Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF PUERTO RICO

2

IN RE: :

3 : CASE NO. 10-07005 (ESL)

PICK & SAVE, INC. :

4 : CHAPTER 11

Debtor :

5 ____________________________________:

6 OPINION AND ORDER

7 This case is before the court upon the Debtor’s Objection to Claims # 37, 38, 39 and 40 Filed

8 by Jose I. Perez Nieves and Oscar Muñoz Garces (the “Objection to Claims”, Docket No. 151) and

9 the Supplemental Brief in Support of Objection to Claim[s] (“Supplemental Brief”, Docket No. 163)

10 alleging that the claims were filed after the deadline for filing proofs of claims and must therefore

11 be disallowed. Also before the court is Creditors Jose I. Perez Nieves’ and Oscar Muñoz Garces’ (the

12 “Creditors”) Reply to Objection to Claims (Docket No. 156) and Supplement to Reply to Objection

13 (Docket No. 164) sustaining that their claims are not barred and that they were diligent in filing them.

14 For the reasons stated below, the Debtor’s Objection to Claims is hereby denied.

15 Procedural Background

16 On July 29, 2010, the Creditors received letters discharging them from their work with the

17 Debtor (Docket Nos. 156-1, pp. 1-2, and 161, p.1, ¶ 1).

18 On August 2, 2010, the Debtor filed its Chapter 11 bankruptcy petition (Docket No. 1). The

19 Creditors were not included in the bankruptcy petition or notified of its proceedings (Docket No. 161,

20 p. 1, ¶ 3). The deadline to file proofs of claims for all non-governmental creditors was set for

21 December 9, 2010 (Docket No. 14). The Creditors were not notified of the bar date.

22 On November 29, 2010, the Debtor filed its first Chapter 11 Plan of Reorganization (Docket

23 No. 52) and Notice to Creditors (Docket No. 53). Neither included the Creditors.

24 On December 27 and 28, 2010, Creditor Perez and Creditor Muñoz respectively filed

25 complaints before the Puerto Rico Court of First Instance (“PR Court of First Instance”) for damages

26 against the Debtor on account of alleged wrongful termination of their respective employments

27 (Docket No. 161, p. 1, ¶ 5). They were both represented by the same legal counsel, Attorney Virgilio

28 J. Gonzalez-Perez (“Attorney Gonzalez”) (Docket No. 161, p. 2, ¶ 6). In both cases, the Debtor was

served with copies of the complaints and on January 26, 2011 proceeded to file motions to stay the

1 state court proceedings. Consequently, the PR Court of First Instance issued judgments in both state

2 court cases staying and closing them for statistical purposes due to the Debtor’s bankruptcy filing.

3 Docket Nos. 151, pp. 10-14, and 161, p. 2, ¶ 8. Both motions requesting the stay of the state court

4 proceedings were properly served on the Creditors through Attorney Gonzalez, as was the Judgment

5 issued by the PR Court of First Instance in both cases (Docket No. 151, pp.7, 9, 10 and 13).

6 On April 21, 2011, the Debtor filed an Amended Plan of Reorganization (Docket No. 92),

7 which contemplated and included all timely filed claims. See Docket No. 161, p. 2, ¶ 10. It did not

8 include the Creditors.

9 On May 2, 2011, the court entered the Order confirming the Debtor’s Amended Plan of

10 Reorganization (Docket Nos. 92 and 95). Also see Docket No. 161, p. 2, ¶ 11.

11 On September 20, 2011 and September 22, 2011, the Creditors filed their claims as general

12 unsecured creditors. See Claims Register Nos. 37 and 38. On December 16, 2011, the Creditors

13 amended their Claims to request priority under 11 U.S.C. 507(a)(4). See Claims Register Nos. 39-1

14 and 40-1.

15 On December 12, 2011, the Debtor filed a Request for Final Decree Pursuant to F.R.B.P.

16 3022 (Docket No. 130) alleging that the plan had been substantially consummated and that entry of

17 the final decree order was proper. On December 21, 2011, the Court scheduled a hearing for January

18 20, 2012 to consider the Debtor’s Request for Final Decree. See Docket No. 132. On December 29,

19 2011, the Creditors filed pro se two separate Motions of Objection (Docket Nos. 134 and 135)

20 averring that they had submitted proofs of claims and that they had subsequently amended them to

21 be entitled to “administrative expense”1 rank under Class 1. On January 11, 2012, the Court issued

22 an Order ruling that the Creditors’ objections would be considered at the January 20, 2012 hearing

23 (Docket No. 138). On January 12, 2012, the Debtor filed a Response to [the Creditors’] Objection

24 to [its] Request for Final Decree arguing that both of Creditors’ claims are “bar dated as general

25 unsecured claims” and that neither one can be considered an administrative expense under 11 U.S.C.

26

27 1 The Court notes that in Creditors’ amended proofs of claims, they did not seek administrative expenses

under 11 U.S.C. § 503 but priority ranking under 11 U.S.C.§ 507(a)(4). See Claims Register Nos. 39-1, ¶ 5, and 40-

28 1, ¶ 5.

2

1 § 503 (Docket No. 140, ¶¶ 10 and 13). The Creditors sur-replied on January 18, 2012 sustaining the

2 main reason for their delay was because the Debtor did not report their claim to the Bankruptcy Court

3 of the US Trustee at any time (Docket Nos. 145 and 146).

4 On January 20, 2012, the Court held a hearing to consider the Debtor’s Request for Final

5 Decree. The Debtor was granted seven (7) days to file a formal objection to the Creditors’ proofs

6 of claims. See Docket No. 147.

7 On January 30, 2012, the Debtor filed its Objection to Claims (Docket No. 151) averring that

8 the Creditors’ claims were time barred, that they had knowledge of the bankruptcy petition filed in

9 the case at bar since at least January 26, 2011 –when it filed and served the motion for stay of the

10 state court proceedings– which caused the PR Court of First Instance to enter the Judgments

11 dismissing both cases. The Debtor also sustains that the Creditors were not diligent in the

12 prosecution of their claims and that therefore they must be disallowed.

13 On February 28, 2012, the Creditors filed a Motion Requesting Extension of Time to File of

14 [sic] Reply to Objection to Claims Number 37, 38, 39 and 40 (Docket No. 152) and on February 29,

15 2012, the court granted it (Docket No. 153). On March 6, 2012, the Creditors filed their Reply to

16 Objection to Claims (Docket No. 156) arguing that the Debtor never scheduled or gave notice of the

17 bankruptcy filing to them as creditors in spite of the fact that Fed. Rs. Bankr. P. 1007(a) and 2002

18 require such notice. They also sustain that they are “known creditors” whose claims were

19 “reasonably ascertainable” by the Debtor and that as such, they were entitled to due process by

20 receiving notice of the deadlines for filing proof of claims (bar date), a copy of the reorganization

21 plan(s) and notice of the confirmation hearing and the confirmation order, none of which they

22 received. They further ascertain that as known creditors, they had a right to assume that proper and

23 adequate notice would be provided before their claims are forever barred. Thus, the Creditors

24 conclude that their lack of notice of these proceedings make any discharge injunction inapplicable

25 to them.

26 On May 8, 2012, a hearing was held to consider the Debtor’s Objection to Claims and the

27 Creditors’ Reply thereto. See Docket Nos. 157, 159 and 160. The court ordered the Debtor and the

28 Creditors to file a joint statement of uncontested facts and granted them 14 days to file supplemental

3

1 legal memoranda and 7 days thereafter to reply. See Docket Nos. 159 and 160.

2 On May 11, 2012, the Debtor and the Creditors jointly filed a Statement of Uncontested Facts

3 (Docket No. 161).

4 On May 22, 2012, the Debtor filed a Supplemental Brief in Support of Objection to Claim[s]

5 (Docket No. 163) reiterating that the Creditor’s claims were time barred and that Creditors were not

6 diligent in prosecuting their claims because they had actual knowledge of the filing of the instant

7 bankruptcy petition since at least January 26, 2011 and yet they filed their claims 8 months after they

8 became aware of it. The Debtor argues that if the Creditors had actual knowledge of the bankruptcy

9 case, then they are deemed to have been on notice of the deadlines which are of record in the case.

10 The Debtor also avers that the Creditors were not “known creditors” because their Complaints at the

11 PR Court of First Instance were for damages due to wrongful termination, not for unpaid wages or

12 vacations.

13 Also on May 22, 2012, the Creditors filed a Motion to Supplement [Reply to] Objection to

14 Claims (Docket No. 164) reiterating that they had been diligent in the prosecution of their claims.

15 Aside from the fact that the Creditors expressed their willingness to go under oath regarding the facts

16 stated therein, the legal arguments of the Motion to Supplement are virtually the same as the ones

17 stated in their Reply to Objection to Claims (Docket No. 156).

18 Legal Analysis and Discussion

19 (A) The Creditors’ Claims: Pre-Petition or Post-Petition?

20 The Bankruptcy Code defines a “claim” as “a right to payment, whether or not reduced to

21 judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,

22 legal, equitable, secured or unsecured; or a right to an equitable remedy for breach of performance

23 if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is

24 reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,

25 secured or unsecured.” 11 U.S.C. § 101(5). The term “claim” is broadly construed under the

26 Bankruptcy Code. Nobelman v. American Savings Bank, 508 U.S. 324, 331 (1993) (“[t]he

27 unqualified word ‘claim’ is broadly defined under the Code”). Also see Alexandra E. Olson,

28 Comment, Treading Murky Waters: The Third Circuit’s Search for When a Claim Arises in In re

4

1 ||Grossman’s, Inc., 52 B.C. L. Rev. E. Supp. 27, 28 (2011) (“The breadth of this definition implies that

2 Congress intended that a debtor would be able to address all legal obligations during the bankruptcy

3 lproceeding.”) “The term ‘claim’ is [also] coextensive with the term ‘debt’”. Alan N. Resnick &

4 J. Sommer, 5 Collier on Bankruptcy J 105.05[1] (16" ed. 2012), citing Penn. Dep’t of Public

5 Welfare v. Davenport, 495 U.S. 552 (1990). A “debt” is a “liability on a claim”. 11 U.S.C. §

6 |101(12).

7 The determination of whether a claim is pre-petition or post-petition is of utmost importance

8 bankruptcy because if the claim arises pre-petition it can be discharged by the Chapter 11 debtor’s

9 of reorganization. See 11 U.S.C. § 1141(d)(1)(A) (stating that the confirmation of a plan

10 |Idischarges the debtor from debt arising before the date of plan confirmation). The Bankruptcy Code

11 not clearly establish when a right to payment arises, but caselaw has held that claims “arise[]

12 when all transactions necessary for liability have occurred, regardless of whether the claim was

13 ||contingent when the petition was filed.” Inre Myers, 362 F.3d 667 (10" Cir. 2004). “[A] debt arises

14 llpre-petition when the debt is ‘valid and enforceable’ at the time the debtor files his bankruptcy

15 |Ipetition.” Id. at 673, quoting Buckner v. Buckner, 218 B.R. 137, 145 (B.A.P. 10" Cir. 1998). “A

16 is ‘valid and enforceable’ pre-petition when liability has attached to the debt as of the petition

17 Inre Myers, 362 F.3d at 673. Also see Epstein v. Official Committee of Unsecured Creditors

18 lof Estate of Piper Aircraft Corp. (In re Piper Aircraft), 58 F.3d 1573, 1577 (11" Cir. 1995). A claim

19 regardless of enforcement efforts (7.e. future litigation) or whether the claim is contingent,

20 |funliquidated, or unmatured when the petition is filed. See In re Stewart Foods, Inc., 64 F.3d 141, 146

21 Cir. 1995) (“[T]hat the payments became due after the bankruptcy filing does not alter the

22 |Iconclusion that the payments are pre-petition obligations”); Chiasson v. J. Louis Matherne & Assocs.

23 Oxford Mgmt., Inc.), 4 F.3d 1329, 1335 (5" Cir. 1993) (“A claim is not rendered a post-petition

24 |Iclaim simply by the fact that time for payment is triggered by an event that happens after the filing

25 the petition”); United States v. Gerth, 991 F.2d 1428, 1433 (8" Cir. 1993) (“[D]ependency on a

26 |Ipost-petition event does not prevent a debt from arising pre-petition.”); Braniff Airways v, Exxon,

27 814 F.2d 1030, 1036 (5" Cir. 1987) (“The character of a claim is not transformed from pre-petition

28 post-petition simply because it is contingent, unliquidated or unmatured when the debtor’s petition

1 is filed”).

2 Until 2010, to determine if a claim was pre-petition or post-petition many courts followed the

3 test established in Avellino & Bienes v. M. Frenville Co. (In re Frenville Co.), 744 F.2d 332 (3rd Cir.

4 1984): a right to payment does not exist until there is a cause of action under the applicable state law.

5 Id. at 337. In JELD-WEN, Inc. v. Van Brunt (In re Grossman’s Inc.), 607 F.3d 114, 125 (3rd Cir.

6 2010), however, the Third Circuit expanded the scope of a “claim” to when an individual is merely

7 “exposed” to the debtor’s product or conduct giving rise to a pre-petition injury that manifests post-

8 petition.

9 In the instant case, the Complaints filed by the Creditors at the PR Court of First Instance

10 constitute pre-petition claims because all the necessary transactions for Debtor’s possible liability

11 occurred on July 29, 2010, the day when the Creditors received their respective letters discharging

12 them from their employments with the Debtor (Docket Nos. 156-1, pp. 1-2, and 161, p.1, ¶ 1). The

13 fact that the Complaints were filed post-petition, i.e. on December 27 and 28, 2010, respectively, does

14 not make them post-petition claims. See Claims Nos. 37-1, pp. 2-6, and 38-1, pp. 2-4.

15 (B) The Creditors’ Due Process

16 The Debtor avers that the Creditors were negligent in prosecuting their Claims for eight (8)

17 months after they became aware of the existence of the instant bankruptcy proceeding and that

18 therefore their Complaints should be barred. Conversely, the Creditors contend that they are known

19 creditors to the Debtor subject to adequate notice of the bankruptcy proceeding and its deadlines

20 before their claims are forever barred by a discharge injunction. They also argue that their general

21 knowledge of the instant proceeding is insufficient to satisfy the requirements of due process. In

22 short, on the one hand, the Debtor argues that the Creditors had the affirmative duty to diligently

23 prosecute their claims once they became aware of the instant bankruptcy proceeding, and on the other

24 hand, the Creditors argue that it is the Debtor who had the affirmative duty to notify them of these

25 proceedings, include them in the schedules and give them adequate notice of all deadlines.

26 In Paging Network, Inc. v. Nationwide Paging, Inc. (In re Arch Wireless, Inc.), 534 F.3d 76

27 (1st Cir. 2008), the Court of Appeals for the First Circuit (the “First Circuit”) explained that the

28 general rule of due process in bankruptcy requires:

6

1 notice reasonably calculated, under all the circumstances, to apprise interested parties

of the pendency of the action and afford them an opportunity to present their objections.

2 The notice must be of such nature as reasonably to convey the required information, and

it must afford a reasonable time for those interested to make their appearance. Id. at 83,

3 quoting Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950).

4

Notice to creditors embodies a “basic principle of justice — that a reasonable opportunity to be heard

° must precede judicial denial of a party’s claimed rights.” In re Arch Wireless, Inc., 534 F.3d at 84,

° quoting City of New York v. New York, N.H. & H.R. Co., 344 US. 293, 296 (1953).

' To ensure creditors’ due process in bankruptcy proceedings, Fed. Rs. Bankr. P. 1007(a) and

2002 require a debtor to list all of his/her/its creditors and notify them of the key events in the

° bankruptcy proceeding. Caselaw distinguishes between “unknown” and “known” creditors . See In

re Arch Wireless, Inc., 534 F.3d at 84. “Unknown creditors” are those whose “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].” Mullane v. Cent. Hanover Bank & Trust Co., 339

U.S. at 317. “Known creditors” are those whose claims and identity are actually known or

“reasonably ascertainable” by the debtor. Tulsa Prof?| Collection Servs. Inc. v. Pope, 485 U.S. 478,

490 (1988). A creditor is “reasonably ascertainable” if his/her/its claim can be discovered through

“reasonably diligent efforts.” Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 (1983).

" These efforts generally include “a careful search of the debtor’s own records.” Louisiana Dep’t of

Envt’l Quality v. Crystal Oil Co. (In re Crystal Oil Co.), 158 F.3d 291, 297 (5" Cir. 1998). “[I]n

order for a claim to be reasonably ascertainable, the debtor must have in his possession ... some

°° specific information that reasonably suggests both the claim for which the debtor may be liable and

the entity to whom he would be liable.” Id. at 297. The distinction between these known and

unknown creditors implies different approaches to due process. Known creditors must receive notice

of deadlines for filing proofs of claims (bar date), a copy of the reorganization plan, notice of the

confirmation hearing and the confirmation order. Fed. Rs. Bankr. P. 2002(a)(7), 3017(d) and 2002(f).

°° Also see In re Arch Wireless, Inc., 534 F.3d at 82. For known creditors, general knowledge of the

°° bankruptcy proceedings will not suffice. “[T]he fact that the creditor may ... be generally aware of

the pending reorganization, does not of itself impose upon him an affirmative burden to intervene in

1 matter and present his claim. ... [T]he [known] creditor has a right to assume that proper and

2 ljadequate notice will be provided before his claims are forever barred.” In re Intaco Puerto Rico, Inc.,

3 1494 F.2d 94, 99 (1* Cir. 1974).

4 The First Circuit recently emphasized the importance of a debtor’s schedules in Guay v.

5 ||Burack, 677 F.3d 10 (1* Cir. 2012). Though the controversy in that case hinged on a debtor’s failure

6 schedule certain assets, the Court reasoned that “a bankruptcy court ‘accepts’ a position taken ...

7 bankruptcy schedules [and the representations made therein] when it grants the debtor relief,

8 as discharge, on the basis of those filings.” Id, at 18. “The law is abundantly clear that the

9 burden is on the debtors to list the asset and/or amend their schedules...” Jeffrey v. Desmond, 70 F.3d

10 183, 186 (1* Cir. 1995). The same principle is applicable to a debtor’s duty to list creditors in the

11 bankruptcy schedules and to amend them upon becoming aware of a claim against the bankruptcy

12 For instance, in Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 163, 177

13 ||(B.A.P. 9" Cir. 2007) aff’d 578 F.3d 1167 (9" Cir. 2009), the Bankruptcy Appellate Panel for the

14 Circuit ruled that “nondisclosure of creditors (and debts) can be just as important as

15 nondisclosure of assets.” With that ruling, the Court in Khalil expressly expanded a previous ruling

16 Searles v. Riley (In re Searles), 317 B.R. 368 (B.A.P. 9" Cir. 2004) aff'd 212 Fed. Appx. 589, 2006

17 ]U.S. App. LEXIS 29595, 2006 WL 3431844 (9" Cir. 2006), which dealt with nondisclosure of

18 |Imaterial assets in the bankruptcy schedules. Also see DPWN Holdings (USA), Inc. v. United Air

19 |Lines, Inc., 2012 U.S. Dist. LEXIS 70026 at *36, 2012 WL 1821409 at *11 (E.D.N.Y. 2012)

20 is required to prepare schedules of its debts, and should include potential legal claims against

21 even if disputed.”) Similar to the instant case’, in Searles the debtor argued that when she filed

22 bankruptcy petition she was not cognizant of certain funds from her former employer’s profit

23 |\sharing plan and thus did not include them in her schedules. 317 B.R. at 378. Notwithstanding, the

24 emphasized that regardless of her lack of knowledge at that time:

25 [e]very debtor has a continuing duty to assure the accuracy and completeness of

schedules. Postpetition discovery of rights that actually existed at the time of filing

26 must be addressed in the schedules. This implies a duty to amend. Searles, 317 B.R.

27 WO

28 * There is no dispute that when the Debtor filed its petition in this case, the Creditors had not filed their

Complaints before the PR Court of First Instance, and thus the Debtor had no knowledge of the claims at that time.

1 at 378 (emphasis added).

2 “The duty to disclose is a continuing one that does not end once the forms are submitted to the

3 ||bankruptcy court; rather, a debtor must amend his financial statements if circumstances change.”

4 |IBurnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1286 (11" Cir. 2002), citing In re Coastal Plains,

5 179 F.3d 197, 208 (5" Cir. 1999), “Full and honest disclosure in a bankruptcy case is ‘crucial

6 ||to the effective functioning of the federal bankruptcy system.’” Burnes, 291 F.3d at 1286 quoting

7 Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 362 (3" Cir. 1996). “[T]he

8 |limportance of full and honest disclosure cannot be overstated.” Ryan Operations G.P., 81 F.3d at

9 362. Hence, failure to amend schedules to include pre-petition rights, be it assets or liabilities, can

10 jJultimately result in denial or revocation of a discharge order. See In re Khalil, 379 B.R. at 177; In

11 Searles, 317 B.R. at 378. The debtor carries a duty to amend its/his/her schedules upon becoming

12 aware of an asset or liability. “Accordingly, a debtor’s objection to a late claim cannot

13 |lconstitutionally be sustained and the creditor’s claim barred if the debtor’s failure to list, or inaccurate

14 of, the creditor causes the creditor to miss the proof of claim deadline.” Vicenty v. San Miguel

15 Sandoval (In re San Miguel Sandoval), 327 B.R. 493, 507 (B.A.P. 1* Cir. 2005)’.

16 In the instant case, when the Debtor filed its bankruptcy petition, the Creditors had not filed

17 complaint regarding the alleged wrongful termination of their employments, which happened

18 4 days prior. There is no indication or evidence in the record that suggests that the Creditors

19 informed the Debtor of their intention to claim their alleged wrongful terminations prior to the

20 of the bankruptcy petition. Consequently, the Debtor could not reasonably infer at that time

21 the Creditors’ claims were “reasonably ascertainable”. In re Arch Wireless, Inc., 534 F.3d at 81.

22 Notwithstanding, when the Debtor was summoned with the Creditors’ Complaints or became aware

23

24

25

26 * The Court notes that the Debtor cited this case in its Supplemental Brief in Support of Objection to Claim

47 || Docket No. 163, p. 7) for the proposition that service of notice of pending bankruptcy proceedings on a creditor’s

attorney is deemed to bestow upon the creditor actual knowledge of the bankruptcy and thus lack of a specific notice

2g || of the bar date does not violate the creditor’s right to due process. Notwithstanding, in In re San Miguel Sandoval,

contrary to the one at bar, the debtor included the creditor in controversy in its schedules. 327 B.R. at 498.

1 of them4, they became ipso facto “known creditors” to the Debtor. Its duty then was to immediately

2 amend its schedules to include them as creditors and give them proper notice of the bankruptcy

3 proceeding. In re Arch Wireless, Inc., 534 F.3d at 81. The Debtor cannot shift that duty onto the

4 Creditors.

5 (C) Proofs of Claims in Chapter 11 Cases

6 Creditors can file proofs of claims in bankruptcy proceedings pursuant to 11 U.S.C. § 501.

7 Filed claims are “deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502(a). A

8 disallowed claim will not participate in the case, vote on Chapter 11 plans or receive any payment

9 with regards to that claim. See Alan N. Resnick & Henry J. Sommer, 5 Collier on Bankruptcy ¶

10 502.01 (16th ed. 2012). Section 502(b) establishes the grounds for objecting a proof of claim.

11 Subsection (b)(9) provides that a proof of claim may be disallowed if:

12 [it] is not timely filed, except to the extent tardily filed as permitted under paragraph

(1), (2), or (3) of section 726(a) of this title or under the Federal Rules of Bankruptcy

13 Procedure, except that a claim of a governmental unit shall be timely filed if it is filed

before 180 days after the date of the order for relief or such later time as the Federal

14 Rules of Bankruptcy Procedure may provide, and except that in a case under chapter 13,

a claim of a governmental unit for a tax with respect to a return filed under section 1308

15 shall be timely if the claim is filed on or before the date that is 60 days after the date on

which such return was filed as required. 11 U.S.C. § 502(b)(9).

16

17 The effect of the time frame on which a proof of claim is filed depends largely upon the

18 chapter of the Bankruptcy Code under which the case is proceeding. The reason for the distinction

19 was explained by the Court of Appeals for the Ninth Circuit in Levin v. Maya Constr. (In re Maya

20 Constr. Co.), 78 F.3d 1395 (9th Cir. 1996), as incorporated by the First Circuit in Arch Wireless, Inc,

21 534 F.3d at 85:

22 In contrast to the rule governing proofs of claims in a Chapter 11 suit, which instructs

the court to fix a proof of claims deadline and permits the court to extend that deadline

23 “for cause shown,” the rule governing Chapter 7 and 13 proceedings provides that

proofs of claim shall be filed within 90 days of the first creditors meeting and specifies

24 limited exceptions. Thus, once the creditors [in Chapter 7 and 13 cases] had received

notice of the creditors meeting, they had effective notice that proofs of claim were due

25

26

4 The Court notes that when the Debtor filed the motion to stay the Creditors, it alleged that the summons

27 were defective because the summons did not have the signature, time, place and method of service and thus appeared

before the PR Court of First Instance without submitting itself to its jurisdiction (Docket No. 151, pp.6, ¶ 2 and 8, ¶

28 2). Regardless, the Debtor does not dispute that it was served with copies of the Creditors’ Complaints.

10

1 within 90 days, unless very limited exceptions applied. In contrast to creditors in a

Chapter 7 or 13 case, even if [a Chapter 11 creditor] had received notice of a creditors

2 meeting or any other formal notice, ... he still would not have known when the deadline

for filing proofs of claims was, and therefore, cannot be said to have been given any

3 notice.

4 Fed. R. Bankr. P. 3003 governs the filing of proofs of claim in Chapter 11 cases like the

5 instant one by providing in its pertinent part that “[t]he court shall fix and for cause shown may

6 extend the time within which proofs of claim or interest may be filed.” Likewise, LBR 3003-1 sets

7 the bar date for Chapter 11 claims as follows:

8 Proofs of claim in Chapter 11 cases must be filed: (a) on or before ninety (90) days from

the date first set for the § 341 meeting of creditors; and, (b) for governmental units,

9 within one hundred and eighty (180) days after the date of the order for relief, unless

otherwise ordered by the court. Id. (emphasis added).

10

11 These two rules must be read in conjunction with Fed. R. Bankr. P. 9006(b)(1), which allows in part

12 that:

13 Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required

or allowed to be done at or within a specified period by these rules or by a notice given

14 thereunder or by order of court, the court for cause shown may at any time in its

discretion ... on motion made after the expiration of the specified period permit the act

15 to be done where the failure to act was the result of excusable neglect.

16 In Pioneer Inv. Serv. Co. v. Brunswick Assoc. L.P., 507 U.S. 380, 389 (1993), the Supreme

17 Court addressed the scope of “excusable neglect” set forth in Fed. Bankr. R. 9006:

18 Hence, by empowering the courts to accept late filings where the failure to act was the

result of excusable neglect, Rule 9006(b)(1), Congress plainly contemplated that the

19 courts would be permitted, where appropriate, to accept late filings caused by

inadvertence, mistake, or carelessness, as well as by intervening circumstances beyond

20 the party’s control.

21 Following that analysis, the Supreme Court established the applicable standard:

22 Because Congress has provided no other guideposts for determining what sorts of

neglect will be considered “excusable”, we conclude that the determination is at bottom

23 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

24 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

25 acted in good faith. Id. at 396.

26 Also see Perea Ferrer v. Irizarry Concepcion, 2010 Bankr. LEXIS 2426, 2010 WL 7698071 (BAP

27 1st Cir. 2010) (incorporating this analysis intertwining Fed. Rs. Bank. P. 3003 and 9006 and applying

28 the Pionner standard).

11

1 In the instant case, the Court finds that extending the bar date to permit the Creditors’ claim

2 warranted for various reasons. As previously discussed, it was the Debtor’s main duty to amend

3 |jits schedules once it became aware of the Creditors’ Complaints. The Creditors also have “a right

4 Ito assume that proper and adequate notice will be provided before his claims are forever barred.”

5 Intaco, 494 F.2d at 99. The totality of the circumstances of this case, in addition to the “basic

6 |lprinciples of justice”, warrant the discretion afforded by Fed. Rs. Bankr. P. 3003 and 9006 and LBR

7 3003-1 to extend the bar date to allow the Creditor’s Complaints. The Court, however, will not rule

8 jjon the validity of such claims at this time.

9 (D) — The Creditors’ Claims: Priority or Administrative Expense?

10 The Creditors alleged in their Motions of Objection that their claims are entitled to

11 |\“administrative expense” status. (Docket Nos. 134 and 135, J 1(b) respectively).

12 In Cramer v. Mammoth Mart, Inc. din re Mammoth Mart, Inc.), 536 F.2d 950 (1* Cir. 1976),

13 |Ithe First Circuit established a two-prong test to determine whether or not a claim qualifies as an

14 lladministrative expense: (1) the right to payment must arise from a post-petition transaction with the

15 estate, rather than from a pre-petition transaction with the debtor, and (2) the consideration

16 ||supporting the right to payment must be “beneficial to the estate” of the debtor. Id. at 954 (emphasis

17 added). This two-prong test was subsequently upheld by the First Circuit in In re FBI Distrib. Corp.,

18 F.3d 36, 42 (1* Cir. 2003): “In general, for a claim to qualify as an administrative expense under

19 |lsubsection 503(b)(1): (1) it must have arisen from a transaction with the trustee or debtor in

20 |Ipossession, rather than from a pre-petition transaction with the debtor, and (2) the consideration

21 |lsupporting the claim must have benefitted the estate in some demonstrable way”.

22 As previously discussed, the Creditors’ claims are pre-petition, not post-petition, and thus do

23 |Inot satisfy the first prong of the administrative expense test. In re Mammoth Mart, Inc., 536 F.2d at

24 1954. Also, the claims have no demonstrable benefit to the bankruptcy estate. The court therefore

25 their request for administrative expenses.

26 The Court notes, however, that the Creditors’ amended proofs of claims requested “priority

27

28 ° In re Arch Wireless, Inc., 534 F.3d at 84, quoting City of New York, 344 U.S. at 296.

12

1 |\status” under 11 U.S.C. § 507(a)(4).

2 Unsecured claims are divided into two groups: those entitled to priority under Section 507

3 the Bankruptcy Code and those not entitled to priority. Priority claims must be paid in full before

4 any payment is made to nonpriority claims. In reorganization cases like the one at hand, priority

5 must be paid in full in order to confirm reorganization plans under Chapter 11. See 11 U.S.C.

6 1129(a)(9); William D. Warren & Daniel J. Bussel, Bankruptcy, Foundation Press, 8" ed. 2009, p.

7 121. Section 507(a)(4)(A) of the Bankruptcy Code provides as follows:

8 (a) The following expenses and claims have priority in the following order:

9 (4) Fourth, allowed unsecured claims, but only to the extent of $11,725 for each

individual or corporation, as the case may be, earned within 180 days before the date

10 of the filing of the petition or the date of the cessation of the debtor's business,

whichever occurs first, for--

(A) wages, salaries, or commissions, including vacation, severance, and sick leave pay

12 earned by an individual; ... 11 U.S.C. § 507(a)(4)(A) (emphasis added).

13 The Creditors’ Complaints seek severance payment (Claims Register Nos. 38-1, p. 3, J 17,

14 37-1, p. 6, 36), and therefore may be entitled priority up to the amount of $11,725 pursuant to

15 Section 507(a)(4)(A).

16 Conclusion

17 For the reasons stated herein, the Debtor’s Objection to Claims (Docket No. 151) and

18 ||Supplemental Brief (Docket No. 163) alleging that the Creditors’ are time barred and must therefore

19 disallowed is hereby denied. Creditors’ request for administrative expenses is also hereby denied.

20 In San Juan, Puerto Rico, this 13" day of September, 2012.

21 SO ORDERED.

22

» Ahmeyle

24 ique S. Lamoutte

United States Bankruptcy Judge

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