By: Naffie Lamin
St John’s University Law Student
American Bankruptcy Institute Law Review Staff
In In re Nortel Inc., the Bankruptcy Court denied a motion filed by former Canadian employees of the debtor Nortel Networks’ Canadian affiliates (the “Canadian Employees”) seeking leave to file proofs of claim after the expiration of the final date to file a proof of claim in the United States (the “Bar Date”).[1] On January 14, 2009, the United States Nortel affiliates (the “U.S. Debtors”) filed voluntary petitions of relief under chapter 11 of the Bankruptcy Code.[2] On the same day, the Canada affiliates (the “Canadian Debtors”) filed insolvency proceedings under Canada's Companies' Creditors Arrangement Act (“CCCAA”).[3] Pursuant to the rules of the CCCAA, the Ontario Superior Court appointed Ernst & Young Inc. (the “Monitor”) as monitor and Koskie Minsky, LLP (“Koskie Minsky”) as the law firm to represent the interests of all former employees of the Canadian Debtors, including the Canadian Employees.[4]
On August 4, 2009, the bankruptcy court entered an order establishing September 30, 2009 as the Bar Date for filing claims against the U.S. Debtors.[5] The U.S. Debtors consequently served notice of the Bar Date on all known creditors.[6] The U.S. Debtors also published notice of the Bar Date in the national and global editions of The Globe, Mail, and The Wall Street Journal.[7] The notice stated that “[a]ll persons and entities ... who have a claim or a potential claim against the [U.S.] Debtors that arose prior to January 14, 2009 … MUST FILE A PROOF OF CLAIM so as to be actually received ... on or before September 30, 2009[.]”[8] On August 14, 2009, the Canadian Court recognized the bar date order.[9] This “recognition order” was mailed to the parties representing the interests of the former employees of the Canadian Debtors, including Koskie Minsky.[10] Additionally, notice of the Bar Date was published in weekly news bulletins issued by Koskie Minsky to the former employees of the Canadian Debtors, publicly filed documents in Canada, and posted to a LinkedIn group where former employees of the Canadian Debtors received information on the insolvency proceedings.[11]
The Canadian Employees did not timely file proofs of claim against the U.S. Debtors before the Bar Date.[12] Consequently, they filed a motion with the bankruptcy court seeking leave to file proofs of claim after the Bar Date.[13] According to the Canadian Employees, they did not receive actual or constructive notice of the Bar Date, which amounted to a denial due process.[14] They further argued that even if they did receive proper notice of the Bar Date, the court should grant their motion based on excusable neglect.[15] The court held that because the Canadian Employees were employed by Nortel Inc.’s Canadian subsidiaries and did not receive any benefits or have any substantial contact with the U.S. Debtor they did not qualify as known creditors and therefore were not entitled to actual notice of the Bar Bate.[16] Instead, according to the court, the Canadian Employees were unknown creditors who were entitled to constructive notice.[17] Additionally, the court found that the theory of excusable neglect was inapplicable because the Canadian Employees and their CCCAA representatives had all the facts necessary to make a timely decision as to whether or not to file claims against the U.S. Debtor.[18]
Bankruptcy Rule 3003(c) requires that claimants in a chapter 11 bankruptcy case file proofs of claim before the bar date established by the bankruptcy court.[19] Constitutional due process concerns require that notice be provided in a manner that is “reasonably calculated to reach all interested parties, reasonably conveys all the required information, and permits a reasonable time for a response.”[20] Therefore, a creditor who did not receive adequate notice of the claims bar date is not estopped from filing a tardy proof of claim.[21] To determine whether proper notice was served, bankruptcy courts distinguish between known or unknown creditors.[22]
A known creditor is one whose identity is either known or “reasonably ascertainable” by the debtor.[23] According to the Supreme Court, a known creditor must be provided with actual notice of the bar date.[24] On the other hand, unknown creditors are those “[w]hose ‘interests are either conjectural or future or, although they could be discovered upon investigation, do not in due course of business come to knowledge [of the debtor].”[25] As a result, mere constructive notice of the claims bar date to unknown creditors is sufficient to satisfy due process requirements.[26]
The In re Nortel decision served as an important reminder to creditors to be mindful of public notices and publications pertaining to a chapter 11 bankruptcy filing.[27] The decision made evident that the existence of an employment relationship between a debtor and a creditor was not sufficient to establish “known creditor” status upon the creditor for the purposes receiving actual notice of a claims bar date.[28] The holding in In re Nortel was consistent with courts’ well established recognition of the practical difficulties and expenses of making actual notice available to all potential creditors.[29] In the context of multinational corporations that may employ thousands of people worldwide, this problem may be exacerbated.
[1] In re Nortel Networks, Inc., 531 B.R. 53, 57 (Bankr. D. Del. 1997).
[2] Id. at 57.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at 57–8.
[9] Id. at 58.
[10] Id.
[11] Id.
[12] Id. at 59. The Canadian Employees had all been terminated from employment by means of a termination letter from the Canadian affiliates, which provided that Nortel Networks Corporation “shall … pay” a severance package to each terminated employee. The Canadian Employees’ proofs of claims sought to compel the severance payments referenced in their termination letters.
[13] Id. at 60.
[14] Id. at 62.
[15] Id.
[16] Id. at 63.
[17] Id. at 64.
[18] Id. at 66.
[19] See Fed. R. Bankr. P. 3003(c)(3) (“The court shall fix and for cause shown may extend the time within which proofs of claim or interest may be filed. Notwithstanding the expiration of such time, a proof of claim may be filed to the extent and under the conditions stated in Rule 3002(c)(2), (c)(3), (c)(4), and (c)(6).”).
[20] Greyhound Lines, Inc. v. Rogers (In re Eagle Bus Mfg., Inc.), 62 F.3d 730, 735 (5th Cir. 1995) (finding that because debtor mailed creditor notice of claims bar date, creditor's due process rights were not violated).
[21] See City of New York v. New York, N.H. & H.R. Co., 344 U.S. 293, 296 (1953) (holding that “constructive notice” of claims bar date by publication in newspaper was did not give known creditor sufficient notice, and that creditor was therefore not bound by date).
[22] Tulsa Prof'l Collection Serv., Inc. v. Pope, 485 U.S. 478 (1988) (noting that distinguishing between known and unknown creditors is necessary to establish whether actual notice to creditors is required by due process).
[23] Id. (holding that if creditor was known or “reasonably ascertainable” by debtor, Fourteenth Amendment requires that creditor be given actual notice).
[24] Id. Case law has established that the “reasonably ascertainable” standard is met by “reasonably diligent efforts” which vary according to the facts of each case. Small Engine Shop, Inc. v. Cascio, 878 F.2d 883, 878 (5th Cir.1989); In re Sharon Steel Corp., 110 B.R. 205, 206 (Bankr. W.D. Pa.). However, courts have repeatedly recognized the “practical costs and difficulties” that would necessarily arise if actual notice were to be provided to all possible claimants. Mullane v. Central Hanover Bank & Trust, Co., 339 U.S. 306, 317 (1950). The “reasonably diligent effort” standard does not require debtors to engage in unreasonable searches for claimants or to search for and actively encourage claimants to file timely proofs. Id. After all, it is in the interests of the claimants themselves to file timely proofs. Chemetron Corp., 72 F.3d at 346.
[25] Id. (quoting Mullane, 339 U.S. at 317) (finding that notice to beneficiaries whose claims were “conjectural” or “future” are not necessary to address due process concerns).
[26] See Brown v. Seaman Furniture Co., Inc., 171 B.R. 26, 27 (E.D.Pa.1994) (finding that publishing claims bar date in both national and international publications satisfied due process clause); see also In re U.S. Airways, Inc., 2005 WL 3676186, *6 (Bankr. E.D. Va. Nov. 21, 2005) (finding that defendant employees were not known creditors and consequently did not require actual notice of claims bar date in order to satisfy due process requirements); see also In re Best Products Co., Inc., 140 B.R. 353, (Bankr. S.D.N.Y.1992) (holding that notice by publication satisfied due process requirements).
[27] In re Nortel Networks, Inc., 531 B.R. at 65 (“The Canadian Employees were unknown creditors. The Court is satisfied [. . .] that the Published Notice satisfies the requirements of due process with respect to unknown creditors.”).
[28] Id.
[29] See City of New York v. New York, N.H. & H.R., 344 U.S. 293, 296 (1953) (“Notice by publication is a poor and sometimes a hopeless substitute for actual service of notice . . . But when the names, interests and addresses of persons are unknown, plain necessity may cause a resort to publication.”).