4th Circuit: Gentry v. Siegel- Class Action Proofs of Claim

Summary: Prior to the filing by Circuit City of a Chapter 11  bankruptcy, Gentry commenced a class action lawsuit against Circuit City, but the class certification was pending at the time the bankruptcy was commenced.  (Three other Named Claimants/Appellants were similarly situated with undecided class certifications.)  The Named Claimants then filed Proof of Claim on behalf of themselves and  "all those similarly situated."  Circuit City and the Trustee objected to these claims on the basis that the Named Claimants had failed to seek authorization from the court under Rules 914 and 7023 to certify a class and act as the agent for the unnamed class members. In ruling on this issue, the 4^th Circuit assumed, without deciding, that Rule 7023, which incorporates the class action rules and procedures of Rule 23,  could be applied not only in Adversary Proceedings, but also in contested matters, such as objections to claims. The Court of Appeals then rejected the strict reading of Bankruptcy Rules sought by the Trustee,  which would have only allowed Proofs of Claim to be filed by the creditor or the agent of the creditor.  In the absence of a pre-bankruptcy class certification, the Named Claimants were not the agents of the other putative class members, the Trustee argued that the Named Claimants were required to bring a Motion under Rule 9014 making Rule 7023 applicable in this matter.  As the 4^th Circuit recognizes, the logical conclusion of this reading would likely mean that the Named Claimants could never pursue a class action: Under the Trustee’s  view, because class proofs of claim may not be filed except following a Rule 9014 order approving application of the class action rules and because Rule 9014 is applicable only to contested matters, it follows that a class proof of claim can never be filed because it is not "a contested matter" when filed. And if a class proof of claim cannot be filed, then unnamed claimants who have not filed proofs of claim cannot be parties to the bankruptcy case. The Trustee’s position would presumably require that all creditors file individual proofs of claim and then, if those claims become so numerous and so similar as to justify class action treatment, the creditors could seek to commence a class action under Rule 7023. This take on the Bankruptcy Rules would likely preclude virtually all class actions in bankruptcy cases. Accordingly, the Court of Appeals, following the vast majority of opinions, held that when filing a Proof of Claim, the Named Claimants were the "putative agents of similarly situated unnamed claimants", pending a retrospective approval by the bankruptcy court of the class. Additionally, the Court of Appeals rejected the argument by the Trustee that the motion by the Named Claimants under Rule 9014 to allow application of Rule 7023 was untimely.  Finding that 11 U.S.C. § 1109(b) provides that a creditor "may raise and may appear and be heard on any issue in any case" without imposing any deadlines, meant that the Rule 9014 Motion was not required to be brought prior to the claims bar date. After clarifying the  procedure for Class Action Proofs of Claim, the 4^th Circuit nonetheless found that the bankruptcy court had not abused its discretion in deciding that the bankruptcy claims procedure process was superior to class litigation.  The bankruptcy court had found that the existing claims procedures: (1) established mechanisms for notice; (2) established mechanisms for managing large numbers of claimants; (3) proceedings centralized in a single court with nationwide service of process; and (4) protection against a race to judgment since all of the debtor’s assets are under control of the bankruptcy court. By contrast, the bankruptcy court found that class litigation would be expensive and time-consuming and, since the bankruptcy court was already positioned to be the single court ruling on claims, the "normal policy concerns" that favor class actions, viz.  inconsistent results between similar claimants, would not be present.  Even though the bankruptcy court had denied class certification prior to allowing discovery, the 4^th Circuit held that such denial was a proper exercise of discretion in this case. Lastly, the 4^th Circuit found that because the motion by Named Claimants to apply Rule 7023 had been denied, the "opt-out notice" required under Rule 7023 was not required.  As to any due process violations, the Named Claimants had received full notice and did not have standing to raise this issue for unnamed claimants that may not have received notice. Commentary: Because their members often represent classes in order to address business practices affecting large numbers of consumers, NACBA and NACA jointly filed an amicus brief in this case, seeking to have the Court of Appeals allow both Named Plaintiffs to file Proofs of Claim for a putative class and also to allow a motion seeking class treatment "at an early practicable time" after filing of the class Proof of Claim.  Even though it affirmed the denial of class certification in this case, if anything, the procedures set byt the 4^th Circuit, which do not even  limit the time to seek class recognition to "at an early practicable time". For a copy of the opinion, please see: Gentry v. Siegel- Class Action Proofs of Claim.PDF For a copy of the Amicus brief by NACBA and NACA, please see: Gentry Amicus Brief.PDF