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Creditor’s Failure to File a Proof of Claim Inexcusable Where Potential Danger of Prejudice to Debtor Exists

By: Meghan Lombardo

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

 

        In In re LMM Sports Management, the United States Bankruptcy Appellate Panel for the Ninth Circuit affirmed the bankruptcy court’s order disallowing a proof of claim that was filed after the deadline to file claims against the debtor (the “Bar Date”).[1] Appellant Warner Angle Hallam Jackson & Formancek, P.L.C. (“Warner Angle”) filed proofs of claim against the debtor, LMM Sports Management (“LMM” or the “Debtor”), for legal services it provided to LLM in connection with a prior state court case against Your Source Pacific Fund I, LLP (“Your Source”). In the state court case, Your Source obtained a $2.4 million judgment against LLM, causing LLM to file for protection under chapter 11 of the Bankruptcy Code. The bankruptcy court approved a settlement of $1.5 million between Your Source and LMM (represented by new counsel) in full satisfaction of Your Source’s judgment over Warner Angle’s objection. Warner Angle filed its objection to the Debtor’s settlement motion on February 17, 2015, two months after the bar date. One day later, Warner Angle belatedly filed the proofs of claim. The Debtor objected to the proofs of claim arguing they should be disallowed as untimely. Warner Angle then filed a cross-motion requesting that the proofs be treated as timely because the late filing was the result of excusable neglect. The bankruptcy court rejected Warner Angle’s excusable neglect argument and denied its reconsideration motion. Warner Angle appealed.

        The Bankruptcy Appellate Panel of the Ninth Circuit noted that requests to file a late proof of claim based on excusable neglect should be analyzed by considering the totality of the circumstances and by focusing on the four specific factors established in Pioneer Inv. Servs. Co.[2]:  (1) the danger of prejudice to the non-moving party; (2) the length of delay and its potential impact on judicial proceedings; (3) the reason for the delay, including whether it was within the reasonable control of the movant; and (4) whether the moving party’s conduct was in good faith.[3]

        The lower bankruptcy court found that Warner Angle had satisfied two of the four Pioneer factors; Warner Angle (1) acted in good faith, and (2) established that the length of delay was relatively minor and did not influence the debtor’s bankruptcy cases.[4] Warner Angle conceded that there was not a good reason for the delay and that avoiding the delay would have been within Warner Angle’s reasonable control.[5] On appeal, Warner Angle focused on the danger of prejudice element. The lower court found that if Warner Angle had timely filed its proofs of claim, LMM would have had the option to consider a different path than the one they chose, which involved finalizing and submitting their settlement agreement for approval with Your Source.[6] Accordingly, the Bankruptcy Appellate Panel concluded that LLM would be prejudiced by allowing Warner Angle to file a late claim.

        The ruling in this case reaffirms the importance of Pioneer in determining whether relief should be granted for excusable neglect, specifically with respect to the danger of prejudice requirement. Because bankruptcy courts are given some discretion to determine whether prejudice exists, it is extremely important for creditors and counsel to keep track of bar dates to avoid having potentially reasonable objections denied.

 



[1] In re LMM Sports Mgmt., BAP No. AZ-15-1195, 2016 WL 3213829, at *1-3 (9th Cir. Jun.1, 2016).

[3] See id.

[4] In re LMM Sports Mgmt, 2016 WL 3213829, at *2

[5] Id.

[6] See id. at *4