Bankruptcy Judge Laurie Selber Silverstein of Delaware allowed the filing of a class claim, in part to discourage the debtor from continuing an accounting practice that may be shortchanging suppliers.
Royalty owners filed a class action in 2011 against an oil and gas producer in federal district court in Oklahoma, contending that the company was incorrectly calculating royalties by deducting expense that the company should have borne. The plaintiffs’ motion for class certification under Federal Rule 23 was pending when the company filed a chapter 11 petition in May 2016.
Before the claims bar date in August 2016, the plaintiffs filed a class claim in bankruptcy court seeking $90 million for 3,900 leases. After the debtor and the plaintiffs agreed to modify the automatic stay by permitting the Oklahoma court to rule on class certification, the district court certified the class in Jan. 2017, with modifications.
The debtor objected to permitting a class claim and in the meantime confirmed a chapter 11 plan in March 2017. The plan gave stock to creditors in the reorganized company. If the class claim were allowed for $90 million, Judge Silverstein said that royalty owners would receive 7% of the new stock.
The company consummated the plan although Judge Silberstein had not ruled on the class claim objection before confirmation. In her opinion on May 24, she allowed the class claim, without determining the amount of the claim.
To decide how she should exercise discretion in allowing or disallowing a class claim under Bankruptcy Rule 7023, made applicable by Bankruptcy Rule 9014(c), Judge Silverstein adopted the three-part test enunciated by New York Bankruptcy Judge Stuart M. Bernstein in In re Musicland Holding Corp., 362 B.R. 644, 654 (Bankr. S.D.N.Y. 2007): (1) whether the class was certified before bankruptcy; (2) whether class members received notice of the bar date, and (3) whether class certification would adversely affect case administration.
Judge Silverstein cited cases allowing class claims where there was no certification before bankruptcy. The lack of notice to the entire class, she said, weighed in favor of class certification because the company arbitrarily gave bar date notice only to royalty owners three years before bankruptcy. The class suit, however, sought damages back to 2006.
Although failure to serve the bar date notice universally “may not always be fatal,” Judge Silverstein sought to avoid condoning a practice that did not give actual notice to known creditors whose identities were ascertainable from the debtor’s books and records.
Judge Silverstein found no prejudice to case administration, because the debtor did not contend that the claim had to be decided before confirming and consummating the plan.
Judge Silverstein added a fourth factor: deterring the confirmed debtor from continuing a business practice that might violate royalty owners’ rights.
Because the debtor argued that it had been properly calculating royalties, Judge Silverstein presumed that the reorganized company would continue the practice. If she determines that the class claim was well founded, the judge said it would “serve as a deterrent” against “continuing with the same behavior.”