Class Proofs of Claim Create Procedural Minefield

Bankruptcy has been likened to a class action. In a typical class action, a class representative files suit against a defendant seeking relief on behalf of a class of plaintiff. If class certification is not granted, the suit continues as a conventional suit. In bankruptcy, a debtor files for relief against his or her creditors. However, as shown by Fed.R.Bankr.P. 7023, it is possible to have a traditional class action within the collective proceeding of a bankruptcy. Sometimes this is done through the vehicle of filing a class proof of claim. However, unless an actual class of claims is certified, a "class" proof of claim is just a regular proof of claim. 

Fifth Circuit Opinion Upholds Limits on Actions Between Non-Debtors

 In a case involving multiple parties and proceedings, the Fifth Circuit has affirmed lower court rulings which prohibited one non-debtor from suing a second non-debtor and awarded sanctions against a party that told a state court to disregard the Bankruptcy Court's orders. In the Matter of PFO Global, Incorporated, Case No. 20-10885 (5th Cir. 2/9/22), which can be found here. While the result may sound extreme, it appears to be an unintended consequence of an agreed order entered years earlier.

District Court Finds Plan Provision So Broad It Exceeded Jurisdiction

While bankruptcy subject matter jurisdiction is broad, sometimes an order can just go too far as shown by the recent opinion from the U.S. District Court for the Eastern District of Virginia in Patterson v. Mahway Bergen  Retail Group, Inc., 2022 U.S. Dist. LEXIS 7431 (E.D. Va. 2022).

The Three Types of Jurisdiction

Bankruptcy practitioners can usually recite the three types of bankruptcy jurisdiction in their sleep: arising in, arising under and related to. Of these, related to is the broadest. In the Fifth Circuit, related to jurisdiction is present if the matter being addressed could have a conceivable effect on the debtor or the bankruptcy estate. Thus, if the debtor owned a store at the bottom of a hill and a property owner had allowed a boulder at the top of the hill to work precariously loose, an adversary proceeding to force the other property owner to secure the boulder would have a conceivable effect on the bankruptcy estate and related to jurisdiction would be present. Why is this? If the boulder rolled down the hill, it could smash the debtor's store. On a more mundane note, there is related to jurisdiction to collect accounts receivable owed to the debtor because collecting money would make it easier to reorganize.

In the past, there were many arguments about whether bankruptcy courts had jurisdiction to grant third-party releases. The Supreme Court put this controversy to rest in United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010). In that case, the Supreme Court drew a distinction between having statutory authority to take an action and having jurisdiction to do so. The Bankruptcy Code does not allow a court to grant a hardship discharge on a student loan without filing an adversary proceeding. However, there is clearly jurisdiction to do so because granting the discharge would have a conceivable effect on the debtor. What this means is that if a plan contains a provision which should not be approved, the parties have to challenge it directly as opposed to coming back years later and saying that there was no jurisdiction to approve the provision.