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Delaware Bankruptcy Court Reinforces Third Circuit’s Departure From Frenville

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On February 7, 2012, Judge Kevin Carey of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued an opinion disallowing a late-filed claim in In re New Century TRS Holdings, Inc., Feb. 7, 2012 (Case No. 07-10416-KJC) based, in part, on the Third Circuit’s recent holding in Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s Inc.), 607 F.3d 114 (3d Cir. 2012).

By way of background, in late 2006, Helen Galope entered into a mortgage note with New Century Mortgage Corporation (“NCMC”) in the principal amount of $522,000 (the “Mortgage Note”). Ms. Galope conveyed title to the subject property to NCMC to secure repayment of the Mortgage Note. The Mortgage Note was subsequently sold by NCMC.

In the spring of 2007, NCMC and certain of its affiliates (the “Debtors”) filed voluntary petitions under chapter 11 of the Bankruptcy Code. A deadline for filing proofs of claim was set for August 31, 2007 (the “Bar Date”). Notice of the Bar Date was mailed to parties listed on a master service list maintained by the Debtors’ claims agent and also published in The Wall Street Journal and Orange County Register.

On July 29, 2011—almost four years after the Bar Date—Ms. Galope filed a proof of claim against the Debtors for fraud in connection with the sale of her Mortgage Note. The Liquidating Trustee objected and sought an order expunging the claim as untimely. Though acknowledging her tardiness, Ms. Galope argued her claim should nonetheless be allowed because it did not arise until she realized it existed, which occurred postpetition. Ms. Galope also argued that notice of the Bar Date was insufficient because she was a “known” creditor of the estates but not included in the Bar Date service mailing.

The Court did not agree. Applying the Third Circuit’s recent holding in Grossman’s that a claim arises when the claimant is exposed to the conduct that gives rise to injury, which departed from the highly criticized “accrual” test pronounced in Avellino & Bienes v. M. Frenville Co. (Matter of M. Frenville Co.), 744 F.2d 332 (3d Cir. 1984), the Court held that Ms. Galope’s claim for fraud arose at the instant the Debtors sold her Mortgage Note. Because this conduct occurred prior to the bankruptcy filing, Ms. Galope’s claim arose prepetition and should have been submitted before the Bar Date.

To determine whether Ms. Galope received adequate notice of the Bar Date, the Court first considered whether she was a “known” creditor of the estates. The Trustee testified that Ms. Galope was listed in the Debtors’ records only as a counterparty to a note that was sold prepetition and that there had been no information prior to Ms. Galope’s claim indicating any complaints about the Mortgage Note. Based on this evidence, the Court found that, without more, Ms. Galope was an unknown creditor entitled to constructive notice only. The Court found constructive notice that satisfied due process concerns based on the Debtors’ decision to publish notice in a newspaper of national circulation and of local circulation in the county of its headquarters.

A copy of the bankruptcy court’s opinion is available here.