A contractor that installed a sand screen at a drying facility previously owned by the debtor that was sold “free and clear” in its bankruptcy filed a motion to reopen the bankruptcy case so that it could assert an administrative expense claim for unpaid services. The bankruptcy court denied the motion and the contractor appealed to the district court.
As discussed in Construction Subcontractor Claims: Is a Subcontractor Merely a Creditor of a Creditor Without Standing?, the bankruptcy court held that the contractor did not have standing, and even if it had standing it did not establish cause to reopen the case.
A key consideration for the bankruptcy court was the relationship between the parties at the relevant points in time: A third-party operated a facility owned by a debtor. The third party engaged the contractor to install the sand screen at the facility and was solely responsible for payment of all expenses incurred in the installation. Subsequently the facility was sold “free and clear” under a confirmed plan of reorganization. So, the contractor was not a creditor of the debtor but merely a creditor of a creditor, and potential in rem rights were cut off by the sale.
On appeal the district court began by noting that a case can be reopened by a debtor or other “party in interest.” Section 1109(b) of the Bankruptcy Code states that this includes “the debtor, the trustee, a creditors’ committee, and equity security holders’ committee, the creditor, and equity securities colder, or any indenture trustee.” Applicable case law held that this “generally means anyone who has a legally protected interest that could be affected by the bankruptcy case.”
The contractor argued that it had a legally protected interest because it was entitled to assert a construction lien under state law. Since that right was extinguished when the bankruptcy court approved the “free and clear” sale of the drying facility, it had standing to reopen the case.
While acknowledging that generally “party in interest” is broadly defined (for example, in determining standing to object to a proof of claim), the district court commented that in the context of reopening a bankruptcy case this term is implicitly confined to debtors, creditors, or trustees. A more lenient standard would potentially thwart the bankruptcy purpose of providing “reasonably expeditious rehabilitation of financially distressed debtors with a consequent distribution to creditors who have acted diligently.”
Further, even if a more lenient standard was used, the contractor did not have a legally protected interest: (1) At the time of the free and clear sale the contractor did not yet have a lien right, and (2) it never attempted to file a lien and the deadline for doing so expired before it tried to reopen the case.
Consequently, the district court agreed that the contractor did not have standing to reopen the case.
In addition, reopening the case would be futile and the equities did not support reopening the case. Among other things, there were no more funds to distribute. Also, the motion was filed almost 3 years after the effective date of the plan and one year after the case was closed. Reopening at this late date would prejudice other parties.
One argument made in response by the contractor was that the bankruptcy court should have considered whether it could grant relief from the court’s order. Although the contractor did not identify any of the grounds for granting relief from an order set forth in FRBP 9024 (incorporating FRCP 60(b)), in a supplemental pleading the contractor contended that the sale order violated its due process rights because it did not receive notice prior to entry of the order. This was construed as an argument that the order was void because the court action was inconsistent with due process of law.
The analysis of this issue was as follows:
- The level of notice required by due process depends upon whether a creditor is “known” or “unknown.”
Known creditors must receive actual notice.
- Known creditors include those that are actually known to the debtor and those whose identities are “reasonably ascertainable.”
- To be reasonably ascertainable the debtor must be able to discover the claimant through “reasonably diligent efforts.”
- At a minimum this means there is specific information suggesting both the claim that the debtor may be liable for and the entity to whom it would be liable.
- In contrast, only constructive notice is required for unknown creditors, and publication in a national newspaper is sufficient.
The court concluded that the contractor was an unknown creditor. The contractor was not a creditor of the debtor, had no claim against the debtor, and there was no evidence that the trustee knew the contractor would claim that it was not paid or that it might want to file a lien on the drying facility in the future. Consequently, the notice given by publication was sufficient, the contractor’s due process rights were not violated, and the claim that the court’s order was void was without merit.
Accordingly, the bankruptcy court order was affirmed in the appeal dismissed since the contractor did not have standing to reopen the case, and even if it has standing it did not demonstrate cause.
This is a reminder that due process can be the potential Achilles’ heel of a sale order. Depending on the case, assuring that all “known” creditors receive actual notice can be a daunting task.
Vicki R Harding, Esq.