Get to the Head of the Class Promptly: Class Representatives Must be Diligent when Defendants File for Bankruptcy

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Plaintiffs in a lawsuit bear a substantial burden when seeking to be certified as a class under federal law. Where the defendant commences a bankruptcy proceeding, and the plaintiffs seek to file a proof of claim on behalf of all class members, that burden becomes even greater and is rife with obstacles unique to the bankruptcy process.

To file a class proof of claim, the proponent must make a motion to extend the application of Fed. R. Civ. P. 23(a) and establish the four threshhold requirements in that rule for certifying a class: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interest of the class.

Generally, Rule 23 applies in bankruptcy cases; however, “bankruptcy significantly changes the balance of factors to be considered in determining whether to allow a class action and thus class certification is often less desirable in bankruptcy than in ordinary civil litigation.” In re Bally Total Fitness of Greater New York, Inc., 402 B.R. 616, 620-1 (Bankr. S.D.N.Y. 2009). Thus, in addition to satisfying the requirements of Rule 23, the class representatives must also demonstrate that, “the benefits derived from the use of the class claim device are consistent with the goals of bankruptcy.” In re Musicland Holding Corp., 362 B.R. 644, 651 (Bankr. S.D.N.Y. 2007).

Against this backdrop, courts have considered, among other factors, the timing of a motion for a class claim and its impact on the administration of the bankruptcy estate. Specifically, where a class waits until far into the Chapter 11 plan process to seek to file a class claim, courts have consistently denied motions for such relief as being disruptive to the bankruptcy case. See e.g. In re Ephedra Prods. Liability Lit., 329 B.R. 1, 5 (S.D.N.Y. 2005) (court denied class certification request made after plan was sent to creditors for voting); In re FIRSTPLUS Fin., Inc., 248 B.R. 60, 73 (Bankr. N.D. Tex. 2000) (motion for class certification denied where it was filed one month prior to plan confirmation hearing).

Similarly, where the claims bar date in a bankruptcy case has expired, a motion to file a class proof of claim may be denied. See In re Sacred Heart Hospital of Norristown, 177 B.R. 16, 23 (Bankr. E.D. Pa. 1995) (court denied motion to file class proof of claim and extension of bar date, reasoning that, “[i]t is clearly disruptive to the formulation of a plan to frustrate a debtor’s logical assumptions regarding the amounts of total claims by compelling the debtor to alter or extend an established bar date.”).

Class representatives, as a rule, must always be vigilant in serving the interests of their constituents in a class action lawsuit. Where the defendant commences a bankruptcy proceeding, that vigilance also requires a general familiarity with the bankruptcy process and the careful monitoring of the defendant’s bankruptcy case, including the claims bar date and the status of the plan confirmation process. As the foregoing case law demonstrates, class representatives ignore these critical events at their own peril.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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