LOS ANGELES

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TUESDAY, SEPTEMBER 2, 2014

Class recovery in bankruptcy

By Hanna B. Raanan

arlier this year, Plaza

Healthcare Center and
eighteen related entities
filed Chapter 11 bankruptcy petitions in the Central District of California. Their primary motivation,
according to a news release, was
the debtors inability to continue defending at least seven class
action cases and numerous other
matters. This filing highlighted a
number of concerns related to the
impact of bankruptcy filings by
defendant(s) in pending class litigation, and the inability to proceed
against the debtor in state court,
unless there are other non-bankrupt defendants. As formidable of
an obstacle as a defendants bankruptcy is, it does not necessarily
doom class claims or recovery.
The severity of its impact depends
on the stage of the class litigation,
the type of bankruptcy filed by the
defendant and the likelihood of the
defendant emerging from bankruptcy and retaining sufficient assets for potential recovery by the
creditors.
The stage of the class action litigation will affect the resources the
debtor will need to expend to defend the state court action and will
influence the bankruptcy courts
decision regarding granting relief
from the automatic stay. The further along the case is i.e. certification granted, settlement approval stage, or eve of trial the better
the chances of obtaining relief.
The type of bankruptcy filed
(Chapter 7 or Chapter 11) helps
assess the value of pursuing the
debtor in the bankruptcy proceeding. The ultimate goal of Chapter
11 filings is the reorganization of
debtors debts and assets and even-

tual emergence out of bankruptcy

with some assets intact to remain
in business. The ultimate goal of
Chapter 7 filings is liquidation of
all debtors assets. It is not uncommon, however, for Chapter 11
cases to be converted to Chapter 7
filing if the reorganization plan is
not approved or debtor fails to execute it successfully. Since many
bankruptcies, regardless of type,
often result in zero-distribution
to unsecured creditors, adequate
analysis of likelihood of recovery
is necessary.
Creditors claims in bankruptcy
are ordered by priority under the
Bankruptcy Code. 11 U.S.C. Section 507. While litigation creditors,
typically categorized as unsecured
claims, are low priority, wages
owed to employees and incurred
within 180 days of the bankruptcy are among the highest priority
claims. 11 U.S.C. Section 507(a)
(4). Therefore some of the class
members claims may be entitled
to priority payment. This should be
considered in deciding to pursue
class action claims in bankruptcy. Even for low priority claims,
it might be worthwhile to pursue
relief from automatic stay and the
ability to litigate in the state court.
Relief from the automatic stay is
based on factual analysis of several issues. The Bankruptcy Code
provides that: On request of a
party in interest and after notice
and a hearing, the court shall grant
relief from the stay provided under
subsection (a) of this section, such
as by terminating, annulling, modifying, or conditioning such stay
for cause, including the lack of
adequate protection of an interest
in property of such party in interest. [emphasis added] 11 U.S.C.
362(d)(1). The decision to termi-

nate the automatic stay is within

the discretion of the bankruptcy
judge. In re MacDonald, 755 F.2d
715 (9th Cir. 1985). Cause for
modifying the automatic stay is
determined on a case by case basis. In re Kronemyer, 405 B.R. 915
(9th Cir. BAP 2009). Bankruptcy
courts favor having state court
matters heard by the state court,
particularly in instances where the
state court case was near or at the
trial stage at the time of the bankruptcy filing. See 28 U.S.C. Section 1334(c).
The seminal case in the 9th
U.S. Circuit Court of Appeals
governing whether or not class
action claimants should be granted relief from the automatic stay
is In re Tuscon Estates, 912 F.2d
1162 (1990) (holding that where
a bankruptcy court may abstain
from deciding issues in favor of an
imminent state court trial involving the same issues, cause may
exist for lifting the stay as to the
state court trial). The Tuscon court
lists 12 factors which support abstention and must be met in order
for a bankruptcy court to lift the
stay. In the recently filed Plaza
Healthcare matter, each set of litigating creditors will have a different analysis under these factors.
However, courts acknowledge that
getting relief from stay is limited
to liquidation of the claims, not
collection on the final judgment
or settlement. Izzarelli v. Rexene
Products Co. (In re Rexene Products Co.), 141 B.R. 574 (Bankr. D.
Del.1992). Thus, the importance
of assessing availability of assets
is imperative. The debtors schedules provide first insight into the
ability to pay the class claims.
If the debtors assets are insufficient, another option for recovery

is to add an individual defendant,

such as the owner of the debtor,
under a Labor Code Section 558
claim. This will depend on whether that individual has assets to recover and whether the actions of
an owner of the debtor merit relief
under the Labor Code. Amending
a complaint to add an additional
party also requires an order granting relief from the automatic stay,
but this has minimal impact on the
debtor and is routinely granted.
The decision to pursue a debtor in bankruptcy carries inherent
risks: the lack of assets in the estate to cover the liquidated class
claims; or that the pressure of a
strong position may force the debtor to completely liquidate rather
than reorganize. The decision to
do nothing or wait out the bankruptcy also carries inherent risks:
that your claims will go stale; that
without a value on the claims, the
class may get no distribution from
the estate; or that the class claims
may be discharged. A clear understanding and evaluation of the
risks on both sides is essential to
plotting a course forward.
Hanna B. Raanan is an attorney in
Marlin & Saltzmans Irvine office.
Ms. Raanan primarily focuses her
practice on litigation, specifically in
areas of employment and consumer
class actions. Her work focuses on
class action litigation as a means to
protect workers and consumers from
unfair corporate
practices.

HANNA B. RAANAN
Marlin & Saltzman

Reprinted with permission from the Daily Journal. 2014 Daily Journal Corporation. All rights reserved. Reprinted by ReprintPros 949-702-5390.