in Support of the Trustee's Objection (the "Trustee's Memorandum") at 9-11. The gravamen of this argument is that Packaging and AFG both asserted the same claims now sought as a "new value" defense to the Trustee's preference actions. Having received the benefit of keeping their preferences under the settlements, argues the Trustee, their proofs of claim should be deducted by the amounts that were sought against them under the preference actions.
The Trustee never even hinted at this argument in his objection to the Packaging claim or his objection to the AFG Motion or at the hearing. Where, as here, an arguments is raised for the first time in memoranda and does not allow the other party the opportunity to respond, courts are reluctant to even address such an argument. See e.g., In re Mall at One Associates, L.P., 185 B.R. 1009, 1015 (Bankr. E.D. Pa. 1995);In re Smith, 76 B.R. 426, 429-30 (Bankr. E.D. Pa. 1987). I see no harm in doing so here, however, given my conclusion. See infra. Moreover, while these matters were still under advisement, the creditors had the opportunity and filed a reply brief, though they chose not to address this argument.
The Bankruptcy Code provides that a trustee may not avoid certain transfers as preferential to the extent that the transfer was (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange. 11 U.S.C. § 547(c)(1).
As an initial matter, I note that this argument is not addressed to any prejudice stemming from the lateness of the formal proofs of claim, but rather attacks the validity of the claims themselves. It therefore seems to me that this argument is irrelevant under the fifth prong of the Trustee's proposed test. In any case, the Trustee has presented no evidence to support his assertion. In the context of formal proofs of claim, Bankruptcy Rule of Procedure 3001(f) provides that a proof of claim executed and filed in accordance with the rules of procedure constitutes prima facie evidence of the validity and amount of the claim. Amatex Corporation v. Aetna Casualty Surety Co., et al., 107 B.R. 856, 870 (E.D. Pa. 1989), aff'd, 908 F.2d 961 (3d Cir. 1990); In re Wall to Wall Sound Video, Inc., 151 B.R. 700, 701 (Bankr. E.D. Pa. 1993). The objecting party carries the burden of going forward with evidence in support of its objection which must be of probative force equal to that of the allegations of the creditor's proof of claim. "The objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claims legal sufficiency." In re Allegheny International, Inc., 954 F.2d 167, 173 (3d. Cir. 1992). If the objecting party succeeds in overcoming the prima facie effect of the proof of claim, the ultimate burden of persuasion then rests on the Claimant. Allegheny International, 954 F.2d at 174;Wall to Wall Sound, 151 B.R. at 701. Here I have found that the informal proofs of claim satisfy all the factors of the Trustee's proposed test that address the validity of the proofs of claim. Waterman, 227 F.3d at 609. It seems to me that the spirit of Rule 3001 therefore also accords the Involuntary Petition a prima facie effect which the Trustee should bear the initial burden of rebutting. Here, the Trustee has failed to put in any evidence supporting his allegations.
While Packaging and AFG did in fact raise the new value defense in their answers to the Trustee's complaints in the preference actions, the answers merely cite to the relevant statute. They do not identify the new value allegedly given. See Defendant's Answer to Complaint, Seitz v. Packaging, Adv. No. 01-0447 (Doc. No. 6); Seitz v. AFG, Adv. No. 01-0426 (Doc. No. 8). Nor do the settlement stipulations signed by the parties in the adversary actions make any mention of the proofs of claim asserted in the main bankruptcy case. Seitz v. Packaging, Adv. No. 01-0447 (Doc. Nos. 17-18); Seitz v. AFG, Adv. No. 01-0426 (Doc. Nos. 10-11). I simply have no way to tie the proofs of claim to the new value defenses in the adversary actions. Therefore, even if this new argument was a relevant consideration under the fifth factor, the Trustee has produced no evidence in support of it.
Court documents, filed as a matter of public record, are proper for judicial notice. See e.g., Gwynedd Properties, Inc. v. Lower Gwynedd Tp., 970 F.2d 1195, 1206 n. 18 (3d Cir. 1992) (district court may take judicial notice of court documents after giving both parties an opportunity to respond to ensure that its view of the state proceedings is a complete one) ( citing Fed.R.Evid. 201, incorporated in these proceedings by F.R.Bankr.P. 9017).
I also find this evidentiary deficiency to the Trustee's related argument, that Packaging waived its proof of claim as a result of its settlement of the adversary action against it. With respect to the adversary action against Packaging, the parties initially submitted a stipulation settling the matter for $4,000, with the caveat that the Trustee would not oppose Packaging's late filed proof of claim (the "First Stipulation"). Seitz v. Packaging, Adv. No. 01-0447 (Doc. No. 13). The Court scheduled a hearing on the First Stipulation. At the hearing I expressed my concern that the Trustee was not only abandoning a preference action, but waving his objection to a $96,000 proof of claim that appeared on its face untimely, all for the bargain price of $4,000. The possibility of an informal proof of claim was not before me at that hearing. The Trustee, anticipating my concern, came to that hearing armed with a new stipulation (the "Amended Stipulation") which was silent as to Packaging's proof of claim. Id. (Doc. No. 17). The Amended Stipulation simply settles the adversary for $4,000 and states that Packaging is preserving its rights pursuant to 11 U.S.C. § 502(h). I was satisfied with the Amended Stipulation and approved it by order, superceding the First Stipulation. Id. (Doc. No. 18).
Section 502(h) states that: "A claim arising from the recovery of property under section 522, 550, or 553 of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition."
Now the Trustee asserts that Packaging has waived its proof of claim by entering into the Amended Stipulation. Again, however, the Trustee presents no evidence of such waiver. Packaging was not present at the hearing and made no representation that it was abandoning its proof of claim. That Packaging reserved its right under § 502(h) only goes to its ability to submit a claim for the amount of the recovered preference, $4,000. Its proof of claim, which is separate and apart from the preference, is simply not addressed by the Amended Stipulation.
CONCLUSION
While Packaging and AFG may not have adhered to the formalities of Bankruptcy Rule 3001, their actions in filing the Involuntary Petition were sufficient to put the Court and Debtor on notice of their claims and their intention to hold the Debtor liable. This is all that is required in the Third Circuit. Even under the Trustee's proposed five-part test, the additional factors are met, including the equitable consideration factor. There is no legally cognizable prejudice to the estate or other creditors from allowing the amendment of valid informal proofs of claim that were timely asserted. The proofs of claim will be treated as amendments to the Involuntary Petition, which relate back to this informal proof of claim.
An order consistent with this Memorandum Opinion shall issue.
ORDER AND NOW, this 6th of February, 2003, upon consideration of the Omnibus Objection of Gary F. Seitz, Chapter 7 Trustee (the "Trustee") to the proof of claim filed in this involuntary Chapter 7 case (the "Trustee's Objection") and the Motion of AFG, Industries, Inc. ("AFG") to Allow Proof of Claim (the "AFG Motion"), after notice and hearing and for the reasons stated in the accompanying Memorandum Opinion;
It is hereby ORDERED and DECREED that:
The Trustee's Objection to Proof of Claim No. 49 is DENIED. Claim number 49 is an allowed unsecured claim;
The AFG Motion is GRANTED. Proof of claim No. 54 is an allowed unsecured claim.