Class Proofs of Claim Involve Procedural Minefield

Bankruptcy has been likened to a class action. In a typical class action, a class representative files suit against a defendant seeking relief on behalf of a class of plaintiff. If class certification is not granted, the suit continues as a conventional suit. In bankruptcy, a debtor files for relief against his or her creditors. However, as shown by Fed.R.Bankr.P. 7023, it is possible to have a traditional class action within the collective proceeding of a bankruptcy. Sometimes this is done through the vehicle of filing a class proof of claim. However, unless an actual class of claims is certified, a "class" proof of claim is just a regular proof of claim. 

Several recent cases illustrate the difficult relationship between class actions and bankruptcy. In Patterson v. Mahway Bergen Retail Group, Inc., 2022 U.S. Dist. LEXIS 7431 (E.D. Va. 2022), a plan contained an opt out feature for third-party releases. The lead plaintiff in a securities class action objected to the plan. This resulted in that plaintiff being deemed to have opted out of the release. The plaintiff then attempted to appeal on behalf of the class. The District Court found lack of standing to appeal. Because the class had not been certified, the plaintiff lacked the ability to represent the class on appeal. Because the plaintiff had objected to the opt out provision, they were not harmed by it. The Court stated:However, the Securities Litigation Lead Plaintiffs' capacity as putative representatives of a class in the District of New Jersey does not confer standing to appeal in this Court. The Securities Litigation Lead Plaintiffs claim that they have standing "because they are fiduciaries for the Class, have rights closely aligned with those of Class members, and are the court-appointed advocate for Class members' rights." (Appellants' Reply at 19.) However, this argument puts too much weight on their role as putative class representatives. As lead plaintiffs in a putative class action, the Securities Litigation Lead Plaintiffs have no special status; consequently, they must establish individualized harm. Opinion, at *32.

In In re Mallinckrodt, PLC, 2022 Bankr. LEXIS 273 (Bankr. D. Del. 2022), a putative class rep filed a class proof of claim and attempted to object to a proposed settlement on behalf of the class. The Court found that the gambit failed on several grounds. First, the Court found that a certified class representative must still request permission to file a class proof of claim. Second, the putative class rep had not been certified. Finally, the debtor had objected to the class proof of claim and it had been expunged.

Given these mis-steps, what should be done to file a class proof of claim?

In In re Legendary Field Exhibitions, LLC, 2021 Bankr. LEXIS 2947 (Bankr. W.D. Tex. 2021), a class action by football players was filed pre-petition and removed to bankruptcy court. The Bankruptcy Court granted preliminary class certification. The class representative filed a class proof of claim. The trustee objected to the class proof of claim. However, the trustee ultimately filed a motion to compromise and settle with the class. In this instance, certification of a class in an adversary proceeding was combined with filing a class proof of claim. The trustee made a tactical decision that it was better for the estate to settle with the class. Judge Gargotta found that it was an open question in the Fifth Circuit whether class proofs of claim were permissible. However, he found that he certainly had authority to approve a compromise and settlement.

In W. Wilmington Oil Field v. CJ Holding Co., 2021 U.S. Dist. LEXIS 149292 (S. D. Tex. 2021), the court found that most courts that had considered the issue had found class proofs of claim to be permissible. In W. Wilmington Oil Field, the Court looked through the bankruptcy rules. Rule 9014 allows certain rules applicable to adversary proceedings to be applied to contested matters. Rule 7023, which allows class actions is one of these. As Judge Rosenthal stated:
The majority of federal courts hold that "a class proof of claim is permissible under the Bankruptcy Code and Federal Rules of Bankruptcy Procedure," and that "Bankruptcy Rule 9014 allows bankruptcy courts to apply Bankruptcy Rule 7023 and Rule 23 to any stage of a contested matter, including the filing of a proof of claim." (citations omitted). The Fifth Circuit has not addressed this question, but it has held that bankruptcy courts have discretion as to whether to apply Rule 23 to contested matters. Opinion, at *29. In the specific case, the class representatives had filed class proofs of claim on the last day for filing claims. The Bankruptcy Court ruled that the claims were late-filed as to the class because the class was not certified prior to the claims bar date. The District Court reversed and directed the Bankruptcy Court to grant the motion for late-filed claims.

Several conclusions arise from these cases. The first is that class actions are permissible in bankruptcy but must follow the rules for class certification. It is possible to file a class proof of claim. However, without class certification, a class proof of claim is just a proof of claim. Where a class proof of claim is filed prior to the bar date but the class is not certified prior to this time, the claim runs the risk of being untimely as to the class. In this instance, the class representative should either file the claim well before the bar date and seek class certification or move to extend the bar date for filing claims to allow for the class to be certified. A class proof of claim is possible in bankruptcy but it requires navigating a difficult procedural landscape.