United States: Delaware Bankruptcy Court Reaffirms The Viability Of Class Proofs Of Claim

On June 22, 2016, the Bankruptcy Court for the District of Delaware allowed a putative creditor class to file a class proof of claim in the In re Pacific Sunwear of California, Inc., et al., bankruptcy proceedings.1  In granting the motion, the bankruptcy court applied its discretion to certify a class of retail employees holding claims alleging violations of state labor laws, and rejected the Debtors' assertion that the Third Circuit had categorically prohibited class proofs of claim in bankruptcy.  This ruling should serve as a warning that bankruptcy is not a surefire recipe to avoid class treatment, and will serve as an arrow in the quiver of the class action plaintiffs' bar to the extent their cases are pulled into the bankruptcy realm.

Background

In January 2011, Charles Pfeiffer filed an action against PacSun entities alleging violations of the California Labor Code Private Attorneys General Act of 2004 ("PAGA").  Later in 2011, Tamaree Beeney filed a separate suit, as a putative class action, against PacSun, alleging violations of California labor law, in addition to claims pursuant to PAGA.2  The two lawsuits, along with a third similar suit, were coordinated pursuant to California procedural law.  Nearly five years later, following discovery and oral argument, on February 26, 2016, the Superior Court for the County of Los Angeles, entered an order granting class certification.3 

Less than two months after the California state court granted class certification, on April 7, 2016, PacSun and related entities ("Debtors"), filed for bankruptcy in Delaware.4  On the same day, Debtors filed a plan of reorganization and an accompanying disclosure statement.  Debtors then moved successfully for the approval of a general bar date, which was set for June 13, 2016.5  However, Debtors deliberately did not serve the members of the certified class with notice of the bar date but instead "unilaterally chose to limit notice of the Bar Date to employees who worked for PacSun in the two years prior to the filing of the petition."6  Despite the limited notice program, Plaintiffs Pfeiffer and Beeney timely filed representative proofs of claim on behalf of their respective classes.  Plaintiffs then petitioned the bankruptcy court for an order approving the filing.

In their motion for leave to file class proofs of claim, Plaintiffs argued that allowing the filing would "merely maintain[] the status quo," which was warranted given that: (1) Debtors willfully failed to notice the class claimants of the bar date; (2) the class certification was won "after years of arduous litigation"; (3) PAGA claims did not require certification;7 and (4) Plaintiffs Pfeiffer and Beeney were appropriate representatives to file such class proofs of claim.8

Debtors maintained that the class proofs of claim were inappropriate.  They argued that: (1) the Third Circuit previously rejected "the importation of class action principles into bankruptcy cases"; (2) there was no authority for permitting a PAGA claimant to file a representative claim in bankruptcy; (3) the motion was a collateral attack on the Bar Date Order; (4) the requirements of Bankruptcy Rule 7023 were not satisfied; and (5) the court should exercise its discretion to reject the filing.9

The Bankruptcy Court's Opinion

Importantly, the court first rejected the Debtors' contention that the Third Circuit had categorically prohibited the filing of class proofs of claim in bankruptcy.10  Debtors relied primarily on SEC v. Aberdeen Securities Co., for this proposition.11  In Aberdeen, while the Third Circuit affirmed the district court's refusal to treat claims as part of a class action, it made no per se announcement that class proofs of claim were impermissible in bankruptcy.  Rather, it simply affirmed the district court's discretionary decision to reject a class action claim explaining that "petitioners have failed to show that the method they advocated [class treatment] was superior to the procedures being followed by the Bankruptcy Court."12  Hence, the Delaware Bankruptcy Court found that Aberdeen did "not stand for the principle that class claims are, as a rule, impermissible in bankruptcy cases."13

The court then analyzed the proposed filing under Bankruptcy Rule 7023, which governs Class Proceedings in bankruptcy.  Rule 7023 states: "Rule 23 F.R.Civ.P. applies in adversary proceedings."  Thus, the court's task was to determine whether the requirements of Rule 23 had been satisfied such that a class proof of claim could be properly filed in the proceeding. 

First, the court analyzed whether it should exercise its discretion to apply Rule 7023.  It explained that it would follow the three-factor framework developed in Musicland14 to guide its discretion in determining whether Rule 7023 should be extended in the instant case.  Those factors include: (1) whether the class was certified pre-petition; (2) whether the members of the putative class received notice of the bar date; and (3) whether class certification would adversely affect the administration of the estate.15

The court easily dispensed with the first two factors as it was undisputed that the class was certified in February 2016 and that the Debtors did not provide notice to all claimants in the certified class.16  As to the third, whether certification would adversely affect administration of the estate, the court found that "application of Rule 7023 will not hinder the chapter 11 process, but rather will promote efficiency by placing potentially thousands of individual claims before the court in a single class claim with competent counsel representing the interests of the class."17 

After deciding to exercise its discretion and apply Rule 7023, the court then turned to a substantive analysis of whether the elements of Rule 23 were satisfied.  Rule 23 requires a showing of numerosity, commonality, typicality, and adequacy of representation.  The court found that numerosity, commonality, and typicality were easily satisfied given that the class appeared to be in excess of 20,000 members, all members were subject to the same companywide policies that allegedly violated California law, and Plaintiff Beeney's claims and legal theory were "not only typical of the claims of the unnamed class members, they are identical to their claims."18

However, the court found a wrinkle with respect to the adequacy of representation requirement.  This element requires that the representative plaintiff's interests and incentives align with the rest of the class.19  The court found that putative members of the class certified by the California state court may ultimately have divergent interests based on how their claims are categorized pursuant to the Bankruptcy Code.  While Plaintiff Beeney, and those similarly situated, would likely hold general unsecured claims in the bankruptcy proceedings, current employees may hold either wage priority or administrative claims.20  Thus, a structural problem existed within the class which could prevent Plaintiff Beeney from adequately representing those claimants who held different classes of claims.21  The court thus limited the class certification in the bankruptcy proceeding to those unnamed class members who, like Plaintiff Beeney, would hold general unsecured claims.22

*   *   *   *   *

Although the Debtors aggressively asserted the notion that class proofs of claim are impermissible in the Third Circuit, the bankruptcy court squarely rejected such a view.  This ruling further substantiates the viability of class proofs of claim in the bankruptcy arena as a tool for effectively addressing potential bankruptcy claims that may number in the hundreds or thousands, when claimants meet the requisite elements for class certification.   Such treatment may promote the same efficiency and cost-sharing goals that class plaintiffs enjoy outside of bankruptcy and the ruling should prove a boon to the class action plaintiffs' bar when seeking class treatment, and the resultant benefits that flow therefrom, in bankruptcy cases. 

Footnotes

1 In re Pacific Sunwear of California, Inc., a California corporation, et al., No. 16-10882, 2016 WL 3564484, (Bankr. D. Del. Jun. 22, 2016).

2 Id. at *1-2.

3  The court defined the class to include "[a]ll hourly, non-exempt employees of PacSun working in retail locations in the State of California from March 18, 2007 through the date the certification Order is entered."  The certification encompassed claims for "failing to authorize and permit employees to take duty-free rest breaks...and to compensate employees therefor" and "requiring employees to undergo security checks and perform closing duties off-the-clock without compensation."  Id. at *1.  In granting certification, the court found that Plaintiff Beeney's claims were typical, that common questions of law and fact predominated, and that class treatment was superior given the relatively small potential for recovery in comparison to the fixed costs of litigating each individual action.  Id.

4 Id. at *2.

5 Id.

6 Id.

7  The court easily dispensed with the PAGA claims brought by Plaintiffs Pfeiffer and Beeney.  It explained that PAGA's express statutory language "deputizes an aggrieved employee to bring claims on behalf of the State of California against an employer for violations of the California Labor Code as long as certain procedures are met."  Section 501 of the Bankruptcy Code permits a creditor's "authorized agent" to file a claim.  Here, agency was conferred by statute and, thus, no further permission was required from the court for the PAGA claims to proceed.  Id. at *2-4.

8 Id. at *2.

9 Id.

10 Id. at *4-5.

11 SEC v. Aberdeen Securities Co., 480 F.2d 1121 (3d Cir. 1973).

12 Id. at 1128. 

13 In re PacSun, 2016 WL 3564484 at *5.

14   In re Musicland Holding Corp., 362 B.R. 644, 654-55 (Bankr. S.D.N.Y. 2007).

15 In re PacSun, 2016 WL 3564484 at *5.

16 Id. at *6.

17 Id.

18 Id. at *7-8.

19 Id. at *8.

20 Id. at *9.

21 Id.

22  Given the court's order limiting the class to those who would hold general unsecured claims, certain class claimants have since moved for leave to amend the previously filed proof of claim.  Claimants Beeney and Victoria Batterton have moved to substitute Victoria Batterton, and any additional qualified representatives, as representative for the priority claim subset of the Beeney Class certified by the California state court pre-petition.  In the alternative, they have requested additional time for the filing of a Priority Class Claim, and for reconsideration of the order granting leave to file a class proof of claim for general unsecured creditors.  See Motion of Class Claimants (a) For Leave to Amend Proof of Claim to Substitute Class Representative or, Alternatively, to Provide Additional

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions