IN RE KMART CORPORATION (Bankr.N.D.Ill. 2005)

Case No. 02 B 02474.United States Bankruptcy Court, N.D. Illinois, Eastern Division.
January 27, 2005

MEMORANDUM OPINION
SUSAN SONDERBY, Chief Judge, Bankruptcy

This matter is before the court on the Motion of Marie Rivera for Reconsideration of Expungement of Claim No. 21907, and upon the objection thereto filed by Kmart Corporation.

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, and actions pending against Kmart at the time of the petitions were stayed. One such action was a personal injury suit filed by Marie Rivera (“Rivera”), who was allegedly injured at a Kmart store in 1999.

After the filing of the Chapter 11 petitions, on March 26, 2002, this court entered an order fixing July 31, 2002 as the bar date for filing proofs of claim. Notice of the bar date was caused to be served on or about April 1, 2002 by Trumbull Services, LLC, the court-approved

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noticing agent in this case. Rivera timely filed her proof of claim on July 1, 2002. The claim was assigned No. 21907.

Thereafter, on July 17, 2002, this court entered its Order Approving Procedures for (A) Liquidating and Settling Personal Injury Claims Through Direct Negotiation and/or Alternative Dispute Resolution and/or (B) Modifying the Automatic Stay to Permit Certain Litigation with Respect to Such Claims to Proceed (the “PI Procedures”). On August 29, 2002, an order was entered modifying the July 17, 2002 order in respects not material here.

Kmart caused a copy of the July 17, 2002 order, including as exhibits the PI Procedures and a Questionnaire, to be served on personal injury claimants who had filed timely proofs of claim. According to affidavits submitted by Kmart in support of its objection, the PI Procedures and Questionnaire were sent to Rivera’s counsel, Steven Rovner, on August 12, 2002, at his office in Feasterville, Pennsylvania.[1]

Pursuant to the PI Procedures, claimants were to submit the completed Questionnaire to Kmart by November 15, 2002. The July 17, 2002 order approving the PI Procedures provided, in part, as follows:

Upon the failure of a Claimant to comply with the Claims Resolution Procedure, and until such default is cured, the Claimant shall not have an allowed claim for purposes of voting on a plan of reorganization and for purposes of any distribution under any confirmed plan of reorganization.

Rivera failed to file her Questionnaire as required by the PI Procedures. Accordingly, on or about June 25, 2003, approximately two months after confirmation of Kmart’s plan of reorganization, Kmart filed its Motion to Disallow Claims of Certain Personal Injury Claimants

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Not Complying with the Personal Injury Claims Resolution Procedures (the “Disallowance Motion”). Rivera was among the claimants listed as not being in compliance with the Procedures. According to affidavits submitted by Kmart, the Disallowance Motion was served on Lawrence Abel, another one of Rivera’s attorneys. No objection or other response to the motion was filed on Rivera’s behalf, and this court entered an order on July 16, 2003, disallowing and expunging, inter alia, the Rivera claim.

Rivera filed her motion to reconsider on May 17, 2004. Although she contended in the motion that she had not been served with either the Disallowance Motion or the PI Procedures and Questionnaire, her bankruptcy counsel, Lawrence Abel, acknowledged at the hearing that the documents were in fact received. He argued that the failure to return the Questionnaire was attributable to the fact that Kmart had served it on Rivera’s personal injury attorney, Steven Rovner, and not on Abel. Although Rovner and Abel are in the same law firm, they work in different locations; Rovner is in the Feasterville, Pennsylvania office, and Abel is in Philadelphia. Abel had advised Kmart’s state court counsel, by letter dated January 28, 2002, that Abel would be handling the bankruptcy aspects of the matter, and he requested that he be included on the service list for documents relevant to personal injury actions in the bankruptcy. Abel was the attorney that executed Rivera’s proof of claim.

Kmart contends that service of the PI Procedures and Questionnaire on Rovner at the Feasterville office was adequate, not only because Rovner and Abel work in same firm, but also

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because “Rivera’s counsel, in a March 5, 2004 conversation with Melissa Pouttu, a Kmart Claims Examiner, verified that this was the correct address.” Kmart attaches the supporting affidavit of Karen Pelc, a Liability Supervisor at Sedgwick Claims Management Services, Inc., Kmart’s third-party administrator for public liability claims. Pelc avers that Kmart maintains contemporaneous records of such conversations in “Juris Notes,” Kmart’s system for tracking information on claims. Pelc attaches to her affidavit an entry from Juris Notes documenting Pouttu’s March 5, 2004 conversation. The Juris Notes entry supplied by Pelc reads as follows:

“talked to clmt atty. . . . we straighed [sic] this out. . . . she lives in PA, ax happened in NJ. he asked for a Q [i.e., Questionnaire]. I advised I can’t just send one out. . . . i advised one was sent in august 2002 to his office and was never returned, he is arguing he never got it and could i just send him another one so he knows what he needs to do when he is sent one . . . I said no.
I double checked the address the Q was sent to in August 2002 and he said that was the right one . . .
Told him to file his motion and we’ll be back in touch”

Four days after this conversation took place, a document was filed with this court entitled “Response of Marie Rivera (Claim No. 37078) to Reorganized Debtors’ Twenty-First Omnibus Objection to Claims.” Although this document was not mentioned by either party in their papers or at the hearings on this matter, it appears to have been executed by Abel and submitted for filing on or about March 5, 2004, i.e., the day of the conversation with Pouttu.[2] According to the

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records maintained in this bankruptcy case, Abel had filed a proof of claim on Rivera’s behalf on July 29, 2002, assigned No. 37078, which was identical to Claim No. 21907, filed on July 1, 2002. Kmart objected to Claim No. 37078 in its Twenty-First Omnibus Objection to Claims, filed on February 2, 2004. Claim No. 37078 was included in Exhibit G to that objection as a “Non-Complaint Public Liability Claim,” i.e., one for which a timely and complete questionnaire had not been received. Because Abel responded to the Twenty-First Omnibus Objection, Claim No. 37078 was not disallowed in the April 1, 2004 order expunging certain claims pursuant thereto, but was instead shown in an exhibit to that order as “continued” for further hearing.

DISCUSSION
Rivera urges the court to vacate the July 16, 2003 order of disallowance and allow her to pursue her claim through the PI Procedures at this time. She has submitted the completed Questionnaire as an exhibit to her motion and contends that Kmart will not be prejudiced, since all the information contained therein was previously provided to Kmart as early as November 14, 2000, when Rovner sent Kmart a settlement demand package containing documentation of the injuries and losses.

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Kmart, on the other hand, argues that the order of disallowance should not be vacated, because Rivera has failed to sustain her burden under Fed.R.Civ.P. 60(b) (applicable herein by virtue of Fed.R.Bankr.P. 9024). Kmart notes that Rivera admits the Disallowance Motion was received by her bankruptcy counsel, Lawrence Abel, and that he failed to respond or object thereto. When Abel was asked at the hearings on this matter why he had not responded to the Disallowance Motion, he stated, inter alia,
that he did not know, — that it was simply an inadvertent failure. (July 20, 2004 Transcript, at 133) Rivera seeks relief on the basis of inadvertence and excusable neglect, both as to the failure to respond to the Disallowance Motion and the failure to submit the Questionnaire.

It is Kmart’s position that under Rule 60(b), the court can only dispose of the request for reconsideration, and that any request for affirmative relief, e.g., with respect to the failure to submit the Questionnaire, would be inappropriate at this time. Kmart asserts that while Rule 60 permits a court to set aside a prior judgment, it does not permit the court to grant affirmative relief.

While that may be true,[3] the court concludes that in the unique circumstances of this case and for the reasons cited herein, relief is warranted as to both requests, and no further hearing is necessary. The court is concerned that personal injury claimants like Rivera, who successfully

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cleared the primary (and only statutory) hurdle by timely filing their proofs of claim, have now had numerous additional obstacles set in their path, — one deadline after another. Moreover, the PI Procedures Order does not even clearly provide for the expungement of claims of those claimants who file late Questionnaires. The order allows, instead, for a “cure” of defaults, providing that a claimant who fails in some measure to perform in accordance with the Procedures does not have an allowed claim “until such default is cured.” In light of this language, claimants could reasonably believe that missing a deadline, e.g., by filing a late Questionnaire, would not be fatal to their claims.

Indeed, Kmart acknowledged at the hearing on this matter that there was a right to cure defaults and that no specific time limit had been fixed for the exercise of that right. Kmart nonetheless contends that the right clearly could not be exercised after the Disallowance Motion was served on Abel and an order entered expunging the claim.[4]

The Court notes, however, that the Disallowance Motion related to a great many claimants, and Exhibit 1 to the proposed order (attached as Exhibit A to the motion) appeared to set forth those claimants alphabetically. Upon closer examination, the purported unitary list actually consists of two separate alphabetical listings, with no designation or label alerting claimants to the dual nature of the exhibit. Accordingly, a claimant reviewing Exhibit 1 to

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determine whether his name was included could easily have come to the mistaken conclusion that it was not, unaware that he needed to check in two places.

For all of these reasons, and those that follow, the court finds that any neglect on the part of Rivera’s counsel to submit the Questionnaire or to respond to the Disallowance Motion is excusable under the circumstances.[5] Rivera and her counsel were clearly acting throughout in good faith. Moreover, the delay here will cause little prejudice to Kmart. Kmart is still involved in the process of reviewing, reconciling, and litigating personal injury claims. Indeed, Kmart sought and obtained an extension of the claims objection deadline to February 2, 2004, and its Twenty-Fourth Omnibus Objection to Claims was not filed until September 16, 2004. Moreover, procedures similar to the PI Procedures were established in this case for resolution of postpetition personal injury claims, and under those procedures, the questionnaires to be

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submitted by claimants were not even due until February 15, 2004.[6] Kmart’s responses were not due until ninety days after receipt of the questionnaires, and the claimants then could take up to ninety additional days (or approximately mid-August, 2004) to serve their replies. Even that did not end the litigation process, however, because where no agreements were reached, the claimants may obtain relief from the plan injunction to litigate their claims in nonbankruptcy fora. Indeed, scores of agreed orders have been entered over the past several months lifting the plan injunction to allow both pre- and post-petition personal injury actions to proceed as to claimants who have exhausted the Procedures. Clearly, the claims process for personal injuries is not complete.

Finally, as indicated above, Kmart may have contributed to the problems now faced by Rivera, not only through its failure to clearly include a claim expungement penalty in the PI Procedures Order drafted by its counsel and the accompanying cover letter to claimants, but also through its inclusion of the dual alphabetical listing of claimants in the Disallowance Motion.

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, counsel’s neglect was excusable.

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CONCLUSION
For all the foregoing reasons, the court grants the motion of Marie Rivera for reconsideration of the expungement of Claim No. 21907 and for leave to proceed with the resolution of her claim through the personal injury claims resolution procedures previously established in this case. The completed Questionnaire attached as an exhibit to the motion will be deemed submitted by Rivera to Kmart, and no further filing or submission of same will be required. 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.