Contributed by Elizabeth Hendee
Last year, we wrote about two cases in the Second Circuit which addressed whether publication notice satisfies constitutional due process requirements. In a recent decision in In re New Century TRS Holdings, Inc., the United States Bankruptcy Court for the District of Delaware faced the issue and held that publication notice of the debtor’s bar date notice satisfied constitutional due process concerns and was binding on unknown creditors. Deadlines for filing claims against bankrupt debtors, commonly known as bar dates, are an integral part of the bankruptcy process. Bar dates provide a clear picture of a debtor’s liabilities and thus allow debtors to effectively reorganize or liquidate and fairly disperse their assets.
In New Century, the court established a bar date of August 31, 2007. On July 23, 2007, in accordance with the bar date order entered in the case, which required the debtors to publish notice of the bar date only in the Wall Street Journal, notice of the bar date was published in the national edition of the Wall Street Journal and a local paper, the Orange County Register. A chapter 11 liquidation plan was subsequently confirmed, and a trustee was appointed to administer the resulting liquidating trust. Three years later, an individual who had borrowed funds from New Century or one of its affiliates filed a proof of claim in New Century’s bankruptcy case. Multiple objections and motions followed, culminating with a motion by the trustee asking the court to find that New Century’s publication notice satisfied the requirements of due process for all unknown creditors.
Multiple borrowers objected to the trustee’s motion, arguing that the published notices did not satisfy due process requirements. The borrowers asserted that the notice provided was a “mere gesture” that was not reasonably calculated to inform the borrowers of the bar date. According to the borrowers, the debtors had not considered the readership of the newspaper used for national notice, had not spent adequate funds on notice, had not provided sufficient time to file proofs of claim, and had not ensured that the font size and placement of the notice was adequate. The borrowers further argued that the debtors, who should have been aware of the large number of borrower claims that were likely to materialize, published notice in a manner intended to ensure that potential borrower claimants would not receive notice.
New Century defended its manner of publication notice, arguing that the notice was consistent with the bar date order, the amount spent on notice was in line with comparable cases, and the debtors had truly believed that the chosen newspapers would provide reasonable notice to potential creditors. The Wall Street Journal was chosen because it had a national presence and frequently published such notices. The Orange County Register was chosen because it attracted a readership in the area where New Century’s main operations had been located and thus would likely reach former employees with potential claims against the debtors. Further, the Register was providing extensive coverage of the bankruptcy and would be a natural place for a potential claimant to look for information about New Century. Finally, the debtors argued that they had not anticipated that individual borrowers would account for a substantial number of unknown creditors.
The bankruptcy court agreed with the debtors. To satisfy the requirements of due process, a debtor must provide reasonable notice of its claims bar date to its creditors. For unknown creditors, constructive notice, typically through publication, will suffice if the notice is “reasonably calculated” to notify potential claimants of the bar date. The court in New Century found that the publication notice met this standard. The decision to publish in a widely available national newspaper such as the Wall Street Journal was reasonable in light of New Century’s national presence and the varied group of potential creditors, notwithstanding the fact that the Journal tends to attract wealthy, educated readers. Although publication in a larger number of local newspapers may have reached additional claimants, such publication would have been costly and impracticable. When determining whether notice is constitutionally sufficient, bankruptcy courts must consider the interests of not only unknown/potential claimants but also those of the debtor’s known creditors—expending significant funds on notice may reduce the debtor’s assets and thus negatively impact all creditors. New Century was especially cost conscious because it was liquidating and anticipated that its administrative expenses would be high. The court found that publication in two newspapers, including one with a national reach, was thus reasonable. It also found that the timing, placement, and aesthetics of the bar date notices were consistent with the bar date order and constitutionally adequate. Finally, the court rejected the borrowers’ unsubstantiated argument that the debtors’ manner of publication notice was intended to preclude the borrowers from asserting timely claims.
The bankruptcy court’s decision stresses that bar dates promote finality, an overriding bankruptcy principle. Its finding that New Century’s bar date order was effective against all unknown creditors furthers this policy. As we have previously discussed in the blog, notice that is published a single time does not automatically satisfy constitutional due process. Notice must be reasonably calculated to reach the intended class. Here, this standard was met.