Even under the most sympathetic of circumstances, courts are charged with respecting the integrity of deadlines and employing a cool, impartial approach to everyone, including the most desperate of late claimants.
Unfortunately, the old adage “better late than never” makes for terrible advice when applied to bankruptcy law. Indeed, even under the most sympathetic of circumstances, courts are charged with respecting the integrity of deadlines and employing a cool, impartial approach to everyone, including the most desperate of late claimants. This outcome was recently borne out by a recent decision in the Toys “R” Us bankruptcy case—Bravo Sports v. Toys “R” Us, Civil Action No. 3:18-cv-00784-JAG (E.D. Va. Apr. 11, 2019).
After Toys “R” Us filed for bankruptcy, Bravo Sports—a vendor that supplied the debtors with sporting equipment—continued to do business with the debtors. Bravo delivered nearly $575,000 of goods, entitling it to an administrative claim under Section 503 of the Bankruptcy Code. The Bankruptcy Court set the administrative bar date for July 16, 2018, notice of which was served almost six weeks prior. These communications were all received by Bravo’s controller, who was scheduled to commence maternity leave on July 6, 2018, causing it to hire an interim controller on May 21, 2018. Unfortunately, a medical emergency required the controller to unexpectedly begin maternity leave early, only a few weeks after her replacement joined the company.
Having prematurely transitioned into the role, the interim controller was initially unaware of the July 16 administrative claims bar date, only learning of the deadline a week later on July 23. To make matters worse, the interim controller was mistakenly told by an internal source that his predecessor had already filed the necessary claims in the debtors’ case. The original controller had unfortunately never filed the nearly $575,000 administrative claim before her unexpected departure. The interim controller eventually realized this error and began a search to retain local counsel, ultimately hiring attorneys on Sept. 6, 2018—over a month and a half post-bar date. Further complicating the situation, the interim controller himself became indisposed due to a family emergency thus, delaying the motion for permission to file a late administrative claim until Sept. 18, 2018—64 days after the deadline. Notwithstanding this somewhat sympathetic factual scenario, the Bankruptcy Court denied permission, finding that the creditor failed to show excusable neglect for missing the deadline; Bravo appealed to the U.S. District Court for the Eastern District of Virginia.
The district court ultimately affirmed the Bankruptcy Court’s ruling. Under relevant case law, the Bankruptcy Court considered: the danger of prejudice to the debtor caused by a late filed claim; the length of delay and its potential impact on judicial proceedings; the reason for the delay, including whether it was within the reasonable control of the movant; and whether the movant acted in good faith. This district court agreed with the lower court’s assessment of the factors. Ultimately, no prejudice arose from the late-filed claim—it was evident that the debtors were well aware of the outstanding claim. Likewise, the length of delay (64 days) was afforded little weight and all parties agreed that Bravo was acting in good faith. Thus, with the first, second and fourth factors supporting the late-filed claim, the Bankruptcy Court’s and district court’s rulings hinged on the third—the reason for delay—which relevant case law recognizes as being paramount to the analysis. Testimony at the hearing before the Bankruptcy Court made clear that Bravo’s ability to timely file its claim remained within its reasonable control. Notwithstanding the controller’s medical emergency, it did receive timely notice of the bar date, the tenure of the controller and her replacement did overlap for at least some time, and even after her departure the interim controller had sufficient time to timely file a claim. The Bankruptcy Court ruled that the interim controller did not act with adequate haste in remedying the situation after discovering that the bar date had passed. Despite the other three factors weighing in Bravo’s favor, the Bankruptcy Court denied leave to file the administrative claim based entirely on one factor which the district court upheld, finding no abuse of discretion.
This case presents an extremely relatable and human dilemma. Professionals are often under considerable pressure in the workplace. When these pressures are exacerbated by personal emergencies, it is not hard to see how deadlines could fall through the cracks. Indeed, it is easy to feel a degree of sympathy for Bravo. The controller likely thought she had weeks to transition her replacement into his role and, perhaps, even take care of the administrative claim before taking her leave. Yet a medical emergency quickly dashed any plans of an organized and thorough training period; and of course, in such circumstances, it was highly unlikely that the controller was worrying about the Toys “R” Us bankruptcy case. The interim controller’s situation was likewise far from ideal. After his transition period was cut short, he likely had to learn much of his job as controller on the fly—a job which certainly had many demands outside of this bankruptcy case. After discovering the missed bar date, the interim controller was apparently mistakenly told the claim had been filed. After realizing the mistake, he hired counsel, but then himself suffered a personal emergency. Thus, one could look at the Bankruptcy Court’s ruling and the district court’s affirming opinion as somewhat harsh or unforgiving.
Yet, both courts arrived at the right result. Although the controller’s and interim controller’s roles humanize the situation, the creditor was a sophisticated corporation and it was the creditor, not the individuals, who ultimately suffered the consequences of these rulings. The creditor knew that it needed to transition working knowledge of the controller position to her replacement well in advance of the bar date. What’s more, the debtors emphasized at the hearing before the Bankruptcy Court that there were many pending attempts to file late claims in the case. A ruling on this claim could embolden these other late claimants and perhaps lend additional strength to their arguments in favor of permission to file. While Bravo’s situation was unfortunate—and for very human reasons—it is difficult to criticize the outcome. What this case does suggest as well is that while compelling facts may exist in favor of proving excusable neglect, it is not an easy standard to overcome when a court-imposed bar date has been missed.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.