In re Computer Devices, Inc.
| Decision Date | 31 July 1985 |
| Docket Number | Case No. 83-01505-JG. |
| Citation | 51 BR 471 |
| Parties | In re COMPUTER DEVICES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Mark N. Berman, Widett, Slater & Goldman, P.C., Boston, Mass., for plaintiff.
Peter A. Pease, Berman, Devalerio & Pease, Boston, Mass., for defendant.
Before the Court is the Debtor's Motion to Disallow or Subordinate the Claim of Joseph Davella. A hearing on the Motion was held on May 30, 1985 and the matter was taken under advisement. Both the debtor and the claimant filed briefs and reply briefs. The undisputed and agreed facts are as follows.
The debtor, Computer Devices, Inc., ("the debtor" or "CDI") filed a voluntary chapter 11 petition in this Court on October 31, 1983. Prior to filing chapter 11, in July of 1983 CDI commenced a public offering of one million shares of its common stock. In November 1983, Joseph Davella ("Davella" or "the claimant") filed a civil action in the Southern District of New York as a class action suit on behalf of himself and all other purchasers of the one-million shares of CDI stock pursuant to the public offering against certain directors and officers of CDI and A.G. Becker Paribas, Inc., the investment banker who served as underwriter for the public offering. The debtor was not named as a defendant in the class action because the automatic stay of 11 U.S.C. § 362 (a) prohibited the commencement of any judicial proceedings against the debtor. The class action complaint sought an unspecified amount of damages for violations of sections 11, 12, and 15 of the Securities Act of 1933, 15 U.S.C. sections 77k, 77l, and 77o (1933), and alleged as facts that the prospectus CDI had issued in connection with the 1983 public offering was false in that it misrepresented and omitted material facts concerning CDI's lack of product capabilities for software and that it failed to reveal tremendous corporate losses for 1983. In January 1984 Davella filed an Amended Complaint in the class action which contained the same counts as the original Complaint but expanded the factual allegations. On March 13, 1985 Davella filed a Second Amended Complaint in the class action which added a third count against the CDI President and the underwriter for violations of Rule 10b-5. Count three alleged that the defendants schemed and conspired to make false statements and to omit material facts in the preparation of and issuance of the prospectus, and, in reliance on fraudulent representations, buyers were induced to purchase stock at prices higher than the actual value. The amended complaint also expanded the class to include "all persons who purchased common stock of Computer Devices from July 8, 1983 to August 17, 1983" which amounted to more than 2,100,000 shares traded during this period. To date, the district court has not certified the class action.
On March 15, 1984, this Court (Gabriel, J.) entered an Order Fixing Time for Filing Proofs of Claim Other Than for Administrative Expenses. The Order provided that any creditor with a claim that the debtor had listed in the schedules as disputed, or scheduled as undisputed but in a different amount than the creditor asserts, or not listed in the debtor's Schedules, must file a claim before May 4, 1984 "or be forever barred from treatment as a creditor with respect to such claim for the purposes of voting and distribution". Davella's claim was listed as disputed in the debtor's Schedules. The Bar Order was mailed to all listed creditors and was published in the New York Times and Boston Globe on April 11, 12, and 13, 1984.
On May 2, 1984 Davella filed a Proof of Claim for "over $10,000,000" on behalf of himself and all other shareholders similarly situated, based on the allegations of the first Amended Complaint which was attached to the Proof of Claim. On April 4, 1985 Davella filed an Amended Proof of Claim based on his Second Amended Complaint.
The debtor's Motion seeks disallowance of the Amended Proof of Claim dated April 4, 1985 on the grounds that it was filed after the bar date and asserts a new claim, and, in the alternative, that as a "class claim", it is inappropriate in bankruptcy, and that even if allowable on behalf of a class, the claimant has not complied with the procedural requirements for asserting the claim. The debtor further contends that if the claim is allowed, as it is a claim for damages arising from the purchase of debtor's stock, it nonetheless should be subordinated to the interests of common stockholders under the 1978 version of 11 U.S.C. § 510 (b).
Davella argues that since the allegations of the amended proof of claim arise out of the same transactions and occurences as those forming the basis of the original claim which was filed timely, the amendment relates back to the date of the original proof of claim. Davella contends that his proof of claim was properly filed as a class claim on behalf of the plaintiffs in the pending class action suit. Finally, Davella interprets § 510 (b) to require subordination of stockholder damages claims to unsecured creditors and not subordination to stockholders as well.
This contested matter presents three issues for determination:
(1) Whether an alleged defrauded securities purchaser is entitled to file a class proof of claim in a chapter 11 case as a representative of other stock purchasers on behalf of which he has filed a class action in federal court?
(2) Whether a claimant who filed an original claim for violation of the Securities Act of 1933, Sections 11, 12, and 13, may amend his claim after the bar date to expand the class of claimants and to add a claim for violation of Rule 10 b-5?
(3) Whether a claim for damages for fraud in the purchase of securities of the debtor is subordinate to the claims of all stockholders as well as to the claims of unsecured creditors under the 1978 version of 11 U.S.C. § 510 (b)?
CLASS PROOF OF CLAIM:
There is no provision of the Bankruptcy Code or Bankruptcy Rules that specifically authorizes the filing of a proof of claim on behalf of a class. Decisions under the former Bankruptcy Act of 1898 considered the applicability of class actions in bankruptcy inappropriate because adequate economical and expeditious bankruptcy procedures for resolving claims existed. See, e.g., SEC v. Aberdeen Securities Co., Inc., 480 F.2d 1121, 1128 (3d Cir.1973); In re Penn Central Transportation Co., 328 F.2d 1273, aff'd, 455 F.2d 976 (3d Cir.1972).
The only reference to class actions in the Code or current Bankruptcy Rules is found in Bankruptcy Rule 7023, which provides that Rule 23 of the Federal Rules of Civil Procedure governing class actions applies in adversary proceedings. Bankruptcy Rule 7023 (1983). A proof of claim and objection thereto is a "contested matter" not an adversary proceeding, see Advisory Committee Notes to Bankruptcy Rule 9014 (1983), unless the objecting party files a counterclaim to the proof of claim. Bankruptcy Rule 3007 (1983). Although the Court may direct that adversary proceeding rules may apply in a contested matter, it is within the discretion of the court to so do. Matter of GAC Corp., 681 F.2d 1295, 1299 (11th Cir.1982). It is this Court's view that class action procedures should not apply to bankruptcy claims litigation.
"... claims against a bankrupt estate may not be treated en masse but instead must be treated on their own merits."
3 Collier on Bankruptcy, ¶ 57.187, at 303 (14th ed. Supp.1984). "... The requirement of individual determination of allowability of claims precludes a class action." In re Woodmoor Corp., 4 B.R. 186, 192 (Bankr.D.Colo.1980). In order to be entitled to a distribution in a chapter 11 bankruptcy case, a creditor must be listed on the Schedules as undisputed, or file a proof of claim. 11 U.S.C. § 1111 (a) (1979); Bankruptcy Rule 3003(c)(2) (1983). To allow a representative of a class to file a claim on behalf of others is inconsistent with the requirement that a claimant file his own claim.
The only case decided under the Bankruptcy Code allowing the class procedure in claims litigation is In re REA Express, Inc., 10 B.R. 812 (Bankr.S.D.N.Y.1981). There, the Court named two claimants as representatives of the debtor's one-thousand non-union employees for the purpose of resolving the trustee's objection to employees' claims for vacation, holiday, and severance pay. Id. at 815. The one thousand employees had filed proofs of claim with the court and the trustee filed a "class" objection. Id. at 813. The court found the class action procedure appropriate to resolve the objection because the trustee's general objection to the claims would affect each claim without reference to individual circumstances if sustained and because a unified response was the only practical means by which the employees could participate in the litigation. Id. at 814. It is important to note that in REA the court was not asked to allow a class claim on behalf of employees. Rather, the court treated the trustee's objection as a class action rather than a "class proof of claim." The court was concerned with the practical control of the trial, an entirely different concern then the need to first file individual claims.
This distinction was emphasized in the recent case In re Standard Metals Corp., 48 B.R. 778 (D.Colo.1985), where the court sustained objections to a bondholder's claim filed on behalf of other bondholders on numerous grounds. First, the court refused to permit the filing of a class proof of claim placing great weight on decisions under the Bankruptcy Act which indicated that class claims were not appropriate and because the claimant had not yet obtained certification of the class action under Rule 23. The Court distinguished the class claim from a proof of claim filed on behalf of a putative class. Id. 781.
The court further sustained the objection on the ground that even if class claims were appropriate the...
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