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- Delaware District Court Disagrees with Bankruptcy Court’s Ruling and Holds That Committee’s Challenge Rights Survived Entry of the Sale Order and Consummation of Sale
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Pac Sun Class Representative Denied Permission to File Class Proof of Claim on Behalf of Priority Claimants
In re Pacific Sunwear of California, Inc., No. 16-10882 (LSS) (Bankr. D. Del. June 22, 2016 and Aug. 8, 2016)
In the first of two related Opinions, Judge Laurie Selber Silverstein granted claimant Tamaree Beeney permission to file a class proof of claim for alleged violations of California wage and hour laws under California’s Private Attorney General Act (“PAGA”), but limited her representative role to absent class members who hold non-priority general unsecured claims. In the second Opinion, the Court denied reconsideration of Her Honor’s ruling and further disallowed another claimant from representing the priority class in Ms. Beeney’s absence.
Prior to the bankruptcy filing of Pacific Sunwear of California, Inc. and its affiliates (collectively, the “Debtors”), Charles Pfeiffer filed an action under PAGA, and Ms. Beeney filed a lawsuit that included a putative class action as well as claims under PAGA. The California state court granted class certification for certain employees working in California stores from March 18, 2007 through February 26, 2016. After the Debtors filed for bankruptcy, Mr. Pfeiffer requested permission of the Delaware Bankruptcy Court to file a proof of claim under PAGA (the “PAGA claim”), and Ms. Beeney sought permission to file both a PAGA claim and a class proof of claim in her capacity as a prepetition court-approved class representative, which the Debtors contested.
The Court devoted most of the Opinion to whether Ms. Beeney could file a class action proof of claim. Rejecting the Debtors’ contention that the Third Circuit in Aberdeen Securities Co., 480 F.2d 1121 (3d Cir. 1973) has prohibited the filing of class proofs of claim in bankruptcy cases, Judge Silverstein joined the majority of courts in holding that whether to permit a class action is a matter of discretion. In exercising such discretion, courts consider whether it is beneficial to apply Bankruptcy Rule 7023 to the claims administration process and whether the requirements of Federal Rule 23 have been satisfied.
To determine whether Bankruptcy Rule 7023 should be extended, courts look to the following Musicland factors: (i) whether the class was certified prepetition; (ii) whether the members of the putative class received notice of the bar date; and (iii) whether class certification will adversely affect administration of the estate. In re Musicland Holding Corp., 362 B.R. 644 (Bankr. S.D.N.Y. 2007). Here, all three factors were satisfied, and the Court exercised its discretion to apply Bankruptcy Rule 7023. First, the California state court granted class certification for two of Ms. Beeney’s claims. Second, the Debtors did not serve members of the certified class with notice of the bar date, but instead limited notice to employees who worked for the Debtors in the two years prior to the bankruptcy filing. Recognizing that it is a debtor’s burden to provide proper notice to known creditors, the Court cautioned that it may “behoove a debtor to specifically raise [the sufficiency of notice] issue [in the bar date motion or] with the judge in court.” Op. at *4 n.13. Third, class certification will not adversely affect administration of the estate because the bar date had not yet passed, the claims administration process was in the early stages and the Debtors were aware of the claims.
In order to certify a class claim, the claimant must satisfy the numerosity, commonality, typicality and adequacy of representation factors in Federal Rule 23(a) as well as one of the Federal Rule 23(b) criteria. Here, the first three factors were easily met with respect to all unnamed class members. However, the Court found that the fourth factor is only met with respect to those unnamed class members who (like Ms. Beeney) hold non-priority general unsecured claims (i.e., claims arising prior to the 180-day prepetition priority period of section 507(a)(4)). Evaluating the interests and incentives of the representative plaintiff, the Court found that Ms. Beeney (who can only be a member of the non-priority general unsecured class) has an incentive to favor similarly situated creditors over creditors in other classes and therefore cannot adequately represent unnamed class members who may have administrative and/or priority claims. For Federal Rule 23(b), the Court found that common questions of law predominate as the essential issue for all unnamed class members’ claims is whether the Debtors’ companywide policies violate California law. Moreover, similar to Judge Walrath’s analysis in In re United Cos. Fin. Corp., 276 B.R. 368 (Bankr. D. Del. 2002), most of the unnamed class members probably do not know their rights under California law and would not have filed claims even with proper notice. Also, the recovery of each class member is likely to be minimal, rendering prosecution of such claims cost prohibitive.
Based on the above, the Court permitted Ms. Beeney to file a class proof of claim for class members who hold non-priority general unsecured claims. Dissatisfied with the temporal limitation, Ms. Beeney asked the Court to reconsider its decision and permit her to represent employees with section 507(a)(4) priority claims. Alternatively, she asked for permission to amend her proof of claim to permit another claimant to be added as a class representative of employees whose claims would fall within the 180-day priority period.
In the Court’s second Opinion, Judge Silverstein denied Ms. Beeney’s request for reconsideration and further declined to permit another claimant to file a proof of claim on behalf of class members who hold priority claims. Application of the Musicland factors to the priority class differed in two respects from the analysis applied to the non-priority general unsecured class. First, the entire priority class was not certified prepetition as the state certified class term ended approximately five weeks prior to the filing of the bankruptcy petition. Second, each potential priority claimant received actual notice of the bar date and therefore had an opportunity to file an individual proof of claim.
Because the Court did not permit the filing of a class proof of claim for the period after October 10, 2016, the Court ordered that a second bar date notice be sent to employees who worked in the Debtors’ California stores from October 11, 2016 through February 26, 2016.