Class Certification Granted to Former MF Global Employees Seeking Vacation Pay

by Cooley LLP

Judge Glenn of the U.S. Bankruptcy Court for the Southern District of New York recently granted class claim certification to a group of former MF Global employees seeking payment on account of unpaid accrued vacation time. 

Under the Federal Rules of Bankruptcy Procedure 7023 and 9014, in contested bankruptcy matters bankruptcy judges have discretion to apply Federal Rule of Civil Procedure 23, which provides for class certification.  To determine whether to certify the putative class, Judge Glenn conducted a 2-step inquiry: first deciding whether Rule 23 should be applied, then determining whether the proposed class claim satisfies the requirements of Rule 23.

Traditionally, bankruptcy courts have considered several factors when deciding to apply Rule 23.  Of the typical factors, Judge Glenn highlighted three:

  1. Whether the class was certified pre-petition;
  2. Whether the members of the putative class received notice of the bar date; and
  3. Whether class certification will adversely affect the administration of the estate.

The Judge declared the issue of prepetition certification irrelevant, because the claims arose from the same events that precipitated their employer’s bankruptcy.  Therefore, the claimants could not be reasonably expected to have filed this type of claim prepetition.

Second, Judge Glenn considered whether allowing a class claim would unfairly prejudice MF Global’s estate by effectively extending the bar date for employees who had not filed timely claims.  Outside of bankruptcy the timely filing of a class action tolls individual actions.  Following existing precedent, Judge Glenn found that class claims should similarly toll individual claims, because penalizing employees for waiting for the certification of a class claim would result in “precisely the multiplicity of activity which Rule 23 was designed to avoid.”

Having negated the first two factors, Judge Glenn weighed the effects of certification on administration of the bankruptcy estate.  Finding in favor of certification, he gave significant weight to the fact that the class claim was filed less than one month after the case was commenced.  As such, the MF Global Trustee had ample notice that the employees were seeking vacation pay as a class.  Judge Glenn also recognized that if he denied certification, he would have to set a new bar date, which would significantly delay the administration of the case.

The Court next turned to the requirements for class certification under Rule 23(a) and Rule 23(b). Under Rule 23(a), four prerequisites must be met: numerosity, commonality, typicality, and that the representative parties will fairly and adequately protect the interests of the class.  Only commonality and adequacy of representation were in dispute.  As to commonality, the Court found that the issue of entitlement to unpaid accrued vacation time was a common issue of law.  Because the amount of vacation accrued would be determined by looking at the MF Global’s books and records, each claim would also rest on a common question of fact.

With respect to the adequacy of representation by the class claimants, the Trustee argued that they were unduly slow in moving for class certification and, therefore, inadequate representatives of the class.  Judge Glenn acknowledged that the class claimants had the burden of bringing the claim as quickly as possible, but he found that the commencement of the case “mere weeks” after the filing date was sufficient to meet this burden.

Once the Court found that the requisite elements of Rule 23(a) were satisfied, the class claimants were required to satisfy at least one of the three prongs of Rule 23(b).  The claimants relied on Rule 23(b)(3), which allows a class action to proceed if common questions of law or fact predominate over questions affecting individual class members and a class action is superior to other methods of adjudicating the controversy.  The Trustee argued that the bankruptcy case itself, which allows claimants to file claims without counsel and with little expense, was sufficient to adjudicate disputes related to accrued unpaid vacation time.  The Court disagreed, finding that granting class claim certification would be more administratively efficient than extending the bar date to allow individual employees to file proofs of claim.

In essence, Judge Glenn’s decision to certify the class boiled down to one overarching question: would granting class certification lead to a more efficient administration of the estate?  He found that it would and certified the class.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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