Court Opinion

ID: 9691338
Source: CourtListenerOpinion
Date Created: 2023-08-24 20:26:17.172192+00
Date Added: 2024-06-11T18:19:17.146262
License: Public Domain

Feeney, Bankruptcy Judge,
Dissenting.
For the reasons set forth below, I respectfully dissent from the plurality opinion. Based upon the record, I find that the debtor established cause for reconsideration of the allowance of Espino’s claim and that the bankruptcy court abused its discretion in denying the Debtor’s second Motion for Reconsideration.
Section 502(j) of the Bankruptcy Code provides in relevant part: “A claim that has been allowed or disallowed may be reconsidered for cause. A reconsidered claim may be allowed or disallowed according to the equities of the case.” 11 U.S.C. § 502(j). Bankruptcy Rule 3008 provides that “A party in interest may move for reconsideration of an order allowing or disallowing claim against the estate. The court after a hearing on notice shall enter an appropriate order.” Fed. R. Bankr.P. 3008.
To permit reconsideration of Espino’s claim, it was the Debtor’s burden to establish “cause.” Neither the Bankruptcy Code nor the Bankruptcy Rules, however, define cause as used in § 502(j). In re Jones, 2000 WL 33673759, at *2 (Bankr.M.D.N.C.2000); In re Coffman, 271 B.R. 492, 498 (Bankr.N.D.Tex.2002).
In In re Rayborn, 307 B.R. 710 (Bankr.S.D.Ala.2002), the bankruptcy court stated:
Reconsideration under § 502(j) is a two-step process. A court must first decide whether “cause” for reconsideration has been shown. Jones, 2000 WL 33673759 *2. Then, the Court decides whether the “equities of the case” dictate allowance or disallowance of the claim. Id.; 11 U.S.C. § 502(j).
307 B.R. at 720. The court in Rayborn added:
“Bankruptcy courts have substantial discretion in deciding what constitutes *772‘cause’ for reconsidering a claim pursuant to section 502(j).” Coffman, 271 B.R. at 498 (citations omitted); In re Davis, 237 B.R. 177, 181-82 (M.D.Ala. 1999). Although “the ‘for cause’ standard ‘is not standardless,’ ” id. (quoting In re Davis, 237 B.R. at 182), there “is considerable variation in the cases concerning the test or standard which should be used.” Jones, 2000 WL 33673759, at *2.
Some courts look to when the motion to reconsider was filed in order to determine what standards to use to determine “cause.” These courts generally say that if the motion is filed within ten days, the motion should be governed by Bankruptcy Rule 9023 and Federal Rule of Civil Procedure 59. See, e.g., Jones, 2000 WL 33673759, at *2, n. 1 (citing cases). Other courts hold that where the motion is file outside of ten days, Bankruptcy Rule 9024 and Federal Rule of Civil Procedure 60(b)(1) should govern what is “cause.” Id. Still other courts “[wjithout relying solely upon the timing of the motion for reconsideration ... have debated whether the ‘for cause’ standard under § 502© is different from the ‘excusable neglect’ standard of Rule 60(b)(1) and have reached differing conclusions.” Id. In addition, some courts focus on how the claim was initially resolved in deciding what standard of “cause” to apply. Jones, 2000 WL 33673759, at *2. In Jones, the court held that a party seeking relief from failing to file a timely objection must show “excusable neglect” under the standards announced in Pioneer Investment Services Co. v. Brunswick Associates, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). Id.
Rayborn, 307 B.R. at 720-21(footnote omitted).
In In re Choquette, 290 B.R. 183, 187-88 (Bankr.D.Mass.2003), the bankruptcy court considered a Chapter 7 debtor’s standing to object to claims. It stated:
The majority of courts have held that a Chapter 7 debtor has standing to object to claims where one or more of the following factual requisites obtained: 1) the debtor had a pecuniary interest in the result by way of a demonstrable surplus; 2) the trustee failed or refused to object to the claim or claims in question; and/or 3) the debtor’s objection would not undermine the efficient administration of the estate. See In re Thompson, 965 F.2d [1136] at 1141 and 1147 [(1st Cir.1992)] (holding that a Chapter 7 debtor had appellate standing to object to a settlement of claims litigation only where the trustee failed or refused to perform a fiduciary duty); In re El San Juan Hotel, 809 F.2d 151, 154 (1st Cir.1987) (holding that the “person aggrieved,” an analogue to the “party in interest,” had appellate standing when that person’s rights or interests were “ ‘directly and adversely affected pecuniarily’ by the order or decree of the bankruptcy court”) (quoting In re Fondiller, 707 F.2d 441, 442 (9th Cir.1983)); Willemain v. Kivitz, 764 F.2d 1019, 1022 (4th Cir.1985) (holding that only solvent debtors had standing in bankruptcy court); United States v. Jones, 260 B.R. [415] at 418 [(E.D.Mich.2000]) (holding that a debtor with no hope of a surplus from the estate had no standing to object); In re Gribben, 158 B.R. 920, 922 (S.D.N.Y.1993) (holding that assignment of all claims related causes of action to the trustee promoted orderly asset collection); In re Sun OK Kim, 89 B.R. 116, 118 (D.Haw.1987) (holding that leave of court secured after formal refusal by the trustee to object to a claim or trustee wrongdoing could confer standing to object upon the debtor); In *773re Savidge, 57 B.R. 389, 392 (D.Del.1986) (holding that in order to uphold orderly administration of the estate, the trustee must be noticed and refuse to object before the debtor could obtain court ordered standing to object); Silverman v. Leucadia, Inc., 37 B.R. 200, 201 (S.D.N.Y.1982) (holding that only the debtor that “demonstrated that the dis-allowance of the claim would produce a surplus in the estate which would be available to the bankrupt” had standing to object); In re Bakke, 243 B.R. 753, 755 (Bankr.D.Ariz.1999) (holding trustee refusal and application to the court to be precursors to debtor standing); In re I & F Corp., 219 B.R. 483, 485 (Bankr.S.D.Ohio 1998) (holding that standing resided statutorily with the trustee as the appointed estate representative to ensure expeditious, cost effective case disposition); In re Woods, 139 B.R. 876, 877 (Bankr.E.D.Tenn.1992) (stating that, absent surplus, debtor standing to object is a threat to judicial economy because it would “permit [the debtor] to usurp the trustee’s authority and ... require the court to rule on objections where the allowance or disallowance of the claim is meaningless to the administration of the estate”); but see Mulligan v. Sobiech, 131 B.R. 917, 921 (S.D.N.Y.1991) (debtor is a de facto party in interest with standing to object to claims untethered from considerations of surplus or trustee action); cf. In re Simon, 179 B.R. 1, 6-7 (Bankr.D.Mass.1995).
290 B.R. at 187-88 (footnote omitted).
The foregoing recitation of the applicable law highlights the bankruptcy court’s discretion and its ability to balance the equities inherent in the claims process. Moreover, it is significant that there is no time limit either under 11 U.S.C. Section 502(j) or Fed. R. Bankr.P. 3008 for a motion for reconsideration of an order allowing or disallowing a claim. The one year deadline of Fed.R.Civ.P. 60 does not apply to reconsideration of orders allowing claims by virtue of the express provisions of Fed. R. Bankr.P. 9024 which provides: “Rule 60 ... applies in cases under the Code except that (1) a motion ... for the reconsideration of an order allowing or disallowing a claim against the estate entered without a contest is not subject to the one year limitation ...” Fed. R. Bankr.P. 9024. A leading commentator has stated that “... a motion for reconsideration of a claim presented before the order closing the estate should be timely.” 4 Lawrence P. King, Collier on Bankruptcy ¶ 502.11[3], at 502-77 (Supp.2005). Although reconsideration should not be a substitute for a timely appeal, in all contexts reconsideration is warranted where a manifest error of fact or law has been made. Cf. In re Wedgestone Financial, 142 B.R. 7 (Bankr.D.Mass.1992). In the claims context, which has a more relaxed standard for reconsideration than other types of litigation, there is cause for reconsideration where the court has made a fundamental error which deprived the objecting party of an opportunity to be heard on the merits and substance of an objection to claim.
The bankruptcy court’s decision in this case, dated January 26, 2005, overruling the Chapter 7 trustee’s objection to Espino’s claim was predicated upon its May 31, 2002 and November 8, 2002 rulings. The May 31, 2002 ruling was made at a pretrial conference in the adversary proceeding commenced by Espino to determine that the state court judgment that the Debtor held against him was an asset of the bankruptcy estate and that the Debtor did not have a right to exempt the proceeds. At that hearing, Espino admitted that he did not hold a state court judgment, although the bankruptcy judge in a written order dated August 24, 2001 had *774indicated that his claim appeared to be based upon a state court judgment. At the May 31, 2002, hearing the Debtor insisted that he had always asserted a timely challenge to the existence and amount of Espino’s claim, and that his challenge was not simply based on untimeliness. The bankruptcy judge disagreed, however, indicating that only the timeliness issue had been raised by the Debtor. The Debtor, however, in his response to the August 24, 2001 show cause order had indicated that he did not list Espino as a creditor because in his view Espino had no claim against him. The bankruptcy court did not enter a separate written order allowing Espino’s claim following the May 31, 2002 hearing.
In my view, the May 31, 2002 ruling had a cascading affect tainting all subsequent rulings with respect to Espino’s claim. The bankruptcy court appears to have concluded, albeit erroneously, that the merits of Espino’s claim had been determined. It entered its November 8, 2002 order in conjunction with the Debtor’s motion to vacate the conversion of his Chapter 13 case to Chapter 7. The Debtor alleged that Espino’s claim had been allowed erroneously. The bankruptcy judge, however, confirmed his earlier ruling that Espino held a timely unsecured claim. No appeal was taken from that order. The validity and amount of the Espino’s claim, however, were not before the bankruptcy court at that time; only the motion to vacate the conversion was before the court.
On March 31, 2005, the bankruptcy court denied, without a hearing, the Debt- or’s first Motion for Reconsideration of the January 26, 2005 overruling the Chapter 7 trustee’s objection to Espino’s claim on grounds that it had adjudicated the claim at an actual hearing held on June 12, 2002, which the majority has taken as a reference to the May 31, 2002 hearing. See note 1 supra. As noted above, the May 31, 2002 hearing was a pretrial conference in an adversary proceeding and not a hearing on the proof of claim. A review of the record demonstrates that the merits of the claim were not adjudicated as of May or June 2002, and indeed the substance of the Debtor’s objection to the claim has never been adequately addressed. In the Debt- or’s second Motion for Reconsideration, which has generated this appeal, the Debt- or makes many of the same arguments he did in his first motion, but he also maintained that the claim lacked evidentiary support and merit, that the contested matter concerning the validity of the proof of claim had never been adjudicated, and that he has standing because he would be entitled to a distribution in the chapter 7 case.
I disagree with the reasoning of the plurality and concurring opinions which in my view both fail to recognize that Bankruptcy Code Section 502(j) clearly authorizes the correction of an error in the allowance of a proof of claim. In failing to order a remand to allow for a hearing on the substance of the Debtor’s objection to claim the plurality and concurring opinions have the effect of depriving the Debtor of an opportunity to be heard on his objection, and validate the error committed below, which was based on an erroneous assumption and mistaken view of the procedural history of the case. Where as here a patent mistake has been made, and where the claim was allowed without regard to the substance of the objection, I believe that the bankruptcy clearly erred in not recognizing the existence of cause for reconsideration.
The factual and procedural record below is tortured, and the affirmance by the majority of the Panel results in the reinforcement of numerous procedural errors and a potential material substantive error. Although I am convinced that the bankruptcy judge correctly determined that Espino’s claim (# 7) was timely filed because of his lack of notice of the commencement of *775the Debtor’s Chapter 13 bankruptcy case, I am not convinced that the actual merits of the claim have ever been adequately addressed in an appropriate procedural context and as a matter of substance. The Debtor’s objection to the merits of Espino’s claim has never been properly adjudicated, although the bankruptcy judge erroneously stated on a number of occasions that the merits had been determined. Furthermore, because the existence of the Debtor’s judgment against Espino is compelling evidence that Espino’s claim may, indeed, lack merit as the Debtor claims, I am convinced that a manifest error of fact and law was made. In my view, the bankruptcy judge abused his discretion in not allowing reconsideration of the order overruling the objection to Espinos’ proof of claim and in refusing to grant the second motion for reconsideration. For these reasons, I would remand for further hearings on two issues: 1) whether the debtor has standing, as he asserts, to object to the claim because this is a surplus case; and 2) whether Espino’s claim should be allowed in the amount of $36,667.86.