On June 22, 2016, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on a motion to for class certification in the PacSun bankruptcy, Case No. 16-10882.  In 2011, two plaintiffs filed actions under the California Labor Code Private Attorneys General Act (“PAGA”), alleging violations of California wage and hour laws.  One of the Plaintiffs was granted class certification in February, 2016.  After PacSun filed for bankruptcy, these plaintiffs moved for authority to file bankruptcy proofs of claim as representatives of the PAGA class for the class.  The “Opinion” is available here.

Because of the clarity and length of the Opinion, I have included only a cursory summary here.  However, it is worth noting that instances in which bankruptcy courts approve of class treatment for class-action claims is not terribly common.  Often, the Court will rule that the bankruptcy claims process is just as likely to provide adequate notice and recovery to potential claimants as the class-action process – but without the additional costs of class counsel (which is often upwards of 25% of any class recovery).  As held by the Third Circuit in a prior case:  “All creditors were given notice of the insolvency proceedings, and they were given the opportunity to file claims…  Furthermore, this is not a plenary suit but a liquidation proceeding which should be concluded as expeditiously as possible. We see no indication that a class action designation would have such a result…”  Opinion at *7-8 (quoting SEC v. Aberdeen Securities Co., 480 F.2d 1121, 1128 (3d Cir. 1973)).

As Judge Silverstein rules in this case, however, “Aberdeen does not stand for the principle that class claims are, as a rule, impermissible in bankruptcy case.  Opinion at *9.  Instead, she looks to the Musicland factors: (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.  Opinion at *10 (citing In re Musicland Holding Corp., 362 B.R. 644, 654-55 (Bankr. S.D.N.Y. 2007)).

In this case, the first factor was met (the class was previously certified), the second factor was met (the Debtor limited notice to only a portion of former employees, not all employees who were members of this class, and Judge Silverstein held that regardless of whether certification occurred, she would have to address these claims, satisfying the third factor.  Opinion at *12.  Thus, she determined that it was appropriate that she exercise her discretion under Rule 7023.  She then analyzed the elements and arguments around Federal Rule 23, determining that it was satisfied in this case.  This portion of the Opinion spans pages 13-20.

Ultimately, Judge Silverstein granted the motion in part, certifying nearly the exact same class as had been previously certified (the differences are in bold below):

Class: All hourly, non-exempt employees of PacSun working in retail locations in the State of California from March 18, 2007 through the 181st day prior to the filing of the bankruptcy petition concerning Ms. Beeney’s claims for:

a) failing to authorize and permit employees to take duty-free rest breaks every four hours or major fraction thereof and to compensate employees therefor; and

b) requiring employees to undergo security checks and perform closing duties off-the-clock without compensation.

My $.02

At the end of the day, no matter how infrequent relief of a specific type is granted, if you have met ALL of the statutory requirements and you can successfully distinguish contrary case law, you can obtain the relief you seek.  In some cases it is easy – but those cases almost always end up settling.  However, a litigant will not settle unless they will get more from settling than they would after getting a Court ruling and paying their lawyers – So if they feel certain of winning, their settlement range is much narrower than if they are uncertain of the outcome.  In a case like this, where certification of a class is infrequent, settling becomes a more difficult proposition.

On April 7, 2016, Pacific Sunwear of California, Inc. (aka PacSun, aka Pacific Sunwear) filed for chapter 11 protection in the United States Bankruptcy Court for the District of Delaware.

Through the bankruptcy, Pacific Sunwear is seeking bankruptcy protection in order to get rid of two thirds of its debt and restore its balance sheet, according to CEO Gary Schoenfeld in a statement. Pacific Sunwear is also looking to reduce the cost of running its stores, either by negotiating with landlords or getting out of leases.

Landlords need to pay close attention to this bankruptcy.  Pacific Sunwear has approximately 600 retail store locations across the country.  Not surprisingly, the Debtors have already filed a motion to establish procedures for rejecting executory contracts and unexpired leases.

Whether Pacific Sunwear rejects store leases, or assumes the leases, the rights of Pacific Sunwear’s commercial landlords will invariably be impacted.  Below is a link to a previous post titled “Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.”  This link provides a brief summary of some of the issues landlords should consider when a commercial tenant such as Pacific Sunwear files for bankruptcy.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272.