In every Chapter 11 case, the bankruptcy court issues a “bar date” order setting the deadline for creditors to file their claims. The bar date order is critical, since it generally bars those who fail to meet the deadline from later asserting a claim, even a claim that hadn’t matured as of the bar date. A union or fund, therefore, would be well advised to file any claim or potential claim it may have by the bar date, and to err on the side of filing even if in doubt about whether it has to. A recent decision by a New York bankruptcy court provides a cautionary tale about the consequences of failing to do so. See Manhattan Jeep Chrysler Dodge, Inc., Case No. 18-10657 (Bankr. S.D.N.Y. April 3, 2019)
In Manhattan Jeep, the employer participated in a union-affiliated pension fund. It was clear from the outset of the case that the company planned to sell its assets and cease operating, which would have meant a withdrawal from the pension fund.
The court issued a bar date order setting a deadline for filing claims. The question for the pension fund was whether to file a claim for withdrawal liability by the bar date. The fund decided not to. No sale had occurred yet and the employer had not yet withdrawn from the fund. At least one case holds that a withdrawal liability claim “cannot exist prior to withdrawal.” CPT Holdings, Inc. v. Indus. & Allied Employees Union Pension Plan, Local 73, 162 F.3d 405, 409 (6th Cir. 1998). The fund filed its proposed proofs of claim months past the bar date, after waiting for the sale to occur and the company to withdraw from the pension plan.
Unfortunately for the fund, other cases hold that a withdrawal liability claim exists at the commencement of a Chapter 11 case if the bankrupt employer’s withdrawal is “sufficiently probable.” In re CD Realty Partners, 205 B.R. 651, 659 (Bankr. D. Mass. 1997). The bankruptcy court in Manhattan Jeep accepted that reading of the law. Bankruptcy Judge Michael Wiles noted that Section 101(5) of the Bankruptcy Code defines a “claim” to include a right to payment that is “unmatured” and “contingent.” He found that even though the fund’s claim may not have “fully matured” as of the bar date, it was still a claim, noting that under the facts of the case, it was “extraordinarily likely” from the outset that withdrawal liability would be triggered. Therefore, the judge concluded, the fund should have filed its claim by the bar date.
Judge Wiles wrote that the fund’s reliance on one reading of the law “was a risky thing to do” and he puzzled over why the fund took the risk. “Certainly prudence should have dictated that the Fund act promptly so as to ensure that its rights were protected.” “Instead,” he noted, “the Fund elected to stake its fortunes on its legal conclusions as to whether withdrawal liability was subject to the Bar Date Order, and to take the risk that its legal conclusion might be wrong.”
The court considered whether under the doctrine of “excusable neglect” it should pardon the fund’s failure to file by the bar date. It declined to do so, finding that the fund’s conduct — putting “its faith in a mistaken legal conclusion” — did not constitute excusable neglect.
Finally, the fund tried to squeeze within a loophole in the bar date order. Bar date orders often contain exceptions for certain types of claims and the one in Manhattan Jeep had an exception for claims arising out of a rejected contract. The court, however, concluded that because withdrawal liability is a statutory claim, not dependent on contract rejection, that exception offered the fund no escape from the bar date deadline.
The consequences of not meeting a bar date deadline are harsh. Bankruptcy Rule 3003 states that a party that fails to file a timely claim “shall not be treated as a creditor” with respect to voting on a plan of reorganization or receiving a distribution under a plan. In other words, the late-filing creditor likely loses its say in the case and the chance at a recovery.
As Manhattan Jeep demonstrates, a union or fund should consider such consequences carefully before allowing a bar date to pass without filing a claim. If the union or fund decides not to file before the bar date passes, it might want to consider asking the court’s permission for an extension to file or for an exception from the bar date order for the type of claim at issue.