Delaware Bankruptcy Court Rejects Late Filings of Asbestos Claims

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Last February, we blogged about the Third Circuit’s decision in In re Energy Future Holdings Corp, No. 19-1430, 2020 U.S. App. LEXIS 4947 (Feb. 18, 2020).  The Third Circuit approved a process for resolving asbestos claims in which a bar date was imposed on filing the claims, but late claimants who were unaware of their asbestos claims would be allowed to have the bar date excused through Bankruptcy Rule 3003(c)(3).  (A bar date is a date set by the court by which all claims against the debtor must be filed.  Rule 3003(c)(3) permits such time for filing to be extended “for cause shown,” and has been held, based on Rule 9006(b), to permit late filing upon a showing of “excusable neglect” by a claimant.)  In a recent decision, the United States Bankruptcy Court for the District of Delaware rejected an effort by two late claimants to make use of this process, reasoning that the claimants had failed to meet Rule 3003(c)(3)’s “excusable neglect” standard because they had participated in the bankruptcy case for years without seeking to file claims.

As reviewed in our previous post, the debtor, Energy Future Holdings Corporation (“EFH”), sold four subsidiaries to Sempra Energy.  These subsidiaries had asbestos-related liability, and EFH and Sempra Energy sought to have the court set a bar date for the asbestos claims.  Asbestos claimants who did not file claims by the bar date could seek to file claims under Bankruptcy Rule 3003(c)(3), with the opportunity to argue that the lateness of their claim was excusable since they had not been aware of their asbestos-related injury until after the bar date.  Certain potential claimants who had learned of their asbestos-related health conditions after the bar date objected to this procedure, arguing that it deprived them of their claims without due process, and that the debtor should be required to take the more traditional approach of creating and funding a trust for future asbestos-related claims.  The bankruptcy court approved EFH's proposed procedure, overruling the objections, and the district court and the Third Circuit upheld it on appeal.

After the Third Circuit’s ruling, two of the appellants (the “Movants”) moved for leave to file late claims under Rule 3003(c)(3).  The Movants had been diagnosed with mesothelioma in 2016 and 2017, after the bar date in December 2015.  They had participated in the bankruptcy case since shortly after their diagnoses, objecting to plan confirmation and then appealing the bankruptcy court’s ruling confirming the plan, but had not previously filed claims or sought leave to file late claims.  The Movants argued that they had not seen the publication notice of the bar date, and that they met the excusable neglect standard the Third Circuit had articulated because they had not known of their asbestos-related conditions until after the bar date.

The bankruptcy court rejected these arguments.  As to the notice argument, the court ruled that the publication notice was adequate, as the Third Circuit had already held, and whether the Movants had actually seen the notice was irrelevant to the adequacy of publication notice.  As to the excusable neglect standard, the court considered prejudice to the debtors, reasonableness of delay, impact on judicial proceedings, and good faith, and held that all four factors cut against a finding of excusable neglect.  The main theme of the court’s reasoning was that the Movants had unreasonably delayed in filing their claims, waiting more than two years in both cases from the time they had been diagnosed with asbestos-related illness.

On prejudice to the debtors, the court held that EFH and Sempra Energy had relied on the universe of asbestos claims that had been filed as of consummation of the sale to Sempra Energy.  While the parties expected some number of late-filed claims, here EFH was surprised, because the Movants had failed to file claims earlier despite participating in the case for years.  On reasonableness of delay, the court rejected Movants’ argument that their delay was reasonable because they had not received notice of the bar date and they would not have understood its significance prior to their diagnoses.  The said this did not explain the long delay in filing the claims after their diagnoses, which appeared to have been a strategic decision in service of their appeal of the plan confirmation order.  On impact on judicial proceedings, the court noted that Movants could have filed their claims before the effective date of the plan, but instead had waited until well after the plan had gone into effect.  On good faith, the court held that Movants’ strategic delay in filing their claims constituted bad faith, and even if it was accidental, attorney error would not constitute excusable neglect.  Thus, the court denied the motions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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