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Lawyers for Chase Manhattan Bank have snatched a $23 million victory from the jaws of an embarrassing defeat. The ruling, in federal appeals court in the matter of In re Cendant Corp., came in an appeal that focused on whether Chase, as custodian for three mutual funds, had established “excusable neglect” for its late filing of documents confirming its right to portions of the $341 million settlement of the class action securities case against Cendant Corp. Chase was on time when it filed initial proofs of claim seeking $16.3 million for Income Fund of America Inc.; $4.6 million for Capital Income Builder Inc. and $2.5 million for Capital World Growth and Income Inc. But when the claims administrator, Valley Forge Administrative Services, asked for more information in 1999, Chase was eight days late in filing documents to “cure” the claims for Income Fund and World Growth and failed to file any information for Capital Income. At first, Valley Forge approved the Income Fund and World Growth claims. But in September 1999, lawyers for Cendant moved to dismiss all late cured claims. In January 2000, U.S. District Judge William H. Walls rejected the claims for Income Fund and World Growth because they had failed to file excuses for their untimely filing of cures. In April 2000, Chase moved under Federal Rule of Civil Procedure 60(b) for allowance of all three claims, including that of Capital Income. When Walls denied the request, Chase appealed, and the 3rd U.S. Circuit Court of Appeals ruled in late 2000 that Walls had failed to consider whether Chase had a basis for establishing excusable neglect. But Walls again denied the claims after finding that the late filings were the result of Chase’s lack of diligence and commenting that Chase’s conduct indicated a lack of good faith in the claims process. Now the 3rd Circuit has ruled that Walls “chose the wrong path” and that his decision to deny the three claims amounted to an abuse of discretion. Senior U.S. Circuit Judge Joseph F. Weis said he agreed with Walls that “insistence upon meeting time limitations is important in the prompt disposition of litigation.” Weis said the evidence also supported Walls’ finding that Chase had “carelessly and inefficiently handled its serious responsibilities.” But Weis found that Walls erred in his inquiry into whether Chase had established that its late filings were the result of excusable neglect. “Given that Cendant was not prejudiced by the delay, and the court not hindered in any substantial degree in its administration of the case, the issue is narrowed down to the fundamental question of whether the party that committed fraud should profit by the careless and inept conduct of the party having a legitimate claim,” Weis wrote. “In the circumstances here, equity should, albeit with misgivings, tolerate negligence rather than reward fraud,” Weis wrote in an opinion joined by U.S. Circuit Judges Richard L. Nygaard and Jane R. Roth. Weis said the 3rd Circuit established a four-factor test for deciding whether a party has established excusable neglect in the 1993 decision in Pioneer Inv. Servs. v. Brunswick Associates. The four Pioneer factors are prejudice to the adverse party; length of the delay and its potential impact on the judicial proceedings; reason for the delay, including whether it was within the reasonable control of the movant and whether the movant acted in good faith. Weis focused first on whether Chase had met the test for the Income Fund and World Growth claims, the cures for which were filed eight days late. Since the judge himself had established a four-day grace period, Weis found that the cures were only four days late. Walls erred, Weis found, by failing to give enough weight to the short delay. “We conclude that the four-day delay in filing the cures by Income Fund and World Growth was trivial. � Indeed, the justification for imposing unyielding time limits on perfecting a cure is even less obvious than that for filing a proof of claim,” Weis wrote. “In view of the insignificant time lapse of only four days, and the assurance given by Valley Forge that the claims were in order, it would not be unreasonable for Chase to have assumed that there was no need to submit an excuse to the court.” The issues relating to the Capital Income claim were different because Chase failed to file any cure and claimed that one of the letters from the claims administrator was never received and another was lost. In denying the claim, Walls criticized Chase’s practice of using a central mailroom, which processed all incoming communications and employed a 10-step arrangement for internal distribution. Walls concluded that Chase had lost a notice of disallowance because of its own fault in maintaining an inefficient internal mail distribution system. During the oral argument, Walls expressed his irritation with Chase’s internal mailroom system, commenting that “even under the Pony Express, delivery was better than that.” Weis found that Walls’ criticism “was understandable and well-deserved.” But Weis nonetheless found that Walls erred by rejecting Chase’s claim of excusable neglect. Weis found that Chase’s mailroom “handled the bank’s extensive correspondence and distributed the mail in a manner that almost guaranteed human error would creep in and result in mishandling.” But he also found that Chase should have been given the benefit of the doubt since it had responded to two of the three requests to cure but did nothing about the letter to Capital Income requesting the same information. “One could reasonably assume that since Chase took pains to answer the two letters, it must have been inadvertence that led to its failure to do the same with the third — if it had been received,” Weis wrote. Weis noted that Walls had excused Mellon Bank’s neglect in failing to respond to four letters from Valley Forge after Mellon conceded that the clerk in charge, who was suffering from a severe bout of depression, deliberately did nothing. “We have no quarrel with the court’s ruling in the Mellon matter, but fail to see a difference substantial enough to account for a contrary result in Chase’s case,” Weis wrote. Chase was represented by attorneys Gerald T. Ford and Robert A. Kasuba of Landman Corsi Ballaine & Ford in Newark, N.J. Cendant was represented by Michael M. Rosenbaum and William M. D’Annunzio of Budd Larner Gross Rosenbaum Greenberg & Sade in Short Hills, N.J.

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