Opinion
Case No. BR-00-03833,00-03840 through 00-03850-ECF-CGC.
March 30, 2005
Donald L. Gafhey, Steven D. Jerome, Joshua A. Rateazyk, SNELL WILMER LLP, Phoenix, AAZ, Attorneys for MicroAge, Inc.
Robert P. Harris, Lori L. Winkelman, QUARLES BRADY STREICH LANG LLP, Phoenix, AZ, Attorneys for ASM Capital, L.P.
UNDER ADVISEMENT DECISION RE: CREDITOR'S MOTION TO REOPEN CLOSED CASE
I. INTRODUCTION
Movant ASM Capital, L.P. ("ASM Capital"), a creditor and party-in-interest, seeks to reopen this case to require Debtor, MicroAge, Inc., ("Debtor") to pay to ASM Capital certain unpaid unsecured claims totaling approximately $114,116.40, plus interest, costs and fees. In a nutshell, the reorganized Debtor recovered significantly more than what it projected it would and than what it provided for in its Confirmed Plan. As a result, Debtor was able to pay all creditors on its Final Claims List in full with some interest. In addition, unclaimed funds from the Final Distribution left the Estate with approximately three million dollars, which Debtor requested, and received, authority to pay to members of the Plan Committee, the Liquidating Officer and Debtor's counsel as additional professional compensation.
II. BACKGROUND
Debtor filed for Chapter 11 bankruptcy on April 13, 2000. Post-petition, ASM Capital purchased twenty-four claims from pre-petition unsecured creditors of the MicroAge Estate. Of interest here are the claims of PCMAX, Inc. for $25,675 ("PCMAX), CM Excel, Inc. for $46,376 ("CM Excel"), and Macally Mace Group, Inc. for $67,305.30 ("Mace") (collectively referred to as the "Subject Claims"). Debtor alleges that ASM Capital paid approximately 12.5% of the face value of all the twenty-four claims.
When ASM Capital purchased the claims, it signed separate assignment agreements with each of the claim holders. The assignment agreements indicate ASM Capital purchased the Mace Claim on February 5, 2001, the CM Excel Claim on February 14, 2001, and the PCMAX claim on April 2, 2001. ASM Capital alleges that shortly thereafter it filed and mailed notices of its assumption of the claims "to, among others, counsel for MicroAge" pursuant to Bankruptcy Rule 3001(e)(2) and (4). ASM Capital alleges it sent these notices for the Mace and PCMAX claims on February 21, 2001, and for the CM Excel claim on April 18, 2001.
On July 10, 2001, shortly after ASM Capital purchased the claims, this Court confirmed Debtor's First Amended Plan of Reorganization ("Plan"). The Plan classified all of the claims ASM Capital purchased, including the Subject Claims, as Class 5 Unsecured Claims. Under the Plan, all distributions would be made on a pro rata basis, which the Plan defined as "the proportion that an Allowed Claim in a particular Class bears to the total amount of all Allowed Claims in that Class." The Liquidation Analysis attached to the Disclosure Statement projected a 19.8% to 28.1% return on the general unsecured claims, which included the Subject Claims.
In accordance with the Plan, Debtor made its First Interim Distribution on October 26, 2001, in the amount of 11.8% to all unsecured claim holders. ASM Capital received payment on each of its twenty-four claims, including the Subject Claims. Debtor's Second Interim Distribution was on February 24, 2002, in the amount of 7.8% to all unsecured claim holders. Under this Second Distribution, ASM Capital received distributions for only twenty-three of its twenty-four claims: It did not receive a distribution for the PCMAX claim.
Subsequently, on April 12, 2002, between the Second and Third Distributions, Debtor filed separate preference actions against CM Excel, PCMAX, and Mace, the original claim holders of the three Subject Claims. ASM Capital was not a named defendant in any of these adversaries and was not served a summons and complaint with respect to these actions. This Court entered default judgment against PCMAX on December 18, 2002, and against CM Excel on January 17, 2003.
The Mace preference action was allegedly settled by agreement, although whether settlement in this case was actually reached and properly approved is unclear. Debtor alleges that it settled its claim against Mace on May 30, 2003, and that pursuant to the terms of the settlement Mace agreed to waive all claims against the Estate. The Court has researched the matter itself and could not find any evidence that a settlement agreement was filed with or approved by this Court. The docket reflects that a "Stipulation for Dismissal of Adversary Proceeding with Prejudice" was filed, but that has apparently never been approved by this Court, as there is no order on the docket involving the stipulation. Further confusing the matter is the fact that the parties signed the Stipulation on June 17, 2003, but did not file it with the Court until over a year later on November 8, 2004. In fact, the docket indicates that this adversary proceeding is still open. The Court's decision in this matter renders these discrepancies irrelevant, however.
On June 26, 2002, after the adversaries were commenced, Debtor made its Third Interim Distribution in the amount of 3.8% to all unsecured claim holders. As a result of the preference actions, ASM Capital did not receive distributions on any of the Subject Claims. However, ASM Capital did receive distributions on its other twenty-one claims.
At this Court's direction, Debtor then published a notice of Impending Final Distribution on August 25, 2004, in the Wall Street Journal to inform the remaining claim holders that the Final Distribution "will materially and significantly exceed the projection contained in the Disclosure Statement and may result in payment of a substantial portion remaining on each Allowed Unsecured Claim." Debtor also mailed the notice to all claim holders of record and alleges that ASM Capital received actual notice through this mailing.
On October 4, 2004, Debtor filed a Final Claims List Motion with the Court and requested that the Court "authorize and direct the Liquidating Officer to pay pursuant to the Plan only the Allowed Class 5 General Unsecured Claims on the Final Claims List." The Final Claims List listed ASM Capital as the payee on twenty-one claims, but not on the three Subject Claims in accordance with the results obtained in the preference actions. Debtor alleges that ASM Capital received at least eleven copies of the Final Claims List Motion, a fact ASM Capital does not appear to dispute. The Court held three days of hearings on the Final Claims List Motion, at which time parties had the opportunity to and did raise objections to the Final Claims List Motion. This Court certified the Final Claims List on November 10, 2004. ASM Capital neither appeared at these hearings to object to the Final Claims List nor appealed the Order certifying the Final Claims List.
On October 6, 2004, Debtor filed a Motion for Approval of Final Report of Liquidating Officer, Modification of Provisions of Confirmed Plan of Reorganization to Effectuate Final Wind-Up, and Entry of Final Decree ("Final Motion"). This Court entered an Order approving the Final Motion on November 3, 2004: ASM did not appeal the Order and it became non-appealable on November 13, 2004. This Court then entered a Final Decree closing the MicroAge bankruptcy on December 2, 2004.
Some time between the entry of the Final Claims List and the Final Decree, ASM Capital contacted Debtor regarding the payment status of the Subject Claims and was informed that the Final Claims List was binding and could not be modified without a court order. ASM Capital did not object to the Final Decree until more than a month after the Court closed the bankruptcy case.
The Final Distribution left the Reorganized Debtor with approximately three million dollars in cash from unclaimed funds. Debtor intends to distribute this amount as additional interest to the remaining creditors. ASM Capital contends the case should be reopened and the monies used to pay the aggregate unpaid balance owing of $114,116.40 on these Subject Claims, plus interest, costs and fees. ASM Capital insists that reopening the case will not prejudice anyone because Debtor has an excess of unclaimed funds and has paid all of its creditors in full with interest. Debtor asserts the affirmative defense of laches.
III. DISCUSSION
ASM Capital seeks to reopen this case pursuant to 11 U.S.C. § 350(b), which allows a bankruptcy court to reopen a case "to administer assets, to accord relief to the debtor, or for other cause." The decision to reopen a case is within this Court's discretion and will only happen upon a showing of compelling circumstances. In re Pagan, 59 B.R. 394, 396 (D. Puerto Rico 1986). According to ASM Capital, this case should he reopened because it is "holding Allowed Claims in Class 5 of the Plan that have not been repaid, while similarly situated claims have been repaid in full. In addition, there appears to be unadministered assets . . . available to pay ASM Capital's Subject Claims."
The Court does not find these reasons compelling as required by section 350(b), especially when considered in light of two fatal errors made by ASM Capital in this case. ASM Capital's first critical error was failing to provide proper notice to Debtor that the Subject Claims had been transferred to it. While ASM Capital references in its Motion to Reopen three notices it allegedly filed with the Court and mailed to MicroAge pursuant to Rule 3001(e)(2) and (4), ASM Capital has not provided copies of these notices to the Court. This Court's independent review of the dockets in these consolidated cases, moreover, does not confirm such notices were in fact filed with the Court as required by Rule 3001. Without such proof, the Court cannot conclude that notice was in fact properly provided.
Bankruptcy Rules 3001(e)(2) and (4) require that the transferee of the transferred claim (ASM Capital in this case) file a notice with the court. The transferor has twenty days to object to the transfer, at which point a hearing shall be held to hear any objections.
This failure to provide adequate notice to Debtor is fatal to ASM Capital's argument that the subsequent preference actions Debtor brought against the original claim holders after the transfers occurred are invalid as they were not brought against the proper party in interest. According to ASM Capital, if it had been named and served in these cases, it could have answered and defended the cases on grounds it believes would have prevailed, thereby avoiding default judgment in at least two of the cases. In addition to the notice problem, it also appears that ASM Capital's real complaint lies with the three original claim holders, and not Debtor, for their failure to notify ASM Capital of the adversaries, answer and interplead ASM Capital, or inform Debtor that they were no longer holders of the claims and that the claims had in fact been transferred to ASM Capital.
Similarly, with respect to the adversary involving the original claim holder Mace that was allegedly settled by Mace and Debtor, if Debtor had no notice that Mace was no longer the holder of that claim, it cannot be faulted for settling the case with Mace. Again, this may more properly give rise to a claim against Mace for settling a claim it no longer owned.
Even if ASM Capital had provided adequate notice to Debtor under Rule 3001, this Court finds ASM Capital's failure to do anything over the last three years to protect its interest in the Subject Claims the second critical error barring reopening. While Bankruptcy Rule 9024 excepts motions to reopen from the one year statute of limitations that applies to Rule 60(b), Federal Rules of Civil Procedure, motions to reopen may be barred by the doctrine of laches. Staffer v. Predovich (In re Stafer), 306 F.3d 967, 973 (9th Cir. 2002) (holding motion to reopen could be barred by laches if debtor makes heightened showing of compelling circumstances). "Laches is an equitable doctrine to be applied at the discretion of the court so as to protect a party against whom a claim has been asserted from any prejudice which may result from the unreasonable delay of the party asserting the claim." Slali v. Ruiz, 282 B.R. 225, 232 (D. Cal. 2002). Laches requires the party asserting it to prove (1) lack of diligence by the opposing party and (2) prejudice arising from the undue delay. Beaty v. Selinger, 306 F.3d 914, 926-927 (9th Cir. 2002). Delay alone is insufficient to prove laches: prejudice to the party asserting the defense must be shown. Id.
ASM Capital is a sophisticated party that has had numerous opportunities over the last three years to assert any rights it may have to the Subject Claims and to object to Debtor's decision not to pay on the Subject Claims. ASM Capital failed to object when it stopped receiving Interim Distributions for each of the Subject Claims, even while it continued to receive distributions on its twenty-one other claims. In February, 2002, Debtor made its Second Interim Distribution: ASM Capital did not receive a distribution on the PCMAX claim. In June, 2002, Debtor made its Third Interim Distribution: ASM Capital did not receive distributions on any of the three Subject Claims. It did, however, in both of these distributions continue to receive payments on its other twenty-one claims. At no point from February, 2002, until now, did ASM Capital object to or even inquire about the missing payments on the Subject Claims.
ASM Capital also failed to object to and appear at any hearings regarding the Final Motion Order, Final Claims List Motion, and Final Decree all filed, noticed, and entered by the Court in 2004. ASM Capital received actual notice of both the Impending Distribution and of the Final Claims List Motion because both notices were mailed to all claim holders of record. In fact, ASM Capital received at least eleven copies of the Final Claims List Motion, which contained the Final Claims List, a fact ASM Capital does not dispute. The Court held three days of hearings before approving the Final Claims List: ASM Capital never appeared at these hearings or objected to the Final Claims List. Likewise, the Court held a hearing regarding the Final Motion Order, which among other things sought to remove the restriction on the compensation of the Plan Committee and close the case with the entry of a Final Decree. This Final Motion became non-appealable on November 13, 2004: ASM Capital did not object either before or after the Court approved the Final Motion Order. Finally, pursuant to the Final Motion Order, the Court entered a Final Decree declaring the estate fully administered and closing the case. ASM Capital waited more than a month after the Final Decree to object to the exclusion of the Subject Claims from the Final Claims List and more than three months after it received at least eleven copies of the Final Claims Motion. This complete lack of diligence on ASM Capital's part is unexplained.
In addition, the undue delay will in fact cause harm to the Estate, whereas little harm will result to ASM Capital if the case is not reopened. ASM Capital argues it will suffer in not being paid the full amount on its Subject Claims. This argument rings a hollow in light of the fact that to date ASM Capital has realized a substantial profit on its investment. ASM Capital is in the business of purchasing claims at substantially less than their full value and gambling on how successful it might be in recovering those claims from a bankrupt estate. In this case, ASM Capital purchased a number of claims for approximately 12.5% of their value. After all distributions, Debtor alleges ASM Capital realized more than a 710% profit on its investment, a fact ASM Capital appears not to dispute. It is difficult to be sympathetic under these circumstances, even if it ASM Capital lost money on the three Subject Claims.
On the flip side, reopening the case will result in litigation expenses in connection with the disputed Subject Claims, as well as invite litigation from other creditors of the estate excluded from the Final Claims List for whatever reason. The cost of litigation could be substantial and further litigation will clearly decrease the amount of available funds. In addition, pursuant to the October 26, 2004, Order of this Court, Debtor has begun destroying business records, which could adversely affect its ability to litigate any reopened claims matters.
Another important consideration not addressed by ASM Capital is the harm reopening under these circumstances would do to principles of finality. Reopening a final judgment is an extraordinary relief that must be fully substantiated by adequate proof and its exceptional character must be clearly established. In re Russell, 22 B.R. 143, 146 (Bankr. D. Or. 1982). Finality must be something parties can rely on and, under the circumstances here, nothing has been presented to overcome this fundamental principal.
The Court also rejects ASM Capital's suggestion that it is being treated unfairly by not being paid in full for its claim where Debtor now has an unexpected recovery of funds. The unexpected increased recovery alone does not justify undoing the Plan and approving additional distributions where it appears to be the result of a job well done by the Reorganized Debtor. ASM Capital makes no allegation of bad faith or fraud on the part of Debtor in negotiating the Plan or in collecting the surplus of funds. A reopening under this scenario would seriously impair the finality parties now enjoy with confirmed plans. Further, other creditors who did not receive full payment on their claims for whatever reasons would possibly, be entitled to seek additional payments also, which would in essence undo the entire confirmation process in this case.
Last, ASM Capital contends that Debtor never objected to the Subject Claims before the Claim Objection Deadline and, therefore, these claims are "allowed claims" as defined under the Plan and the preference actions brought against the original claim holders were untimely, invalid, and unable to change the allowed status of the claims. The Court agrees with ASM Capital that it appears Debtor never objected to these Subject Claims, having independently reviewed the docket in this case to locate the objections. In particular, the Court notes that Debtor's Omnibus Objection Pursuant to 11 U.S.C. § 502(d) does not include these Subject Claims. This failure to object, however, does not lead to the result ASM Capital urges.
Debtor's failure to include these Subject Claims in its 502(d) objection has no bearing on whether the statute of limitations for bringing a preference action was somehow shortened or the right to bring such an adversary eliminated. Subsection 502(d) expressly provides
[n]othwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section . . . 547 . . . unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable.
Section 502(a) provides that a claim is deemed allowed unless a party in interest, such as the debtor, objects. Under section 502(b), then, once an objection is made, the court will determine the amount of the claim. Subsection (d) sets itself apart from both subsections (a) and (b), expressly stating that "notwithstanding" those two subsections, "the fact that a claim may he deemed allowed pursuant to § 502(a) by the absence of an objection or a hearing on notice pursuant to § 502(b), § 502(d) states that the Court shall disallow a claim if the claimant is found to have received a preferential transfer under § 547." In re Ampace Corp., 279 B.R. 145 (Bankr. D. Del. 2002) (finding irrelevant for purposes of subsection (d) the fact that the trustee failed to object to the creditor's claims or that the creditor's claims were allowed under the terms of the plan); see also In re Rhythms Netconnections, Inc., 300 B.R. 404 (Bankr. S.D.N.Y. 2003) (agreeing with other reported decisions that a debtor's failure to object to a creditor's claim based on § 502(d) does not later preclude assertion of a preference action); In re Bridge Information Systems, Inc., 293 B.R. 479 (Bankr. E.D. Mo. 2003) (same). Subsection (d) is not limited or qualified by subsection (a) or (b). As the Court in Ampace illustrated, if there were no valid basis upon which to object to a claim filed by a claimant who received a preference, there would be no need for a section 502(a) objection. It would be illogical, however, then to bar the preference action as a result. Id. at 163.
This is not a situation like that in In re Service Plastics, Inc. (Sewice Plastics Inc. v. Cameo Container Corp.), 1997 WL 657119 (Bankr. N.D. Ill.), where the debtor expressly agreed in the Stipulated Plan of Reorganization not only to reduce the time within which it could bring a preference action but also the time within which it could object to the creditor's proof of claim. The court found that where the debtor voluntarily agreed to reduce the time period within which to file an adversary and then also failed to file an objection to the claim within the time period stipulated to by the parties in the Plan, the adversary was untimely and section 502(d) could not otherwise be used as a defense to the creditor's proof of claim. That is not the case here, where Debtor only failed to meet an agreed upon claims objection deadline. The statute of limitations governing the preference action left untouched.
Similarly, in a case appealed to the Ninth Circuit BAP and involving this same Debtor, Debtor MicroAge negotiated the claims amount of creditor Viewsonic for over a year and ultimately settled with creditor Viewsonic, granting it an allowed reclamation administrative priority claim for over $574,000. The section 502(d) avoidance issue was never raised during the claims resolution process as a defense, nor was any avoidance action ever brought, by the Debtor. It was not until after Viewsonic filed a motion to compel payment under the approved settlement that Debtor sought to raise it as a defense to payment. In re MicroAge, Inc., 291 B.R. 503 (9th Cir. BAP 2002). The BAP refused to let Debtor raise section 502(d) as a defense to payment of the stipulated claim. As other courts have recognized, these decisions were based largely on the fact that the debtors' actions in negotiating and ultimately agreeing to specific claim amounts were later attempted to be undone with by the commencement of a preference action. See In re Rhythms, 300 B.R. at 409; In re Cambridge Indus. Holdings, Inc., 2003 WL 21697190 (Bankr. D. Del.). That fact pattern is absent here.
ASM Capital has had nearly three years in which to dispute the Subject Claims with Debtor. Without a compelling explanation for why relief was not requested earlier, the Court cannot justify such extraordinary action.
IV. CONCLUSION
For the foregoing reasons, this Court denies the Motion to Reopen. Counsel is to lodge a form of order consistent with this decision.
So Ordered.