In re Jemal

Citations: 496 B.R. 697; 2013 WL 4804420; 2013 Bankr. LEXIS 3745Docket: Case No. 11-50734-CEC

Court: United States Bankruptcy Court, E.D. New York; September 9, 2013; Us Bankruptcy; United States Bankruptcy Court

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BNY Mellon, N.A. (BNY) filed a motion seeking an extension to file a proof of claim in a Chapter 7 bankruptcy case involving Debtors Marvin and Robin Jemal. BNY argues it was unaware of the bankruptcy filing before the May 21, 2012, bar date due to a lack of notice. Several parties, including Israel Discount Bank, the Debtors, and the Chapter 7 trustee, oppose BNY's motion, contending that BNY should be barred from receiving a distribution since it waited approximately seven months after learning of the bankruptcy to file the motion, potentially disrupting ongoing settlement negotiations.

The court has jurisdiction over the matter as a core proceeding under 28 U.S.C. 157(b). The Debtors filed for bankruptcy on December 28, 2011, and did not initially list BNY as a creditor. An amended schedule on October 10, 2012, added an unsecured claim from BNY amounting to $1.3 million, derived from a promissory note originally secured by a mortgage on property in New Jersey. A state court action had determined that another bank's mortgage was superior, and the property was sold in January 2013.

BNY claims it only became aware of the bankruptcy in July 2012, after the deadline had passed, and seeks an extension for filing its claim. The court concludes that BNY's claim is entitled to distribution with timely filed claims under 726(a)(2)(C), contingent upon BNY filing its proof of claim in a timely manner.

BNY contends it did not receive notice of the bankruptcy filing until after the claims deadline had passed, and this claim remains unchallenged by the objections. IDB opposes BNY's motion to file a proof of claim, arguing that BNY’s seven-month delay after learning of the bankruptcy is unjustified and could severely prejudice other creditors by undermining nearly a year of settlement negotiations. The Trustee supports IDB's position, highlighting that extensive negotiations for a global settlement were ongoing, and BNY's $1.3 million claim could disrupt these efforts by diluting creditor recovery, as BNY was not included in the negotiations.

BNY responded to IDB’s objection with a certification from attorney Corrine LaCroix Tighe, who claims her firm was unaware of the bankruptcy until notified by Metropolitan’s counsel in July 2012. Upon learning of the bankruptcy, Tighe contacted the Debtors’ counsel, asserting BNY’s valid claim and sending necessary documentation, including a proposed stipulation to extend the claims filing deadline. Despite attempts to obtain the Trustee's consent for the stipulation, Tighe was unsuccessful until sending the draft via Federal Express in November 2012. A revised stipulation was submitted in January 2013 due to the expiration of the original deadline, but no response was received. BNY filed its motion on February 11, 2013, arguing that its delay was due to efforts to resolve the matter consensually, and claims that all objectors were aware of its claim by November 2012.

BNY argued for permission to file a late proof of claim under § 726(a)(2)(C) of the Bankruptcy Code, seeking distribution alongside timely filed claims. A March 12, 2013 hearing allowed objecting parties, including the Debtors and IDB, to submit additional briefs opposing BNY's motion, primarily citing the doctrine of laches. Under Rule 3002(c) of the Federal Rules of Bankruptcy Procedure, a proof of claim in a Chapter 7 case is timely if filed within 90 days after the creditors' meeting, unless specific exceptions apply, none of which were relevant to BNY’s case. Consequently, the court lacked authority to treat BNY’s claim as timely. However, § 726(a)(2)(C) allows tardily filed claims to receive distribution if they meet two conditions: the creditor had no notice or knowledge of the case in time to file on time, and the claim was filed in time for payment. This provision aims to ensure no-notice creditors can receive distributions despite tardy filings. This approach is exclusive to Chapter 7 cases; in contrast, Chapter 11 allows for distribution based on the "excusable neglect" standard. The Supreme Court has noted the differing purposes of Chapter 7 and Chapter 11, emphasizing Chapter 7’s focus on prompt estate closure and distribution versus Chapter 11’s goal of debtor rehabilitation.

Bankruptcy courts possess broad equitable powers to balance the interests of parties involved, emphasizing the importance of successful reorganization. In a Chapter 7 case, the "excusable neglect" standard does not apply to late claims, as the specific criteria in 11 U.S.C. § 726(a)(2)(C) are met, allowing BNY's late claim to be eligible for distribution alongside timely claims. BNY was unaware of the case until after the May 21, 2012, bar date, and no distribution has occurred to preclude its payment. Objecting parties argue that BNY's delay should bar its distribution, citing the doctrine of laches, which requires unreasonable delay resulting in prejudice to the opposing party. However, laches cannot be used against claims filed within the applicable statute of limitations. The principles of separation of powers prevent federal courts from applying laches to bar timely federal statutory claims. Section 726(a)(2)(C) mandates that no-notice creditors file claims in time for payment, and any attempt to apply laches would conflict with congressional intent. Previous rulings, including In re Feldman, affirm that Congress intended for late claims from known creditors to be allowed if filed timely, thereby maintaining the integrity of the statutory framework for claims in Chapter 7 cases, unlike Chapter 11 or Chapter 13 cases where equitable considerations may apply.

The court determines that the doctrine of laches is not applicable to Code 726(a)(2)(C), thereby negating the need to evaluate the creditor's delay in filing its claim post-bankruptcy notification. The court establishes that the creditor lacked timely notice to file a claim within the stipulated 90-day period, and the estate’s final distribution has yet to occur. Unlike Chapters 11 and 13, where no-notice creditors face a different treatment, Chapter 7 allows for distribution to such creditors under 726(a)(2)(C). The court distinguishes prior cases cited by objectors, noting that they pertain to different chapters and contexts. While acknowledging due process for no-notice creditors, the court emphasizes that laches should not bar BNY from receiving distribution under 726(a)(2)(C). Even if laches were relevant, BNY's seven-month delay was reasonable, as it attempted to resolve disputes amicably, and all objecting parties were aware of BNY’s claim and timing issues prior to the current motion. The court concludes by granting BNY's motion for distribution, contingent on timely filing of its proof of claim, and indicates that a separate order will be issued.

Statutory citations refer to Title 11, U.S.C. A motion was filed to extend the time for BNY to object to the Debtors’ discharge or move to dismiss, but BNY withdrew this request on March 14, 2013. The reference "ECF No." pertains to documents in the Court's electronic docket. Although BNY did not initially cite 726(a)(2)(C) in its motion, it effectively sought to allow its late claim to be treated equally with timely claims under this provision. The parties provided supplemental briefs in response to this argument. Under 726(a)(2)(C), BNY is not required to seek court permission to file its proof of claim, yet it has not done so. The decision assumes BNY will file its claim timely enough to allow for payment as required. The Debtors argue that BNY's motion should be denied due to its failure to file a proof of claim by October 24, 2012, a deadline they had consented to, but which was never approved by the Court or executed by the trustee. Consequently, any stipulation for a claim filing deadline will not be recognized since it was unapproved and not fully executed.