On June 22, 2016, the Bankruptcy Court for the District of Delaware allowed a putative creditor class to file a class proof of claim in the In re Pacific Sunwear of California, Inc., et al., bankruptcy proceedings.[1]  In granting the motion, the bankruptcy court applied its discretion to certify a class of retail employees holding claims alleging violations of state labor laws, and rejected the Debtors’ assertion that the Third Circuit had categorically prohibited class proofs of claim in bankruptcy.  This ruling should serve as a warning that bankruptcy is not a surefire recipe to avoid class treatment, and will serve as an arrow in the quiver of the class action plaintiffs’ bar to the extent their cases are pulled into the bankruptcy realm.

Background

In January 2011, Charles Pfeiffer filed an action against PacSun entities alleging violations of the California Labor Code Private Attorneys General Act of 2004 (“PAGA”).  Later in 2011, Tamaree Beeney filed a separate suit, as a putative class action, against PacSun, alleging violations of California labor law, in addition to claims pursuant to PAGA.[2]  The two lawsuits, along with a third similar suit, were coordinated pursuant to California procedural law.  Nearly five years later, following discovery and oral argument, on February 26, 2016, the Superior Court for the County of Los Angeles, entered an order granting class certification.[3]  

Less than two months after the California state court granted class certification, on April 7, 2016, PacSun and related entities (“Debtors”), filed for bankruptcy in Delaware.[4]  On the same day, Debtors filed a plan of reorganization and an accompanying disclosure statement.  Debtors then moved successfully for the approval of a general bar date, which was set for June 13, 2016.[5]  However, Debtors deliberately did not serve the members of the certified class with notice of the bar date but instead “unilaterally chose to limit notice of the Bar Date to employees who worked for PacSun in the two years prior to the filing of the petition.”[6]  Despite the limited notice program, Plaintiffs Pfeiffer and Beeney timely filed representative proofs of claim on behalf of their respective classes.  Plaintiffs then petitioned the bankruptcy court for an order approving the filing.

In their motion for leave to file class proofs of claim, Plaintiffs argued that allowing the filing would “merely maintain[] the status quo,” which was warranted given that: (1) Debtors willfully failed to notice the class claimants of the bar date; (2) the class certification was won “after years of arduous litigation”; (3) PAGA claims did not require certification;[7] and (4) Plaintiffs Pfeiffer and Beeney were appropriate representatives to file such class proofs of claim.[8]

Debtors maintained that the class proofs of claim were inappropriate.  They argued that: (1) the Third Circuit previously rejected “the importation of class action principles into bankruptcy cases”; (2) there was no authority for permitting a PAGA claimant to file a representative claim in bankruptcy; (3) the motion was a collateral attack on the Bar Date Order; (4) the requirements of Bankruptcy Rule 7023 were not satisfied; and (5) the court should exercise its discretion to reject the filing.[9]

The Bankruptcy Court’s Opinion

Importantly, the court first rejected the Debtors’ contention that the Third Circuit had categorically prohibited the filing of class proofs of claim in bankruptcy.[10]  Debtors relied primarily on SEC v. Aberdeen Securities Co., for this proposition.[11]  In Aberdeen, while the Third Circuit affirmed the district court’s refusal to treat claims as part of a class action, it made no per se announcement that class proofs of claim were impermissible in bankruptcy.  Rather, it simply affirmed the district court’s discretionary decision to reject a class action claim explaining that “petitioners have failed to show that the method they advocated [class treatment] was superior to the procedures being followed by the Bankruptcy Court.”[12]  Hence, the Delaware Bankruptcy Court found that Aberdeen did “not stand for the principle that class claims are, as a rule, impermissible in bankruptcy cases.”[13]

The court then analyzed the proposed filing under Bankruptcy Rule 7023, which governs Class Proceedings in bankruptcy.  Rule 7023 states: “Rule 23 F.R.Civ.P. applies in adversary proceedings.”  Thus, the court’s task was to determine whether the requirements of Rule 23 had been satisfied such that a class proof of claim could be properly filed in the proceeding. 

First, the court analyzed whether it should exercise its discretion to apply Rule 7023.  It explained that it would follow the three-factor framework developed in Musicland[14] to guide its discretion in determining whether Rule 7023 should be extended in the instant case.  Those factors include: (1) whether the class was certified pre-petition; (2) whether the members of the putative class received notice of the bar date; and (3) whether class certification would adversely affect the administration of the estate.[15]

The court easily dispensed with the first two factors as it was undisputed that the class was certified in February 2016 and that the Debtors did not provide notice to all claimants in the certified class.[16]  As to the third, whether certification would adversely affect administration of the estate, the court found that “application of Rule 7023 will not hinder the chapter 11 process, but rather will promote efficiency by placing potentially thousands of individual claims before the court in a single class claim with competent counsel representing the interests of the class.”[17] 

After deciding to exercise its discretion and apply Rule 7023, the court then turned to a substantive analysis of whether the elements of Rule 23 were satisfied.  Rule 23 requires a showing of numerosity, commonality, typicality, and adequacy of representation.  The court found that numerosity, commonality, and typicality were easily satisfied given that the class appeared to be in excess of 20,000 members, all members were subject to the same companywide policies that allegedly violated California law, and Plaintiff Beeney’s claims and legal theory were “not only typical of the claims of the unnamed class members, they are identical to their claims.”[18]

However, the court found a wrinkle with respect to the adequacy of representation requirement.  This element requires that the representative plaintiff’s interests and incentives align with the rest of the class.[19]  The court found that putative members of the class certified by the California state court may ultimately have divergent interests based on how their claims are categorized pursuant to the Bankruptcy Code.  While Plaintiff Beeney, and those similarly situated, would likely hold general unsecured claims in the bankruptcy proceedings, current employees may hold either wage priority or administrative claims.[20]  Thus, a structural problem existed within the class which could prevent Plaintiff Beeney from adequately representing those claimants who held different classes of claims.[21]  The court thus limited the class certification in the bankruptcy proceeding to those unnamed class members who, like Plaintiff Beeney, would hold general unsecured claims.[22]

*   *   *   *   *

Although the Debtors aggressively asserted the notion that class proofs of claim are impermissible in the Third Circuit, the bankruptcy court squarely rejected such a view.  This ruling further substantiates the viability of class proofs of claim in the bankruptcy arena as a tool for effectively addressing potential bankruptcy claims that may number in the hundreds or thousands, when claimants meet the requisite elements for class certification.   Such treatment may promote the same efficiency and cost-sharing goals that class plaintiffs enjoy outside of bankruptcy and the ruling should prove a boon to the class action plaintiffs’ bar when seeking class treatment, and the resultant benefits that flow therefrom, in bankruptcy cases.