IN RE KMART CORPORATION (Bankr.N.D.Ill. 2004)

Case No. 02 B 02474.United States Bankruptcy Court, N.D. Illinois, Eastern Division.
June 25, 2004

MEMORANDUM OPINION
SUSAN SONDERBY, Chief Judge, Bankruptcy

This matter is before the court on the Motion to Determine Applicability of Administrative Claim Bar Date, or, in the Alternative, to File Late Requests for Payment of Claims, or, in the Alternative, to Have Supplemental Bar Date Apply to the Claims, and for Related Relief (the “Motion”) filed on behalf of ten personal injury claimants, viz., Valencia Acoy, as mother and next friend of minor Satinice Acoy, Emma Diaz, Bobby Ferris, Shedrine Leomine, Alfred Lopez, Janella Parris, Pearly Rhymer, Joseph Sparado, Josephine Vigilant, and Idona Wallace. The Motion has been withdrawn as to claimants Diaz, Rhymer, and Sparado.[1] Each of the remaining seven claimants (the “Claimants”) failed to file an administrative proof of claim by the June 20, 2003 bar date. They now seek an order, on several alternative grounds, deeming their claims to be timely.

Page 2

BACKGROUND
On January 22, 2002, Kmart Corporation and thirty-seven of its subsidiaries and affiliates filed voluntary Chapter 11 petitions in this court. Kmart continued to operate as debtor in possession thereafter.

Each of the Claimants is a resident of the Virgin Islands and was allegedly injured at a Kmart store after the filing of the petitions. The Claimants are represented by Lee J. Rohn, an attorney in the Virgin Islands who practices primarily in the personal injury, employment discrimination, and civil rights areas. Rohn filed actions on behalf of most of the Claimants in the Virgin Islands District Court.

At the time Kmart filed its Chapter 11 petition, Rohn was representing certain other claimants in personal injury cases and wrongful discharge cases pending against Kmart in the Virgin Islands District Court. These actions, which arose out o prepetition incidents, were automatically stayed by the bankruptcy filing, and Rohn routinely received bankruptcy notices, pleadings, correspondence, and other documents with respect to such claims.

With respect to the postpetition actions filed on behalf of the instant Claimants, however, Rohn did not routinely receive bankruptcy notices, pleadings, correspondence, or other documents. Indeed, it appears that the only bankruptcy document received by Rohn with respect to such claims prior to the June 20, 2003 administrative bar date was the notice of that bar date, discussed below.

Kmart was represented in the postpetition personal injury actions by Bryant, Barnes Moss, LLP. Rohn avers that at a scheduling conference held before Magistrate Resnick in one of

Page 3

these actions, the magistrate “inquired about whether the post bankruptcy action was subject to Kmart’s pending bankruptcy.” (Rohn Affidavit, ¶ 8) According to Rohn, she responded that “she did not believe the bankruptcy affected post bankruptcy causes of action,” and Kmart’s counsel, Britain Bryant, concurred. (Rohn Affidavit, ¶ 9) Rohn states that Bryant further represented that the post bankruptcy actions could be scheduled and proceed as if there were no bankruptcy. Magistrate Resnick then scheduled the actions, and discovery ensued, including depositions, interrogatories, and requests for production of documents.

Kmart contests Rohn’s statements, relying upon the affidavit of Britain Bryant.[2] Bryant avers that “at no time did [he] ever intentionally misrepresent the effect of the stay before or after June 20, 2003.” (Bryant Affidavit, ¶ 3) He further states that he spoke with Magistrate Resnick on September 29, 2003 and that the magistrate does not recall any such “misrepresentation” having been made. (Bryant Affidavit, ¶ 4) Finally, Bryant avers that on several occasions, including a July 1, 2003 scheduling conference in one of the postpetition actions before Magistrate Resnick, Rohn represented that she had a bankruptcy lawyer in the States with whom she was consulting “on these matters.” (Bryant Affidavit, ¶ 6)

At the hearing on the instant motion, Claimants’ bankruptcy counsel, Karen Kranbuehl, of the firm Field Golan, LLP, stated that Rohn had indeed been working with Field Golan

Page 4

during the bankruptcy case, but that the consultation concerned the prepetition claims against Kmart held by other Rohn clients; Field Golan had not been consulted by Rohn regarding the postpetition claims.

On or about April 23, 2003, this court entered an order confirming the First Amended Joint Plan of Reorganization of Kmart Corporation and its Affiliate Debtors and Debtors-in-Possession, as modified (the “Plan”). The Plan became effective on May 6, 2003 (the “Effective Date”). Shortly after the Effective Date, Trumbull Services, LLC, the court-approved noticing agent in this case, caused to be served a “Notice Regarding (A) Entry of Order Confirming the First Amended Joint Plan of Reorganization of Kmart Corporation and its Affiliated Debtors and Debtors-in-Possession, (B) Occurrence of Effective Date, and (C) Notice of the Administrative Bar Date” (the “Notice”). Paragraph 7 on the fourth page of the Notice contained a section entitled “Administrative Claims Bar Date.” That section stated that “Administrative Claims” (other than certain types of claims dealt with elsewhere in paragraph 7) had to be filed by June 20, 2003 (the “Administrative Bar Date”).

On or about July 31, 2003, Rohn began receiving letters from Bryant stating that the Claimants’ claims were barred for failure to file claim forms by the Administrative Bar Date. In early August, Rohn also received letters from a claims examiner at the Kmart Customer Incident Center to the same effect. Accordingly, on August 12, 2003, Rohn caused the instant motion to be filed with this Court.

Page 5

The Claimants do not dispute that Rohn received the Notice.[3] They contend, however, that it would be unjust to bar their claims merely because Rohn, a nonbankruptcy lawyer, failed to appreciate that the personal injury claims, which arose postpetition, constituted “Administrative Claims,” — particularly since the definitions of “Administrative Claim” contained in the Plan and in the instructions on the back of the claim form failed to mention personal injury claims. They further contend, inter alia, that the Notice was, in effect, negated by Bryant’s representation that the bankruptcy would not affect postpetition causes of action.

On July 9, 2003, an order was entered on Kmart’s motion fixing a supplemental administrative claim bar date of August 22, 2003, for certain creditors who did not receive notice of the original bar date. The Claimants here contend that since any notice to them was inadequate, the supplemental bar date should be deemed to apply to their claims.[4] Alternatively, they seek an order deeming their claims timely (under the original Administrative Bar Date) on grounds of excusable neglect.[5]

Page 6

DISCUSSION
Rule 9006(b)(1) of the Federal Rules of Bankruptcy Procedure provides in relevant part that

when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion . . . (2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.

Prior to the Supreme Court’s decision in Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), there was a disagreement among the circuits as to the meaning and scope of “excusable neglect.” Robb v. Norfolk Western Railway Co., 122 F.3d 354, 358 (7th Cir. 1997). The Seventh Circuit was among those that interpreted the phrase narrowly. Id. That narrow approach was rejected in Pioneer, and the Supreme Court made it clear that neglect could be excusable even where it was the result of carelessness on the part of a litigant or his attorney.

Of course, not all carelessness is excusable. The Supreme Court concluded in Pioneer that the determination of whether neglect is “excusable”

is at bottom an equitable one, taking account of all relevant circumstances surrounding the party’s omission. These include . . . the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.

507 U.S. at 395. The four factors cited by the Court are, however, not exclusive. As the Seventh Circuit has noted, the Supreme Court “specifically rejected an approach that would `narrow the range of factors to be considered.'” Robb, 122 F.3d at 362.

Page 7

In Robb, for example, the Seventh Circuit held that an attorney’s “track record” may be considered as one of the circumstances bearing on whether his negligence constitutes “excusable neglect.”[6] Another factor that has been considered is the attorney’s relative experience in the area at issue. In U.S. v. Brown, 133 F.3d 993 (7th Cir. 1998) cert. denied, 523 U.S. 1131, 118 S.Ct. 1824, 140 L.Ed.2d 960
(1998), the defendant’s attorney in a criminal case filed an appeal one day late. He had miscalculated the 10-day deadline, believing that weekends and holidays tolled the appeal period.[7] The trial court considered the attorney’s inexperience in federal court, his good faith, and the lack of prejudice resulting from his mistake. The Seventh Circuit affirmed, stating, inter alia, that “[t]hese are reasonable factors to consider, and ones invited by the Supreme Court i Pioneer and this court in Prizevoits.” Brown, 133 F.3d at 997.[8]

It must be remembered, however, that “[i]t is difficult to draw bright lines in this inquiry.” Brown, 133 F.3d at 996. In U.S. v. Guy, 140 F.3d 735 (7th Cir. 1998), for example, the defendant’s lawyer made a mistake identical to the one made i Brown. Nonetheless, the Seventh Circuit found the neglect inexcusable, noting that the attorney’s level of experience was

Page 8

the “critical difference.”[9] In Guy, the defendant’s lawyer was an experienced federal criminal appellate litigator who “must” have known how to compute the appeal deadline in a federal criminal case. Guy, 140 F.3d at 736.

Again, the fact-intensive and equitable inquiry required b Pioneer is a balancing test, and “[b]alancing tests naturally produce indeterminacy; focusing on one factor may change the balance, and, in turn, the result.” Brown, 133 F.3d at 997.

The Claimants in this case place great emphasis on Bryant’s concurrence in the proposition that Kmart’s bankruptcy would not affect postpetition causes of action. While that statement, assuming it was made, might have indeed caused Rohn to read the Notice less carefully, the issue need not be reached, as the Court finds in any event that under all the circumstances here, counsel’s neglect was excusable.[10]

The Notice itself did not define “Administrative Claim;” instead, it included on the first of its seven pages a statement that capitalized terms and phrases would, unless otherwise defined in the Notice, have the meanings set forth in the Plan and Confirmation Order, neither of which

Page 9

were served with the Notice.[11] The only definition of administrative expense claims actually included in the package was contained not in the Notice, but in the instructions on the back of the claim form itself, and the only mention of personal injury claims was in a small font check-box on the claim form.

Section 503(b) of the Bankruptcy Code provides for the allowance, as “administrative expenses,” of “the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case” and certain taxes.[12] It is not, of course, readily apparent that a postpetition personal injury claim might be a “necessary” cost of “preserving the estate,” and the types of claims that are specifically mentioned in the statute are of a totally different nature.[13] Thorough research would reveal, however, that in 1968, the Supreme Court held that tort claims resulting from the negligence of a receiver in an arrangement proceeding under Chapter XI of the former Bankruptcy Act were entitled to administrative priority. Reading Co. v. Brown, 391 U.S. 471, 20 L.Ed.2d 751, 88 S.Ct. 1759
(1968). The Court reasoned, inter alia, that “actual and necessary costs” of administration should be construed to include “costs ordinarily incident to operation of a business, and not be limited to costs without which rehabilitation would be impossible.” Id. at

Page 10

483.[14] This case law doctrine survived enactment of the Bankruptcy Code and is sometimes referred to as the “Reading
exception” to the usual requirements for administrative priority e.g., that the expense benefited the estate. See, e.g., In re Jack/Wade Drilling, Inc., 258 F.3d 385, 387-88 (5th Cir. 2001); 4 L. King, Collier on Bankruptcy ¶ 503.06[3][c][i] (15th ed. rev. 2003).

Although Rohn might have discovered the “Reading exception” had she researched the relevant case law under § 503 and its predecessor provisions, her failure to do so is understandable. Rohn is a personal injury lawyer, — not a bankruptcy attorney, — and the Notice transmitted by Debtors merely referred to “Administrative Claims.” The Notice did not mention personal injury claims, and it did not set forth a definition of “Administrative Claims;” it merely referred to the definitions in the Plan and Confirmation Order, neither of which were served with the Notice. However, even if Rohn had a copy of the Plan and read the definition contained therein, or if she had gone on to review the small font definition on the back of the claim form itself, those definitions would not have indicated to her that personal injury claims were included in “Administrative Claims.” The Plan’s definition merely contains language similar to the language of § 503(b), including the “actual, necessary costs and expenses, incurred on or after the Petition Date, of preserving the Estates.”[15] Under these circumstances, it is understandable that

Page 11

Rohn, a nonbankruptcy attorney, believed that the Claimants’ claims were not “Administrative Claims” within the purview of the Notice.[16]

In addition, any delay resulting from her failure to timely file the claims or this motion is minimal and nonprejudicial. Rohn caused the motion to be filed less than two weeks after receiving her first letter from Bryant indicating the claims were barred. She then filed the claims on August 21, 2003, prior to the supplemental bar date. Kmart was not prejudiced by these modest delays.

Finally, in light of the Claimants’ (and their counsel’s) manifest good faith, the lack of prejudice to the Debtors, the minimal delay, and the understandable nature of Rohn’s mistake, it would appear that forfeiture of any claim, regardless of its merits, would be an excessive sanction. In Brown, discussed above, the court regarded dismissal of the late-filed appeal as a “harsh sanction for a relatively minor legal mistake,” and noted that “[p]roportionality has its appeal.” Brown, 133 F.3d at 997
(citing a pre-Pioneer case, Lorenzen v. Employees Retirement Plan of the Sperry Hutchinson Co., 896 F.2d 228, 232-33
(7th Cir. 1990) for the proposition that “`[i]f the mistake is slight, nonprejudicial, easily understandable, could happen to the best of us, etc., then dismissal of the appeal, with prejudice, may be an excessive sanction.”).

Page 12

Accordingly, “[a]lthough inadvertence, ignorance of the rules, or mistakes construing the rules do not usually constitute `excusable’ neglect,” Pioneer, 507 U.S. at 392 (emphasis added), under all the circumstances of this case, the neglect was excusable.

CONCLUSION
For all of the reasons set forth above, the court grants the Motion to Determine Applicability of Administrative Claim Bar Date, or, in the Alternative, to File Late Requests for Payment of Claims, or, in the Alternative, to Have Supplemental Bar Date Apply to the Claims, and for Related Relief, as to the remaining claimants, i.e., Valencia Acoy, as mother and next friend of minor Satinice Acoy, Bobby Ferris, Shedrine Leomine, Alfred Lopez, Janella Parris, Josephine Vigilant, and Idona Wallace. This opinion constitutes the court’s findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052. A separate order will be entered pursuant to Bankruptcy Rule 9021.

Page 1