Bankruptcy Court Finds There Is No Excuse for Inconvenienced Creditors

The U.S. Bankruptcy Court for the Eastern District of Virginia held recently that unsecured creditors who fail to monitor bankruptcy proceedings for treatment of their claim do not show “excusable neglect” and must face the consequences of failing to respond to a claims objection even where no payments to unsecured creditors were expected. Courts will not find excuses for creditors with the ability to use counsel to monitor the docket and obtain access to free electronic notifications in bankruptcy cases.

In 1999, Pier 1 Imports Inc. (Pier 1) entered into a commercial lease agreement with the predecessor-in-interest to GDI Aventura Development LLC (GDI). Pier 1 filed for Chapter 11 reorganization in February 2020.

After confirmation of its Chapter 11 plan in July 2020, Pier 1 sought to reject the lease. GDI did not object to rejection of the lease. Both before and after Pier 1’s Chapter 11 plan was confirmed, it was widely believed that there would be no distribution to unsecured creditors.

Over two years later, in 2022, Pier 1 filed the claim objection, seeking to reduce the claim to zero, and served the claim objection by U.S. Mail on GDI at the address listed on the claim. GDI did not respond. On June 22, 2023, the court sustained the claim objection, and entered the order reducing the claim to zero.

In April 2023, Pier 1 filed a claim objection, seeking to reduce GDI’s claim to zero. GDI did not respond to the claim objection. In June 2023, the bankruptcy court entered an order sustaining the claim objection and reducing the claim to zero.

In September 2023, Pier 1 filed and served a Notice of Allowed General Claims, providing notice that unsecured creditors with valid claims might receive an interim distribution of 8% to 9%, but also that the claim was allowed in the amount of $0.00. Despite multiple mailings, GDI claimed that its agent, Savitar Realty Advisors (Savitar), did not receive any mailings. GDI also alleged that Savitar received an email inquiry from an unrelated third party about purchasing the claim. Savitar reached out to Pier 1 about the claim but was informed that GDI would not receive any distribution because the claim had been reduced to zero. GDI then moved in January 2024 to vacate the order on the claim objection and for leave to file a late response to the claim objection as a motion.

In ruling on the motion earlier this month, the court focused on whether GDI may seek relief from the order due to “mistake, inadvertence, surprise, or excusable neglect” under Federal Rule of Civil Procedure 60(b). The court noted that GDI intentionally withdrew from participating in the bankruptcy case and communicating with Pier 1 once it learned that Pier 1 did not expect to make a distribution to unsecured creditors. GDI only began to recommunicate with Pier 1 when it learned about a distribution on unsecured claims from a claims purchaser. The court refused to excuse GDI’s decision to disengage from the bankruptcy case because it believed that Pier 1 would not pay any unsecured claims. It found that granting the motion would prejudice Pier 1 and the unsecured creditors with further delay and affect the interim distribution to creditors actively involved in the case. Specifically, the court resisted allowing GDI to file a late response to the claim objection out of concern that hundreds of other creditors would seek the same relief.

The court also concluded that GDI had not rebutted the evidentiary presumption of receipt of the mailings relating to the claim when it failed to present evidence of its standardized practice for receiving and processing mail. The court discussed other alternatives for GDI to receive notices about the claim, such as receiving free electronic notifications in the bankruptcy case or hiring counsel to monitor the docket for activity concerning its claim. Lastly, GDI did not offer evidence of its good faith. As to the claim objection, the court found that GDI needed to establish the validity and amount of the Claim, but GDI failed to establish that it had a bona fide claim.

The Takeaway

The court’s decision is a warning to all creditors to participate in and monitor claim objections or risk coming away from a bankruptcy case empty-handed while other similarly situated creditors get paid. It is important for creditors to hire experienced bankruptcy counsel to file claims and then either keep counsel engaged to monitor claims, or set up an internal system to monitor the claims themselves.

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