A recent decision reminds creditors of the harsh consequences of failing to comply with a court imposed deadline for filing claims in a bankruptcy case. The U.S. Court of Appeals for the Third Circuit recently held in Ellis v. Westinghouse that claims accruing after confirmation of a chapter 11 plan, but before the plan goes effective, are subject to the administrative claim deadline established by the plan. Absent a few narrow exceptions, creditors that fail to file an administrative claim by the deadline risk having their claims discharged. This first impression decision directly impacts creditors with claims that accrued during the post-confirmation, pre-effective date period, including contract counterparties, landlords, employees, unpaid suppliers, and equipment lessors.
Westinghouse filed for chapter 11 bankruptcy relief in March 2017 and confirmed its plan on March 28, 2018. The plan required creditors to file claims for administrative claims, those relating to obligations arising post-petition, within 30 days after the plan’s effective date, or such claims would be forever discharged. Timothy Ellis was a vice president of Westinghouse, and on May 31, 2018, two months after the bankruptcy court confirmed the plan, but prior to the plan going effective, Ellis was terminated. Ellis believed he was wrongfully terminated because of his age.
Westinghouse’s plan went effective on August 1, 2018, five months after it was confirmed. Westinghouse sent creditors a notice of the effective date of the plan which included a reminder to file administrative claims by August 31, 2018, the deadline set by the plan. Both Ellis and Westinghouse agreed that Ellis’ employment claim accrued on his termination date, giving Ellis 91 days before the deadline to file his claim with the bankruptcy court.
Ellis, however, did not file a claim by the August 31, 2018 deadline. Instead, on October 2018, Ellis filed a lawsuit against Westinghouse for employment discrimination. In response, Westinghouse filed a motion for summary judgment, asserting that the plan discharged Ellis’ claim. The district court denied Westinghouse’s motion, concluding that the bankruptcy code cannot discharge or create a bar date for claims that arose post-confirmation but pre-effective date.
The Third Circuit disagreed and reversed the district court, holding that the bankruptcy code authorizes bankruptcy courts to set deadlines for post-confirmation, pre-effective date claims, and that claims that are filed late may be discharged.
Although creditors have a few exceptions, the result is harsh. First, the bankruptcy code allows creditors to file untimely administrative claims after showing “cause” for the delay. Additionally, administrative claim deadlines must comply with due process, so a claim is only subject to discharge if a creditor received adequate notice of the bankruptcy and had a fair opportunity to press the claim. Neither exceptions appears to apply to Mr. Ellis’ situation.
The Ellis v. Westinghouse decision is the first ruling by a U.S. Court of Appeals regarding the discharge of claims accruing post-confirmation, but prior to the a plan effective date. Other Courts are likely to follow the Third Circuit’s reasoning, so creditors should carefully follow a plan’s administrative claim deadline or otherwise have their claims discharged.