In Re: Maya Construction Company, Id 86-0352941, Debtor. Alan L. Levin v. Maya Construction
Docket: 93-17195
Court: Court of Appeals for the Ninth Circuit; March 5, 1996; Federal Appellate Court
In the case of In re: Maya Construction Company, the United States Court of Appeals for the Ninth Circuit addressed a chapter 11 bankruptcy issue regarding whether a creditor, Alan Levin, was bound by the confirmation of a reorganization plan after failing to timely list his claim.
The facts reveal that Levin and Maya Construction had an agreement for the placement of fill dirt, which was later discovered to be contaminated with diesel fuel. Levin demanded that Maya defend and indemnify him from the consequences of this contamination. Subsequently, discussions occurred between Levin and Maya's president, Roberto Ruiz, during which Levin indicated he may not pursue a claim against Maya, expressing a preference to seek assistance against the Arizona Department of Transportation instead.
However, Levin later asserted he was unaware of Maya's knowledge of the contamination at the time of these discussions, which influenced his decision-making. The recollections of Levin and Ruiz differ regarding Levin’s intentions, but both agree on key points: Ruiz knew Levin believed contaminated soil was placed on his land, Levin had formally notified Maya of his claim, and Levin communicated orally that he did not intend to pursue that claim. Ruiz’s concerns about Levin potentially suing prompted him to seek legal counsel regarding the claim. The timeline of when Ruiz consulted with an attorney in relation to Levin's statements remains unclear.
The central legal question pertains to Levin's standing to challenge the confirmed reorganization plan, given the ambiguity surrounding his claim and communications with Maya.
Maya Construction filed for Chapter 11 reorganization on February 22, 1991, shortly after receiving a written demand from Mr. Levin's lawyer and seeking legal advice regarding Levin's potential claim. Mr. Levin was not listed as a creditor in Maya's filings, including the required Master Mailing List and schedules submitted to the bankruptcy court in March 1991. The case progressed without Levin's inclusion, and he received no notice of hearings or proceedings related to the reorganization plan. A declaration from Mr. Ruiz indicated discussions with Levin prior to the claim bar date of August 23, 1991, but did not confirm Levin's awareness of the bankruptcy prior to December.
On December 3, 1991, the bankruptcy court approved a final reorganization plan, which Levin was not part of, as he had not been served with notice. Levin's name first appeared in the bankruptcy file on December 20, 1991, when Maya submitted a request to add him to the creditor list, noting a contingent claim for contaminated soil. After Maya objected to Levin's claim on December 26, 1991, and notified him of a hearing set for January 1992, Levin responded on January 23, 1992, claiming damages of $500,000 due to the contaminated soil.
The court subsequently designated Levin's claim as an adversary proceeding, set for trial in October 1992 and later rescheduled for January 1993. Meanwhile, on February 24, 1992, the court confirmed the reorganization plan, claiming that notice had been sent to Levin, despite his and his wife's affidavits stating otherwise. Levin did not take action to contest the confirmation during the two months prior.
On January 12, 1993, Levin filed a motion seeking a judicial determination regarding his rights in relation to the confirmed reorganization plan, asserting he had been denied proper notice and the opportunity to object. The bankruptcy court found that Levin was aware of the bankruptcy, failed to file a claim before the bar date, did not request an extension, and that Maya did not submit a claim on his behalf.
Levin was not included on the master mailing list by the debtor and did not request to be added. The debtor's disclosure statement received approval on October 24, 1991, and the plan was confirmed on February 24, 1992. Levin did not receive notice of the hearings related to these matters but was later added to the mailing list and his claim was included in the debtor's schedules on December 20, 1991. Although Levin was mailed notice of the confirmation order, he did not object or appeal.
The court found that Levin was unaware of his claim until after the plan's confirmation and indicated he would not file a claim during the bankruptcy. The bankruptcy court ruled that Levin was bound by the plan due to his stated intention not to file a claim and his subsequent lack of knowledge about it. The court noted Levin had a responsibility to investigate his claim regarding contamination that occurred between 1989 and 1992. Moreover, Levin delayed ten months post-confirmation before objecting to the discharge of his claim.
Levin appealed to the district court, which affirmed the bankruptcy court’s decision but criticized its classification of Levin as an unknown creditor. The district court acknowledged that Maya was aware of Levin’s potential claim and had retained counsel to evaluate it, yet determined that Levin was barred from relief for not filing a timely claim despite having procedural avenues available.
Levin argued he should not be bound by the confirmation due to a lack of notice regarding the objection filing deadlines and hearings. The review of the bankruptcy court's findings is for clear error, and while the district court acknowledged errors in the bankruptcy court’s treatment of Levin’s claim, it maintained that Levin was not entitled to relief due to his failure to act on his potential claim. The court emphasized that Levin's actions, including a formal written demand from his lawyer, indicated Maya should have recognized the seriousness of the potential claim, irrespective of Levin's expressed intentions.
Maya was obligated to file a comprehensive list of creditors and a schedule of liabilities and assets in accordance with 11 U.S.C. § 521(1). The responsibility to list creditors hinges on the debtor's awareness of the creditor, not the creditor's awareness of their claim, as established in In re Hi-Lo Powered Scaffolding, Inc. The bankruptcy court is required to provide formal notice of the initial creditors' meeting to all creditors, including instructions and deadlines for filing proofs of claim as per Fed. R. Bankr. P. 3002 and 2002. Maya failed to list Levin as a creditor and did not provide him with the necessary notices, which is critical because if Levin, a contingent creditor, does not file a proof of claim within the designated timeframe, his claims will be discharged upon confirmation of a reorganization plan under 11 U.S.C. § 1141(d)(1)(A).
Generally, a known contingent creditor is not bound by a discharge order if they do not receive formal notice, regardless of their actual knowledge of the bankruptcy proceedings. The Supreme Court in New York v. New York, New Haven & Hartford R.R. Co. emphasized that creditors are entitled to reasonable notice, and knowledge of a reorganization does not negate the requirement for such notice. The principle of justice dictates that a party must have a reasonable opportunity to be heard before their rights are denied. Debtors must list any creditor whose identity and claim they are aware of, as per 11 U.S.C. § 521, and it is the debtor's duty to ensure formal notice is provided. Creditors are not obligated to investigate the proceedings even if they are aware of them. Maya's attempt to evade obligations through a federal court judgment raises due process concerns, as the affected party deserves notice before their claims are extinguished.
Chapter 7 and 13 cases differ from Chapter 11 regarding the necessity of formal notice for proofs of claim deadlines. In Chapter 11, the court is required to set a deadline and can extend it for cause, per Fed. R. Bankr. P. 3003(c)(3). Conversely, in Chapter 7 and 13, claims must be filed within 90 days of the creditors' meeting, with limited exceptions (Fed. R. Bankr. P. 3002), meaning that notice of the meeting suffices to inform creditors of the relevant deadline.
The case of Levin is distinct as he did not receive any notice, unlike creditors in the cases of Coastal Alaska Lines and Gregory, who were informed about their meeting. Maya was aware of Levin's potential claim, but his intention not to sue did not eliminate the claim's existence. The court concluded that Levin forfeited his claim by failing to act swiftly against the confirmation of the plan. However, the bankruptcy court initially ruled Levin's claim was unknown, a stance the district court rejected.
The judgment is reversed, and the bankruptcy court is instructed to determine if, despite Maya's failure to list Levin as a creditor, the notice he eventually received would still lead to the discharge of his claim due to the confirmation of the plan. The court will assess whether Levin, upon receiving notice, recognized the advanced state of the proceedings and whether his delay in taking action was excessive. The district court's decision is reversed, and the bankruptcy court's judgment is vacated and remanded for further evaluation.
