Court Denies the Filing of Class Action Proof of Claim in PG&E’s Bankruptcy

Bankruptcy and class actions each establish elaborate procedures and provide a convenient forum to resolve numerous claims against one or more defendants, in an efficient manner.  However, while a class action focuses on providing adequate representation to claimants with similar claims, bankruptcy focuses on enabling an insolvent company to reorganize.  The two goals do not necessarily blend well in every circumstance.

Still, Bankruptcy Rules 9014 and 7023 do make it possible, and practical in certain instances, to incorporate the rules pertaining to class actions into the rules governing the claims resolution process in bankruptcy.  These Bankruptcy Rules do so by allowing individual claimants to file a class proof of claim on behalf of numerous other claimants.

But, blending class action rules with bankruptcy rules is like layering one complicated procedure on top of another.  As numerous courts have found, the two procedures often overlap and do not necessarily blend cheaply.  For example, both processes require sufficient notice to be provided to claimants in order for them to timely assert their claims and/or exercise their rights.  One can readily imagine that in a bankruptcy case involving hundreds of thousands of potential claimants, providing notice pursuant to the class action rules after notice has already been provided under the bankruptcy rules (pursuant to strict deadlines) could not only be very expensive and time-consuming, but also very confusing.

That is why bankruptcy courts are generally afforded sound discretion in determining whether to apply class action rules to proofs of claim.   Seee.g.Reid v. White Motor Corp., 886 F.2d 1462, 1470 (6th Cir. 1989) (“Rule 9014 delegates wide discretion to the bankruptcy judge in considering certification of class proofs of claim pursuant to Rule 7023 in a contested matter.”)

In the recent case of In re PG&E Corporation, No 19-30088 (Bankr. N.D. Cal. Feb. 24, 2020), the Bankruptcy Court for the Northern District of California was asked to incorporate the class action rules into limited proofs of claim filed by individual investors alleging securities fraud against PG&E.  These individual claimants sought to use their proofs of claim to prosecute numerous others claims on behalf of other investors who were similarly injured, pursuant Bankruptcy Rule 7023.  As with many cases where individual bankruptcy claimants are seeking to avail themselves of class action rules, the putative class representatives had already initiated class action litigation prepetition but had not yet achieved class certification.

The Bankruptcy Court ultimately denied the movants’ request to file class proofs of claim, because such approach risked derailing the tight confirmation deadlines scheduled in the bankruptcy case.  Nonetheless, given the flexibility of the Bankruptcy Code, the Court was able to fashion alternative relief for the putative class members who had not already filed claims in the case.

Analysis

Permitting class proofs of claims in bankruptcy typically involves a two-step process, whereby a court first allows the class claim to be filed and then determines whether class certification is appropriate.  A court does not reach the second step unless it approves the first step.

In considering the first step, many courts typically apply the following factors:

  1. whether the class was certified prepetition;
  2. whether members of the putative class received notice of the claims bar date; and
  3. whether class certification will adversely affect the administration of the estate.

See, e.g., In re Musicland Holding Corp., 362 B.R. 644, 651 (Bankr. S.D.N.Y. 2007).  The Court in PG&E‘s case similarly applied these factors.

With respect to the first factor, the Court found that, while the movants had not yet reached class certification in their prepetition securities litigation, this factor was not determinative because the securities litigants had been stymied by procedural nuances in that case (i.e., the defendants had filed a motion to dismiss, which stayed all discovery and proceedings).

The Court next found that the second factor weighed heavily in favor of the movants, because putative class members had not received actual notice of the general claims bar date in the bankruptcy.  While PG&E argued that such putative members received constructive notice, the Court found that the known creditors, which PG&E was aware of from the securities litigation, were entitled to actual written notice of the claims bar date.  See, e.g., Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3d Cir. 1995).

With respect to the last factor, the Court found it unclear whether class certification would adversely affect the administration of the estate but was inclined to weigh this factor in favor of PG&E.  The main concern was that legislative requirements, along with numerous other considerations, made the deadline to confirm a chapter 11 plan much shorter in PG&E‘s case than in most other cases.  Indeed, the disclosure statement and confirmation deadlines had already been set to allow plan confirmation to occur by the end of June 2020.  The Court also considered that, even if it allowed the class proof of claim, it could deny class certification in the second step of the analysis, which would result in further delay.  According to the Court, this precarious situation would give the parties even less time to provide due process notice to putative class members and potentially could derail confirmation, leaving the bankruptcy case in chaos.

The Court thus denied the movant’s request to file a class proof of claim.  But, the Court  found an alternative form of relief that would provide less risk to the confirmation process.  Relying on precedent from other jurisdictions, the Court decided to extend the claims bar date for putative class members, thereby giving them an opportunity to file their claims well in advance of confirmation.  See ,e.g. , Schuman v. The Connaught Grp., Ltd (In re The Connaught Grp., Ltd.), 491 B.R. 88, 97 (Bankr. S.D.N.Y. 2013) (“[i]f a class action was filed prior to the running of the statute of limitations and class certification is denied, the tolling of the statute of limitations will give the class members additional time to assert their individual rights . . . The same tolling rule applies in bankruptcy.  If the representative files a timely adversary proceeding or class proof of claim, and the Court denies a motion to certify the class, it should set a reasonable bar date to allow the members of the putative class to file individual claims.”)  Since the movants here demonstrated that they could timely file proofs of claim, the Court found that other putative class members could do the same (after being given additional notice) within a reasonable amount of time, without disrupting the confirmation deadlines in the bankruptcy case.

Takeaway

While class actions may provide an efficient means of resolving numerous claims, this process may not necessarily be efficient enough to be incorporated into a complicated bankruptcy case, which carries its own deadlines and seeks to advance other objectives.  PG&E serves as another example of an instance where a court found that the bankruptcy rules and class action rules do not necessarily mesh well.  Nonetheless, because bankruptcy rules themselves preserve due process rights and provide mechanisms to address numerous claims in a single forum, the putative class members in PG&E were found not to be prejudiced by the alternative relief fashioned by the Court.  In the end, the Court’s alternative relief advanced the dual goals of allowing a debtor to reorganize, within a reasonable amount of time, and providing redress to numerous claimants.  This approach appears to have balanced the interests of both PG&E and its claimants.

 

Partner at FisherBroyles, LLP