Law Firm's Proof of Claim Filed Untimely in Ch. 11 Cases

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By Diane Davis

June 3 — A bankruptcy court correctly determined that a law firm's untimely-filed proofs of claim for attorney's fees in three bankruptcy cases couldn't be treated as timely filed under Federal Rule of Bankruptcy Procedure 9006(b) (1) due to excusable neglect, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held June 1 in an unpublished decision ( Warner Angle Hallam Jackson & Formanek, P.L.C. v. Lock (In re LMM Sports Mgmt., LLC), 2016 BL 174776, B.A.P. 9th Cir., No. AZ-15-1195-KuJaJu, unpublished decision 6/1/16 ).

Judges Frank L. Kurtz and Meredith A. Jury, and Judge Christopher D. Jaimee of the U.S. Bankruptcy Court for the Eastern District of California, sitting by designation, concluded that bankruptcy courts shouldn't exercise their equitable authority in a manner that conflicts with the explicit provisions of the statutes and rules.

“The Bankruptcy Code and Rules, as drafted, provide bright line procedures making it clear for creditors whether or not they need to file proofs of claim, and the act of filing a claim is easy and straightforward in the vast majority of cases,” the BAP said.

Exercising Equitable Authority

Bankruptcy courts should cautiously “exercise their equitable authority within the confines of the Bankruptcy Code,” the BAP said, citing the U.S. Supreme Court's decision in Law v. Siegel , 2014 BL 57926, 134 S. Ct. 1188 (2014)(26 BBLR 311, 3/6/14),

According to the BAP, the bankruptcy court's finding that the debtors were prejudiced by the law firm's delay in filing proofs of claim was “logical, plausible, and supported by the record.”

Debtors Reach Settlement With Creditor

Debtors Ethan Lock and Eric Metz are two of the three owners of debtor LMM Sports Management, LLC. The third owner is Vance Malinovic. The debtors and Malinovic are sports managers and agents for 30 athletes employed by the National Football League.

The law firm Warner Angle Hallam Jackson & Formanek, P.L.C., provided legal services to the debtors in their state court litigation against third party Your Source Pacific Fund I, LLP.

Your Source Pacific Fund I, LLP obtained a $2.4 million judgment in state court against the debtors and Malinovic. Enforcement of the judgment caused the three debtors to file for Chapter 11 bankruptcy protection. Chapter 11 is for businesses or individuals whose debts exceed the statutory thresholds for Chapter 13.

Ultimately, the debtors and Your Source Pacific Fund I reached a $1.5 million settlement. The bankruptcy court approved the settlement over Warner Angle's objection. In a footnote in their objection, Warner Angle stated that as of the petition date, it had a $1.3 million claim against the debtors for attorney's fees. The footnote went on to state that the court hadn't set a claims bar date and, thus, Warner Angle hadn't filed a proof of claim.

Untimely Filed Proofs of Claim

The bankruptcy court, however, had set a claims bar date and it had passed by two months when Warner Angle filed its objection. Warner Angle asked the bankruptcy court under Rule 9006(b)(1) to treat its late filed proofs of claim as if they had been timely filed. Warner Angle said that its late filed proofs of claim was the result of excusable neglect, citing Pioneer Inv. Servs. Co. v. Brunswick Assoc. Ltd. P'ship, 507 U.S. 380 (1993).

The bankruptcy court found that there was no good reason for the law firm's delay in filing the proofs of claim. They had been served with adequate notice of the claims bar date, the court said. The debtors presented evidence that they proceeded down a particular path towards settlement that they wouldn't have proceeded down if Warner Angle had filed timely proofs of claim. Thus, the debtors were prejudiced by Warner Angle's delay in filing its proofs of claim.

On appeal to the BAP, Warner Angle argued that the bankruptcy court's finding of prejudice was erroneous, and that the court should fashion an equitable exception to Rule 3003(c)(2)'s claim filing requirement and apply that to its claims.

Upholds Prejudice Finding

The BAP rejected Warner Angle's arguments. According to the BAP, had Warner Angle timely filed their proofs of claim, Lock and Metz would have had the “option to consider a path other than finalizing and submitting for approval their settlement agreement with Your Source Pacific Fund I and thereby might have avoided the dilemma it faced when it was confronted for the first time with the proofs of claim in the midst of the pending compromise motion proceeding and with Your Source Pacific Fund I's settlement payment deadline looming over their heads.”

Mark C. Hudson of Schian Walker, P.L.C., represented appellant Warner Angle Hallam Jackson & Formanek, P.L.C.; Janel Glynn of Gallagher & Kennedy, P.A., represented appellees Ethan Lock and Eric D. Metz.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com