In Re: Energy Future Holdings Corp.

Filing 70

MEMORANDUM OPINION regarding appeal from a December 16, 2015 order of the Bankruptcy Court. Signed by Judge Richard G. Andrews on 9/28/2016. (nms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

In re:
ENERGY FUTURE HOLDINGS CORP.,
et al.,
Debtors.
MICHAEL CUNNINGHAM, JOE
ARABIE, AND MICHELLE
ZIEGELBAUM, ON THEIR OWN
BEHALF AND ON BEHALF OF
SIMILARLY SITUATED,

Chapter 11
Bankruptcy Case No. 14-10979 (CSS)
(Jointly Administered)
Bankruptcy Adv. No. 15-51

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Civil Action No. l 5-cv-1183-RGA
(consolidated)

Appellants,
v.
ENERGY FUTURE HOLDINGS CORP.,
et al.,
Appellees.

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MEMORANDUM OPINION
Jeanne E. Mirer, Esq. (argued), MIRER MAZZOCCHI SCHALET & JULIEN, PLLC, New
York, NY; Daniel K. Hogan, Esq., HOGAN MCDANIEL, Wilmington, DE.
Attorneys for Appellants

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Mark D. Collins, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; Daniel J.
Defranceschi, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; Jason M.
Madron, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; Brenton A. Rogers,
Esq. (argued), KIRKLAND & ELLIS LLP, Chicago, IL; Mark E. McKane, P.C., Esq.,
KIRKLAND & ELLIS LLP, San Francisco, CA.
Attorneys for Appellees

September~, 2016

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ANDREWS,

U.S.~ S~E:

This is an appeal from a December 16, 2015 order of the Bankruptcy Court denying a
motion by Appellants for certification of a class pursuant to Fed. R. Civ. P. 23. The appeal is fully
briefed. (Civ. Act. No. 15-1218 D.I. 21, Civ. Act. No. 15-1183 D.I. 43, 50). 1 The Court heard
oral argument on September 9, 2016. (D.I. 67).
For the reasons set forth below, the order of the Bankruptcy Court is AFFIRMED.

I. BACKGROUND
Debtors/Appellees filed voluntary petitions for relief in the United States Bankruptcy Court
for the District of Delaware under Chapter 11 of the Bankruptcy Code. Certain of Debtors'
subsidiaries have potential liability related to former employees' "alleged exposure to asbestos in
power plants owned, operated, designed, constructed, or maintained, in whole or in part, by the
Debtors' predecessors." (D.I. 43, p. 21). On January 7, 2015, the Bankruptcy Court granted

unmanifested claimants, those who were exposed to asbestos but who have not yet manifested any

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symptoms of asbestos-related disease. (Civ. Act. No. 15-1218 D.I. 22-1, pp. 1-8). On July 30,

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2015, the Bankruptcy Court issued an order setting a bar date of December 14, 2015 for all asbestos

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Debtors' motion to have the court establish a bar date for all asbestos claimants, including

claimants, establishing requirements for proofs of claim for manifested and unmanifested asbestos
claimants, and approving notice procedures. (Id. at pp. 9-22).
On December 1, 2015, Appellants filed a motion with the Bankruptcy Court seeking to
have the Court exercise its discretion to apply Federal Rule of Bankruptcy Procedure 7023 to the
proceeding and to certify a class of persons holding unmanifested asbestos claims. (Id. at pp. 23-

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After Appellants filed their opening brief, the parties stipulated to consolidate the instant appeal (Civ. Act. No. 151218) with a related appeal (Civ. Act. No. 15-1183) for procedural and administrative purposes only. (Civ. Act. No.
15-1183 D.I. 34). In this opinion, all references to Docket Index numbers will refer to the docket in the lead case
(Civ. Act. No. 15-1183) unless otherwise specified.

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33). The Bankruptcy Court heard argument on the motion at a hearing on December 16, 2015.
(D.I. 46-1, pp. 273-328 ("Hr'g Tr.")). 2 The Bankruptcy Court denied the motion. (Civ. Act. No.
15-1218 D.I. 1-1). The court declined to exercise its discretion to apply Rule 7023. (Hr'g Tr.
82: 19-85: 1). In addition, the court found that the class proof of claim did not meet the superiority
requirement of Fed. R. Civ. P. 23(b). (Hr'g Tr. 85:2-87:2).

II.

STANDARD OF REVIEW
The Court has jurisdiction to hear an appeal from a final judgment of the Bankruptcy Court

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pursuant to 28 U.S.C. § 158(a)(l). On appeal from an order issued by the Bankruptcy Court, the
Court "review[s] the bankruptcy court's legal determinations de nova, its factual findings for clear
error and its exercise of discretion for abuse thereof." In re Trans World Airlines, Inc., 145 F.3d
124, 131 (3d Cir. 1998). Abuse of discretion is found where a "court's decision rests upon a clearly
erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact."

Int'/ Union, United Auto., Aerospace & Agr. Implement Workers of Am., UAW v. Mack Trucks,
Inc., 820 F.2d 91, 95 (3d Cir. 1987).
Whether to allow a class proof of claim is within the discretion of the bankruptcy court. Jn

re Zenith Labs., Inc., 104 B.R. 659, 664 (D.N.J. 1989); see In re Am. Reserve Corp., 840 F.2d 487,
488 (7th Cir. 1988). Rule 7023 of the Federal Rules of Bankruptcy Procedure expressly allows
class certification in adversary actions, by incorporating Rule 23 of the Federal Rules of Civil
Procedure. Fed. R. Bankr. P. 7023. Rule 9014 expands the reach of Rule 7023 to "any stage" in
contested matters, at the court's discretion. Fed. R. Bankr. P. 9014(c).
A court's decision to deny certification of a class is reviewed for abuse of discretion. In re

Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 312 (3d Cir. 2008).

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2 Further

citations to this transcript will refer to the transcript's internal pagination rather than the pagination of the
document found at D.I. 46-1.

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III.

DISCUSSION
As an initial matter, Appellees question whether Appellants have standing to appeal the

denial of the motion at issue. (D.I. 43, p. 17). I decline to decide the issue of standing at this time
because I have jurisdiction to decide this appeal and will resolve it on other grounds.

A.

The Bankruptcy Court's Discretionary Decision not to Apply Fed. R. Bankr. P. 7023
The Federal Rules of Bankruptcy Procedure require that appellants file "a statement of the

issues to be presented" on appeal. Fed. R. Bankr. P. 8009(a)(l)(A). The Rules further require
that, in opening briefs, appellants again state the issues presented on appeal as well as an argument
"contain[ing] the appellant's contentions." Fed. R. Bankr. P. 8014(a)(5), (8). "[A] district court
may, in its discretion, deem an argument waived if it is not presented in accordance with Rule
801 [4]." In re Trans World Airlines, Inc., 145 F.3d at 132.
Appellees argue that Appellants failed to address the Bankruptcy Court's discretionary
decision not to apply Rule 7023 in their opening brief. (D.I. 43, p. 52). Appellants counter that
this was not an independent ground for denying the motion; rather, "the consideration of the
superiority issue was the focus of the Court's decision whether to exercise its discretion to certify
the class." (D.I. 50, p. 10). According to Appellants, "the Bankruptcy Court merged the ruling
about its discretion into a ruling on the merits." (Id. at p. 11 ).
Appellants misstate the Bankruptcy Court's ruling. In denying Appellants' motion, Judge
Sontchi first discussed the discretionary decision whether to apply Rule 7023, concluding, "I will
not exercise my discretion to apply Rule 7023 at all to the filing of a class proof of claim here."
(Hr'g Tr. 84:24-85:1). He could not have been any clearer. Only after ruling on the question of
whether to apply Rule 7023 did he turn to the issue of superiority, reasoning that if he were to
certify a class, and "assum[ing] solely for purposes of this ruling that ... 23(a) is ... satisfied," he

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did not "believe that in this situation the class action is superior to other available methods." (Id.
at 85:2-17). In other words, the Bankruptcy Court's ruling that it would exercise its discretion not
to permit the filing of a class proof of claim was separate from its ruling, in the alternative, that if
it did apply Rule 7023, the Court would not certify the proposed class because class resolution
would not be superior to alternative methods of adjudication.
Appellants failed to identify the Bankruptcy Court's decision not to exercise its discretion
to apply Rule 7023 as an issue presented on appeal, and then did not argue it in their opening brief.
In their reply brief, Appellants again failed to address this issue, arguing only that the issue was
not waived because the exercise of discretion was not an independent ground for denying the
motion. (D.I. 50, p. 10). For this reason, it is unnecessary to consider whether the Bankruptcy
Court abused its discretion in not applying Rule 7023, as Appellants have waived the argument.
Even if the argument were not waived, there is no evidence that the Bankruptcy Court
abused its discretion. As Judge Sontchi noted, "to allow a class proof of claim under the facts and
circumstances of this case would be unprecedented." (Hr'g Tr. 83:1-3). This is not a case where
there is a previously certified class from pending litigation outside the Bankruptcy Court
proceedings that is coming to the Court to file a proof of claim on behalf of the class. In fact, the
proposed class in this case would never litigate anything.

Rather, Appellants seek class

certification "solely for the purposes of filing a proof of claim." (Id. at 83:11-12). As Judge
Sontchi recognized, the purpose of the class proof of claim would be to negate the bar date. (Id.
at 84: 15). The Bankruptcy Court recognized it had the power to allow a class proof of claim, and
explained why it chose not to do so. The reasons it gave make sense. Therefore, the Bankruptcy
Court did not abuse its discretion in declining to apply Rule 7023.

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B.

Superiority of the Proposed Class
Although Appellants' waiver as to the Bankruptcy Court's decision not to apply Rule 7023

is a sufficient and independent reason to affirm, and, in any event, the Bankruptcy Court's decision
was not an abuse of discretion, for the sake of completeness, and recognizing that there are
important issues at stake here, I will address the parties' arguments regarding the Bankruptcy
Court's ruling that the class would not be superior to alternative methods of adjudication.

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Abuse ofDiscretion is the Correct Standard ofReview
Appellants argue the Bankruptcy Court committed an error of law, requiring de nova

review, when it used "the wrong comparator in its superiority analysis." (Civ. Act. No. 15-1218
D.I. 21, p. 18). In support of this assertion, Appellants provide only a conclusory statement that
"whether a class action is superior to other forms oflitigation in this context is inherently a question
of law." (D.I. 50, p. 11). Appellants claim that the Bankruptcy Court used the bankruptcy
proceeding, specifically the setting of a bar date and establishment of a notice procedure, as a
comparator rather than an alternative form of adjudication, and that this was an incorrect legal
standard. (Civ. Act. No. 15-1218 D.I. 21, p. 19).
While Appellants are correct that the District Court will review de nova the question of
"whether an incorrect legal standard has been used," Appellants have not demonstrated that the
Bankruptcy Court used an incorrect legal standard. In re Hydrogen Peroxide Antitrust Litig., 552
F.3d at 312 (quoting In re Initial Pub. Offering Sec. Litig., 471 F.3d 24, 32 (2d Cir. 2006)). On the
contrary, the Bankruptcy Court applied precisely the legal standard for which Appellants appear
to argue.
Appellants argue that the Bankruptcy Court committed legal error by using the wrong
comparator. (Civ. Act. No. 15-1218 D.I. 21, p. 18). The correct comparison for the superiority

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analysis, Appellants claim, is not the notice and bar date procedure set up by the Bankruptcy Court,
but rather individual litigation by future claimants as they manifest, beginning with proceedings
in the Bankruptcy Court to determine whether their claims were discharged. (Id. at pp. 18-19).
This is an unconvincing argument, however, because the comparator Appellants propose
is precisely the comparator the Bankruptcy Court used. During the hearing on the Motion, the
Bankruptcy Court discussed the comparator it was using, finding:
The issue of whether that due process as applied is sufficient to individual
claimants is fully preserved. And that's what Grossman's is about. So ifthere are
unmanifested claimants, who don't file a proof of claim, who manifest an injury in
the future, and who attempt to file some sort of claim and prosecute a cause of
action against the reorganized [debtors], their ability to argue under Grossman's
that the due process I previously approved was insufficient and that their claim
should survive, their cause of action should survive, that's fully preserved, and that
[will] be decided on a fact-by-fact and a case-by-case basis in the future by
whatever judge has to decide those issues.
I think that that is sufficient and superior to requiring or allowing the
issuance of a ... class proof of claim in this instance."
(Hr'g Tr. 86:12-87:1).

In other words, the Bankruptcy Court expressly considered

individual litigation as compared to the proposed class proof of claim. Appellants have not
shown that the Bankruptcy Court applied an incorrect legal standard. Abuse of discretion
is, therefore, the correct standard ofreview.

2.

The Bankruptcy Court Did Not Abuse Its Discretion in Finding the Proposed Class Would
Not Be Superior to Individual Litigation
The superiority consideration requires a court to compare the proposed class "to other

available methods for fairly and efficiently adjudicating the controversy." Fed. R. Civ. P. 23(b)(3).
Appellants argue that the proposed class "is clearly superior in terms of efficiency and fairness."
(Civ. Act. 15-1218 D.I. 21, p. 1). Appellants have not shown, however, that the Bankruptcy Court
abused its discretion in its determination that the proposed class was not superior to individual
litigation.

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The Bankruptcy Court considered both efficiency and fairness, noting first that it had
already established "an elaborate notice procedure" which it deemed successful. (Hr' g Tr. 85: 1821). 3 Appellants attempt to rebut this and to support their efficiency argument by arguing that, in
the coming decades, "the Courts could conceivably be flooded with thousands" of suits filed by
currently unmanifested claimants.

(Civ. Act. 15-1218 D.I. 21, p. 22 (emphasis added)).

Appellants provide no support for this claim, however, and an unsubstantiated claim about the
potential number of future lawsuits cannot serve as the basis for finding abuse of discretion on the
efficiency prong.
As to fairness, Appellants argue that the Bankruptcy Court "conflated the superiority
analysis with the due process analysis applicable to the confirmation hearing and the entry of the
bar date." (Id. at p. 23). Appellants claim that the alternative to the proposed class would involve
the unfair and insurmountable burdens to individual claimants of having to appear in Bankruptcy
Court in Delaware to argue that their claims were not discharged. (Id. at 23-24).
The Bankruptcy Court, as noted above, found that the notice procedure was successful.
(Hr' g Tr. 85: 18-21 ).

In addition, the Court discussed how the due process issue raised by

Appellants related to the superiority inquiry.
Under Third Circuit precedent prior to 2010, a claim for the purposes of bankruptcy arose
not when the underlying act giving rise to liability occurred, but when the right to payment arose.
Matter ofM. Frenville Co., 744 F.2d 332, 336 (3d Cir. 1984). In the context of asbestos claims, a

claim arose when the state law tort cause of action accrued, which would typically be when the
claimant manifested symptoms of an asbestos-related disease. In re Grossman's, Inc., 607 F.3d

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Debtors represent that the notice procedure approved by the Bankruptcy Court cost approximately $2.5 million.
(D.1. 43, p. 31 ). The notice procedure consisted of direct mailings to "individuals identified in employee and
contractor records" in addition to known claimants, as well as "a comprehensive publication notice program, using
print, online media, and other outlets." (Id. at pp. 31-32).

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114, 118 (3d Cir. 2010). In other words, potential future claims by those exposed to asbestos but
who had not manifested symptoms as of the bar date were considered post-petition claims that
could not be discharged in bankruptcy. Id. at 119-20.
In 2010, however, the Third Circuit overruled the Frenville accrual test. Id. at 121. For
the purpose of discharge of claims in bankruptcy, a claim now arises upon exposure rather than
upon manifestation of symptoms. Id. at 125. As the Third Circuit recognized when it overruled
Frenville, this definition presents due process concerns. Id. In order to protect unmanifested
claimants, the court provided guidance for determining whether a claim has been discharged,
directing courts to consider, among other things, whether the claimants received notice of the bar
date for submitting proofs of claim in the bankruptcy proceedings. Id. at 127.
The Bankruptcy Court recognized that this is the law in the Third Circuit and that
Appellants appeared to be attacking the Third Circuit's holding in Grossman's. (Hr'g Tr. 83:2284:5). The Bankruptcy Court also recognized that allowing a "class proof of claim on behalf of
unmanifested claimants" would amount to an end-run around the bar date because "the whole point
of the bar date goes away because everybody's covered." (Id. at 84:14-16).

In fact, certifying the proposed class would have the effect of reinstating the accrual test of
Frenville, at least as applied to the proposed class. In other words, the members of the proposed
class would be able to bring suit whenever they manifest, regardless of whether they received
notice of the bar date, which is precisely the opposite of what the Third Circuit, sitting en bane in
Grossman's, held. Grossman's, 607 F.3d at 125.

This discussion of due process was directly relevant to the issue of fairness as it relates to
the current law in this circuit. Appellants have not shown that the Bankruptcy Court made any
erroneous findings of fact, errors of law, or that it improperly applied the law to the facts with

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respect to the superiority inquiry. Therefore, the Bankruptcy Court did not abuse its discretion in
finding the proposed class would not be superior to individual litigation.
IV.

CONCLUSION

For the reasons set forth herein, the Bankruptcy Court's December 16, 2015 Order
denying class certification is AFFIRMED.
An appropriate order will be entered.

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