When 99% of class members otherwise will not receive a distribution on their claims, Bankruptcy Judge Harlan D. “Cooter” Hale of Dallas decided that allowing a class proof of claim is the proper exercise of discretion.
The debtors provided software and other services to consumer lenders throughout the country. The debtors’ chapter 11 filing was “largely caused by lawsuits that were being filed against the Debtors in multiple jurisdictions across the country,” Judge Hale said in his August 30 opinion. The plaintiffs alleged that the debtors violated the Racketeer Influenced and Corrupt Organizations Act, state usury laws, and a variety of consumer protection laws.
In erecting a bar date for the filing of proofs of claim, Judge Harlan explained how the debtors attempted to give notice to 1.13 million borrowers around the country who might hold claims alleged by the plaintiffs. Court-approved notice procedures called for sending more than one million postcards along with publication in the Wall Street Journal and USA Today.
Judge Hale said there were “notable weaknesses” in the notice procedures as implemented. Potential creditors might not recognize the debtors’ names, and the notice “did not give any information about what kind of claim the individuals may have,” he said. The result of the notice of the bar date was “a great deal of confusion.”
There were more than 26,000 phone calls. Fewer than 5,000 proofs of claim were filed. An expert testified that the notice did not afford consumer borrowers with “enough information in a comprehensible way to enable them to make an informed decision about whether to file a proof of claim,” according to Judge Hale.
To alleviate the alleged shortcomings in the bar date notice, the plaintiffs filed a motion asking Judge Hale to apply Bankruptcy Rule 7023, governing class actions in adversary proceedings.
Invoking Rule 7023 in an adversary proceeding entails a two-step process, Judge Hale said, citing Teta v. Chow (In re TWL Corp.), 712 F.3d 886 (5th Cir. 2013). First, the bankruptcy court must use discretion in deciding whether to apply Rule 7023 in a contested matter. Second, the court must decide whether the requirements for class certification in Rule 23 have been satisfied.
Judge Hale bifurcated the process by addressing the first issue in his August 30 opinion.
Although Judge Hale found multiple grounds for invoking Rule 7023, he said that notice of the bar date “had some significant weaknesses and ultimately did not produce good results.” Many borrowers “may have been dissuaded from believing they had a claim based on some of the language in the postcard, or they may not have understood some of the legal terms used in the notice.”
The evidence persuaded Judge Hale that a “vanishingly small” number of consumer borrowers “understood the notice, filed a claim, and properly identified the basis for their claims.”
Although notice procedures for the bar date “may have been constitutionally sufficient,” Judge Hale said they “were not successful in facilitating creditor participation in these bankruptcy cases.”
Judge Hale therefore exercised discretion by applying Rule 7023 to the filing of class proofs of claim.
To read about other cases involving class claims, click here, here and here.
When 99% of class members otherwise will not receive a distribution on their claims, Bankruptcy Judge Harlan D. “Cooter” Hale of Dallas decided that allowing a class proof of claim is the proper exercise of discretion.