Teta v. Chow (In re TWL Corp.)

Decision Date29 March 2013
Docket NumberNo. 12–40271.,12–40271.
Citation712 F.3d 886
PartiesIn the Matter of TWL CORPORATION, Debtor. Frank Teta, Appellant v. Michelle Chow, Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

OPINION TEXT STARTS HERE

John Mark Chevallier, McGuire, Craddock & Strother, P.C., Dallas, TX, for Debtor.

Jack A. Raisner, Rene S. Roupinian, Outten & Golden, L.L.P., New York, NY, Jeff Philipp Prostok, Forshey & Prostok, L.L.P., Fort Worth, TX, for Appellant.

Appeal from the United States District Court for the Eastern District of Texas.

Before KING, SOUTHWICK, and GRAVES, Circuit Judges.

KING, Circuit Judge:

TWL Corporation and its primary subsidiary, TWL Knowledge Group, Inc., filed for bankruptcy in 2008. Appellant Frank Teta, a former TWL employee, commenced a class action adversary proceeding within TWL's bankruptcy suit, alleging violations of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§ 2101–2109. The bankruptcy court denied Teta's related motion for class certification and dismissed the adversary proceeding. The district court affirmed. Because the reasons for the bankruptcy court's order are unclear, we VACATE the orders below and REMAND to the district court to remand to the bankruptcy court for reconsideration in light of this opinion.

I. FACTUAL AND PROCEDURAL BACKGROUND

Prior to filing for bankruptcy, TWL Corporation and its primary subsidiary, TWL Knowledge Group, Inc. (collectively “TWL”), were in the business of providing workplace learning, training, and certification programs. Appellant Frank Teta served as a vice president of TWL. On September 8, 2008, TWL allegedly laid off the majority of its workforce, including Teta. On October 19, 2008, TWL filed a voluntary petition for bankruptcy under Chapter 11.1 The bar date for filing proofs of claim against TWL was February 19, 2009.

On November 4, 2008, Teta filed within TWL's bankruptcy case a complaint against TWL, thereby initiating the adversary proceeding underlying this appeal. In that complaint, Teta—who claims to be acting on behalf of himself and other terminated employees—alleges that TWL violated the Worker Adjustment and Retraining Notification Act (“WARN Act”), 29 U.S.C. §§ 2101–2109, by failing to give its employees sixty days written notice of their termination. 2 Teta seeks to recover for himself and the class sixty days of wages and benefits under the Act. He asserts that such claims are entitled to be paid as administrative claims under 11 U.S.C. § 503(b)(1)(A) or, alternatively, as priority unsecured claims under § 507(a)(4) and (5). TWL moved to dismiss Teta's adversary complaint on February 9, 2009.

In addition to the aforementioned adversary complaint, Teta also filed, on February 18, 2009, a class proof of claim against TWL on behalf of all former TWL employees. The same day, Teta filed a motion seeking class certification 3 and an order naming Teta as the lead plaintiff.4 On March 23, 2009, the bankruptcy court granted a motion filed by Teta to stay consideration of the class proof of claim until the court ruled on TWL's motion to dismiss the adversary proceeding. At the parties' request, the court abated the adversary proceeding until October 6, 2009. The hearing on the motion to dismiss and the request for class certification subsequently was continued several times because the parties informed the court that they did not wish to proceed with the adversary proceeding until the size of the estate was determined.

In the meantime, because TWL's reorganization efforts were unsuccessful, the court converted the bankruptcy case to Chapter 7 and appointed Appellee Michelle Chow (Trustee) as trustee of the estate. The last day to file proofs of claim in the converted case was December 10, 2010. Creditors ultimately filed 86 claims against the estate of TWL Corporation, and 107 claims against TWL Knowledge Group, Inc. According to the bankruptcy court's estimation, only 34 of those claims were filed by individuals, of which, fewer than 20 appeared to relate to unpaid wages, salaries, or commissions.

On March 23, 2011, the bankruptcy court denied Teta's motion for class certification and granted the Trustee's motion to dismiss the adversary proceeding.5 The district court affirmed the bankruptcy court's order in toto on February 13, 2012. Teta now appeals.

II. STANDARD OF REVIEW

We apply the same standard of review to the bankruptcy court's decision as applied by the district court. In re Amco Ins., 444 F.3d 690, 694 (5th Cir.2006). We thus review class certification decisions for abuse of discretion. In re Wilborn, 609 F.3d 748, 752 (5th Cir.2010). A bankruptcy court abuses its discretion when it applies an improper legal standard or rests its decision on findings of fact that are clearly erroneous. In re Babcock & Wilcox Co., 526 F.3d 824, 826 (5th Cir.2008). Whether the lower court applied the correct legal standard in reaching its decision on class certification is a legal question that we review de novo. Allison v. Citgo Petrol. Corp., 151 F.3d 402, 408 (5th Cir.1998). 6

III. ANALYSIS

At the outset, we underscore the limited scope of this appeal. In particular, while Teta filed a class proof of claim against TWL, that matter is not currently before us, and we expressly decline to address the merits of that claim. Rather, this appeal concerns only the bankruptcy court's order denying Teta's class certification motion in his adversary proceeding, and its related dismissal of that proceeding. Teta submits that the bankruptcy court abused its discretion by applying an improper legal standard to the class certification question. To fully appreciate Teta's objections, a brief discussion of the bankruptcy court's order, and the federal bankruptcy rules implicated by it, is warranted.

A. The Bankruptcy Court's Order

In denying class certification, the bankruptcy court held that Teta did not satisfy Rule 23's numerosity and superiority requirements. With respect to numerosity, the court observed that [e]ven if all 130 members of the putative class elected to pursue WARN Act claims—which seems unlikely given their lack of participation in the claims allowance process to date—that number certainly would be manageable.” This conclusion was informed by the court's finding that, although each putative plaintiff could have asserted WARN Act claims “simply by filling out a proof of claim form,” none had done so. Because the bar date for filing proofs of claim already had passed on two occasions, the court explained that “class certification would negate the bar date by permitting those who missed the deadline to interpose claims into [the] case without establishing ... excusable neglect.” Moreover, the court expressed that “the expense of allowing [the] adversary proceeding to go forward so that Teta can offer certain creditors a third bite at the proverbial apple is a factor that weighs against class certification.” This fact seemed especially weighty to the court, given its conclusion that [e]ven without considering Teta's WARN Act claims,” TWL's estate was “insufficient to pay all of [its] creditors in full.” Thus, the court held that “under the facts of this case, Teta has failed to establish the numerosity required to prosecute a class claim.”

As for superiority, the court explained that it was unconvinced “that a class action would be a ‘superior method’ of adjudication as required by Rule 23(b)(3).” The court stated that the Bankruptcy Code already concentrates any WARN Act claims in [the bankruptcy court] by requiring former employees to seek allowance of such claims in order to share in any distribution from [TWL's] estate[ ].” Accordingly, the court concluded that “it would be a waste of [TWL's] limited assets to move forward with [the] adversary proceeding when Teta is the only individual who has asserted a timely WARN Act claim, and the claims process can more expeditiously move Teta's claims down a parallel track.”

Aside from these general references to the parallel proofs of claim process, the bankruptcy court did not offer an explanation for its decision to grant the Trustee's motion to dismiss Teta's adversary proceeding.

B. Applicable Bankruptcy Rules

The court issued its order against the backdrop of the procedural rules governing a bankruptcy case. Those rules provide that once a debtor files a bankruptcy petition, a creditor may file a “proof of claim” to establish a claim against the debtor. Fed. R. Bankr.P. 3002. If objected to, the proof of claim becomes a “contested matter.” Fed. R. Bankr.P. 9014 advisory committee's note (“Whenever there is an actual dispute, other than an adversary proceeding, ... the litigation to resolve that dispute is a contested matter.”). An “adversary proceeding,” on the other hand, is a lawsuit filed within the bankruptcy case. SeeFed. R. Bankr.P. 7001; see also 10 Collier on Bankruptcy ¶ 7001.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010) (“Adversary proceedings are separate lawsuits within the context of a particular bankruptcy case and have all the attributes of a lawsuit....”). Adversary proceedings are initiated with the filing of a complaint. Fed. R. Bankr.P. 7003; Fed.R.Civ.P. 3.

Pursuant to Rule 7023—which falls within Part VII of the Federal Bankruptcy Rules—Rule 23 of the Federal Rules of Civil Procedure “applies in adversary proceedings.” 7Fed. R. Bankr.P. 7023. Thus, [i]n an appropriate situation, class adversary proceedings may be commenced in a bankruptcy case provided that the requirements of the various subdivisions of Rule 23 are satisfied.” 10 Collier on Bankruptcy ¶ 7023.01; see also In re Wilborn, 609 F.3d at 754 ([C]lass action proceedings are expressly allowed in the Federal Bankruptcy Rules, which provide that the requirements for class actions under Federal Rule of Civil Procedure 23 apply in adversary proceedings.”).

Rule 23 does not necessarily apply, however, to a class proof of claim. First, our circuit has not addressed whether a class proof of...

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