Subchapter V by Itself Doesn’t Bar Class Claims, Florida Judge Says

Although newly enacted Subchapter V of chapter 11 does not itself prohibit class proofs of claim, Bankruptcy Judge Roberta A. Colton in Jacksonville, Fla., declined to authorize the filing of a class claim to cover about 150 homeowners in a resort community.

For reasons Judge Colton explained in her May 4 opinion, procedures already in place in bankruptcy cases are superior to class actions in soliciting creditors to file claims and in sorting out liability and damages.

In lieu of allowing a class claim, Judge Colton established a system for quickly soliciting claims from individual homeowners.

The Class Suit

Years before bankruptcy, several homeowners in a resort community filed a class suit in state court against the owner of the common areas and resort facilities. Claiming they were overcharged, the homeowners sought damages, an injunction and an equitable lien on monies held by secured lenders.

Also before bankruptcy, the state court certified the class but did not rule on liability or damages. The class included about 150 current and former homeowners.

The owner of the common areas and resort facilities filed a chapter 11 petition and sought treatment as a small business debtor under the Small Business Reorganization Act, which became effective in February 2020 and is codified primarily in Subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195.

The class plaintiffs filed a motion for leave to file a class proof of claim under Bankruptcy Rule 7023 and Federal Rule 23. The debtor opposed, contending that the truncated procedures under the SBRA imply a bar to class claims.

Class Claims Are Ok, but Not Here

Judge Colton recited how “most courts” have decided that class claims are permissible in bankruptcy cases, although the decision to allow a class claim or certify a class is addressed to the court’s discretion. She observed that class claims in “typical” chapter 11 cases are “are not a routine occurrence.”

So far, no court has decided whether class claims are permissible in Subchapter V cases, Judge Colton said. She rejected the debtor’s contention that class claims are prohibited.

Judge Colton said she could “envision possible scenarios where a creditors’ committee or a class claim may be an efficient and appropriate vehicle in a Subchapter V case.”

Having decided that class claims are theoretically possible, Judge Colton turned to the question of whether she would permit the filing of a class claim under Rule 7023.

Judge Colton laid out the so-called Musicland factors that inform a decision on invoking Rule 7023 in bankruptcy cases. They are: (1) whether the class had been certified before bankruptcy; (2) whether the members of the class have received notice of the bankruptcy bar date; and (3) the effect on the administration of the estate.

Judge Colton quoted a New York bankruptcy judge for saying that certifying a class may be “less desirable” in bankruptcy than in ordinary litigation. Compared to class actions, she said that bankruptcy courts “are unique in that they are equipped to efficiently handle thousands of claims in one forum.”

Weighing the factors, Judge Colton said that the state court’s certification of the class “certainly weighs in favor” of permitting a class claim. On the other hand, she said that the Code and Rules “are unique in that they are equipped to efficiently handle thousands of claims in one forum.”

Next, Judge Colton compared the relief sought in the state court to the proposed class claim. In state court, the plaintiffs were seeking an injunction, but the class claim would only assess damages. However, another homeowner had a pending adversary proceeding seeking the same injunction. Thus, barring a class claim would not limit the relief obtainable by the homeowners.

Judge Colton addressed the equitable liens sought by the class. She said that a lien could only be obtained through an adversary proceeding, not from a class claim. If the class plaintiff wanted an equitable lien, the class claim wasn’t the way to do it.

With regard to whether class members had received notice of the bankruptcy, several were not on the debtor’s matrix and had not received notice to file a claim. In fact, none of the individual homeowners had filed proofs of claim. She concluded that notice about the bankruptcy “was of no real significance.”

In terms of interference with the bankruptcy case, Judge Colton said that filing proofs of claim under bankruptcy bar date procedures would bring in claims faster than through class certification. She exercised her discretion by declining to apply Rule 7023.

In lieu of allowing a class claim, Judge Colton created a “simplified procedure” for homeowners to file claims. She directed the debtor to send a notice of a new 45-day bar date to everyone in the purported class. In addition, she allowed lawyers to file their own claims if they had made claims against the debtor in state court.