What Practitioners Should Know about Class Actions that Are Not Certified Pre-petition
• Unless the class was certified pre-petition, the class representatives must file a proof of claim and move for class certification as soon as possible after the petition date.
• The burden is on the class representative to put—and keep—the wheels in motion. Moving for class certification and then agreeing to adjourn proceedings will not satisfy this burden. Courts may decline to allow class claim litigation to proceed through no fault of the class claimant when the plan or claims resolution processes are well underway, such that class claim proceedings would unduly delay the administration of the case.
The purpose of this article is to provide practitioners with a procedural guide for handling class claims with respect to classes that were not certified pre-petition.
How the Law Developed
The leading decision in this area is In re American Reserve Corp., 840 F.2d 487 (7th Cir. 1998), which held that a bankruptcy court has discretion to allow class claims after a determination is made under Rule 9014 of the Federal Rules of Bankruptcy Procedure3 to apply Rule 7023 of the Federal Rules of Bankruptcy Procedure (which makes applicable Rule 23 of the Federal Rules of Civil Procedure). In making that determination, courts will assess the particular fact situation and decide whether the class device is appropriate. The bankruptcy court must then determine, "at an early practicable time," whether to certify the action as a class action. Fed. R. Bankr. P. 7023(c)(1)(A). Once the class is certified, Rule 7023 also requires that class members be notified and given the opportunity to opt in or out of the class. Fed. R. Bankr. P. 7023(c)(2).
Recognizing that cerification proceedings can be time-consuming and that the class-noticing process can be inconsistent with the bar date process established in chapter 11 cases, courts following In re American Reserve have declined to apply Rule 7023 when doing so would unduly delay the administration of the case.
The court has broad discretion in applying Rule 7023 and certifying classes, and there is no clear guide as to how class claims must be pursued and the burdens associated therewith. Ephedra and Craft/ Mirant shed some light on the factors a court will weigh in determining whether to apply Rule 7023. As explained below, whether the court will exercise such discretion depends on how close the debtor is to making distributions to creditors and whether the claimants have diligently pursued class certification.
Decisions Are Heavily Dependent upon Context
The Ephedra and Craft/Mirant cases address when and under what circumstances a court should exercise its discretion to apply Rule 7023. The context in which the claimants in those cases pursued their class claims was critical to the courts' decisions, as described below. In Ephedra:
• Class representatives in three separate class actions that were not certified pre-petition filed proofs of claim. Class representative #1 moved for stay relief to pursue the class claim in state court, but consented to adjourn the stay motion for almost one year. Class representative #2 commenced an adversary proceeding in the bankruptcy court seeking class certification, but agreed to an adjournment. Class representative #3 similarly hesitated in its efforts to obtain class certification.
• The question of whether the court should exercise discretion to apply Rule 7023 was not raised until the debtors and the committee jointly objected to the class claims—after the bankruptcy court approved the debtor's disclosure statement and votes on the debtor's chapter 11 plan were solicited.
• Holding: objection sustained; class claims expunged. The court declined to apply Rule 7023 on the grounds that certification proceedings would unduly delay the administration of the case and that the class representatives should have pursued class certification earlier in the chapter 11 cases.
• A proof of claim was filed by the class representatives of a class that was certified pre-petition.
• The debtors objected to the class claim nearly one year after the bar date at the time the debtor's plan was being formulated.
• The members of the class were the principal constituency to be addressed under the debtor's plan.
• Holding: objection overruled; class claims not expunged on the ground that class action was certified pre-petition.
• Class representatives of classes that were not certified pre-petition filed proofs of claim. The claimants took no action to have the class certified post-petition.
• The debtors objected to the class claim and filed a motion to strike the class claims nearly one year after the bar date at the time that the debtors' plan was being formulated and in advance of a seven-week schedule the court set aside for the resolution of material claim objections.
• Holding: objection sustained; class claims expunged. Claimants had the burden to seek certification of the class and failed to do so.
In each of the above cases, when determining whether or not to apply Rule 7023, the bankruptcy courts weighed a number of factors, including (1) whether the class was certified pre-petition, (2) prejudice to the debtor or its other creditors, (3) prejudice to putative class members, (4) efficient estate administration, (5) whether class representative satisfied burden to move for class certification and (6) the status of proceedings in other courts. See Craft/ Mirant, 2005 WL 221887 at *7; In re Ephedra, 329 B.R. at 8.
A survey chart identifying some decisions following In re American Reserve in which class claims were permitted follows the end of this article. Those decisions, taken together with Ephedra and Craft/Mirant, show that class representatives must cross some difficult, if not impossible, hurdles when classes are not certified pre-petition.
As the foregoing demonstrates, practitioners must pay close attention to how they pursue or defend class claims. Whether representing a debtor or a class representative, separate strategies must be developed for litigating class claims in the chapter 11 context. When classes are not certified pre-petition, particular attention must be paid to the timing within which class claims are filed, objected to and litigated during the case.
The Class Representative Must Move for Certification
The rulings in Ephedra and Craft/Mirant depended on the diligence of the claimants in pursing class certification. In Ephedra, the court acknowledged that "although no waiver was involved, class claimants bear primary responsibility for the 'gumming up' by not affirmatively moving under Rule 9014(c) for class certification." In re Ephedra, 329 B.R. at 5. Similarly, in connection with the class claims in the Mirant bankruptcy, the court in Craft/Mirant pointed out that "the putative class representatives...have also waited too long to seek invocation of Rule 7023. Though some courts have held that a claim must be objected to in order to create a contested matter, it is the view of this court that it is the burden of the class representatives to raise the issue of class certification." In re Craft, 2005 WL 221887 at *7 (internal citations omitted).
Class representatives could argue that the decisions placing the burden on class representatives to move for class certification run contrary to the notion that claims are deemed allowed unless objected to under §502(a) of the Bankruptcy Code. (According to §502(a) of the Code, a claim is deemed allowed unless a party in interest objects. See 11 U.S.C. §502(a)). But class representatives should not hang their hats on that argument and wait for the debtor to object to the class proof of claim. Moreover, before making this argument, claimants should know whether the local rules for the district court place the burden on class representatives to move for class certification within a particular time frame—a bankruptcy court could borrow that rule. See, e.g., Local Rules for the Eastern District of Pennsylvania (Rule 23(c)); Central District of California (Rule 23-3) and Northern District of Texas (23-2) (each setting deadlines by which class representatives must move for class certification).
The proper mechanisms through which a class representative can pursue a class action and initiate certification proceedings in a chapter 11 proceeding are: (1) a proof of claim that identifies (a) the putative class and (b) class representative, and (2) a motion for certification of the class, filed before the bar date for filing proofs of claim is set. As we learned from some of the cases identified on our survey chart, simply moving to lift the automatic stay to pursue a class action in state or district court may not carry the day. See Iles v. LTV Aerospace and Def. Co. (In re Chateaugay Corp.), 104 B.R. 626, 634 (Bankr. S.D.N.Y. 1989); Zenith Labs. Inc. v. Sinay (In re Zenith Labs. Inc.), 104 B.R. 659, 664 (Bankr. D. N.J. 1989).
Certification Proceedings that Would Unduly Delay the Administration of the Case Will Not Be Allowed
With respect to efficient case administration, the Ephedra court pointed out that "since class litigation is inherently more time-consuming than the expedited bankruptcy procedure for resolving contested matters, class litigation would have to be commenced at the earliest possible time to have a chance of being completed in the same time frame as the other matters that must be resolved before distributing the estate." In re Ephedra, 329 B.R. at 5. Thus, when efficiency dictates, a court could direct the expungement of a class claim, even if the class representative acted diligently.
A court will consider the timing and costs associated with certification litigation and post-certification noticing. Knowing that pre-certification proceedings often involve discovery and extensive briefing, the class representatives should commence class certification proceedings before the bar date is set and well before plan and material claims resolution processes conclude. In connection with any motion to certify the class, class representatives should ensure that either (1) those proceedings result in a certification decision in an expedited fashion or (2) that the order adjourning certification proceedings includes findings with respect to whether the class representative satisfied its burden to move for class certification, why it is not appropriate for the proceedings to continue at that time and that the court will not decline to apply Rule 7023 based on the class representative's diligence in pursuing certification or undue delay of administration of the case. On the other hand, when representing a debtor, counsel may want to wait for the class representative to act before objecting to or moving to strike a class claim that was not certified pre-petition.
1 Any opinions expressed in this article are not necessarily the opinions of White & Case, LLP and AlixPartners, LLP.
2 At this time this opinion was issued, Mirant Corp., et al. and Noble and Junell Craft both had chapter 11 cases pending before Judge Lynn in the U.S. Bankruptcy Court for the Northern District of Texas. Judge Lynn consolidated his opinions regarding class claims in these actions in order to present a more cohesive view of class claims. For purposes of this article, this opinion will be referred to as the Craft/Mirant opinion.
3 While Rule 9014 does not specifically incorporate Bankruptcy Rule 7023, it does empower the court to make the adversary proceeding rules applicable to contested matters.