Class Claims Not Categorically Barred in Bankruptcy, Delaware Judge Rules

The Third Circuit did not categorically bar the filing of class proofs of claim, according to Bankruptcy Judge Laurie Selber Silverstein of Delaware.

The dispute arose in a quickly-moving prepackaged chapter 11 reorganization with a fast approaching bar date and confirmation hearing. Plaintiffs in a pre-bankruptcy class action in California sought permission from Judge Silverstein to file a class claim in the bankruptcy case.

The named plaintiff alleged violation of California labor law for failure to provide rest breaks and compensate workers for undergoing security checks and closing duties. Just weeks before bankruptcy, a California judge had certified a class covering workers going back to 2007.

The debtor contended that the Third Circuit’s 1973 decision in S.E.C. v. Aberdeen Securities Co. categorically prohibited class claims in bankruptcy cases. In her June 22 decision, Judge Silvestein noted that the Aberdeen opinion was “not couched in per se language.” Rather than making class claims impermissible in bankruptcy, she said that Aberdeen “in many instances echoes the factors courts consider in determining whether to certify a class.”

Judge Silverstein therefore joined what she called the “vast majority of courts” by holding that allowing a class claim is a matter of discretion. She proceeded to apply Bankruptcy Rule 7023 and cases tailored to bankruptcy.

Judge Silverstein concluded that the class representative met the requirements of Federal Rule 23, made applicable by Bankruptcy Rules 7023, in all but one respect.

Judge Silverstein allowed the class claim for workers with general unsecured claims, in part because the debtor had not given notice of the bar date to all employees covered by the class. Instead, the debtor only notified those who were employed within two years of bankruptcy. Thus, a class claim was necessary to protect workers with no notice of the bar date.

Regarding workers who might have priority or administrative wage claims, Judge Silverstein found a lack of compliance with Rule 23(a)(4) which requires that the representative must “fairly and adequately protect” the class.

Since some potential class members would have priority claims entitled to full payment, a worker like the class representative who had a general unsecured claim would have “an incentive to favor general unsecured creditors.”

Although the proposed class therefore had a lack of “structural protection,” Judge Silverstein did not preclude a class claim entirely. Instead, she excluded priority claims from the class by limiting the class to unsecured creditors who worked from 2007 until six months before the filing date.

Judge Silverstein’s opinion also contained a holding of benefit to creditors when state law allows proceedings by private attorneys general.

The California statute permits a purported class representative to prosecute an action for civil penalties owing to the state labor department for violation of labor law. Since the state statute made the class representative an agent for the state, Judge Silverstein said that the representative was entitled to file a claim for civil penalties without permission from the bankruptcy court under Section 510.

The opinion is In re Pacific Sunwear of California Inc., 16-10882 (Bankr. D. Dela. June 22, 2016).