Berger v. Trans World Airlines, Inc. (In Re Trans World Airlines, Inc.) , 96 F.3d 687 ( 1996 )

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
9-25-1996
In Re: Tran World
Precedential or Non-Precedential:
Docket 95-7322,95-7323,95-7324
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Recommended Citation
"In Re: Tran World" (1996). 1996 Decisions. Paper 80.
http://digitalcommons.law.villanova.edu/thirdcircuit_1996/80
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 95-7322
No. 95-7324
IN RE: TRANS WORLD AIRLINES INCORPORATED,
Debtor
STANLEY BERGER; BEVERLY BERGER,
Appellants
v.
TRANS WORLD AIRLINES, INCORPORATED
THOMAS E. ROSS,
Trustee
No. 95-7323
IN RE: TRANS WORLD AIRLIINES, INCORPORATED,
Debtor
LONDON INTERNATIONAL TRAVEL, LTD.;
LATIN AMERICAN TRAVEL, INC.,
Appellants
v
TRANS WORLD AIRLINES, INCORPORATED
THOMAS E. ROSS,
Trustee
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
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, Esq. (Argued)
Selner, Glaser, Komen, Berger
& Galganski, P.C.
7700 Bonhomme Avenue
Suite 700
Clayton, Missouri 63105
Eric A. Overby, Esq.
Trans World Airlines,
Incorporated
515 North Sixth Street
18th Floor
Saint Louis, Missouri 63101
Attorneys for Debtor, Trans
World Airlines,
Incorporated
Henry F. Luepke, Esq. (Argued)
The Stolar Partnership
The Lammert Building
911 Washington Avenue
Saint Louis, Missouri 63101
Anne E. Bookout, Esq.
Lassen, Smith, Katzenstein &
Furlow
1220 Market Building
Post Office Box 410
Wilmington, Delaware 19899
Attorneys for Appellants
Stanley Berger, Beverly
Berger, London
International Travel and
Latin American Travel
OPINION OF THE COURT
NYGAARD, Circuit Judge.
London International Travel, Ltd., Latin American Travel,
Inc., and Stanley and Beverly Berger, previously the 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 motions: 1) the
Motion to Proceed; that is, to recognize their compulsory
counterclaim as an informal proof of claim, or alternatively, 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 Chapter 11
petition. The bankruptcy court set May 15, 1992 as the claims
bar date. The Bergers presented no claim by that date. 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 District of
Missouri, asserting a federal RICO claim and several state law
causes of action. The Bergers filed a compulsory counterclaim in
response on April 22, alleging defamation. TWA filed its answer
on May 12.
In March 1994, the district court dismissed TWA's RICO claim
with prejudice and declined to exercise supplemental jurisdiction
over the parties' state law claims. The parties then refiled
their respective state law claims in Missouri state court.
The Bergers allege that TWA made defamatory statements about
them between October 1990 and December 1992. For its part, TWA
asserted claims of fraud, money had and received, and breach of
contract. TWA filed a motion in state court to dismiss the
Bergers' defamation claim, on the ground that the bankruptcy
court had discharged TWA from all debts, except as otherwise
provided in the Confirmation Order, that the Confirmation Order
did not except the Bergers' claim from discharge, and that the
Bergers were enjoined by 11 U.S.C. § 524(a)(2) from commencing or
continuing their suit. Subsequently, the Bergers and
London/Latin moved the bankruptcy court for leave to proceed to
judgment on their claims and to bar TWA's. The bankruptcy court
denied these motions, and the district court affirmed. In re
Trans World Airlines, Inc., 182 B.R. 102 (D. Del. 1995). This
appeal followed. We have appellate jurisdiction under 28 U.S.C.
§ 158(d).
II.
The Bergers argue that the bankruptcy court should have
granted their motion to proceed to judgment in state court
because TWA failed to notify them of the confirmation hearing
date. They assert that TWA had notice of their status as
potential creditors in TWA's bankruptcy once the Bergers asserted
their compulsory counterclaim two months before the June 1993
notice of the confirmation hearing. The Bergers argue that,
because 11 U.S.C. § 1128 requires notice of the confirmation
hearing to all parties in interest, and because they did not
receive formal notice, enforcing the discharge as to their claims
would violate the Fifth Amendment Due Process Clause.
A.
The Berger's state court complaint alleges four instances of
defamation: October 22, 1990; January 30 and August 6, 1991; and
sometime in December 1992. The complaint recites that the
Bergers had entered into a profitable contract to sell their
agencies to another concern, Meritek, but that Meritek, upon
hearing the alleged defamation, refused to tender the remaining
payments due under the contract and dismissed the Bergers from
their employment. Meritek also sued the Bergers for fraud, which
the Bergers allege they settled on unfavorable terms.
Three of the above four instances of alleged defamation
occurred before TWA filed its bankruptcy petition on January 31,
1992. As such, they are prepetition claims that were required,
absent excusable neglect, to be asserted before the bar date of
May 15, 1992. The Bergers failed to assert their claims by that
date. They nevertheless argue that the bar date should not be
enforced as to them because they received inadequate notice of
the proceedings. We reject that argument.
The Bergers admit that TWA did not know of their defamation
claim until they filed their compulsory counterclaim on April 22,
1993. This admission is fatal. When TWA gave notice of the
claims bar date, the Bergers were unknown creditors entitled
solely to publication notice. Chemetron Corp. v. Jones, 72 F.3d
341, 348 (3d Cir. 1995) ("It is well established that, in
providing notice to unknown creditors, constructive notice of the
bar claims date by publication satisfies the requirements of due
process."); see New York v. New York, New Haven & Hartford R.R.
Co., 344 U.S. 293, 297, 73 S. Ct. 299, 301 (1953); Mullane 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 notice to which
they were constitutionally entitled. We therefore conclude that
TWA's discharge in bankruptcy eradicated the Bergers' 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 thereafter entitled
to the formal notice accorded other creditors who filed timely
claims. The Bergers, however, neither claimed nor demonstrated
excusable neglect. Accordingly, the bankruptcy court could not
allow their participation in the bankruptcy even after they made
known their prepetition claims against TWA. See In re
Vertientes, Ltd., 845 F.2d 57, 60 (3d Cir. 1982); accordChemetron, 72 F.3d
at 349 ("[B]ecause claimants are unknown
creditors and Chemetron's publication notice was sufficient,
claimants must show that their failure to file in a timely manner
was due to 'excusable neglect;' otherwise, their claims 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 means 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 dead.
The Bergers also argue that, inasmuch as TWA knew 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 also fails, at a
minimum, because the Bergers never asserted their claims before
the bar date, and the bankruptcy court could not allow them to
file a belated proof of claim absent a showing of excusable
neglect.
B.
This does not end our inquiry, however. The Bergers also
allege that TWA defamed them in or about December 1992, some
eleven months after the bankruptcy petition was filed and seven
months after the bar date. TWA was on notice of this claim as of
April 22, 1993, when the Bergers filed their compulsory
counterclaim, yet failed to give the Bergers formal notice of the
confirmation hearing scheduled for June of that year.
It is well-settled that a known creditor is entitled 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 proceedings
generally, but is not given formal notice of the confirmation
hearing. In re Harbor Tank Storage Co., 385 F.2d 111, 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 reasonably diligent
efforts." Chemetron, 72 F.3d at 346 (internal quotation marks
omitted).
In Chemetron, we stated that, while "a vast, open
investigation[]" is not required, the debtor must undertake a
careful examination and diligent search of its own books and
records. Id. at 346-47. Here, although the Bergers filed their
defamation action as a counterclaim to TWA's fraud suit rather
than proceeding in the bankruptcy court, we are convinced 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 postpetition
defamation they alleged.
That conclusion mandates that we reverse the district
court's decision to deny the Bergers' motion to proceed. Because
they were not given actual notice of the confirmation hearing,
their postpetition defamation claims could not have been
discharged in bankruptcy. See Dalton Development Project 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, that on remand,
the Bergers must prove that a defamatory statement was published
in or around December 1992, and that they proximately suffered
injury as a result. If the evidence at trial reveals only
prepetition tortious conduct, then the Bergers' claims are
discharged.
III.
Each appellant further argues that TWA's state court claims
against the Bergers, London and Latin were not properly 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 assets filed with
the bankruptcy court. They contend that TWA's failure to
disclose those claims bars it from asserting them in 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 the 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 not clearly
erroneous; hence we must reject appellants' argument.
IV.
The district and bankruptcy courts also erred in another
aspect. Without comment or explanation, the bankruptcy court
denied the Bergers' motion to set off under 11 U.S.C. § 553. The
district court affirmed the bankruptcy court's denial of setoff.
In affirming, the district court noted that the confirmation
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, did not decide
whether setoff was available against a discharged debtor.
Instead, assuming arguendo that there could be setoff, the
district court considered whether the mutuality requirement of
§ 553 had been satisfied. Ruling on the mutuality of the claims,
the district court stated:
In their state court petition, the Bergers allege that
TWA published "false, defamatory, libelous and
slanderous statements, to-wit: that the Bergers
dishonestly and fraudulently misappropriated moneys
from TWA by shifting market share on non-TWA airlines
from London to Latin." This allegation of dishonest
and fraudulent misappropriation forms the basis 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 recovery the
Bergers might theoretically win for their claim 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 count, the
Bergers cannot prevail on their defamation claim and there will
thus be no defamation recovery to set off. If the Bergers
prevail on the defamation claim, TWA could not successfully
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 the
creditor's setoff claim can be subtracted from the bankruptcy
debtor's claim.
The district court failed to address the possibility 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 theoretically
possible for the Bergers to prevail on their defamation claim.
The Bergers might be found to have been defamed without
committing fraud, but might still be found liable on 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 opportunity to
decide the issue in the first instance.
V.
For these reasons, and to the extent we have described, we
will reverse in part, affirm in part and remand the cause for
further proceedings.