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When is a creditor a “known” creditor? As a recent decision from the Fourth Circuit recently held, it all depends. The recent 4th U.S. Circuit Court of Appeals decision in Zurich American Insurance Company v. Tessler (In re J.A. Jones Inc.) arose out of a fatal traffic accident. Laura Dunnagan sustained injuries in a multi-vehicle accident occurring in a construction zone on an interstate highway in North Carolina. Rea Construction Company, a subsidiary of J.A. Jones Inc., served as general contractor on the highway construction project. The accident, involving nine cars, created significant publicity, not only because of its severity, but also because this multi-car accident occurred in the same construction area in which a number of other accidents had recently occurred. Dunnagan, having suffered extensive burns, died after 83 days of hospitalization. Laura Tessler was appointed as administrator of Dunnagan’s estate. Rea was very much aware of the accident shortly after it occurred. Kipp Creek, the manager assigned to the project, was not at the site when the accident occurred and in fact was out of town at the time. However, another Rea employee called Creek almost immediately thereafter and advised him of the incident. Others at Rea, including its safety and loss control manager and others in the safety department traveled to the scene to investigate. Rea did not keep its knowledge in-house. It promptly notified its liability carrier, Zurich American Insurance Company, pursuant to Rea’s obligation to notify Zurich of “an ‘occurrence’ or an offense which may result in a claim.” (Rea also reported to Zurich the other accidents in the construction area.) Zurich assigned the claims to a claims representative and hired its own set of accident reconstruction experts and counsel. Cheek, the Rea manager, worked closely with Zurich and its representatives in investigating the Dunnagan accident, assembling (among other things) accident investigation reports, newspaper reports, photographs, project diaries and other documents pertaining to Rea’s potential liability. He also prepared a detailed timeline of the events, and sent all of this material to both the Rea claims department and to Zurich. Included in at least one newspaper article was the name, address and birth date of Dunnagan, the decedent. Cheek did not think that Rea would be held liable in any lawsuit brought against it by the Dunnagan estate. He was not alone. Others employed by Rea, including the safety and loss control manager, concurred, as did Zurich. Nevertheless, Cheek admitted that he “anticipated” a suit. The safety and loss control manager acknowledged that the likelihood of suit was greater than normal, given the fact that a death occurred. And the Zurich claims representative kept her claim file open “because she expected activity on these files � .” About one year after the occurrence of the Dunnagan accident, Jones and its subsidiaries, including Rea, filed for Chapter 11 protection. During the course of the case, Cheek took his file relating to the construction zone accidents with him when he moved to a new entity called Rea Contracting (a separate entity that acquired the assets of Rea, presumably pursuant to Section 363 of the Bankruptcy Code.). And when he left Rea Contracting, he again took his file, leaving a copy with Rea Contracting, in the event it was to be sued in the future. In the Jones Chapter 11 case, neither Dunnagan nor the Dunnagan estate was listed as a creditor. By the same token, neither Tessler nor her counsel (who had been retained shortly after creation of the estate) contacted Rea regarding the accident. A bar date was fixed, and notice of the bar date was published in both a local newspaper and in the Wall Street Journal. In August 2004, a liquidating Chapter 11 plan was confirmed, thus binding creditors to its terms. One of the elements of the plan was a negotiated settlement with Zurich of insurance-covered claims against all of the debtors. Neither Tessler nor her counsel saw the published notices. Neither, in fact, had any actual knowledge of the bankruptcy filings or any applicable deadlines until October 2004, well after expiration of the bar date. In December 2004, Tessler filed a motion in the bankruptcy court to extend the bar date as it applied to her, and to declare her not bound by the terms of the confirmed Chapter 11 plan. Her position was based on her allegation that she was a known creditor of Rea and that despite this, she received no notices, thus depriving her of due process. The bankruptcy court, after a hearing at which the facts stated above were established, made the following three rulings: First, that Tessler could file a late proof of claim on behalf of the Dunnagan estate, as the estate was a known creditor that had not received actual notice, as was required; second, that the estate could proceed with a state court action against the Rea estate (which had been filed with the court’s permission to avoid the running of a statute of limitations, thus implicating Zurich’s insurance); and third, that it would not consider Zurich’s potential financial responsibility with respect to the pending state court action, as liability had not yet been established in the Dunnagan estate’s suit against the Rea estate. Zurich appealed, and the district court affirmed; Zurich then appealed to the 4th Circuit. The court first recognized that its function was to review the findings of the bankruptcy court for clear error, and its conclusions of law de novo. It then set forth a number of well-settled principles that were required to be applied to the facts. First, under Section 1141(d) of the Bankruptcy Code, the terms of a confirmed plan bind creditors and otherwise provide for a discharge of debts. However, claims will be discharged only to the extent that a debtor’s creditors are given notice of the bankruptcy and have an opportunity to assert claims against the debtor’s estate in advance of any statutory or court-imposed deadline. This is, as the Supreme Court has noted, an “elementary and fundamental requirement of due process.” The notice that is required depends, stated the court, on whether the creditor is known or unknown � if known, actual notice is required, and if unknown, constructive notice (typically, by publication) is required � to pass constitutional standards. An unknown creditor “� is a claimant whose identity or claim is wholly conjectural or ‘whose interests or whereabouts could not with due diligence be ascertained’ by a debtor.” The measure of diligence has been expressed as follows: “[t]he requisite search focuses on the debtor’s own books and records. Efforts beyond a careful examination of these documents are generally not required. Only those claimants who are identifiable through a diligent search are ‘reasonably ascertainable’ and hence ‘known’ creditors.” Perhaps most importantly, there is no “bright-line” rule to be applied; each case must be examined based on the facts and circumstances presented, with courts guided by the principles enunciated here. The circuit court, viewing the facts in relation to the standards enunciated above, had little trouble concluding that the findings of the bankruptcy court were not clearly erroneous. It pointed to a plethora of bankruptcy court findings, including the well-publicized nature of the accident and Cheek’s knowledge of it, the assemblage of a comprehensive accident investigation file, the fact that the accident was reported to Zurich, the concession by Rea employees that a suit was likely, and the Zurich reaction, which was fully known to Rea. The court concluded that the record amply supported a finding that reasonably diligent efforts by responsible Rea employees would have disclosed facts sufficient to determine that a claim existed. Zurich advanced three central arguments in an effort to avoid this conclusion. First, based on its investigation, both Rea and Zurich disputed whether Rea would ultimately be liable to the estate. Citing to Section 101(5) of the Bankruptcy Code, the court rejected this contention as relevant to the “known creditor analysis” because of the broad definition of “claim” (which, of course, includes a disputed claim). Second, Zurich noted that the Dunnagan estate had not even contacted (much less brought an action against) Rea. This fact, stated the court, was not of itself enough to alter the conclusion. It was clearly relevant in a totality of circumstances analysis, but it was not enough to overcome the countervailing evidence of knowledge. The debtor, stated the court, must make its own determination based on its own efforts, and not rely on the absence or presence of notice received by an entity asserting a claim. Third, Zurich argued that the bankruptcy and district courts confused a debtor’s awareness of an accident with knowledge that the accident would present a claim in a bankruptcy case. The facts, stated the court, belied the efficacy of this argument. There was much more than “awareness of an accident.” There were here compelling circumstances pointing to the likelihood that a claim would be filed against Rea. Any reasonably diligent effort would have identified this accident as one giving rise to a claim. Zurich raised one other issue � namely, that the plan of reorganization had as a component a settlement of claims arguably covered by Zurich’s liability policies. (The settlement resolved numerous disputes concerning amounts owed to Zurich or due from Zurich under the debtors’ insurance policies, and an agreement as to the handling of covered claims.) This settlement, and thus the plan itself, could be untracked by the court’s affirmance. The court was not persuaded. As a matter of fundamental due process, the estate was entitled to actual notice � not receiving it, it was not bound by a plan that adopted the Zurich settlement. Given that liability had not yet been established, it was entirely proper as an exercise of discretion to decline to reach the issue of the impact of the estate’s suit on the Chapter 11 Plan. Judge J. Harvie Wilkinson concurred, making two points. First, he recognized that in this case, the record shows just how appropriate the “no bright-line” rule is. Not all of the facts favored the Dunnagan Estate. No litigation was filed pre-petition, no contact by Tessler or counsel with Rea occurred pre-petition or even post-petition and prior to the bar date, a substantial period of time, and the accident report indicated Rea was not at fault. Yet it is the totality of circumstances, not just one or two flags, that dictate the result. And by so stating, Wilkinson made his second point. In cases such as this, where the case can be argued either way, the determinations of a court with specialized knowledge and significant expertise should be supported without the need for two appeals where the inefficiency of pursuing such appeals on “close totality of the circumstances questions” is apparent. “In other words, the case for general or actual notice can be argued either way. In this sort of circumstance, it makes all the sense in the world to back up a bankruptcy court’s determination rather than encourage the laborious process of two lengthy and expensive appeals.” Will this case change practitioners’ conduct in cases of this type? Will they encourage clients to not appeal if the appeal is based on comprehensive findings of fact? Perhaps all it does is make the decision to appeal that much more difficult. Myron A. Bloom is a shareholder with the firm of Hangley Aronchick Segal & Pudlin. His practice is concentrated in the areas of corporate organization, bankruptcy, commercial workouts and creditors’ rights.

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