Christopher v. Kendavis Holding Co. (In Re Kendavis Holding Co.)

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 00-10670

In the Matter of: KENDAVIS HOLDING COMPANY; KENDAVIS INDUSTRIES
INTERNATIONAL, INC., Debtors.

JAMES A. CHRISTOPHER,

Appellee,

VERSUS

KENDAVIS HOLDING COMPANY,

Appellant.

Appeal from the United States District Court
for the Northern District of Texas

April 23, 2001
Before STEWART, PARKER, Circuit Judges, and GOLDBERG, Judge.*

ROBERT M. PARKER, Circuit Judge:

Kendavis Holding Company (“Kendavis”) appeals from the

district court’s order reversing the bankruptcy court’s final

judgment. Kendavis claims that Appellee James Christopher’s

*
Judge of the United States Court of International Trade, sitting
by designation.

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knowledge of its previous bankruptcy proceedings was sufficient

notice to satisfy due process requirements and justify the

discharge of Christopher’s claim against the company for loss of

pension benefits.

I.

James Christopher worked for Unit Rig & Equipment Company from

1954 until 1977, except for a three-year period in which he worked

for Unit Rig & Equipment Company Canada. Both companies are

subsidiaries of Kendavis Holding Company, and each had a separate

pension plan. Qualified employees working for the United States

subsidiary participated in the American pension plan, and employees

working for Unit Rig Canada were eligible for benefits from the

Canadian pension plan.

In February of 1985, creditors brought an involuntary

bankruptcy proceeding against Kendavis under Chapter 11. Kendavis

excluded the pension beneficiaries from its bankruptcy schedules

and decided not to inform the beneficiaries of the proceedings.

During the course of negotiating a plan for reorganization,

Kendavis agreed to take twenty million dollars out of a surplus in

the American pension plan for the benefit of its creditors.

Kendavis sent Christopher a letter dated October 18, 1985 stating

its intention to terminate the pension plan and assuring

Christopher that his benefits under the plan would not be affected.

Christopher later acknowledged that he knew about the bankruptcy

through local newspaper articles.

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 On November 24, 1986, the bankruptcy court approved the

reorganization plan and discharged any remaining claims. The court

also issued an injunction against any additional claims arising

before the effective date of the plan.

Christopher elected benefits under the American pension plan

in 1989. He attempted to collect pension benefits under the

Canadian plan in 1995, but learned that Kendavis terminated the

plan years before. On October 3, 1996, Christopher filed suit

against Kendavis in federal district court in Oklahoma. He claimed

that he received less than his full benefits under the American

pension plan and that Kendavis wrongfully rejected the benefits to

which he was entitled under the Canadian pension plan. Kendavis

argued that Christopher’s claim arose before the effective date of

its Chapter 11 reorganization and moved to reopen the bankruptcy

proceedings.

The bankruptcy court reopened the case on April 30, 1997. The

court held that Christopher’s claim was discharged by its 1986

Order of Confirmation and assessed $40,000 in sanctions against

Christopher for violating its injunction. Christopher appealed to

the district court. The district court reversed, concluding that

discharge of Christopher’s claim for pension benefits violated his

right to adequate notice as required by constitutional due process

even though he knew of Kendavis’s bankruptcy proceedings. See

Christopher v. Kendavis Holding Co. (In re Kendavis Holding Co.),

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2000 WL 769226 (N.D. Tex. June 14, 2000).

II.

We review the bankruptcy court’s findings of fact under the

clearly erroneous standard and decide issues of law de novo. See

Henderson v. Belknap (In re Henderson), 18 F.3d 1305, 1307 (5th

Cir. 1994). We review the bankruptcy court’s imposition of

sanctions for abuse of discretion. See Perkins Coie v. Sadkin (In

re Sadkin), 36 F.3d 473, 475 (5th Cir. 1994).

The paramount issue on appeal is whether Christopher’s

knowledge of the bankruptcy proceeding satisfied due process

requirements and justified the discharge of his claim for pension

benefits under 11 U.S.C. § 1141(d).1 Section 1141 provides for the

discharge of any claim arising before the date of a plan’s

confirmation unless the claim is excepted from discharge under

1
This case raises other questions concerning potential pension
claims against a bankruptcy estate that were not submitted as
issues on appeal. This opinion should not be construed as
resolving any issues other than the issues raised herein. See,
e.g., Patterson v. Shumate, 504 U.S. 753 (1992) (holding that an
anti-alienation clause in an ERISA-qualified pension plan excludes
the plan from a beneficiary’s bankruptcy estate); Pension Benefit
Guarantee Corp. v. Pritchard (In re Esco Mfg. Co.), 33 F.3d 509
(5th Cir. 1994), withdrawn on reh’g, 50 F.3d 315 (5th Cir. 1995)
(requiring the bankruptcy trustee to assume the obligations of
terminating a pension plan under ERISA); Pension Benefit Guarantee
Corp. v. Pritchard (In re Esco Mfg. Co.), 50 F.3d 315 (5th Cir.
1995) (holding that the bankruptcy trustee had no power to
terminate the pension plan as successor to the rights of the plan
sponsor and thus was not responsible for claims against the estate
regarding the plan’s termination because the plan administrator,
not the plan sponsor, was responsible for terminating the plan
under ERISA).

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section 523. Section 523(a)(3)(A) precludes discharge of claims

that a debtor neglected to list or schedule. However, even when

the debtor fails to list a claim, the claim may nonetheless be

discharged if the “creditor had notice or actual knowledge of the

case in time for . . . timely filing.” 11 U.S.C. § 523 (a)(3)(A).

While Christopher’s knowledge of Kendavis’s bankruptcy would

presumably require discharge of his claim under the Bankruptcy

Code, Christopher raises a question of due process that must be

resolved on constitutional grounds. See Sequa Corp. v. Christopher

(In re Sequa Corp.), 28 F.3d 512, 516 (5th Cir. 1994); Grossie v.

Sam (In re Sam), 894 F.3d 778, 781 (1990). See generally 8 COLLIER

ON BANKRUPTCY ¶ 1141.06 (Lawrence P. King ed., 15th ed. 2000).

Kendavis argues that this Court set forth a bright-line rule in In

re Sam and In re Sequa Corp. Kendavis contends that actual

knowledge of the pendency of a bankruptcy case will always satisfy

standards of constitutional due process as long as the creditor has

an opportunity to timely file his claim. Because Christopher knew

about the bankruptcy proceedings in time to meet the filing

deadlines, Kendavis contends that we are bound by precedent to

conclude that Christopher’s claim was discharged without further

analysis of the factual circumstances.

Protection of an individual’s due process right to adequate

notice requires more than the cursory review that Kendavis

suggests. In Mullane v. Central Hanover Bank & Trust Co., the

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Supreme Court articulated the standard for adequate notice:

An elementary and fundamental requirement of due

process in any proceeding which is to be accorded

finality is notice reasonably calculated, under all the

circumstances, to apprise interested parties of the

pendency of the action and afford them an opportunity to

present their objections. The notice must be of such

nature as reasonably to convey the required information,

. . . and it must afford a reasonable time for those

interested to make their appearance. But if with due

regard for the practicalities and peculiarities of the

case these conditions are reasonably met the

constitutional requirements are satisfied.

339 U.S. 306, 314-15 (1950) (citations omitted). Under the Supreme

Court’s standard, we must analyze the particular facts of each case

and determine whether the method used to notify an individual was

reasonably certain to inform the individual of a proceeding that

could affect his rights. See id. at 315.

A potential litigant who knows about a legal proceeding

usually has adequate notice that his rights could be jeopardized

and should take steps to protect his rights. Nevertheless, an

ordinarily valid form of notice may “fail to satisfy due process

because of the circumstances of the defendant.” Boddie v.

Connecticut, 401 U.S. 371, 380 (1971). We therefore assess the

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sufficiency of notice against the backdrop of the factual

circumstances in each case. See Mullane, 339 U.S. at 314.

Kendavis’s suggestion that an individual’s knowledge of a

bankruptcy proceeding always qualifies as adequate notice obviates

the Supreme Court’s analysis in Mullane and misinterprets this

Court’s holdings in In re Sam and In re Sequa Corp.

In In re Sam, 894 F.2d 778, 779 (5th Cir. 1990), the claimant

filed a section 1983 suit against the debtor during the debtor’s

bankruptcy proceedings. Although the debtor did not list the

claimant as a creditor, the debtor sent the claimant’s attorney a

Notice of Automatic Stay. See id. at 779. The notice did not

disclose the bar date for filing remaining claims against the

estate. See id. The claimant’s attorney first became aware of the

bar date after it passed. See id. On appeal, we concluded that

the claimant, through his attorney, received adequate notice that

“his section 1983 claim against [the debtor] was affected by [the

debtor’s] bankruptcy . . .,” and that the claimant had sufficient

time to inquire as to the bar date. Id. at 781. In re Sam does

not support the proposition that discovery of a bankruptcy case is

adequate notice in all circumstances.

In In re Sequa Corp., 28 F.3d 512, 513-14 (5th Cir. 1994), the

debtor filed for bankruptcy under Chapter 11. He and other

investors sought to purchase insurance companies from Sequa

Corporation (“Sequa”) during the pendency of his bankruptcy case.

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See id. at 513. Sequa filed suit against the debtor in New York

for claims arising from the transaction. See id. at 514. During

the New York litigation, the bankruptcy court confirmed the

debtor’s Chapter 11 plan. See id. The debtor then filed an

adversary proceeding in the bankruptcy court seeking discharge of

Sequa’s claims. See id. The court held that the postpetition

claims were discharged by the confirmation order. See Christopher

v. American Universal Ins. Group, Inc. (In re Christopher), 148

B.R. 832 (Bankr. N.D. Tex. 1992).

On appeal, Sequa argued that postpetition creditors were

entitled to formal notice of important dates and filing deadlines

under the Due Process Clause. See id. at 515. We concluded that

formal notice is not required for postpetition claims. See id. at

518-19. We further determined that the evidence of Sequa’s actual

knowledge satisfied both prongs of the In re Sam analysis-(1) the

notice apprised the claimant of the pendency of an action affecting

his rights, and (2) the notice allowed sufficient time to permit

the claimant to present his objections. See In re Sam, 894 F.3d at

782. In reaching this conclusion, we reviewed the evidence that

showed the extent of Sequa’s knowledge regarding the bankruptcy

case. See In re Sequa Corp., 894 F.2d at 518. The evidence

clearly established that Sequa possessed sufficient knowledge to

impose a duty on the company to protect its rights in the

bankruptcy court. See id. at 519. We limited our holding to

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“postpetition plaintiffs in [Sequa’s] position.” See id. at 519.

In re Sequa Corp. does not espouse a rule that would preclude

further consideration of the context in which a creditor learns of

a bankruptcy proceeding. As established by the Court in Mullane,

adequate notice is notice reasonably calculated, given the factual

circumstances, to inform claimants of a proceeding that affects

their rights. See Mullane, 339 U.S. at 314-15. See also In re

Sadkin, 36 F.3d at 475-76 (holding that a claimant’s actual

knowledge constituted adequate notice of the debtor’s amended list

of exemptions based on the circumstances of the case); Otto v.

Texas Tamale Co., Inc. (In re Texas Tamale Co., Inc.), 219 B.R. 732

(Bankr. S.D. Tex. 1998) (analyzing the factual context to determine

whether the creditor’s knowledge of the proceedings was adequate

notice). We therefore apply the fact-intensive analysis required

by Mullane to determine whether Christopher’s knowledge of the

bankruptcy case was sufficient to charge him with the burden of

asserting his claim. See Mullane, 339 U.S. at 314.

During the pendency of the bankruptcy proceedings, Kendavis

decided to terminate its American pension plan to satisfy certain

debts. Kendavis sent a letter to Christopher assuring him that the

termination of the Kendavis pension plan would have no affect on

his vested pension benefits. The letter did not mention the

bankruptcy proceeding, but Christopher learned about the case

through local newspaper articles.

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 Despite Christopher’s actual knowledge of Kendavis’s

bankruptcy proceeding, an unrepresented person in his position

should not be expected to file a claim in the bankruptcy court to

protect his rights. An employer owes a fiduciary duty to the

beneficiaries of a pension plan when an employer seeks to recoup

surplus funds by terminating the plan. See Bussain v. RJR Nabisco,

Inc., 223 F.3d 286, 295-96 (5th Cir. 2000) (citing 29 U.S.C. §

1104(a)). Christopher therefore acted reasonably by relying on

Kendavis’s assurance that his pension benefits were not in

jeopardy. The fact that the letter does not specifically refer to

the bankruptcy proceeding does not diminish the effect of the

message. Any concern that the bankruptcy case may have affected

Christopher’s right to pension benefits was reasonably dissipated

by Kendavis’s letter.

Due process requires, at the very least, a debtor to refrain

from assuring potential claimants that their rights will not be

adversely affected during bankruptcy proceedings. This is

especially true when the debtor is a large corporation who owes a

fiduciary duty to the individual claimant. Although Kendavis may

not have harbored any deceptive intent by assuring Christopher that

his rights would not be affected, “fundamental notions of fairness

and due process” dictate that we not place the burden on

Christopher to come forward with his claim. United States v.

Henderson, 707 F.2d 853 (5th Cir. 1983) (holding that the

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requirements of due process were not satisfied by notices of

foreclosure that misrepresented Mississippi law). Before he was

deprived of his claim for pension benefits, Christopher was

entitled to notice that would reasonably apprise him “of the

pendency of the action and afford [him] the opportunity to present

[his] objections.” Mullane, 339 U.S. at 314. In these limited

circumstances, perfunctory knowledge of the bankruptcy proceeding

did not constitute adequate notice to satisfy constitutional due

process requirements.

Accordingly, we hold that the bankruptcy court’s confirmation

order did not discharge Christopher’s claim. Because his claim for

pension benefits was not discharged, Christopher did not violate

the bankruptcy court’s injunction. The bankruptcy court’s

imposition of sanctions was therefore an abuse of the court’s

discretion. The district court’s order is affirmed.

AFFIRMED

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