The Fifth Circuit Court of Appeals recently remanded a dismissed adversary proceeding where a former employee of a corporate debtor attempted to assert a class action on behalf of himself and 129 other employees for alleged violations of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§ 2101-2109. See Teta v. Chow (In re TWL Corporation), Case No. 12-40271 (5th Cir. March 29, 2013).
TWL Corporation and its subsidiary were in the business of providing workplace learning, training and certification programs. In September 2008, TWL laid off the majority of its workforce. One month later, TWL filed a voluntary petition for chapter 11 bankruptcy relief.
Shortly after the filing, a former vice president of TWL who had been laid off commenced a class action against TWL through an adversary proceeding in the bankruptcy. Specifically, the former employee alleged that TWL violated the WARN Act by failing to give its employees sixty days written notice of their termination. The former employee sought a claim for himself and the class for sixty days’ worth of wages and further sought to elevate the priority of those claims to administrative claims under section 503(b)(1)(A) or unsecured priority claims under sections 507(a)(4) and (5) of the Bankruptcy Code.
In addition to the class suit, the vice president filed a class proof of claim against TWL, asserting the same claims on behalf of all 130 putative class members. But, significantly, he was the only individual that filed a proof of claim alleging WARN Act violations. In fact, less than 20 individuals even filed claims for past due wages and salaries.
The class adversary proceeding was abated for a while until it could be determined what bankruptcy estate assets were available to satisfy claims. When it became apparent that a reorganization was not possible, the case was converted to a chapter 7 liquidation case, and a chapter 7 trustee was appointed.
To prove a WARN Act claim, the plaintiff (former employee) must demonstrate the following:
- the defendant was an employer;
- the defendant ordered a plant closing or mass layoff;
- the defendant failed to give the plaintiff 60 days notice of the closing or layoff;
- the plaintiff is an aggrieved or affected employee.
See 29 U.S.C. §§ 2102, 2104. If a plaintiff establishes these elements, the employer may still avoid liability if it qualifies for certain exemptions, like the “natural disaster” exemption. See 29 C.F.R. 639.09.
A class action is a type of lawsuit that enables numerous, similarly-situated claimants to obtain redress from one or more common defendants. Federal Rule of Civil Procedure 23, which governs class action lawsuits in federal courts, provides the following prerequisites to such an action:
- the class is so numerous that joinder of all members is impracticable (numerosity requirement);
- there are questions of law or fact common to the class;
- the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
- the representative parties will fairly and adequately protect the interests of the class.
See Fed. R. Civ. P. 23(a). In addition to the above elements, a class action is maintainable if one of the following 3 conditions exits:
- the prosecution of separate actions by or against individual members of the class would create a risk of: (a) inconsistent or varying adjudications with respect to individual members of the class; or (b) adjudication with respect to individual members of the class would substantially impair the ability of non-class members to protect their interests;
- the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or
- the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting individual class members, and that the class is superior to other available methods for the fair and efficient adjudication of the controversy (superiority requirement).
See Fed. R. Civ. P. 23(b). In class actions, a plaintiff must motion the court to certify the action as a proper vehicle for addressing the claims of numerous similarly-situated parties. If the above requirements are met, however, a court does not have discretion to deny certification of a class. See Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 130 S. Ct. 1431, 1437 (2010).
Federal Rule of Bankruptcy Procedure 7023 incorporates Federal Rule of Civil Procedure 23 and is applicable in adversary proceedings in bankruptcy cases.
Bankruptcy Court Ruling
In TWL’s case, the bankruptcy court ultimately denied the vice president’s motion for class certification and dismissed the adversary proceeding. In doing so, the bankruptcy court found that the vice president had not meet the numerosity and superiority requirements under Federal Rule 23.
With respect to numerosity, the bankruptcy court found that even if all 130 members of the putative class elected to pursue WARN Act claims–which appeared unlikely given the amount of individual claims filed–that number would be manageable outside of the class action context and in the normal claims resolution process in bankruptcy. The court further noted that class certification would also serve to negate the deadlines to file proofs of claim that had long expired, because it would provide putative class members with another opportunity to assert their claims.
As to the superiority requirement, the bankruptcy court found that it was unconvinced that a class action would provide a superior method of adjudication of several disputes. The court found that the Bankruptcy Code already provided adequate remedies to claimants through the traditional claims resolution process and thus it would be a waste of bankruptcy estate resources to move forward with a class action, especially when only 1 claimant timely asserted a WARN Act claim.
Fifth Circuit Ruling
On appeal (after the district court affirmed), the Fifth Circuit started its analysis by taking into consideration the various procedural rules applicable in bankruptcy proceedings. Normally, when a party contests a proof of claim, the resulting litigation over this claim is considered a “contested matter,” pursuant to Federal Rule of Bankruptcy Procedure 9014. In contrast, an adversary proceeding is very similar to a normal lawsuit outside of bankruptcy and is initiated by filing a complaint, pursuant to Bankruptcy Rule 7003.
While the Fifth Circuit found that it may be appropriate to commence class actions as adversary proceedings–and thus Bankruptcy Rule 7023 would apply–it was not appropriate to automatically apply Bankruptcy Rule 7023 to a contested matter involving a mere challenge to a proof of claim. Nonetheless, pursuant to Bankruptcy Rule 9014, the bankruptcy court does have authority to extend Bankruptcy Rule 7023 to a contested matter, but it must first take the following factors into consideration:
- whether the class was certified prepetition;
- whether members of the putative class received notice of the claims bar date;
- whether class certification will adversely affect the administration of the case; or
- whether there exists other benefits and costs to class certification.
The vice president claimed that instead of simply analyzing class certification under Federal Rule 23, the bankruptcy court improperly based its decision on a body of discretionary determinations under Bankruptcy Rule 9014, none of which had bearing on class certification in adversary proceedings. The Fifth Circuit agreed that the bankruptcy court seemed to conflate rules applicable in adversary proceedings with those applicable to contested matters. The Fifth Circuit noted, however, that a bankruptcy court addressing class certification may consider factors related to the bankruptcy case. Thus, the adversary proceeding does not live in a vacuum separate from the bankruptcy case.
Ultimately, the Fifth Circuit held that the bankruptcy court failed to explain with sufficient particularity its rationale for denying class certification. Accordingly, the Fifth Circuit remanded the adversary proceeding to the lower courts so that the bankruptcy court could eventually enter findings of fact and conclusions of law to support its denial of class certification.
(a) numerosity requirement
With respect to the numerosity requirement, the Fifth Circuit noted that predominant wisdom is that there is no definite standard as to what size of class satisfies Federal Rule 23(a)(1)’s numerosity requirement. Therefore, courts should not focus on sheer numbers alone and should also consider factors such as geographical dispersion of the class, the ease with which class members may be identified, the nature of the action and the size of the plaintiff’s claim. See Pederson v. La. State Univ., 213 F.3d 858, 868 n. 11 (5th Cir. 2000); Zeidman v. J. Ray McDermott & Co., 651 F.2d 1030, 1038 (5th Cir. 1981).
Here, the Fifth Circuit held that, while the bankruptcy court did consider the potential size of the class (130), it could not determine whether some of the considerations cited by the bankruptcy court had any bearing on Rule 23(a)’s numerosity requirement. Significantly, however, the Fifth Circuit rejected the argument that bankruptcy-related factors play no role in a bankruptcy court’s consideration of class certification. Within the bankruptcy context, because it is not unusual for large numbers of claims to be filed, challenged and allowed or disallowed, even larger putative classes may not be so numerous as to make joinder impracticable (thereby meeting the numerosity requirement). See In re Woodmoor Corp., 4 B.R. 186, 189 (Bankr. D. Colo. 1980) (denying bankruptcy class certification with 900 members); in re First Magnus Fin. Corp., 403 B.R. 659, 663-64 (D. Ariz. 2009) (denying WARN Act adversary with a putative class of 5,000 members).
(b) superiority requirement
With respect to the superiority requirement, Federal 23(b) lists 4 non-exhaustive factors that should be considered in determining whether the superiority requirement is met:
- the class members’ interests in individually controlling the prosecution or defense of separate actions;
- the extent and nature of any litigation concerning the controversy already begun by or against class members;
- the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and
- the likely difficulties in managing a class action.
See Fed. R. Civ. P. 23(b)(3). Rule 23(b)’s superiority requirement necessarily suggests a comparative process, where a court must asses the relative advantages of alternative procedures for handling the total controversy. Indeed, the superiority analysis is generally fact-specific and will vary depending on the circumstances. The Fifth Circuit also noted that, in the bankruptcy context, bankruptcy-related factors, including whether class certification will adversely affect the administration of the case, are relevant to the superiority analysis. See, e.g., Computer Learning Centers, 344 B.R. at 92. The Court stated:
In our view, a bankruptcy court should consider the cost of the debtor’s estate of a class adversary proceeding simply because the expense of adjudicating the controversy via a class action depletes the debtor’s assets, which in turn diminishes the funding available to creditors, including, possibly, the very claimants pursuing the class action.
As a corollary, the Fifth Circuit noted that a bankruptcy court should also consider the availability and ease of the claims resolution process when determining whether an adversary proceeding is a superior method of adjudicating these types of controversies. The Court noted, however, that it would be error for a bankruptcy court to place too much emphasis on the cost to the bankruptcy estate of the class proceeding and ignore traditional Rule 23 factors.
In the end, the Fifth Circuit found that because the bankruptcy court did not enter any findings of facts and conclusions of law as to the relative complexity of adjudicating the WARN Act claims, it had no insight as to whether the superiority requirement had not been met. For example, the Court noted that knowing whether the chapter 7 trustee planned on asserting defenses to the WARN Act claims was a significant factor in determining the complexity of the controversy, as a failure to assert such defenses would make the controversy “relatively uncomplicated and inexpensive.”
The Fifth Circuit was very clear that its opinion was limited in scope, and the Court even refused to consider other matters raised by the appellant (former employee) with respect to his class proof of claim (which presented a contested matter, not an adversary proceeding). Moreover, while the Fifth Circuit remanded the adversary proceeding to allow the bankruptcy court to make further findings, it did not dictate the ultimate conclusion for the lower court. Thus, the bankruptcy court could reach the same result on remand, after making the appropriate findings. The final outcome remains to be seen.
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