In re WT Grant Co., Bankruptcy No. 75 B 1735.

• Decision Date: 04 November 1982
• Docket Number: Bankruptcy No. 75 B 1735.
• Citation: 24 BR 421
• Parties: In re W.T. GRANT COMPANY, Bankrupt.
• Court: U.S. Bankruptcy Court — Southern District of New York

24 B.R. 421 (1982)

In re W.T. GRANT COMPANY, Bankrupt.

Bankruptcy No. 75 B 1735.

United States Bankruptcy Court, S.D. New York.

November 4, 1982.

Weil, Gotshal & Manges, New York City, for trustee.

Reich, Rosen, Barrison & Felzen, New York City, for Frances M. Massey.

MEMORANDUM AND ORDER

JOHN J. GALGAY, Bankruptcy Judge.

In this motion, Frances M. Massey, former employee of the bankrupt, W.T. Grant ("Grant"), has moved for class certification, urging this Court to name her class representative of former Grant employees who were eligible for retirement benefits at the time of their termination and denied the full, regular severance pay entitlement. Massey contends that a class action suit is the only effective mechanism for her and similarly situated former employees to prosecute their severance pay claims since, she argues, it would be impracticable to prosecute their claims individually. Massey further asserts that the putative class satisfies the prerequisites for class action certification that are delineated in Rule 23 of the Federal Rules of Civil Procedure ("F.R.Civ. P."), and, accordingly, petitions this Court to grant class certification pursuant to Rules of Bankruptcy Procedure 723 and 914 ("Bankruptcy Rules"). The Trustee, Charles G. Rodman, opposes claimants application for class certification arguing that a class action is not appropriate in a simple, uncomplicated, contested matter in a bankruptcy case. The Trustee also contends that class certification should be denied since the claimant has failed to satisfy the prerequisites of F.R.Civ.P. 23. Having read the papers of both parties and having reviewed the applicable legal standards, this Court denies claimants application for class action certification.

Facts

The roots of the instant litigation can be traced to October 2, 1975. On that date Grant filed a petition for arrangement under Chapter XI, Section 322 of the Bankruptcy Act and Bankruptcy Rule 11-6. Subsequently, on April 13, 1976, Grant was adjudicated a bankrupt. As a result of its bankruptcy, Grant was forced to liquidate all its retail outlets and terminate the employment of approximately 75,000 individuals. Of those employees terminated, approximately 41,000 eventually filed proofs of claim against the bankrupt estate, seeking severance pay benefits in accordance with Grant's pre-petition wage and compensation package.¹

By decision dated June 22, 1978, this Court determined that such severance pay claims were to receive priority as an expense of administration under Bankruptcy Act section 64(a)(1). See In re W.T. Grant, 17 C.B.C. 841 (Bankr.S.D.N.Y.1976), aff'd 474 F.Supp. 788 (S.D.N.Y.1979), aff'd, 620 F.2d 319 (2d Cir.), cert. denied, 446 U.S. 983, 100 S.Ct. 2963, 64 L.Ed.2d 839 (1980). On October 3, 1980, this Court authorized the trustee to make distributions in full satisfaction of such severance pay claims. Accordingly, the trustee calculated each former employee's severance pay entitlement and made distributions where appropriate. Where the Trustee's computation did not agree with the amount set forth in an employee's claim, and the dispute could not be resolved, the Trustee interposed an objection to the claim. Such an objection was interposed to Massey's claim, hence the instance litigation between Massey and the trustee.

Claimant Massey was one of 3,393 Grant employees who were eligible for retirement benefits when discharged as a result of Grant's bankruptcy. The Trustee contends that under Grant's pre-Chapter XI personnel policies and procedures, which govern here, such employees are entitled to only one-half of the regular severance pay benefit. Massey disagrees, arguing that Grant's pre-Chapter XI policies and procedures provide that any employee who is permanently laid off is entitled to the full, regular severance pay benefit, regardless of whether the employee was also eligible for retirement benefits at the time of his discharge. In pressing this claim, Massey seeks to proceed as representative of a class consisting of all those former Grant employees who were eligible for retirement benefits at the time of their discharge and were denied the full, regular severance pay benefit.

Of the 3,393 potential members of this proposed class, approximately 3,331 have received and negotiated dividend checks, the amount of which represents each employee's regular severance pay benefit. Each check bears the following waiver:

In full satisfaction and settlement of any and all claims against the bankrupt estate of W.T. Grant Company 75 B 1735 (S.D.N.Y.) in relation to or in any way based upon claims for severance pay benefits.

The Trustee argues that these 3,331 former employees are not properly members of the proposed class since they have already settled their claims against Grant. Massey demurs, contending that the waiver "should be held ineffective against those former employees who cashed their checks without knowledge of their entitlement to full termination pay benefits and without advice of counsel." Petitioners Reply Memorandum at p. 14.

Issues

The questions then, before this Court are: (1) whether the proposed class of former employees should be certified with Massey as representative; and (2) whether those former employees who signed waivers and cashed dividend checks are properly members of such a class.

Discussion

Rule 723 of the Bankruptcy Rules provides that F.R.Civ.P. 23, which governs class actions, applies to adversary proceedings of the Bankruptcy Court. The Trustee's instant objection, however, is not an adversary proceeding but is, instead, a contested matter under the Bankruptcy Rules.² The distinction is significant since most of the Bankruptcy Rules of Part VII, including Rule 723 do not ordinarily apply to contested matters and, consequently, there is usually no procedural basis for prosecuting a contested matter as a class action. However, when litigation of a contested matter becomes "sufficiently serious and complicated," the Court, may, under Bankruptcy Rule 914, apply any of the Part VII Rules, including 723, to ensure that the "elemental requisites of due process are afforded all parties." Advisory Committee Note, 1976 Collier Pamphlet Ed. pt. 2 at p. 276. The threshold question, then, is whether it is appropriate to apply Rule 723 to the instant contested matter.

In In re REA Express, Inc., 10 B.R. 812 (Bkrtcy.S.D.N.Y.1981), a proceeding concerning a similar contested matter, this Court considered the application of approximately 1,000 non-union employees of the bankrupt to respond as a class to the trustee's general objections to their claims for holiday, vacation, and severance pay. Noting that "a unified response appears to be the only means by which all non-union employees may meaningfully participate in the objection hearings," id. at 813, this Court ruled that the matter merited the application of Rule 723. Underlying this ruling was the recognition that the former employees of a bankrupt are often thrust into a uniquely vulnerable position as involuntary creditors with little or no financial means to individually pursue their claims and, therefore, should be afforded some procedural protections not ordinarily afforded other parties under the Bankruptcy Rules.

Following this analysis, this Court, exercising its discretion under Rule 914, finds that the present contested matter also merits the application of Rule 723. Just as in REA, this matter concerns an issue central to the wage claims of, perhaps, thousands of former employees of the bankrupt. And, should the Trustee's instant objections be sustained, the claims of these employees will also undoubtedly be adversely affected. Thus, we think "it is only just that the employees be empowered to respond . . . on a unified basis." In re REA Express, Inc., 10 B.R. at 813, assuming, of course, that claimants meet the class action prerequisites prescribed in F.R.Civ.P. 23. Accordingly, we now turn to the question whether Massey has, in fact, satisfied the preconditions for federal class action certification.

Under the Federal Rules of Civil Procedure, the party requesting a class action must shoulder the burden of "establishing his right to do so." 3B Moore's Federal Practice ¶ 23.02 p. 23-96 (2d ed. 1982). Accordingly, Massey must demonstrate that the four prerequisites of Rule 23(a), as well as one of the three standards of Rule 23(b) have been satisfied before she can maintain this class action suit.³ The first prerequisite under Rule 23(a) provides that the class must be "so numerous that joinder of all members is impracticable." Massey contends that she easily meets this numerosity requirement since, she maintains, the putative class consists of at least 3,393 former Grant employees "undisputably scattered across the country." Petitioner's Reply Memorandum at p. 21. The Trustee, on the other hand, points out that of these 3,393 former employees who were eligible for retirement benefits at the time of Grant's bankruptcy, 3,331 have already settled their severance pay claims and have signed waivers evidencing such settlements. Of the remaining potential class members, only 33 have disputed the Trustee's calculations of their severance pay claims. Thus, the Trustee argues, the putative class properly comprises only 33 members, a number too small to satisfy the numerosity requirement. We agree with the Trustee's position.

Under F.R.Civ.P. 23, the class representative must be a member of the class he claims to represent. "Stated another way, the plaintiff must have standing to represent the class." 3B Moore's Federal Practice ¶ 23.042 p. XX-XXX-XXX (2d ed. 1982). Thus, in Bailey v. Patterson, 369 U.S. 31, 82 S.Ct. 549, 7 L.Ed.2d 512 (1962), the Supreme Court held that individuals who had not been prosecuted or threatened with prosecution under Mississippi's "breach of peace" statutes lacked standing to maintain a class action to enjoin criminal prosecution under such sta...