Opinion
Case No. 02-13533 (AJG) (Jointly Administered).
January 12, 2005
Weil, Gotshal Manges LLP, Marcia L. Goldstein, Esq., Lori R. Fife, Esq., Alfredo R. Perez, Esq., Adam P. Strochak, Esq., New York, NY, Attorneys for the Reorganized Debtors.
Royston, Rayzor, Vickery Williams, LLP, Nathan Wesely, Esq., Houston, TX, Attorneys for David Shepherd and Bruce Goldfarb, Individually and on Behalf of the Putative Class.
MEMORANDUM DECISION AND ORDER REGARDING THE DEBTORS' OBJECTION TO INDIVIDUAL AND CLASS PROOFS OF CLAIM OF DAVID SHEPARD AND BRUCE GOLDFARB
WorldCom, Inc. and certain of its direct and indirect subsidiaries, as debtors and debtors in possession (collectively, the "Debtors") objected to the individual proofs of claim of David Shepard and Bruce Goldfarb, Claim Nos. 17672 and 17682, respectively, and the class proof of claim, Claim No. 17681, (collectively, the "Claims") which allege that Messrs. Shepard and Goldfarb and the other putative class members (collectively, the "Claimants") were wrongfully terminated by the Debtors.
I. Jurisdiction and Venue
The Court has subject matter jurisdiction over this proceeding pursuant to sections 1334(b) and 157(a) of title 28 of the United States Code. This matter is a core proceeding within the meaning of section 157(b) of title 28 of the United States Code. Venue is properly before this Court, pursuant to sections 1408 and 1409 of title 28 of the United States Code.
II. Background
A. The Debtors
The Debtors provide a broad range of communication services in over 200 countries on six continents. Through its core communications service business, which includes voice, data, internet and international services, the Debtors carry more data over its networks than any other entity. The Debtors were the second largest carrier of consumer and small business long distance telecommunications services in the United States, and provided a broad range of retail and wholesale communications services.
On July 21, 2002 (the "Commencement Date") and November 8, 2002, the Debtors commenced cases under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). By orders dated July 22, 2002 and November 12, 2002, the Debtors' chapter 11 cases were consolidated for procedural purposes only and were jointly administered. The Debtors continued to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On July 29, 2002, the United States Trustee for the Southern District of New York (the "U.S. Trustee") appointed the committee of unsecured creditors (the "Committee").
On October 29, 2002, this Court entered an order (the "Bar Date Order") which established January 23, 2003 as the bar date (the "Bar Date") for filing proofs of claim in these cases. Pursuant to the terms of the Bar Date Order, on or about November 22, 2002, the Debtors mailed notice of the Bar Date to an excess of over 1.2 million creditors and potential claimants. A plan of reorganization, pursuant to the Bankruptcy Code, was confirmed on October 31, 2003 and became effective on April 20, 2004 (the "Plan").
B. The Claimants
David Shepherd and Bruce Goldfarb were employees of the Debtors and their predecessor, MCI. Mr. Shepherd began his employment in October 1984 and Mr. Goldfarb began his employment in December 1982. Mr. Shepherd became disabled from performing his job duties in 1988 and has been on long-term disability since 1989. Mr. Goldfarb became disabled from performing his job duties in 1990 and has been on long-term disability since 1990.
In 2001, the Debtors adopted a uniform, neutral absenteeism policy (the "Policy"), providing that any employee who has exhausted all available leave time would be terminated after the employee has not been actively at work for 18 weeks. As a result Mr. Goldfarb was discharged on July 31, 2001, and Mr. Shepherd was discharged on December 7, 2001, because they had exhausted their available leave under company policy and had not returned to active work for a period in excess of 18 weeks.
On January 22, 2003, Messrs. Shepherd and Goldfarb filed the Claims purportedly as representatives of a class of similarly situated individuals. The Claimants assert pre-petition claims, individually and on behalf of the putative class in an amount in excess of $100,000 individually and $40,000,000 collectively. The core allegation of the Claims is that, beginning on or around July 31, 2001, the Debtors unlawfully terminated certain employees who were on long-term disability leave and who were participating in and receiving medical, and other benefits under the 2001 WorldCom Health and Welfare Benefits Plan (the "HW Plan"). At that time, the Claimants lost any coverage under the HW Plan, however, they continue to be entitled to long-term disability.
The Claims are based on allegations made in a pre-petition lawsuit against both the Debtors and the HW Plan filed by Mr. Shepherd and Mr. Goldfarb in the United States District Court for the Southern District of Texas, Galveston Division, styled David Shepherd and Bruce Goldfarb v. WorldCom, Inc., MCI WorldCom Management Company, Inc., MCI WorldCom Communications, Inc., MCI WorldCom Network Services, Inc., and The WorldCom Health and Welfare Benefits Plan; C.A. No. G-02-129 (the "Texas Action"). The Debtors and the HW Plan answered the Complaint in the Texas Action, denying any liability to the Claimants. The Claimants filed a motion for class certification in the Texas Action, which the Debtors and the HW Plan opposed. No class had been certified prior to the commencement of the Chapter 11 cases. Although the Claimants' Claims against the Debtors in the Texas Action were stayed following the bankruptcy filing, the Claimants' related claims against the HW Plan were severed and remain pending in the Texas Action.
The Claimants maintain that the Debtors' mass termination of employees on long-term disability violated section 510 of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1140. The ERISA Section 510 claim alleges that the Debtors terminated the employment of each member of the putative class with the intention of interfering with their continued participation in the HW Plan; and that no legitimate non-discriminatory reasons existed for the termination of employment. The Debtors argue that (1) the putative class cannot be certified under FED. R. CIV. P. 23 ("Rule 23"), and (2) that they have not violated ERISA Section 510.
In the Claimants' original response to the Debtors' objection, they also sought relief under ERISA Section 502, however, at the Hearing the Claimants withdrew this claim. Further, the Court notes that the termination of the employees referenced herein had no impact on their receipt of long-term disability.
The Debtors filed a motion objecting to the Claims. A hearing was held on March 25, 2004 (the "Hearing"). This memorandum decision and order addresses the Debtors' objections to the Claims.
III. Discussion
A. Rule 23 Certification
The Debtors' first objection is that the Claimants lack any legal basis to assert a claim on behalf of any person other than themselves because there was no class certified nor any agent for the class appointed before the Commencement Date. The Claimants correctly point out that the process by which a bankruptcy court may certify a class under FED. R. CIV. P. 23 ("Rule 23") is not set out in the Bankruptcy Code or Rules. The court in In re Charter Co., 876 F.2d 864 (11th Cir. 1989) ruled "absent an adversary proceeding, the first opportunity a claimant has to move under Bankruptcy Rule 9014, to request application of Bankruptcy Rule 7023, occurs when an objection is made to a proof of claim. Prior to that time, invocation of Rule 23 procedures would not be ripe, because there is neither an adversary proceeding nor a contested matter." Id. at 874; see In re Chateaugay Corp., 104 B.R. 626, 634 (S.D.N.Y. 1989) (stating "proofs of claim filed on behalf of a class may be filed as of right and in such circumstances the bankruptcy court must exercise its discretion, pursuant to rule 9014 to apply or not apply Rule 7023, once an objection has been made to those claims."); In re Woodward Lothrop Holdings, Inc., 205 B.R. 365, 369 (Bankr. S.D.N.Y. 1997) (stating "The claim cannot be allowed as a class claim until the bankruptcy court directs that Rule 23 apply. It can only make this direction in a pending contested matter, which the mere filing of the claim does not initiate. In the absence of an objection, however, the proof of claim is deemed allowed."). The Claimants filed class proofs of claim before the Bar Date consistent with the requirements set forth in the Bar Date Order, and therefore, their claims are not time barred. The Court now turns to whether the class is certifiable under Rule 23.
Arguably, it would appear that the Claimants could have sought declaratory relief in an adversary proceeding, however, the Claimants' failure to do so does not prohibit the putative class certification.
Rule 23 governs class actions and is incorporated by bankruptcy courts pursuant to FED. R. BANKR. P. 7023. Rule 23(a) requires
One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claim or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
Id.
In addition to the four prerequisites listed above, one of three requirements outlined in Rule 23(b) must be met as well. The Claimants contend that the putative class claim satisfies Rule 23(b)(2) and (3). The requirement set forth in Rule 23(b)(2) states "the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole." Id. The requirement set forth in Rule 23(b)(3) states "the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." Id.
The Debtors maintain that the Claimants have failed to meet any of the requirements set forth by Rule 23(a) or (b).
The Debtors and the Claimants acknowledge that the numerosity requirement is satisfied if the number of putative class members is so large that joinder is impracticable. The Claimants contend that the 460 or so putative class members is above this minimum threshold. However, the Debtors argue that the putative class does not consist of the 460 members, but of only the 27 Claimants who filed proofs of claim because to permit the other members of the putative class to be represented by the Claimants would be to permit them to submit claims after the Bar Date.
In In re Johns-Manville Corp., 53 B.R. 346 (Bankr. S.D.N.Y. 1985), the court found that filing a class proof of claim on behalf of putative class members who did not file individual proofs of claim was impermissible. The same court certified a class in In re Chateaugay Corp., 104 B.R. 626 (Bankr. S.D.N.Y. 1989) distinguishing the facts from those in Johns-Manville because the putative class members were not provided actual notice of the bar date and the class members did not know that they may have had a claim against the debtors. Here the facts are closer to that in John-Manville than Chateaugay. As discussed more fully below, the members of the class received notice of the Bar Date; the putative class members had sufficient information to formulate a belief that they may have had a claim against the Debtor; and the majority of the putative class members did not file proofs of claim.
The court in Johns-Manville noted that a court in In REA Express, Inc., 10 B.R. 812 (Bankr. S.D.N.Y. 1981) was correct in certifying a disputed class claim because the members of the putative class had filed individual proofs of claim and because the claims and defenses were common among class members. Id. at 353-354.
The court in Chateaugay stated "the Johns-Manville decision may well provide sound arguments, based on the particular facts of the case, for denying class certification in a particular bankruptcy proceeding after a class proof of claim has been filed." Id. at fn. 5.
In fact, the Claimants do not deny that all but three of the members of the putative class were provided actual notice of both the Debtors' filing and of the Bar Date and that those members who did not receive actual notice were on constructive notice of the filing and Bar Date. The Claimants maintain that many of the putative class members did not submit a claim because they did not know of the legal theory for which a claim could be based. Further, the Claimants argue that had there been a physical injury resulting from WorldCom's direct actions then they would have been aware of their claim against the Debtors.
The Court is unpersuaded by the Claimants' arguments. The notice of the Bar Date is broad and includes language to the effect that any present or future; possible or existing claim must be filed with the Court. The members of the putative class experienced two direct adverse consequences due to the change in the Debtors' policy: (1) their employment was terminated, and (2) their health coverage was cancelled. Such actions put the putative class members on notice that they may have a claim against the Debtors even though they may not have known the legal basis on which such a claim may rest. Furthermore, not knowing the precise legal basis for a claim is not an impediment for filing a proof of claim. Therefore, the Court finds that the class consists of only twenty-seven members.
The numerosity requirement is met when joinder is impracticable. Robidoux v. Celani, 987 F.2d 931, 935 (2d Cir. 1993). Although there is no hard and fast rule as to what constitutes the threshold, the Second Circuit has found that forty members is presumed to satisfy the numerosity requirement. Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir. 1995) (citing 1 Newberg On Class Actions 2d, (1985 Ed.) § 3.05). Further, as the Debtors correctly assert, the twenty-seven Claimants have already joined to the bankruptcy proceedings, so joinder of each of the class members is practicable. Here, there are fewer than forty members in the putative class and joinder is practicable; therefore, the Claimants have failed to meet the numerosity requirement; and accordingly, certification of the putative class is not warranted. B. ERISA Section 510
The Claimants contend that the Debtors terminated the employment of employees on long-term disability in order to deprive those employees of medical benefits under the Debtors' employee benefit plan in violation of ERISA Section 510. The Debtors maintain that that they did not discharge the Claimants with the intent to interfere with their participation in the HW Plan or with their attainment of benefits under the HW Plan. Alternatively, the Debtors argue, that because the Claimants were unable to return to active work they were not qualified for their employment positions and were terminated for cause and not in violation of ERISA Section 510; or the Claimants' were discharged because they exceeded all available leave and were therefore subject to termination under the Debtors' neutral absenteeism policy.
Neither party has fully briefed the requirements and consequences of an ERISA Section 510 claim. Therefore, the Court declines to rule on this issue at this time and will schedule a status conference on February 8, 2005 at 10:00 a.m. to establish a briefing schedule regarding the ERISA Section 510 issue.
IV. Conclusion
Based on the foregoing, the Court concludes that the Claimants have not met the burdens imposed by Rule 23, and therefore, the putative class will not be certified.
Therefore, for the reasons set forth herein it is hereby
ORDERED, that the Claimants' request to certify the putative class is DENIED; and it is further,
ORDERED, that the class proof of claim, Claim No. 17681, filed by the Claimants is EXPUNGED; it is further,
ORDERED, that a status conference will be held on February 8, 2005 at 10:00 a.m. to establish, among other things, a briefing schedule regarding the ERISA Section 510 issue.