Monday, March 14, 2022

Fifth Circuit Opinion Illustrates Risks of Class Proofs of Claim

A new opinion from the Fifth Circuit highlights the perils of class proofs of claim, something I recently wrote about here. In West Wilmington Oilfield Claimants v. Nabors Corporate Services, Inc. (Matter of CJ Holding Company), Case No. 21-20394 (5th Cir. 3/10/22), the Fifth Circuit upheld a bankruptcy court decision which denied creditors covered by a putative class claim permission to file late claims. The opinion can be found here.

What Happened

In 2015, two former employees of an oilfield services company filed a class action in California state court. C & J Well Services, the defendant, removed the case to federal court. The defendant sought to enforce a company-wide arbitration agreement and class action waiver. The district court denied the motion. C & J appealed the case to the Ninth Circuit.

In July 2016, while the appeal was pending, C & J and several of its affiliates filed bankruptcy in the Southern District of Texas. The Court entered an order setting a bar date and the deadline was advertised in national publications as well as by notice sent to creditors. The putative class representatives filed a proof of claim on behalf of the class for over $14 million. Twenty-seven individual claimants filed their own proofs of claim. A plan was confirmed which denied and expunged all claims filed after the bar date.

The Debtor also entered into a settlement agreement with Nabors Corporate Services to indemnify it for any allowed claims and authorized Nabors to object to any claims subject to the indemnity agreement. Nabors was an affiliate of a company which had merged into the Debtor which had employed the persons bringing the employment claims.

In February 2017, the bankruptcy court issued an order allowing the parties to the Ninth Circuit appeal to prosecute the appeal. In February 2018, the Ninth Circuit reversed the District Court and held that the arbitration and class waiver provisions were enforceable. Ninety-six claimants filed individual arbitration proceedings. However, only twenty-seven of these had filed individual proofs of claim.

In October 2018, Nabors filed an omnibus objection to the various employment proofs of claim. The Bankruptcy Court ruled that the two class representatives and the twenty-seven additional creditors who had filed individual proofs of claim could proceed with the arbitrations but that the remainder could not rely on the class proof of claim.

The Bankruptcy Court advised the claimants who had not filed claims that they could request leave to file late claims. The non-filing claimants did not file their motion for late-filed claims until August 2019, nearly two years after the bar date. After a hearing the Bankruptcy Court denied the motion. The claimants appealed to the District Court which reversed. Nabors then appealed to the Fifth Circuit. 
The Court's Ruling

The Fifth Circuit ruled that the Bankruptcy Court was correct in denying leave to file a late claim. How a tardily filed claim treated depends on the chapter. In Chapter 7, a late-filed claim is allowed but is subordinated to all timely-filed claims. 11 U.S.C. Sec. 726(a)(3). There is no provision for late-filed claims in Chapter 13, except that a debtor or trust may file a claim for a creditor within thirty days from the original bar date. In Chapter 11, a claim may be filed after the bar date if the late filing was the result of "excusable neglect." The Supreme Court has established a four-part test for excusable neglect: (1) “the danger of prejudice to the debtor,” (2) “the length of the delay and its potential impact on judicial proceedings,” (3) “the reason for the delay, including whether it was within the reasonable control of the movant,” and (4) “whether the movant acted in good faith.” Opinion, p. 8. 

The Fifth Circuit concluded that the risk of prejudice to the debtor weighed in favor of the claimants because the claims were known to the debtor and because Nabors had agreed to indemnify the debtor. 
However, the length of delay was another story. The creditors waited two years and nine months after the bar date had passed and one year and seven months after the Ninth Circuit held that the class action was not a viable remedy.  Adding 67 more arbitrations would add anywhere from two to three months to years to the process. 
Next the court found that the claimants had failed to reasonably explain the cause for the delay.  Excusable neglect "is the failure to timely perform a duty due to circumstances that were beyond the reasonable control of the person whose duty it was to perform." The Court found that most of the reasons proffered for the late filings were within the reasonable control of the creditors. 
Finally, the Court ruled against the claimants on the good faith prong. 
The Debtors argue that the Claimants’ and their counsel’s failure to act diligently throughout the bankruptcy proceeding was so severe that it undermines their argument that they acted in good faith. We agree. To be sure, we have not held authoritatively that lack of diligence constitutes bad faith per se. Nor do we do so now. But other courts have held, in persuasive fashion, that lack of diligence can at least cast doubt on a claim of good faith.
Opinion, p. 19. Thus, the Fifth Circuit agreed with the Bankruptcy Court with regard to three out of four factors. The Court noted that the standard of review was deferential to the Bankruptcy Court and thus reinstated its ruling denying leave to amend. 

Why It's Significant

This case illustrates the danger in filing a class proof of claim. In evaluating good faith, the Court stated:
Granted, the majority of circuits that have addressed the issue permit class proofs of claim. (citation omitted). However, this court has not spoken definitively on the issue. Yet, since 2016, the Claimants have ostensibly proceeded under the assumption that a class proof of claim would ultimately be available to them. Such is not settled law in this Circuit, and the Claimants’ reliance on unsettled law casts serious doubt on their claim of good faith.
Second, even if the Claimants had moved the bankruptcy court to apply Rule 23 to their purported class proof of claim, they had a second hurdle to overcome. Namely, the bankruptcy court would still have had to certify the class proof of claim. Only once the bankruptcy court determines, in its discretion, that Rule 23 applies does it then evaluate whether the proposed class meets Rule 23’s requirements.
Opinion, pp. 20-21. There are many things that can go wrong when individual creditors rely on a putative class rep to file a class claim. First, the jurisdiction might conclude that there is no authority for class claims. The class rep might fail to seek class certification in the bankruptcy court. If class certification is sought and denied, it would likely be after the bar date. 

One question that is left unanswered by the opinion is the specific notice that the individual claimants received. Notice is essential to due process. It is the debtor's burden to provide that notice. Given that twenty-nine claimants knew to file claims, there is an inference that notice was good. 
So what should the putative class reps have done? First, they should have moved for class certification immediately in the Bankruptcy Court. As I have discussed elsewhere, Fed.R.Bankr.P. 7023 allows class actions in bankruptcy. However, there is no specific rule authorizing class proofs of claim. Thus, a class claim must be treated as a class action within the bankruptcy. Second, the putative class reps should have moved to extend the bar date for claimants within the class prior to expiration of the bar date. It is much easier to extend the bar date before it has expired than it is to get permission for a late-filed claim. Finally, this case illustrates why creditors should engage knowledgeable bankruptcy counsel before dealing with these difficult issues. 

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