1996 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-25-1996

In Re: Tran World

Precedential or Non-Precedential:

Docket 95-7322,95-7323,95-7324

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Recommended Citation

"In Re: Tran World" (1996). 1996 Decisions. Paper 80.

http://digitalcommons.law.villanova.edu/thirdcircuit_1996/80
 

 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 

 

 No. 95-7322 

 No. 95-7324 

 

 

 IN RE: TRANS WORLD AIRLINES INCORPORATED, 

 Debtor 

 STANLEY BERGER; BEVERLY BERGER, 

 Appellants 

 v. 

 TRANS WORLD AIRLINES, INCORPORATED 

 THOMAS E. ROSS, 

 Trustee 

 

 No. 95-7323 

 

 

 IN RE: TRANS WORLD AIRLIINES, INCORPORATED, 

 

 Debtor 

 

 LONDON INTERNATIONAL TRAVEL, LTD.; 

 LATIN AMERICAN TRAVEL, INC., 

 

 Appellants 

 v 

 TRANS WORLD AIRLINES, INCORPORATED 

 THOMAS E. ROSS, 

 Trustee 
 

 

 ON APPEAL FROM THE UNITED STATES DISTRICT COURT 

 FOR THE DISTRICT OF DELAWARE 

 (D.C. Civ. Nos. 94-00641/642/643) 

 

 

 Argued January 31, 1996 

 Before: GREENBERG, NYGAARD, Circuit Judges, and 

LAY, Senior Circuit Judge 

(Opinion Filed September 25, 1996) 

 Leonard Komen, Esq. (Argued) 

 Selner, Glaser, Komen, Berger 

 & Galganski, P.C. 

 7700 Bonhomme Avenue 

 Suite 700 

 Clayton, Missouri 63105 

 Eric A. Overby, Esq. 

 Trans World Airlines, 

Incorporated 

 515 North Sixth Street 

 18th Floor 

 Saint Louis, Missouri 63101 

 Attorneys for Debtor, Trans 

 World Airlines, 

Incorporated 

 Henry F. Luepke, Esq. (Argued) 

 The Stolar Partnership 

 The Lammert Building 

 911 Washington Avenue 

 Saint Louis, Missouri 63101 

 Anne E. Bookout, Esq. 

 Lassen, Smith, Katzenstein & 

 Furlow 

 1220 Market Building 

 Post Office Box 410 

 Wilmington, Delaware 19899 

 Attorneys for Appellants 

 Stanley Berger, Beverly 

 Berger, London 

International Travel and 

Latin American Travel 

 

 OPINION OF THE COURT 
 

NYGAARD, Circuit Judge. 

 London International Travel, Ltd., Latin American Travel, 

Inc., and Stanley and Beverly Berger, previously the sole owners 

of London and Latin, appeal several orders entered in the 

bankruptcy of the debtor, Trans World Airlines, Inc. 

 The bankruptcy court denied the following motions: 1) the 

Motion to Proceed; that is, to recognize their compulsory 

counterclaim as an informal proof of claim, or alternatively, for 

leave to file a proof of claim out of time, and for relief from 

the discharge injunction to prosecute their claims to judgment; 

and, 2) the motion to bar the claims of TWA against London/Latin 

and the Bergers. The district court affirmed. We will reverse 

in part, affirm in part and remand. 

 I. 

 On January 31, 1992, TWA filed a voluntary Chapter 11 

petition. The bankruptcy court set May 15, 1992 as the claims 

bar date. The Bergers presented no claim by that date. On 

August 12, 1993, the bankruptcy court confirmed TWA's Second 

Amended Plan of Reorganization, effective November 3, 1993. 

 On April 7, 1993, TWA sued the Bergers, London and Latin in 

the United States District Court for the Eastern District of 

Missouri, asserting a federal RICO claim and several state law 

causes of action. The Bergers filed a compulsory counterclaim in 

response on April 22, alleging defamation. TWA filed its answer 

on May 12. 

 In March 1994, the district court dismissed TWA's RICO claim 

with prejudice and declined to exercise supplemental jurisdiction 

over the parties' state law claims. The parties then refiled 

their respective state law claims in Missouri state court. 

 The Bergers allege that TWA made defamatory statements about 

them between October 1990 and December 1992. For its part, TWA 

asserted claims of fraud, money had and received, and breach of 

contract. TWA filed a motion in state court to dismiss the 

Bergers' defamation claim, on the ground that the bankruptcy 

court had discharged TWA from all debts, except as otherwise 

provided in the Confirmation Order, that the Confirmation Order 

did not except the Bergers' claim from discharge, and that the 

Bergers were enjoined by 11 U.S.C. § 524(a)(2) from commencing or 

continuing their suit. Subsequently, the Bergers and 

London/Latin moved the bankruptcy court for leave to proceed to 

judgment on their claims and to bar TWA's. The bankruptcy court 

denied these motions, and the district court affirmed. In re 

Trans World Airlines, Inc., 182 B.R. 102 (D. Del. 1995). This 

appeal followed. We have appellate jurisdiction under 28 U.S.C. 

§ 158(d). 

 II. 

 The Bergers argue that the bankruptcy court should have 

granted their motion to proceed to judgment in state court 

because TWA failed to notify them of the confirmation hearing 

date. They assert that TWA had notice of their status as 

potential creditors in TWA's bankruptcy once the Bergers asserted 
their compulsory counterclaim two months before the June 1993 

notice of the confirmation hearing. The Bergers argue that, 

because 11 U.S.C. § 1128 requires notice of the confirmation 

hearing to all parties in interest, and because they did not 

receive formal notice, enforcing the discharge as to their claims 

would violate the Fifth Amendment Due Process Clause. 

 A. 

 The Berger's state court complaint alleges four instances of 

defamation: October 22, 1990; January 30 and August 6, 1991; and 

sometime in December 1992. The complaint recites that the 

Bergers had entered into a profitable contract to sell their 

agencies to another concern, Meritek, but that Meritek, upon 

hearing the alleged defamation, refused to tender the remaining 

payments due under the contract and dismissed the Bergers from 

their employment. Meritek also sued the Bergers for fraud, which 

the Bergers allege they settled on unfavorable terms. 

 Three of the above four instances of alleged defamation 

occurred before TWA filed its bankruptcy petition on January 31, 

1992. As such, they are prepetition claims that were required, 

absent excusable neglect, to be asserted before the bar date of 

May 15, 1992. The Bergers failed to assert their claims by that 

date. They nevertheless argue that the bar date should not be 

enforced as to them because they received inadequate notice of 

the proceedings. We reject that argument. 

 The Bergers admit that TWA did not know of their defamation 

claim until they filed their compulsory counterclaim on April 22, 

1993. This admission is fatal. When TWA gave notice of the 

claims bar date, the Bergers were unknown creditors entitled 

solely to publication notice. Chemetron Corp. v. Jones, 72 F.3d 

341, 348 (3d Cir. 1995) ("It is well established that, in 

providing notice to unknown creditors, constructive notice of the 

bar claims date by publication satisfies the requirements of due 

process."); see New York v. New York, New Haven & Hartford R.R. 

Co., 344 U.S. 293, 297, 73 S.Ct. 299, 301 (1953); Mullane v. 

Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 

652, 657 (1950). TWA duly published the requisite notices; 

hence, the Bergers constructively received the notice to which 

they were constitutionally entitled. We therefore conclude that 

TWA's discharge in bankruptcy eradicated the Bergers' claims for 

any prepetition defamation. 

 We acknowledge that the bankruptcy court could allow unknown 

creditors to assert claims after the bar date upon a showing of 

excusable neglect. Such creditors would be thereafter entitled 

to the formal notice accorded other creditors who filed timely 

claims. The Bergers, however, neither claimed nor demonstrated 

excusable neglect. Accordingly, the bankruptcy court could not 

allow their participation in the bankruptcy even after they made 

known their prepetition claims against TWA. See In re 

Vertientes, Ltd., 845 F.2d 57, 60 (3d Cir. 1982); accordChemetron, 72 F.3d 

at 349 ("[B]ecause claimants are unknown 

creditors and Chemetron's publication notice was sufficient, 

claimants must show that their failure to file in a timely manner 

was due to 'excusable neglect;' otherwise, their claims arising 

pre-petition will be barred."); In re Best Products Co., 140 B.R. 
353, 359 (Bankr. S.D.N.Y. 1992). The bar date means just that; 

it is a "drop-dead date" that bars all prepetition claimants who 

received the required notice. Because the Bergers failed to 

assert their prepetition claims by the bar date and failed to 

show excusable neglect, those claims are legally dead. 

 The Bergers also argue that, inasmuch as TWA knew about 

their compulsory counterclaim, the bankruptcy court should have 

treated the compulsory counterclaim as an informal proof of claim 

in the TWA bankruptcy proceeding. This argument also fails, at a 

minimum, because the Bergers never asserted their claims before 

the bar date, and the bankruptcy court could not allow them to 

file a belated proof of claim absent a showing of excusable 

neglect. 

 B. 

 This does not end our inquiry, however. The Bergers also 

allege that TWA defamed them in or about December 1992, some 

eleven months after the bankruptcy petition was filed and seven 

months after the bar date. TWA was on notice of this claim as of 

April 22, 1993, when the Bergers filed their compulsory 

counterclaim, yet failed to give the Bergers formal notice of the 

confirmation hearing scheduled for June of that year. 

 It is well-settled that a known creditor is entitled to 

formal notice of impending bankruptcy proceedings. Chemetron, 72 

F.3d at 346. This is true even where, as here, the creditor has 

actual knowledge of the pendency of bankruptcy proceedings 

generally, but is not given formal notice of the confirmation 

hearing. In re Harbor Tank Storage Co., 385 F.2d 111, 114-15 (3d 

Cir. 1967). A creditor will be deemed to be "known" to the 

debtor if the debtor has either actual knowledge of its existence 

or if its identity "can be identified through reasonably diligent 

efforts." Chemetron, 72 F.3d at 346 (internal quotation marks 

omitted). 

 In Chemetron, we stated that, while "a vast, open 

investigation[]" is not required, the debtor must undertake a 

careful examination and diligent search of its own books and 

records. Id. at 346-47. Here, although the Bergers filed their 

defamation action as a counterclaim to TWA's fraud suit rather 

than proceeding in the bankruptcy court, we are convinced that a 

diligent search of TWA's records by its bankruptcy counsel would, 

or at least should, have revealed the Berger claims. Hence, the 

Bergers were known creditors with respect to the postpetition 

defamation they alleged. 

 That conclusion mandates that we reverse the district 

court's decision to deny the Bergers' motion to proceed. Because 

they were not given actual notice of the confirmation hearing, 

their postpetition defamation claims could not have been 

discharged in bankruptcy. See Dalton Development Project v. 

Unsecured Creditors Committee (In re Unioil), 948 F.2d 678, 682- 

84 (10th Cir. 1991); In re Pettibone Corp., 151 B.R. 166, 170-73 

(Bankr. N.D. Ill. 1993). We emphasize, however, that on remand, 

the Bergers must prove that a defamatory statement was published 

in or around December 1992, and that they proximately suffered 

injury as a result. If the evidence at trial reveals only 

prepetition tortious conduct, then the Bergers' claims are 
discharged. 

 III. 

 Each appellant further argues that TWA's state court claims 

against the Bergers, London and Latin were not properly included 

among TWA's assets in bankruptcy so that action on those claims 

would be barred by res judicata and estoppel. The Bergers, 

London and Latin, separately allege that TWA failed to include 

its claims against them among its schedules of assets filed with 

the bankruptcy court. They contend that TWA's failure to 

disclose those claims bars it from asserting them in the present 

action. The bankruptcy court found that the claims were properly 

included. The bankruptcy court specifically found that "(i) the 

debtor did properly include its said claims among the assets in 

its schedules although not identifying the movants by name, and 

(ii) the Order confirming the plan does provide for the debtor to 

retain the right to collect its assets, which would thus include 

its claims against movants." These findings are not clearly 

erroneous; hence we must reject appellants' argument. 

 IV. 

 The district and bankruptcy courts also erred in another 

aspect. Without comment or explanation, the bankruptcy court 

denied the Bergers' motion to set off under 11 U.S.C. § 553. The 

district court affirmed the bankruptcy court's denial of setoff. 

In affirming, the district court noted that the confirmation 

order discharged TWA from all claims arising before the 

confirmation date. It then observed that 11 U.S.C. § 524(a) 

might bar a setoff. The district court, however, did not decide 

whether setoff was available against a discharged debtor. 

Instead, assuming arguendo that there could be setoff, the 

district court considered whether the mutuality requirement of 

§ 553 had been satisfied. Ruling on the mutuality of the claims, 

the district court stated: 

 In their state court petition, the Bergers allege that 

 TWA published "false, defamatory, libelous and

 slanderous statements, to-wit: that the Bergers 

 dishonestly and fraudulently misappropriated moneys 

 from TWA by shifting market share on non-TWA airlines 

 from London to Latin." This allegation of dishonest 

 and fraudulent misappropriation forms the basis for 

 TWA's count I. If TWA should prevail on count I, the 

 Bergers' defamation claim will be extinguished. The 

 claims, therefore, are not mutual, and any recovery the 

 Bergers might theoretically win for their claim would 

 not be properly characterized a set off. 

TWA, 182 B.R. at 109 (citation omitted). 

 It is true that if TWA prevails on its fraud count, the 

Bergers cannot prevail on their defamation claim and there will 

thus be no defamation recovery to set off. If the Bergers 

prevail on the defamation claim, TWA could not successfully 

demonstrate fraud. Were these the only two claims at issue, the 

lack of mutuality would be apparent. For mutuality to exist, 

both claims must not be mutually exclusive, so that the 
creditor's setoff claim can be subtracted from the bankruptcy 

debtor's claim. 

 The district court failed to address the possibility that 

TWA might not prevail on Count I (fraud), but might still prevail 

on Count II (money had and received) or Count III (breach of 

contract). In such a circumstance, it would be theoretically 

possible for the Bergers to prevail on their defamation claim. 

The Bergers might be found to have been defamed without 

committing fraud, but might still be found liable on the other 

legal theories alleged by TWA in Counts II and III. The district 

court must consider whether the Bergers' defamation claim could 

be deemed mutual with TWA's Count II claim or Count III claim. 

We will remand to give the district court the opportunity to 

decide the issue in the first instance. 

 V. 

 For these reasons, and to the extent we have described, we 

will reverse in part, affirm in part and remand the cause for 

further proceedings.