If a class has not been certified before bankruptcy, every member of the class should file an individual proof of claim before the bar date. That’s the practice point gleaned from a Fifth Circuit opinion on March 10.
If the class is so numerous that individual claims are not practicable, the opinion by Circuit Judge Edith Brown Clement counsels the attorney for the class to file a motion in bankruptcy court for authority to file a class claim, followed by a motion in bankruptcy court to approve the class.
Why go to so much trouble? Easy answer: The bankruptcy court may not approve a class claim, and a court like the Fifth Circuit might not allow individual claims after the bar date.
The Two-Year, Nine-Month Delay in Filing Individual Claims
On behalf of a class of about 100 former employees, two plaintiffs filed a wages and hours class action before the employer’s bankruptcy. Also before bankruptcy, the district court refused to enforce an arbitration clause. The employer appealed to the Ninth Circuit.
While the appeal was pending, the employer filed a chapter 11 petition and served a bar-date notice on each of the 100 former employees in the class. The named plaintiffs filed a $14 million proof of claim for the class, which had not been certified in any court.
Almost 30 class members filed individual claims before the bar date. The remaining 70 did not file claims. Before confirmation of the chapter 11 plan, the debtor signaled its intention to object to the class claim.
After modification of the automatic stay, the Ninth Circuit reversed the district court and directed that the wages and hours claims be arbitrated. As Judge Clement said, enforcing arbitration effectively disallowed the class claim and meant “that all claims by the purported ‘class’ members had to be arbitrated individually.”
Only then, two years and nine months after the bar date, did the 70-some former workers file individual proofs of claim accompanied by a motion to allow late-filed claims for “excusable neglect.” The bankruptcy court refused to allow the late-filed claims, but the district court reversed.
The Fifth Circuit reversed the district court and reinstated the bankruptcy court’s disallowance of the late-filed claims.
Disallowing Late Claims Wasn’t an Abuse of Discretion
The outcome of the appeal was governed by Supreme Court precedent laying out four factors to consider when deciding whether there was excusable neglect. See Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380 (1993).
Although some circuits have held that one factor is more important than the others, Judge Clement said that the Fifth Circuit has not made any factor dominant. She reviewed the bankruptcy court’s excusable-neglect decision for what she called the “exceptionally deferential” abuse of discretion standard.
The first Pioneer factor considers the danger of prejudice to the debtor. The bankruptcy court had found in favor of the debtor, but Judge Clement disagreed.
The debtor had notice of the wages and hours claims long before bankruptcy and “that they might ultimately be allowed in the bankruptcy proceeding,” Judge Clement said. In addition, the plan had a disputed-claims reserve. The first factor “cuts in favor of the Claimants here,” she said.
The second Pioneer factor considers the length of delay and the impact on judicial proceedings if creditors could file late claims. The bankruptcy court decided that the second factor favored the debtor, and Judge Clement agreed.
The debtor’s knowledge of the claims before confirmation “does not mean that they expected to have to resolve those claims even if they were filed late,” Judge Clement said. [Emphasis in original.]
Moreover, the claimants’ counsel presented no evidence to the bankruptcy court regarding the impact on judicial proceedings. Even if the circuit court were to consider the claimants’ argument, Judge Clement said “it permits the reasonable inference that the delay that would result from allowing [approximately 70] additional arbitrations to proceed could significantly impact the resolution of the wage litigation and bankruptcy.”
Judge Clement agreed with the bankruptcy court that the length-of-delay factor favored the debtor.
The reason for the delay is the third Pioneer factor.
Judge Clement said that courts are “less likely to find excusable neglect when the reason for the delay was within the movant’s reasonable control.” She said that the claimants had notice that the debtor would object to the class claim, but they did not protect themselves, even though all 70 had notice of the bar date.
In other words, the “Claimants took a risk that a class proof of claim would be allowed; that risk did not pan out for the Claimants, and the Debtors are not responsible for the consequences that followed,” Judge Clement said.
The third factor focuses on whether the failure to perform on time was “beyond the reasonable control” of the party seeking an extension of time, according to Judge Clement. In the case at hand, she said, “Most of what caused the delay in this case was not beyond the reasonable control of the Claimants, whose duty it was to file timely proofs of claim.”
Judge Clement agreed with the bankruptcy court’s finding that the third factor favored the debtor.
The fourth Pioneer factor weighs the claimants’ good faith. In that respect, Judge Clement noted the bankruptcy court’s observation that the action of the claimants’ counsel “verged on malpractice.” She said that “counsel’s failure to act diligently throughout the bankruptcy proceeding was so severe that it undermines their argument that they acted in good faith.”
Specifically, Judge Clement said that the claimants’ counsel’s failure to invoke Federal Rule 23 in the bankruptcy case “evinces both a severe lack of diligence and a misunderstanding of bankruptcy procedural rules.” In that regard, she noted that the Fifth Circuit is yet to rule on whether a class claim is even permitted in bankruptcy.
Judge Clement agreed with the bankruptcy court: Good faith favored the debtor.
Even though one of the four factors favored the claimants, Judge Clement reversed the district court because she could not “say that the bankruptcy court abused its discretion by denying the Claimants’ motion for relief from the bar date.”
If a class has not been certified before bankruptcy, every member of the class should file an individual proof of claim before the bar date. That’s the practice point gleaned from a Fifth Circuit opinion on March 10.
If the class is so numerous that individual claims are not practicable, the opinion by Circuit Judge Edith Brown Clement counsels the attorney for the class to file a motion in bankruptcy court for authority to file a class claim, followed by a motion in bankruptcy court to approve the class.
Why go to so much trouble? Easy answer: The bankruptcy court may not approve a class claim, and a court like the Fifth Circuit might not allow individual claims after the bar date.