In recent decades, with the emergence of the internet and development of technology, reading a newspaper printed on real paper has become a fleeting relic of daily life in this country. We can now get the news we want in a single click, from almost anywhere and at any time. This once daily ritual, however, may be of great importance to bankruptcy debtors and their attorneys, as well as creditors who may be unknown to the debtor at the time of its bankruptcy proceeding.
For debtors and their attorneys, realizing the value of a newspaper in providing notice by publication may mean the difference between liability and no liability for claims by those creditors who, at the time of the bankruptcy proceeding, may be unknown to the debtor. At the same time, unknown creditors may want to pick up a newspaper to potentially avoid having their claims deemed discharged by a debtor’s bankruptcy.
One of the principal purposes of bankruptcy law, as articulated by the United States Supreme Court, is to secure, within a limited time period, the prompt and effectual administration and settlement of a debtor’s estate. To this end, Federal Rule of Bankruptcy Procedure 3003(c) requires claimants to file proofs of claim prior to an established bar date to participate in a debtor’s reorganization. Where a claimant files a claim after the bar date, or fails to file one at all, the claimant is typically precluded from participating in a debtor’s reorganization except in certain, limited circumstances.
Notice to a debtor’s creditors is the cornerstone of ensuring that those creditors are aware of their ability to participate in a debtor’s reorganization and are afforded their due process rights. The seminal case of Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950), holds that “[a]n elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is 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.” Id. at 314.
But what does “reasonably calculated” mean? And how can a debtor or its attorney ensure that the notice it provides satisfies due process requirements? Unfortunately, case law does not provide clear answers, but does provide a general framework for answering these questions. In determining whether notice is sufficient, courts make an important distinction between “known” and “unknown” creditors. A “known” creditor is one whose identity is, not surprisingly, either known or “reasonably ascertainable by the debtor,” that is, can be identified through “reasonably diligent efforts.” Reasonable diligence does not require “impracticable and extended searches;” indeed, courts have held that debtors are not required to “search out each conceivable or possible creditor and urge that person or entity to make a claim against it.” In re Charter Co., 125 B.R. 650, 654 (M.D. Fla. 1991).
At the other end of the spectrum are “unknown creditors,” or creditors whose “interests are either conjectural or future or, although they could be discovered upon investigation, do not in due course of business to come to [the] knowledge [of the debtor].” Mullane, 339 U.S. at 317.
Mullane demonstrates the significance of one’s status as a known or unknown creditor and the type of notice to which each group is entitled. In Mullane, beneficiaries of a common trust fund challenged a New York statute that permitted the estate’s trustee to provide only publication notice of its judicial settlement of accounts. The court held that publication notice was sufficient for those beneficiaries “whose interest or whereabouts could not with due diligence be ascertained,” reasoning that “[h]owever great the odds that publication will never reach the eyes of such unknown parties, it is not in the typical case much more likely to fail than any of the choices open to legislators endeavoring to prescribe the best notice practicable.” Id. As to “known” creditors, however, publication notice was insufficient, as the court explained that, to satisfy due process, the trustee should have made a “serious effort to inform [these beneficiaries] personally of the accounting.” Id. at 318.
Applied to the bankruptcy context, Mullane makes clear that for notice purposes, known creditors must be provided with actual written notice of a debtor’s bankruptcy filing and bar date, while notice by publication will generally suffice for those creditors which are unknown. The question still remains, however, as to the type of publication notice that will suffice. Federal Rule of Bankruptcy Procedure 9008 authorizes the court to determine the form and manner of notice by publication, including the newspaper or other medium to be used and the number of publications. As the case law demonstrates, the form and manner of notice largely depends on the particular debtor and the geographical scope of its operations.
In Chemetron Corp. v. Jones, 72 F.3d 341 (3d Cir. 1995), for example, the debtor, in accordance with its bar date order, published the bar date notice in the national editions of the New York Times and Wall Street Journal. The debtor also went beyond the requirements of the bar date order, publishing the bar date notice in seven other newspapers in areas where the debtor did business at the time of the filing. The court found that the debtor’s publication of the bar date notice in the national newspapers, combined with the debtor’s supplemental efforts to publish the notice in areas in which it conducted business, were “reasonably designed to reach all interested parties.” Id. at 349. Thus, the court held that notice was sufficient in upholding the due process rights of the debtor’s unknown creditors.
A more recent case, Wright v. Owens Corning, No. 09-1567, 2011 WL 1085673 (W.D. Pa. March 21, 2011), addresses the adequacy of publication notice, but also illustrates the effect that carefully thought-out and executed notices by publication can have on a debtor’s liability for claims of unknown creditors. Before the court in Wright was a motion filed by reorganized Owens Corning for summary judgment as to the claims of two individuals that had purchased roofing shingles originally produced by Owens Corning. The plaintiffs purchased the shingles from third-party contractors in 1998/1999 and 2000, respectively.
In October 2000, Owens Corning and several related entities filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On September 26, 2006, the court issued an order confirming Owens Corning’s plan of reorganization. While only one of the plaintiffs had purchased the shingles prior to the petition date, both of the plaintiffs’ purchases were made prior to plan confirmation. However, neither of the plaintiffs contacted Owens Corning regarding their purchases until 2009, well after the bar date. Accordingly, neither plaintiff received actual notice of the bankruptcy proceeding or bar date.
In its motion, reorganized Owens Corning argued, among other theories, that plaintiffs’ claims were effectively discharged as a result of Owens Corning’s bankruptcy proceeding, adequate notice of which was provided to the plaintiffs by publication. The court agreed. Finding that plaintiffs were “unknown” creditors under Mullane on account of the fact that the plaintiffs first contacted Owens Corning in 2009, years after its plan had been confirmed, the court concluded that Owens Corning was not required to provide the plaintiffs with actual notice and, rather, could satisfy due process requirements through publication notice.
According to the court, the extensive notice provided by Owens Corning – including publication of notice of the bankruptcy proceedings, the bar date, and entry of the confirmation order in The New York Times, The Wall Street Journal and USA Today, as well as 250 regional or local newspapers in areas where Owens Corning had significant business operations at the time of publication, and in approximately 35 trade publications in the primary lines of business operated by Owens Corning – satisfied the due process requirements and discharged Owens Corning’s duty to unknown creditors such as plaintiffs.
* * *
The cases and legal principles presented by Mullane and Chemetron and most recently, Wright, are well established and far from “cutting edge.” Nevertheless, when the popularity of reading a tangible newspaper seems to be steadily depleting, these cases are an important reminder of the critical role that newspapers may play for both debtors and creditors alike.
Creditors should be diligent in checking national papers so as not to miss any publicized notice of a pertinent bar date, thereby potentially avoiding the discharge of their claims. Debtors’ counsel should likewise be mindful of the breadth and scope of their clients’ operations and the likelihood of bar date notice to reach potential creditors to ensure that such notice is reasonably calculated to apprise parties of the debtor’s bankruptcy proceeding.