Class Representation in Bankruptcy

• Publication year: 1989
• Pages: 267

18 Colo.Law. 267 Colorado Lawyer 1989.

1989, February, Pg. 267. Class Representation in Bankruptcy

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Vol. 18, No. 2, Pg. 267

Class Representation in Bankruptcy

by Michael J. Guyerson and Darrell M. Daley

The emergence of bankruptcy as a business planning tool has exposed a wide and varied group of claimants to the confusing and frequently untested waters of the Bankruptcy Code. Large Chapter 11 reorganization cases, affecting such companies as A. H. Robbins, Johns-Manville and Texaco, have involved nationwide groups of present and future claimants.(fn1) The numbers of these claimants may increase, their individual identities may not be known, and their rights against the bankrupt debtor may be permanently altered or even extinguished through the bankruptcy reorganization process.

For example, the A. H. Robbins reorganization involved toxic shock claimants and the Johns-Manville Chapter 11 included asbestosis victims. In both diseases, symptoms may not appear in the victim until many years after exposure to the product. In Colorado, recent cases such as Guerdon Industries, Inc., Standard Metals Corporation, Kaiser Steel Corporation, Associated Grocers and Storage Technology involved claimants who exhibited many of the same characteristics and whose only strength and leverage had been presentation of their claims as a group.(fn2)

All counsel, even if not generally involved in bankruptcy matters, must be aware of the availability of class representation and the concept of adequate notice under the Bankruptcy Code to advise a client properly, whether a claimant or debtor.

This article addresses the developing bankruptcy case law on class representation including class proofs of claim, class action certification and adequacy of notice to alleged class members.(fn3) The bankruptcy application of class representation principles is significantly different than it is for other types of cases. The reported decisions can best be analyzed if class representation is broken down into two predominant issues: (1) whether class proofs of claim may be filed in bankruptcy cases; and (2) whether class certification should be allowed and recognized by bankruptcy courts.

Class Proofs of Claim

The U.S. Court of Appeals for the Tenth Circuit ("Tenth Circuit") recently issued a critical opinion regarding class proofs of claim. In the case of In re Standard Metals Corp., the Tenth Circuit held, as a matter of law, that class proofs of claim are not permitted in bankruptcy cases.(fn4) This holding is in agreement with the majority position and is supported by a long line of cases.(fn5) Recently, however, the U.S. Court of Appeals for the Seventh Circuit ("Seventh Circuit") has adopted the minority viewpoint, allowing class proofs of claim.(fn6)

Majority View

In Standard Metals, the Tenth Circuit held that class proofs of claim violate the statutory scheme of the Bankruptcy Code and the Bankruptcy Rules(fn7) and are therefore prohibited. However, a limited exception for class claims filed by indenture trustees, as expressly authorized by Bankruptcy Code § 501, was recognized.(fn8) Moreover, the Tenth Circuit read Bankruptcy Rules 2019 and 3001, and Code § 501 as strictly prohibiting class proofs of claim.(fn9) According to the Tenth Circuit, the class certification mechanism of the Federal Rules of Civil Procedure ("F.R.C.P."), as adopted by the Bankruptcy Rules, may only be used to consolidate separate claims that have been previously filed.(fn10)

The rationale of the majority viewpoint disallowing class proofs of claim is based on the underlying scheme of the Code that each claimant must file and prove its own separate claim.(fn11) A class representative, even if properly designated as such under F.R.C.P. Rule 23, may not circumvent the one claim per creditor requirement by attempting to file a class proof of claim.(fn12)

Relying on class proofs of claim in the Tenth Circuit will lead to disastrous results if the claim is later denied or disallowed. In such a situation, the individual class members who did not file separate proofs of claim and who relied on the

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class proof of claim may find themselves with absolutely no recourse against the bankruptcy estate and the debtor.(fn13)

Minority View

The minority view allowing class proofs of claim was discussed in Matter of American Reserve Corp.(fn14) The common rationale for this view is that the Bankruptcy Rules, by allowing for class certification in bankruptcy proceedings(fn15) pursuant to F.R.C.P. Rule 23, implicitly allow class proofs of claim. As the Seventh Circuit recently stated: "The right to file a proof of claim on behalf of a class seems secure, at least if the bankruptcy judge elects to incorporate Rule 23 via Rule 7023 via Rule 9014, as the judge did in this case."(fn16) The Seventh Circuit holding allows a properly designated class representative to file a "class claim" for all class members, apparently rejecting the Tenth Circuit limitation of this concept to "separate claims already filed."(fn17)

In the appropriate situation, the prudent lawyer should have the Bankruptcy Court decide at the...