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Outside of the bankruptcy arena, the prosecution of claims on behalf of a class of similarly situations persons is certainly commonplace. Such claims are asserted through class actions. The plaintiffs in class actions seek redress not only on behalf of themselves, but on behalf of all similarly situated persons. There are several types of claimants in bankruptcy cases who would benefit from the opportunity to form part of a class. However, in bankruptcy, the topic of “class claims” remains controversial, and the procedure required to assert them is often considered confusing. As a result, what can sometimes serve as a highly efficient method of asserting claims is frequently underutilized. From a debtor’s perspective, current or former employees, customers, investors and others directly or indirectly harmed by the debtor’s acts or omissions, can all be potential members of a class. From the perspective of a creditor’s attorney, the class claim process may be an ideal tool to allow all members of a class to receive competent representation that can be paid for collectively by the class. Absent use of the class claim process, it is likely that many individuals who would be protected by their inclusion in such a process will instead have their claims disallowed because of ignorance with respect to the system or the inability to obtain bankruptcy representation. The process may also be helpful to a debtor because it can be a much more cost-effective way to address the claims of many claim holders. Finally, although there are disadvantages to the debtor related to the cost and delays that may be caused by the class certification process, especially in liquidation cases in which the expeditious administration of assets is paramount, the process may be good for the integrity of the bankruptcy system because it ensures fairness in the treatment of claims made by similarly situated claimants. Bankruptcy Code and rules provide no specific authority Yet, despite the benefits that class claims can provide, the practice of permitting them in bankruptcy was historically rejected by courts, and there is currently a split of authority with respect to this issue. Some courts found the Bankruptcy Code’s silence with respect to such claims to be troubling. Neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure specifically authorize the filing of a proof of claim on behalf of a class. The sole reference to class actions in the Bankruptcy Code or Federal Rules of Bankruptcy Procedure is found in Fed. R. Bankr. P. 7023, which provides that Rule 23 of the Federal Rules of Civil Procedure, governing class actions, applies to adversary proceedings. Adversary proceedings are lawsuits in bankruptcy, to be differentiated from “contested matters,” which are comprised of all other bankruptcy litigation for the resolution of disputes (such as claim objections). Also, Fed. R. Bankr. P. 9014(c) permits the application of Fed. R. Civ. P. 23 to any contested matter at the court’s discretion. In addition, some courts disallowed the filing of class proofs of claim, relying on a perceived requirement for the filing and prove-up of individual claims. These courts examined � 501 of the Bankruptcy Code, which authorizes the filing of proof of claims by creditors or indentured trustee; Fed. R. Bankr. P. 2019, which provides that every entity representing more than one creditor must file a verified statement with the bankruptcy clerk setting forth the name and address of the representative, the nature and amount of the claim or interest and a recital of the pertinent facts and circumstances in connection with the employment of the entity in its representative capacity; and Fed. R. Bankr. P. 3001, which provides that only a creditor or a creditor’s authorized agent may execute a proof of claim on behalf of that creditor. These courts therefore determined that class proofs of claim violated the statutory scheme of the Bankruptcy Code and the bankruptcy rules and were, therefore, strictly prohibited. Four circuits do allow for class proofs of claim Nevertheless, class proofs of claim may confidently be asserted in the 6th, 7th, 9th and 11th U.S. circuit courts of appeals (subject to the exercise of the bankruptcy court’s discretion to allow them to be utilized in a particular case). Some of the courts that permit the filing of such claims have found that, by allowing for class certification, the bankruptcy rules implicitly permit the filing of class proofs of claim. “[T]he 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.” Matter of American Reserve Corp., 840 F.2d 487, 488 (7th Cir. 1988). In addition, other courts have found the filing of a class claim to be consistent with the definition of “claim” and the goals of the Bankruptcy Code. While a class proof of claim may be filed in many circuits, the procedure required for their assertion is less than clear. What is the proper procedure for prosecuting a class claim? (Utilizing the proper procedure is important because the failure to do so could result in the disallowance of the claim.) Since the allowance of a class proof of claim is ultimately at the court’s discretion, should a creditor that is interested in filing a class claim first seek authority pursuant to Fed. R. Bankr. P. 9014 and 7023 from the court to file the claim? Should the creditor, instead, simply file the class claim and wait for the debtor and court to react? Based on a review of the steps utilized by class claimants in prior cases, the latter approach seems correct. The first step in the prosecution of a class claim should be for the alleged representative of the class to file the class proof of claim with the court. The taking of this first step allows the parties in interest to be put on notice of the assertion, and if the class claim is objected to, a contested matter is commenced. Anticipating the claim objection process The second step in this process should be to seek the application of Fed. R. Bankr. P. 7023 (which incorporates Fed. R. Civ. P. 23) to the claim objection process. This can be done either once an objection to the claim is filed or, perhaps more strategically advisable, once the class proof of claim has been filed but before an objection has been filed. Filing a motion seeking the application of Fed. R. Bankr. P. 7023 before a claim has been objected to may be procedurally problematic because, arguably, there will be no contested matter to which the process may be applied until after the claim is objected to. However, some courts permit this, and the advantage of this latter approach is that it would result in the court determining whether it will exercise its discretion to invoke Fed. R. Civ. P. 23 sooner rather than later, and if so, then permit for the class certification process to begin as soon as possible. As class litigation is inherently more time consuming than the procedure for resolving most claims in bankruptcy, and must be resolved before all estate funds may be distributed, it is advisable to start that process at the earliest possible time. The court’s process after ruling that Rule 23 applies In the event that the court decides to exercise its discretion to apply Fed. R. Civ. P. 23 to the proof-of-claim process and permit the class claim to be prosecuted by and through the class certification process in bankruptcy, the court will determine whether the requirements of Fed. R. Civ. P. 23 for class certification are met and the class claim may stand; whether the alleged class representative is a true representative of the class; and, retroactively, whether the individual who asserted the claim on behalf of the class had standing to file the claim on his or her own behalf. Not every attempt to have a representative deemed an authorized agent of the class and to have the class certified will succeed. Yet if the court certifies the class, then “the self-appointed agent” will become authorized to represent the class and the original proof-of-claim filing will be deemed “effective for the whole class.” Conversely, if the representative fails in this attempt, then the class proof of claim will be considered invalid, and potentially only those proofs of claim filed by individual claimants will be considered valid. As a result, it is advisable for those contemplating the filing of class claims and who represent the “named claimants” to file (within the same proof of claim or separately) individual claims for their clients as well. To do otherwise could potentially place one’s individual clients at risk. Filing class proofs of claim can be an efficient method for the assertion of claims on behalf of similarly situated individuals. Nevertheless, the practitioner must be wary of the status of the case law in his or her district and the procedural pitfalls with respect to these claims, as mistakes in these areas could have dire effects. Craig M. Rankin is a partner, and Jacqueline Rodriguez, is an associate, at Los Angeles-based Levene, Neale, Bender, Rankin & Brill, a bankruptcy boutique representing debtors, creditors, creditors’ committees and trustees. The firm has represented parties in the assertion of, and defense against, class claims. The authors can be reached, respectively, at [email protected] and [email protected].

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