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. e du/thir dc ir c uit_1996/80UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 95-7322
No. 95-7324

IN RE: TRANS WORLD AIRLINES INCORPORATED ,

Debto r

STANLEY BERGER; BEVERLY BERGER,

Appellants

v.

TRANS WORLD AIRLINES, INCORPORATED

THOMAS E. ROSS,

Trustee

No. 95-7323

IN RE: TRANS WORLD AIRLIINES, INCORPORATE D,

Debtor

LONDON INTERNATIONAL TRAVEL, LTD.; LATIN AMERICAN TRAVEL, INC.,

Appellants

v

TRANS WORLD AIRLINES, INCORPORATED

THOMAS E. ROSS,

TrusteeON APPEAL FROM THE UNITED STATES DISTRICT C OURT

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, E sq. (Argued) Selner, Glaser, Komen, Berger & Galganski, P.C

. 7700 Bonhomme Av enue Suite 700 Clayton, Missour i 63105

Eric A. Overby, Esq. Trans World Airl ines, Incorporated
515 North Sixth Street
18th Floor Saint Louis, Mis souri 63101

Attorneys for De btor, Trans
World Airli nes, Incorporated

Henry F. Luepke, Esq. (Argued)
The Stolar Partn ership
The Lammert Buil ding 911 Washington A venue Saint Louis, Mis souri 63101

Anne E. Bookout, Esq. Lassen, Smith, K atzenstein &
Furlow
1220 Market Buil ding
Post Office Box 410 Wilmington, Dela ware 19899

Attorneys for Ap pellants Stanley Ber ger, Beverly Berger , London
International Travel and
Latin American Travel

OPINION OF THE COURTNYGAARD, Circuit Judge.

London International Travel, Ltd., Latin Ameri can Travel, Inc., and Stanley and Beverly Berger, previously th e 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 moti ons: 1) the Motion to Proceed; that is, to recognize their comp ulsory counterclaim as an informal proof of claim, or alte rnatively, 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 Cha pter 11 petition. The bankruptcy court set May 15, 1992 as the claims bar date. The Bergers presented no claim by that d ate. 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 Di strict of Missouri, asserting a federal RICO claim and severa l state law causes of action. The Bergers filed a compulsory c ounterclaim in response on April 22, alleging defamation. TWA fil ed its answer on May 12. In March 1994, the district court dismissed TW A's RICO claim with prejudice and declined to exercise supplementa l jurisdiction over the parties' state law claims. The parties th en refiled their respective state law claims in Missouri state court. The Bergers allege that TWA made defamatory st atements about
them between October 1990 and December 1992. For i ts part, TWA asserted claims of fraud, money had and received, a nd breach of
contract. TWA filed a motion in state court to dis miss the Bergers' defamation claim, on the ground that the b ankruptcy court had discharged TWA from all debts, except as otherwise provided in the Confirmation Order, that the Confir mation Order did not except the Bergers' claim from discharge, a nd that the Bergers were enjoined by 11 U.S.C. § 524(a)(2) from commencing or continuing their suit. Subsequently, the Bergers a nd London/Latin moved the bankruptcy court for leave t o proceed to judgment on their claims and to bar TWA's. The ban kruptcy court denied these motions, and the district court affirm ed. In re Trans World Airlines, Inc., 182 B.R. 102 (D. Del. 1 995). This appeal followed. We have appellate jurisdiction un der 28 U.S.C. § 158(d).

II. The Bergers argue that the bankruptcy court sh ould have granted their motion to proceed to judgment in stat e court because TWA failed to notify them of the confirmati on hearing date. They assert that TWA had notice of their sta tus as potential creditors in TWA's bankruptcy once the Be rgers assertedtheir compulsory counterclaim two months before the June 1993

notice of the confirmation hearing. The Bergers ar gue that, because 11 U.S.C. § 1128 requires notice of the con firmation hearing to all parties in interest, and because the y did not receive formal notice, enforcing the discharge as t o their claims
would violate the Fifth Amendment Due Process Claus e.
A. The Berger's state court complaint alleges fou r instances of defamation: October 22, 1990; January 30 and August 6, 1991; and sometime in December 1992. The complaint recites t hat the Bergers had entered into a profitable contract to s ell their agencies to another concern, Meritek, but that Meri tek, upon hearing the alleged defamation, refused to tender t he remaining payments due under the contract and dismissed the B ergers from their employment. Meritek also sued the Bergers fo r fraud, which the Bergers allege they settled on unfavorable term s. Three of the above four instances of alleged d efamation occurred before TWA filed its bankruptcy petition o n January 31, 1992. As such, they are prepetition claims that we re required, absent excusable neglect, to be asserted before the bar date of May 15, 1992. The Bergers failed to assert their c laims by that date. They nevertheless argue that the bar date sh ould not be enforced as to them because they received inadequat e notice of the proceedings. We reject that argument. The Bergers admit that TWA did not know of the ir defamation claim until they filed their compulsory counterclai m on April 22, 1993. This admission is fatal. When TWA gave noti ce of the claims bar date, the Bergers were unknown creditors entitled solely to publication notice. Chemetron Corp. v. J ones, 72 F.3d 341, 348 (3d Cir. 1995) ("It is well established th at, in providing notice to unknown creditors, constructive notice of the bar claims date by publication satisfies the requir ements of due process."); see New York v. New York, New Haven & H artford R.R. Co., 344 U.S. 293, 297, 73 S.Ct. 299, 301 (1953); M ullane 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 noti ce to which they were constitutionally entitled. We therefore conclude that TWA's discharge in bankruptcy eradicated the Berger s' 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 thereaf ter entitled
to the formal notice accorded other creditors who f iled timely claims. The Bergers, however, neither claimed nor demonstrated excusable neglect. Accordingly, the bankruptcy cou rt could not allow their participation in the bankruptcy even af ter they made known their prepetition claims against TWA. See In re Vertientes, Ltd., 845 F.2d 57, 60 (3d Cir. 1982); a ccordChemetron, 72 F.3d at 349 ("[B]ecause claimants are unknown creditors and Chemetron's publication notice was su fficient,
claimants must show that their failure to file in a timely manner was due to 'excusable neglect;' otherwise, their cl aims 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 mean s 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 de ad. The Bergers also argue that, inasmuch as TWA k new 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 al so fails, at a minimum, because the Bergers never asserted their c laims before the bar date, and the bankruptcy court could not al low them to file a belated proof of claim absent a showing of e xcusable neglect.

B. This does not end our inquiry, however. The B ergers also allege that TWA defamed them in or about December 1 992, some eleven months after the bankruptcy petition was fil ed and seven
months after the bar date. TWA was on notice of th is claim as of April 22, 1993, when the Bergers filed their compul sory counterclaim, yet failed to give the Bergers formal notice of the confirmation hearing scheduled for June of that yea r. It is well-settled that a known creditor is en titled 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 proc eedings generally, but is not given formal notice of the co nfirmation hearing. In re Harbor Tank Storage Co., 385 F.2d 1 11, 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 reaso nably diligent efforts." Chemetron, 72 F.3d at 346 (internal quot ation marks omitted). In Chemetron, we stated that, while "a vast, o pen investigation[]" is not required, the debtor must u ndertake a careful examination and diligent search of its own books and records. Id. at 346-47. Here, although the Berger s filed their
defamation action as a counterclaim to TWA's fraud suit rather than proceeding in the bankruptcy court, we are con vinced 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 po stpetition defamation they alleged.
That conclusion mandates that we reverse the d istrict court's decision to deny the Bergers' motion to pro ceed. Because they were not given actual notice of the confirmati on hearing, their postpetition defamation claims could not have been discharged in bankruptcy. See Dalton Development P roject 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, th at on remand, the Bergers must prove that a defamatory statement was published in or around December 1992, and that they proximate ly suffered injury as a result. If the evidence at trial revea ls only prepetition tortious conduct, then the Bergers' cla ims aredischarged.

III. Each appellant further argues that TWA's state court claims against the Bergers, London and Latin were not prop erly 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 asse ts filed with the bankruptcy court. They contend that TWA's fail ure to disclose those claims bars it from asserting them i n 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 t he 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 no t clearly erroneous; hence we must reject appellants' argumen t.

IV. The district and bankruptcy courts also erred in another aspect. Without comment or explanation, the bankru ptcy court denied the Bergers' motion to set off under 11 U.S. C. § 553. The district court affirmed the bankruptcy court's deni al of setoff. In affirming, the district court noted that the con firmation 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, d id not decide whether setoff was available against a discharged d ebtor. Instead, assuming arguendo that there could be seto ff, the district court considered whether the mutuality req uirement of § 553 had been satisfied. Ruling on the mutuality of the claims,
the district court stated: In their state court petition, the Bergers all ege that TWA published "false, defamatory, libelous and slanderous statements, to-wit: that the Berge rs dishonestly and fraudulently misappropriated m oneys from TWA by shifting market share on non-TWA a irlines from London to Latin." This allegation of dis honest and fraudulent misappropriation forms the basi s 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 rec overy the Bergers might theoretically win for their clai m 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 c ount, the Bergers cannot prevail on their defamation claim an d there will thus be no defamation recovery to set off. If the Bergers prevail on the defamation claim, TWA could not succ essfully 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 thecreditor's setoff claim can be subtracted from the bankruptcy

debtor's claim. The district court failed to address the possi bility 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 the oretically possible for the Bergers to prevail on their defama tion claim. The Bergers might be found to have been defamed wit hout committing fraud, but might still be found liable o n 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 oppor tunity to
decide the issue in the first instance.

V. For these reasons, and to the extent we have d escribed, we will reverse in part, affirm in part and remand the cause for further proceedings.