This past November, the Bankruptcy Court for the Southern District of Texas sided with the majority of circuit courts when it held (i) that bankruptcy courts may apply Federal Rule of Civil Procedure 23 to class proofs of claim and administrative proofs of claim, and (ii) that a putative representative may file a conditional claim on behalf of a putative class that may later be certified.  However, the court’s decision in Vanguard Natural Resources has created a split of authority between the Southern and Northern Districts of Texas, and bankruptcy practitioners must keep an eye out for how and whether the appellate courts try to resolve the split.

The debtor, Vanguard Natural Resources, is an oil and natural gas company principally focused on acquisition, production, and development in western and gulf-coast states.  Not surprisingly, Vanguard was a party to hundreds of royalty agreements.  Retova Resources, L.P. and several others were parties to royalty agreements pursuant to which Vanguard received the right to produce natural gas in exchange for an obligation to pay royalties.  The royalty payments were to be a percentage of gas and natural gas that Vanguard was able to produce and sell.  Though several of the forms of royalty agreements were silent on the issue of payment of post-production costs, Vanguard deducted those costs from the royalty payments.  Prior to the bankruptcy, Retova filed a class action complaint in Colorado state court to recover those post-production costs that Vanguard withheld.  Retova prevailed over Vanguard’s motion to dismiss and motion to deny class certification.  While the state court case was pending, Vanguard and its affiliates filed for chapter 11 protection.  Retova was neither able to certify the class nor be appointed representative prior to the petition date.  Nevertheless, Retova filed a proof of claim on behalf of the class, related to which the Debtors seemingly recognized Retova’s representative status.

Vanguard’s chapter 11 plan of reorganization became effective on August 1, 2017 and by its terms established August 31, 2017 as the bar date for filing administrative claims against the Debtors.  In addition to establishing the bar date, the plan stated that only a “Holder” of a claim (defined as an “Entity” holding a claim) could file an administrative claim.  The Debtors provided notice to each of the members of the class and published notice of the administrative expense bar date.

On the final day to file administrative claims, Retova filed an application for approval and payment of an administrative expense claim on behalf of itself and the class, seeking compensation for post-petition royalties.  Retova also filed a motion seeking an order pursuant to Rule 9014 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) directing that Rule 7023 of the Bankruptcy Rules be made applicable to Retova’s application and certifying the class.  Rule 7023 incorporates Rule 23 of the Federal Rule of Civil Procedure (the “Federal Rules”) which itself governs class actions.

As Retova argued in its motion, Bankruptcy Rule 9014 directs that certain Federal Rules are automatically applicable to contested matters but gives the court discretion to apply other Federal Rules.  Federal Rule 23 is not automatically applicable, but rather, is subject to court discretion.  Retova argued that principles of efficiency and economy supported applying Federal Rule 23 to the contested Retova administrative expense claim application.

The Debtors objected to class certification on several grounds, including:

  1. Retova and the class do not qualify as “Entities” under section 503(a) of the Bankruptcy Code.
  2. The confirmed plan requires that “Holders” of a claim must file their own claims.
  3. Texas bankruptcy courts had previously considered and denied requests for class certification of a proof of claim.
  4. Bankruptcy Rule 3001(b) does not apply to requests for payment of administrative expenses.
  5. Allowing the claim would be in direct contravention of the discharge of the class’s claims under section 1141(d) of the Bankruptcy Code.
  6. Retova’s motion was untimely.
  7. The class cannot satisfy the requirements of Bankruptcy Rule 7023.

The bankruptcy court begins its analysis by considering whether a putative class proof of claim is ever permissible under the Bankruptcy Code and Bankruptcy Rules.  Though several Circuit Courts of Appeal have previously considered this issue, the Fifth Circuit has not.  However, the District Court for the Northern District of Texas in In re FIRSTPLUS held that class proofs of claim filed by a putative class representative were never permitted because Bankruptcy Rule 3001(b) requires that only a creditor or authorized agent may file a claim and a putative class representative is not an authorized agent.  Vanguard argued that because Retova had not been authorized by the class to be its agent, it was unable to file the administrative claim on behalf of the class.  The bankruptcy court disagreed with the In re FIRSTPLUS decision, noting that such analysis was the minority view and that most circuit courts (specifically, the Fourth, Sixth, Seventh, and First Circuit Bankruptcy Appellate Panel) that had considered the issue had held that bankruptcy courts have the discretion to apply Federal Rule 23 to any stage of a contested matter, including the filing of a proof of claim.  The bankruptcy court further held that a class representative may file a conditional proof of claim on behalf of a putative class prior to certification—after which the representative would be an actual agent permitted to file the claim.

Nonetheless, the class was not home free.  The bankruptcy court then applied the Fifth Circuit test for the discretionary application of Federal Rule 23 and decided not to apply Federal Rule 23 in this case.  It is from that analysis that we can draw some practice pointers.  The Fifth Circuit directs the court to consider (i) whether the class at issue was certified pre-petition; (ii) whether the class members received notice of the bar date; and (iii) whether class certification would adversely affect the administration of the case.  Here each of these factors weighed against the application of Federal Rule 23, leading the bankruptcy court to rule against Retova.  Even worse for Retova, the bankruptcy court refused to toll the administrative claims bar date for the class members in order to give them an opportunity to file a claim after the bankruptcy court’s ruling.  In prior cases, the bankruptcy court had given a reasonable time for class members to file their own claims after class certification had been denied.  The bankruptcy court here focused its analysis on whether class members might have relied on Retova’s claim and therefore not filed their own.  Because Retova filed its claim and motion on the bar date, the bankruptcy court reasoned that class members could not have relied on the claim as their own; therefore, they were not entitled to a grace period to file their own claims.  This opinion makes timing crucial to protecting the class members’ rights.  As a matter of practice, a putative representative should file its motion to apply Federal Rule 23 and to certify the class well before the bar date so that class members can still argue for a tolling period to file individual claims in the event the representative’s motion is denied.

Retova has appealed the bankruptcy court refusal to apply Federal Rule 23, its refusal to analyze whether Federal Rule 23 had been satisfied, and its refusal to toll the bar date.  Because Vanguard was ultimately successful in defeating Retova’s class claim, it did not appeal the ruling that Federal Rule 23 is applicable to proofs of claim.  There is now a district split on that issue in Texas, which is ripe for appellate review.  If the district court grants leave to hear the interlocutory appeal, it will be interesting to see how it treats the tolling issue.  The bankruptcy court acknowledged that some courts have allowed a tolling period even when there was no proof that the class relied on the class claim but then the court required such a reliance anyway.  In any event, this ruling underscores the principal that a creditor should always file its own claim and not rely entirely on the class claim.