Blown Proof-of-Claim Deadline Fatal to Employment Suits

A federal appellate court approved a bankruptcy court’s dismissal of dozens of claims after the claimants missed the proof-of-claim filing deadline, due in part to their attorney’s misunderstanding of the bankruptcy rules. ABA Litigation Section leaders describe this case as a cautionary tale for plaintiffs who find themselves in uncharted waters after a defendant files for bankruptcy.

An Employment Class Action and a Bankruptcy

In West Wilmington Oil Field Claimants v. Nabors Corporate Services, Inc., a group of former employees filed a wage-related putative class action against their employer in California federal court. The employer moved to compel arbitration based on contractual arbitration provisions and class action waivers. The district court denied the motion, holding that the provisions were unenforceable. The employer appealed to the U.S. Court of Appeals for the Ninth Circuit.

But before the Ninth Circuit could decide the issue, the employer filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of Texas, which stayed the California litigation. Prior to the bankruptcy court’s bar date, 27 employees filed individual proofs-of-claim, and two employees filed “class” proofs-of-claim on behalf of the putative class. The bankruptcy eventually approved the debtor’s reorganization plan and subsequently lifted the stay on the California litigation.

After the bankruptcy proof-of-claim bar date had passed, the Ninth Circuit reversed the district court’s order and held that the arbitration provisions and class action waiver were enforceable. Consequently, the claimants’ putative class action lawsuit was dismissed, and 96 members of the purported class filed individual arbitrations against the debtors. Of these claimants, 29 had filed timely individual proofs-of-claim in the bankruptcy court, while 67 had not. In the bankruptcy case, the debtor challenged the latter group’s rights to pursue arbitrations based on ineffective or untimely proofs-of-claim.

The debtor first objected to the sufficiency of the class proofs-of-claim because the claimants were unable to certify a class. The bankruptcy court agreed with the debtors and disallowed the class proofs-of-claim.

The bankruptcy court also denied the claimants’ motion for leave to file late individual proofs of claim. It concluded that the claimants had failed to show “excusable neglect,” as required to obtain a post-deadline extension of time under Federal Rule of Bankruptcy Procedure 9006(b)(1). The claimants appealed the bankruptcy court’s decision to the district court, which reversed. The debtors then sought review by the Fifth Circuit.

No Excusable Neglect, No Late Proofs-of-Claim Allowed

The U.S. Court of Appeals for the Fifth Circuit found that the claimants had not shown excusable neglect and were thus not entitled to file untimely proofs-of-claim, reversing the district court’s ruling and reinstating the bankruptcy court’s decision. In analyzing the “excusable neglect” issue, the court considered four factors the U.S. Supreme Court outlined in Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership.

The court determined that the first factor, danger of prejudice to the debtor, weighed in the claimants’ favor. The court concluded that there was little danger of prejudice, since the debtors were aware of the claimants’ claims at least since the beginning of the California litigation.

The second factor, the length of the delay and its potential impact on judicial proceedings, weighed in the debtors’ favor, according to the court. It observed that other courts had found no excusable neglect when the delay was far shorter than the claimants’ delay of two years and nine months. It further reasoned that permitting the untimely proofs-of-claim would negatively impact the judicial proceedings, in part because allowing 67 individual arbitrations to proceed would further delay the close of the bankruptcy.

The court also found that the third factor, the reason for the delay, favored the debtors. The court noted that the claimants were aware that the class proofs-of-claim had been challenged, and they could have filed individual proofs-of-claim by the bar date, as 27 of their co-claimants had.

Finally, the fourth factor, the movant’s good faith, also weighed in the debtors’ favor, concluded the court. Though the court declined to hold that a lack of diligence constitutes bad faith per se, it concluded that the claimants’ and their counsel’s severe lack of diligence undermined their argument that they acted in good faith and revealed a misunderstanding of bankruptcy procedure.

Warning to Inexperienced Bankruptcy Practitioners

According to Litigation Section leaders, this case is a reminder to take a bankruptcy court’s proof-of-claim deadline seriously. “There’s one deadline in bankruptcy court that you just can never miss, and it’s the proof-of-claim bar date,” stresses Blakeley E. Griffith, Las Vegas, NV, cochair of the Section’s Bankruptcy & Insolvency Litigation Committee. “The sooner you file your claim, the better off you’re going to be,” concurs Siobhan Briley, Coralville, IA, cochair of the Bankruptcy & Creditors’ Rights Subcommittee of the Section’s Commercial & Business Litigation Committee.

Section leaders suggest that plaintiffs should get bankruptcy counsel involved as early as possible once a defendant enters bankruptcy. While Griffith does not think the claimants’ reliance on the class proofs-of-claim was necessarily unreasonable, she believes “they probably should have hired an experienced bankruptcy attorney to deal with the bankruptcy issues.” “If you’re going to be dealing with a complicated issue in bankruptcy, like whether you have a class claim or a bunch of individual claims, it’s really important to get an attorney who understands bankruptcy and knows what to do,” emphasizes Briley.