The Permissibility of Class Action Proofs of Claims in Chapter 11 Cases

Excerpt from 2011 Emerging Issues 6099

The filing of a chapter 11 bankruptcy petition automatically stays "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case."  Thus, once a debtor files for bankruptcy, any ongoing class actions are stayed, and claimants are prohibited from commencing a class action against the debtor. Importantly, once a chapter 11 plan is confirmed, the debtor receives a discharge "from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title" regardless of whether a proof of claim was filed or whether the claim was allowed under section 502 of the Bankruptcy Code.  Thus, class members and putative class members must file a proof of claim in the bankruptcy case to preserve their right to receive a distribution from the debtor on account of their claims.  The question then becomes whether a class representative may file a class claim on behalf of the class members or putative class members, or whether each member will be required to file a proof of claim individually in order to preserve its claim and receive a distribution.

The first Circuit Court to address this issue found that class proofs of claim were not allowed in bankruptcy. Subsequent to that decision, few courts have followed this reasoning and other Circuit Courts have found that class proofs of claim should be permitted in bankruptcy, under appropriate circumstances.

Courts Prohibiting the Filing of Class Proofs of Claim

The Tenth Circuit Court of Appeals authored the first major opinion addressing permissibility of a class proof of claim in bankruptcy. That decision, In re Standard Metals [an enhanced version of this opinion is available to lexis.com subscribers], prohibited the filing of a class proof of claim on the grounds that, except where section 501 and Bankruptcy Rule 3001 explicitly contemplate otherwise, an individual claimant must file his or her own proof of claim.

Under section 501, a proof of claim may be filed "(1) by an indenture trustee on behalf of a bondholder; (2) a bankrupt's co-debtor or guarantor on behalf of a creditor; and (3) the debtor on behalf of a creditor."  Barring any of these limited exceptions, Rule 3001 dictates that only a creditor or her "authorized agent" may file a proof of claim.  In holding that class proofs of claim were not allowed (at least in the absence of authorizations from each putative class member), courts such as Standard Metals relied on the absence of the concept of "class representative" from the provisions of section 501 of the Code and Bankruptcy Rule 3001.

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