In a published decision from the General Motors bankruptcy case, the U.S. Bankruptcy Court for the Southern District of New York held that a creditor holding a contingent, unsecured claim that received proper notice of the claims bar date did not establish "excusable neglect" to permit it to file a proof of claim some nine years after the bar date passed. The court found that the movant, a large, public company with tens of thousands of employees, was a "sophisticated" creditor, and that its sophistication was "further proof" that its failure to file a timely claim did not constitute excusable neglect, see In re Motors Liquidation, 598 B.R. 744 (Bankr. S.D.N.Y. 2019).
In 1994, General Motors Corp. (Old GM) sold to American Axle & Manufacturing, Inc. (American Axle) certain real property located in New York that had been contaminated with hazardous chemicals (the site). American Axle had been aware of the environmental contamination since acquiring the site. Among other things, Old GM had disclosed the environmental contamination to American Axle in connection with the sale and, in 2002 and 2003, both American Axle and Old GM participated in proceedings before the state environmental department related to contamination at the site. A third party eventually acquired the site from American Axle.
On June 1, 2009, Old GM filed a Chapter 11 petition, together with a motion to sell substantially all of its assets to an entity that became New GM. The court approved the sale the following month, and subsequently entered an order establishing Nov. 30, 2009, as the deadline for creditors to file proofs of claim. American Axle was served at numerous addresses with every required notice related to Old GM’s bankruptcy, including notice of the sale hearing, notice of plan confirmation and, most significantly, notice of the claims bar date. Despite actual knowledge of the bankruptcy and the contamination at the site, American Axle did not file a pertinent proof of claim by the Nov. 30, 2009, bar date.
In May 2013, the site was designated a Class 2 site in the New York State Registry of Inactive Hazardous Waste Sites, the list of state Superfund sites. Since the current owner of the site was no longer in business, American Axle became concerned that it might be responsible for environmental cleanup costs, even though it had not yet received any notice of the state’s intention to assess liability against it for cleanup costs. However, American Axle had not been found liable for environmental cleanup costs, and had not paid anything toward remediation at the site.
In December 2018, over nine years after the claim bar date, American Axle filed a motion to file a late claim against the General Unsecured Creditors Trust (GUC Trust) in Old GM’s case, among other relief. The administrator of the GUC Trust opposed this relief.
The court determined that American Axle had a contingent, prepetition claim arising from potential future environmental liabilities at the site, noting that a claim under the Bankruptcy Code has the “broadest available definition,” and can exist before a right to payment exists under nonbankruptcy law. The court also noted, however, that American Axle had been “keenly aware” of the potential liabilities giving rise to its claim many years before Old GM’s bankruptcy filing.
The court next turned to the question of whether American Axle, under Bankruptcy Rule 9006(b)(1), established “excusable neglect” to permit a late-filed claim against the GUC Trust. To that end, the court utilized the U.S. Supreme Court’s four-factor test for evaluating “excusable neglect,” as set forth in Pioneer Investment Services v. Brunswick Associates, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993): the risk of prejudice to the debtor; the length of the delay and its potential impact on judicial proceedings; the reason for the delay, including whether it was in the reasonable control of the movant; and the movant’s good faith.
Starting its analysis with the third Pioneer factor (reason for delay), the court found that American Axle’s excuse “essentially boils down to ignorance.” American Axle evidently believed that as a matter of law its environmental claim had not become a claim under the Bankruptcy Code before the bar date. Not surprisingly, the court found this excuse unavailing. American Axle’s misunderstanding of the law, i.e., its mistaken belief that its claim had not accrued before the bar date, did not constitute excusable neglect. Quoting one of its earlier decisions from the same case, the court explained that “a claimant’s neglect is not excusable where its failure to comply with the rule was the result of a mistake of law,” see In re Motors Liquidation, 576 B.R. 761, 775 (Bankr. S.D.N.Y. 2017).
Notably, in analyzing the reason for delay, the court took into account American Axle’s sophistication, citing In re Hills Stores, 167 B.R. 348, 351 (Bankr. S.D.N.Y. 1994). In the court’s view, American Axle, a public company operating more than 90 facilities in 17 countries, with billions of dollars in revenue and over 25,000 employees, qualified as a “sophisticated creditor.” Consequently, the court determined that American Axle’s level of sophistication “further proves” that its failure to file a timely claim could not be deemed excusable neglect.
The court then turned to the remaining Pioneer factors. The first factor—prejudice to the debtor—weighed in favor of the debtor, especially after considering the size of the Old GM case. The court reasoned that allowing a single late claim risked the triggering of an avalanche of similar motions by other creditors that might have missed the claims bar date. It also noted that reaching a judicial determination of excusable neglect is fact-specific and often involves expensive, time-consuming litigation, all to the detriment of a debtor’s estate. Such judicial activity, when taking into account the “practically limitless” number of potential creditors, presented a serious risk of significant expense to the debtor.
As to the second Pioneer factor—length of the creditor’s delay in seeking to file a claim—the court found such delay to be “substantial.” The court noted that American Axle’s nine-year delay far exceeded delays that other courts had found to be substantial in similar cases. During American Axle’s delay, Old GM and its affiliated debtor entities had sold substantially all of their assets, confirmed a Chapter 11 plan, and substantially consummated the plan. As a consequence, the court found this factor to weigh heavily against American Axle.
As to the fourth and final factor, relating to American Axle’s good faith, the court acknowledged there to be no evidence that American Axle had acted in bad faith by failing to file a timely claim. Unfortunately, American Axle’s lack of bad faith could not overcome the fact that it failed to meet the other three Pioneer factors. As a result, the court denied American Axle’s motion in its entirety.
Creditors that receive proper and timely notice of a debtor’s bankruptcy filing and of the related claims bar date are generally subject to that bar date unless they can establish that their failure to act resulted from “excusable neglect.” When evaluating a creditor’s excusable neglect arguments, courts engage in an analysis of the factors laid out in the Supreme Court's Pioneer decision. The bankruptcy court’s rationale in the American Axle case highlights the fact that courts will be even less forgiving of a “sophisticated” creditor. The message of American Axle is abundantly clear: any creditor receiving notice of a claims bar date should consult bankruptcy counsel to assist in determining whether the creditor has a “claim” and whether that creditor should file a proof of claim with the bankruptcy court.
Rudolph J. Di Massa Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors’ rights.
Geoffrey A. Heaton, special counsel at the firm, practices in the area of business reorganization and financial restructuring, concentrating on representation of secured creditors, Chapter 11 and Chapter 7 trustees, creditors’ committees and unsecured creditors.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.