The following is a case update written by Misty Perry Isaacson of Pagter and Perry Isaacson, APLC, analyzing a recent case of interest.
In Nations First Capital, LLC v. Decembre (In re Nations First Capital, LLC),2020 WL 3071983 (9th Cir. BAP 2020) the Bankruptcy Appellate Panel for the Ninth Circuit in an unpublished disposition held that the bankruptcy court abused its discretion by determining that cause existed to reconsider the disallowance of a proof of claim under Fed. R. Civ. P. 60(b)(6) despite finding that the claimant lacked a cogent excuse under any other section of Fed. R. Civ. P. 60(b) for why they failed to respond to the claim objection. Specifically, the court held that reconsideration under Section 502(j) and Fed. R. Bankr. P. 3008 is only permissible when the movant establishes cause such as excusable neglect under Rule 60(b)(1). To read the full decision, click here.
In January 2018, Jean Decembre filed a lawsuit against Nations First Capital, LLC (“NFC”) in the Superior Court of New Jersey seeking damages and injunctive relief. Thereafter in February 2018, NFC filed a chapter 11 petition. Decembre filed an untimely unsecured proof of claim in the amount of $388,000 (“Claim”).
In November 2018, NFC filed an objection to Decembre’s Claim, which was undisputedly served on Decembre and his counsel at the addresses provided in the Claim. Decembre, however, did not file a response to the objection and did not appear at the hearing held on January 9, 2019. At the hearing, the bankruptcy court made findings of fact and conclusions of law on the record and entered an order sustaining NFC’s objection without prejudice to reconsideration under Section 502(j).
On March 20, 2019, the bankruptcy court held a hearing on NFC’s motion for a final decree. Decembre’s counsel appeared requesting that the court delay entry of the final decree in order to reconsider the order disallowing Decembre’s claim. The court continued the hearing a couple times to allow Decembre to brief whether there was evidence to support mistake, inadvertence, or excusable neglect under Rule 60(b)(1) and for NFC to file a brief regarding the merits of the Claim. At the continued hearing, the court stated that it appeared that Decembre may have a meritorious case. The court held that reconsideration of the Claim was appropriate to allow the issues to be decided on the merits, and that the state court was better suited to decide the claims and defenses. The court further stated that a motion for reconsideration under Section 502(j) is evaluated under the same criteria as a motion under Rule 60(b), and the strong federal policy favoring determination of disputes on their merits and Decembre’s potential meritorious defense to the objection were sufficient to satisfy Rule 60(b)(6) “notwithstanding the lack of a cogent excuse for not having responded to the Objection in the first place.”
NFC filed a motion for reconsideration arguing that: (1) the court committed clear error by finding cause under Rule 60(b)(6) after acknowledging that the standard under Rule 60(b)(1) had not been met; and (2) the court erred by looking to the merits of the underlying claim as part of its analysis in determining cause for reconsideration. Decembre opposed the motion. At the hearing, the court stated that the purpose of reconsideration under Section 502(j) and Rule 60(b) is to allow the court discretion to take another look at summary decisions which may have been made without appropriate conversation. The court denied the motion and NFC timely appealed.
The applicable standards for cause to reconsider an order disallowing a claim under Section 502(j) are the grounds enumerated in Rule 60(b). Rule 3008 and Section 502(j) provide the following two-step analysis: (1) the court must determine if cause exists to reconsider the claim and, if it does, (2) the court may enter an appropriate order based on the equities in the case. Although Rule 3008 allows for reconsideration of a disallowed claim, the BAP noted that the merits of the claim objection are no longer considered unless the claimant first establishes a good excuse, recognized under Rule 60(b), for their failure to timely contest the original claim objection.
The BAP found no error with the Court’s finding that Decembre lacked a cogent excuse for failing to respond to the claim objection. The bankruptcy court’s determination that it had discretion to set aside the disallowance under Rule 60(b)(6) in the absence of good cause, however, was reversible error. The BAP held that Rule 60(b)(6) should be used sparingly as an equitable remedy to prevent manifest justice and only where extraordinary circumstances prevent a party from taking timely action to prevent or correct an erroneous judgment. Neither the policy of adjudicating cases on their merits nor Decembre’s potential meritorious claim were sufficient to constitute extraordinary circumstances under Rule 60(b)(6) unless the failure to respond to the claim objection was excusable.
This case serves as a lesson to attorneys regarding the importance of timely seeking reconsideration of any order including an order disallowing a claim. Failure to do so will limit the grounds for reconsideration to those enumerated in Rule 60(b). With regard to an order disallowing a claim, the merits of the claim objection will no longer be fair game unless the claimant first establishes a good excuse under Rule 60(b) for its failure to timely contest the initial objection.
These materials were prepared by former ILC member Misty Perry Isaacson of Pagter and Perry Isaacson, APLC in Santa Ana, California (firstname.lastname@example.org), with editorial contributions from ILC member Ed Hays of Marshack Hays LLP in Irvine, California (email@example.com).