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Bar Date Notice Insufficient For Unknown Creditors Despite Publication Nationally And Locally

White v. Jacobs (In re New Century TRS Holdings, Inc.), No. 13-1719-SLR, 2014 WL 4100749 (D. Del. Aug. 19, 2014)

The central question in this appeal was whether notice of a debtors’ claims bar date was constitutionally sufficient to afford unknown creditors due process.*  Although publication notice of a bar date in national and local newspapers is often deemed sufficient for unknown creditors, the Delaware District Court held that, under the circumstances of this case, the notice was insufficient and vacated the Bankruptcy Court’s ruling.  In so ruling, the District Court observed that “when the bar date is set so close to the publication date, debtors have a heavier burden to ensure that notice is widespread.” Id. at *6 n.8.

By way of background, Molly and Ralph White (the “Appellants”) entered into a consumer mortgage loan transaction with New Century Mortgage Corporation (together with its affiliates, the “Debtors”).  The Debtors filed for relief under chapter 11 on April 2, 2007, and set August 31, 2007 as the deadline for filing proofs of claim (the “Bar Date”).  On July 23, 2007, the Debtors’ claims agent published notice of the Bar Date once in The Wall Street Journal and a local California newspaper near the Debtors’ main office.  Over one year after the Bar Date, Appellants filed their proofs of claim alleging several causes of action against the Debtors stemming from the loan transaction.  In 2009, the Bankruptcy Court entered an order confirming the Debtors’ plan of liquidation, and appointed Alan Jacobs as the Debtors’ liquidating trustee (the “Appellee”).  Appellee objected to Appellants’ claims as, among other things, being untimely filed.

In 2011, the Bankruptcy Court first addressed the Appellants’ claim of lack of notice and due process.  On a motion to dismiss, the Bankruptcy Court held that the Debtors complied with the minimum requirements of the Bar Date Order, but it needed a more fully developed factual record to determine whether the Debtors’ publication notice satisfied the Appellants’ due process.  Eventually, the Bankruptcy Court held an evidentiary hearing, sustained Appellants’ objection, and found that the Debtors’ publication notice was not constitutionally infirm.  Appellants appealed the ruling** and appeared pro se.

The District Court commenced its analysis by stating the importance of notice as a fundamental requirement of due process.  In the bankruptcy context, known creditors must be accorded actual notice of the claims bar date whereas unknown creditors need only be accorded constructive notice.  Publication of the bar date notice in national newspapers, coupled with notice in local papers where the debtor conducts its business, is generally deemed sufficient notice for unknown creditors.  In the case at hand, the Debtors did just that—published notice once nationally and once locally where a large concentration of the Debtors’ employees were based.  However, the Debtors admitted that although they had business operations throughout the United States and had more than one million borrowers nationwide, the Debtors did not consider their borrowers when noticing the Bar Date.  The District Court thus vacated the Bankruptcy Court’s ruling having found that the Debtors could have published notice in a national newspaper for less sophisticated readers, such as USA Today, as opposed to The Wall Street Journal, to ensure that notice reached all potential claimants.  In doing so, it appears the District Court may have held the Debtors’ noticing efforts to a higher standard because the Debtors gave unknown claimants a mere 39 days from publication notice to the Bar Date to file their claims.  For these reasons, the District Court found that the notice provided was not reasonably calculated to apprise Appellants of the Bar Date and vacated the Bankruptcy Court’s holding that the notice passed constitutional muster.

* For recent blog posts from the Delaware Bankruptcy Insider relating to similar issues from the New Century TRS Holdings, Inc. bankruptcy, click here.

** The Bankruptcy Court specifically stated that it did not opine on: (i) whether Appellants were “unknown” or “known” creditors for purposes of actual notice; (ii) whether claimants met the excusable neglect standards; or (iii) the merits of the underlying claims.  As such, the District Court limited its ruling to the constitutional sufficiency of the Bar Date Notice as applied to unknown creditors.