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Creditors Barred from Asserting $53 Million Claim: A Look at the Excusable Neglect Standard

Another case shows the perils of waiting until the final minutes to meet a court deadline.  In re U-Haul, 21-bk-20140, 2021 Bankr LEXIS 3373 (Bankr. S.D. W. Va. Dec. 10, 2021).

The debtor is a well-known truck rental company.  Years before the debtor filed for bankruptcy, a class action lawsuit was filed against it.  The suit alleged the debtor had improperly charged certain environmental fees and sought damages totaling $53 million.

In June 2021, the debtor filed for chapter 11.  The deadline or bar date for creditors to file proofs of claim was set for August 25 at 11:59 pm. Claims could be filed in person, by mail, or through the bankruptcy courts CM/ECF electronic filing system.  And the Court was explicit that claims had to be received before the calendar turned to August 26, or the claims would be “forever barred.”

The class claimants’ counsel opted to file two claims on the CM/ECF system.  But counsel waited to file until the evening of August 25.  All didn’t go as planned.  The person filing the claims didn’t realize that he lacked the proper login credentials for the court.  And, by then, it was too late for him to reach anyone for help in the court clerk’s office.  As a result, he was unable to file the claims by 11:59 pm.

As a back-up, counsel emailed the claims to all counsel an hour and 26 minutes after midnight on August 26.  Then, after counsel obtained proper filing credentials that morning, the claims were filed on the CM/ECF system nine hours and 45 minutes late.  The debtor’s counsel objected to the filing, arguing that the claims should be forever barred because they were filed after the August 25 deadline.

The filing of proofs of claim are governed by Federal Rule of Bankruptcy Procedure 3003. Courts can extend a creditor’s time to file a claim for “cause shown.”  Rule 3003(c).  Under Rule 9006(b)(1), courts will permit creditors to file claims beyond the time set upon a showing of “excusable neglect.”

The leading and well-known case on “excusable neglect” is Pioneer Inv. Servs. v. Brunswick Assocs. Ltd P’ship, 507 U.S. 380 (1993).  In that case, the Supreme Court stated that “[a]lthough  inadvertence, ignorance of the rules, or mistakes construing the rules do not usually constitute ‘excusable neglect,’ it is clear that ‘excusable neglect’ . . . is a somewhat ‘elastic concept’ and is not limited strictly to omissions caused by circumstances beyond the control of the movant.” Id. at 392.  The Court also stressed that any neglect had to be “excusable.”  This requires courts to consider:

  1. the prejudice to the debtor,
  2. the length of delay and impact on the judicial proceedings,
  3. the reason for the delay and if it was within the control of the movant or not, and
  4. if the movant acted in good faith.[MW1]

Class claimants’ counsel argued that they satisfied the excusable neglect standard.  They asserted that the court should excuse the late filing because (1) the debtor wasn’t prejudiced by the late filing, (2) disallowance of the $53 million claims would be unfair to the class claimants, (3) counsel’s inability to file on the CM/ECF system was not under their control, and (4) counsel had tried to file the claims in good faith.[MW2]

The bankruptcy court disagreed.  “The reason for the delay in filing was entirely within the control of counsel to the Ferrell Class. . . .  [T]he Ferrell Class had ample notice of the Bar Date as well as the dire consequences that would result from missing the deadline.”  In addition, the class had over a month to draft its claim and had three options for filing it.  “Counsel knowingly assumed a significant risk to the status of the claim by waiting until the literal last minute to file it.”  2021 Bankr. LEXIS, at *19.

Because the delay in filing was solely caused by class counsel and not “technical difficulties” with the electronic filing system, the court ruled that class counsel couldn’t satisfy the excusable neglect standard.  The court briefly noted that the other Pioneer factors also favored the debtor. As a result, the Ferrell Class was “forever barred” from asserting the $53 million claim.