Pinsker v. Borders, Inc. (In re BGI, Inc.)

Citation: 465 B.R. 365Docket: Bankruptcy No. 11-10614 (MG); Adversary No. 11-02586 (MG)

Court: United States Bankruptcy Court, S.D. New York; February 17, 2012; Us Bankruptcy; United States Bankruptcy Court

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Final approval has been granted for a settlement in a WARN Act class action proceeding initiated by Jared Pinsker, representing former employees of Borders Group, Inc. The settlement agreement, which includes an award of attorneys’ fees for Class Counsel, was jointly sought by the Class Representative and the Debtors. A preliminary hearing occurred on December 20, 2011, resulting in an order that preliminarily approved the settlement, set a fairness hearing for February 16, 2012, and established notice procedures, with notices mailed to Class Members on December 23, 2011. The deadline for opt-outs and objections was set for February 6, 2012, with only three opt-outs received and no objections filed.

The class action complaint, filed on September 2, 2011, claimed violations of both the federal and New York State WARN Acts due to Borders’ failure to provide a 60-day notice before mass layoffs at its Michigan facility between July 22 and August 23, 2011. The complaint also asserted an administrative priority claim under section 503 of the Bankruptcy Code. The WARN Act mandates that employers with over 100 employees notify employees of plant closings or mass layoffs at least 60 days in advance, with specific exceptions applicable under certain circumstances. Employers failing to comply may be liable for damages, including back pay and benefits.

Significant and complex legal and factual issues exist regarding the application of the WARN Act to the Debtors, influencing the viability of the action. To prevent prolonged litigation, the Parties have agreed to a Settlement Agreement, which includes the certification of a class comprising individuals who worked at the Debtors’ Michigan Facility, experienced an "employment loss" on or within thirty days of July 22, 2011, in connection with a "plant closing" or "mass layoff," meet the definition of "affected employee," and do not opt-out of the Class. The Debtors are to pay a total of $240,000, allocated as follows: $3,000 to the class representative, $158,000 distributed among Class Members, and $79,000 in attorneys' fees. Class Members who do not opt-out will release all claims against the Debtors. Furthermore, if 5% or more of the Class opts out, the Debtors or the Liquidating Trust may declare the Settlement null and void. The Court has preliminarily certified the Class for settlement purposes, adhering to Rule 23 of the Federal Rules of Civil Procedure, which outlines four prerequisites for class action certification: numerosity, commonality, typicality, and adequacy of representation. The Court confirms its previous conclusions regarding class certification and the notice provided to Class Members.

The Court finds that the requirements of Rule 23 for class certification are satisfied. Firstly, the numerosity requirement is met with a Class of 198 former employees, as joinder is impracticable with 40 or more members, which is presumed in the Second Circuit. Secondly, the commonality prong is fulfilled because there are shared legal and factual questions among Class Members, specifically regarding whether they were subject to the same “plant closure” or “mass layoff” under the WARN Act. The presence of minor factual differences does not impede this commonality, as the primary legal question concerns compliance with WARN Act notice requirements, which applies uniformly to the Class Members. 

Additionally, the typicality requirement is satisfied because all Class Members’ claims arise from the same events leading to their terminations, and they all utilize the same legal arguments regarding the Debtors' liability. The claims of the Class are also subject to the same affirmative defenses from the Debtors, and the Court notes that the determination of damages will also hinge on shared legal principles. Overall, the Court concludes that the characteristics of the Class align with the stipulations of Rule 23.

The Plaintiff, acting as the class representative, adequately protects the interests of the Class under Federal Rule of Civil Procedure 23(a)(4). Adequate representation is a factual question determined by the court's discretion, requiring the representative to be a class member without needing express authority from other members. The representative must be capable of vigorously prosecuting the case and cannot have conflicting interests with the Class. The court assesses the honesty and trustworthiness of the named plaintiff and considers the quality and experience of class attorneys. 

In this instance, the Plaintiff has actively pursued the action, is not adverse to the Class, and shares the same status as other Class Members as former employees of the Debtors, indicating no ulterior motives. Class Counsel, Lankenau, Miller, and The Gardner Firm, PC, possess significant experience in WARN Act class action litigation, having handled around seventy similar cases, and previously succeeded in representing WARN Act plaintiffs in court.

Additionally, the class action qualifies under Rule 23(b)(3), which requires that common questions of law or fact predominate over individual issues and that class action is the superior method for adjudicating the controversy. The findings relevant to these criteria include the class members' interests in individual litigation, existing related litigation, the desirability of a consolidated forum, and the complexities of managing a class action. The common circumstances of termination among Class Members support the predominance of common issues, while the impracticality of individual claims due to their relatively small value underscores the superiority of the class action format. All factors outlined in Rule 23(b)(3)(A)-(D) favor the certification of the class.

No Class Member intends to individually control litigation, and those who have not opted out will receive individual settlement amounts. There is no existing litigation regarding the WARN Act rights of Class Members in another forum. Concentrating all claims before the Court is preferred for reasons of predominance and superiority.

Rule 23(e)(1) mandates reasonable notice to all class members bound by the proposal. Rule 23(c)(2)(B) requires that notice to Rule 23(b)(3) classes be practical and informative, including: (i) the nature of the action, (ii) class definition, (iii) claims and defenses, (iv) the option to appear through an attorney, (v) exclusion request procedures, (vi) deadlines for exclusion, and (vii) the binding effect of class judgment. Notices need not be overly detailed but must adequately inform potential claimants of their recovery. In this case, the Notice meets all Rule 23(c)(2)(B) requirements and specifies each Class Member’s projected recovery.

Due process requires that notice be calculated to inform interested parties about the action's pendency. The Notice was sent to each Class Member's last known address, as recorded by the Debtors, which is a reasonable identification method. The Court finds that mailing the Notice constitutes the best practicable notice under Rule 23(c)(2)(B).

Settlement approval involves a two-step process: preliminary approval and final approval after a fairness hearing. The Court has decided to send notice of the Settlement to all Class Members and conduct a fairness hearing. For the Settlement to be approved in bankruptcy court, it must be both procedurally and substantively fair under Rule 23 and Federal Rule of Bankruptcy Procedure 9019, requiring assessment of the settlement's terms and the negotiation process.

Procedural fairness under Rule 23 and Bankruptcy Rule 9019 mandates that courts evaluate proposed settlements for collusion and adequate representation. The settlement must stem from arms-length negotiations, supported by experienced counsel, and be subjected to meaningful discovery. In this case, negotiations were characterized as arms-length, with both parties engaged in informal discovery to assess their respective positions, and no objections to the negotiation process were raised by any interested parties.

Substantive fairness under Rule 23(e) requires court approval for class action settlements, focusing on their fairness, reasonableness, and adequacy. The court must independently assess these criteria, employing various factors to determine substantive reasonableness, including the complexity and cost of litigation, class reaction, the stage of proceedings, liability and damages risks, class maintenance risks, the defendants' financial capacity, and the reasonableness of the settlement fund compared to potential recovery.

Specifically, the complexity and expense of litigation suggest that pursuing the case could be costly and prolonged, while the settlement offers a quicker recovery with capped liability for the defendants at 17%. The risk of the Debtors facing a priority claim of approximately $1.4 million underscores the prudence of the settlement. Class reaction, an indicator of settlement fairness, is reflected in the minimal opt-out rate (only three Class Members) and the absence of objections, further supporting the conclusion of fairness in the proposed settlement.

The excerpt evaluates several critical factors regarding a settlement in a legal proceeding. Firstly, it highlights the importance of the stage of discovery, indicating that extensive negotiations and informal exchanges allowed both parties to assess the strengths and weaknesses of their arguments effectively. Both sides were represented by experienced counsel, which further facilitated a clear understanding of the case's complexities.

Next, the risks associated with the plaintiffs' ability to prevail are addressed, emphasizing challenges in establishing liability under the WARN Act and potential difficulties in proving significant damages, especially in light of possible affirmative defenses from the defendants. The excerpt cites precedents indicating that successful liability claims can still result in minimal damages.

Additionally, while the court has certified the Class for trial, uncertainties remain regarding the potential for class de-certification, which the court finds to be a neutral factor due to the lack of evidence from either party.

Lastly, the defendants' ability to withstand a judgment greater than the settlement amount is considered. Evidence of a defendant's inability to pay would favor settlement approval, but the mere capacity to pay more does not render a settlement unreasonable. In this bankruptcy context, the defendants' ability to pay more is uncertain, and the court affirms the settlement as a product of good-faith negotiations, choosing not to disrupt it based on the defendants' potential financial capacity.

The final two Grinnell factors assess the fairness of settlement terms in relation to potential litigation outcomes. The "range of reasonableness" acknowledges the inherent uncertainties and risks of litigation, highlighting that settlement amounts should be evaluated based on the strengths and weaknesses of the plaintiffs' case rather than ideal recovery scenarios. It is noted that precise valuation is unnecessary, as it would undermine the purpose of compromise. The Grinnell court suggested that a satisfactory settlement could represent a minimal percentage of potential recovery. In this case, the Court finds the Settlement reasonable, balancing the interests of Class Members and Debtors. Both parties recognized the significant litigation risks, particularly regarding WARN Act claims, and reached this conclusion after thorough discovery. The agreement's fairness is further supported by the absence of objections from Class Members, with only three opting out, reinforcing the Settlement's reasonableness.

The Settlement amount for Class Members is deemed reasonable as it takes into account the risks and costs of full litigation and the defendant's bankruptcy status. No objections have been raised. Under Bankruptcy Rule 9019, the Court finds the Settlement fair, equitable, and in the best interests of the estate, referencing case law that establishes criteria for approval. The Court evaluates several factors, including the likelihood of success in litigation versus settlement benefits, potential complexities and costs of litigation, creditor interests, support from other stakeholders, the competence of counsel, and the nature of negotiations. The proponent must demonstrate the Settlement's advantages for the estate. This Settlement caps the Debtors' risk at 17% of total exposure, reducing further expenses and uncertainty. Additionally, it is a crucial step in concluding the Debtors' bankruptcy process, given that their Plan of Liquidation is confirmed and effective.

Class Counsel has been appointed in accordance with Rule 23(g), which mandates courts to consider factors including prior work on claims, experience with class actions, legal knowledge, and available resources. The court finds Lankenau, Miller, and the Gardner Firm, PC suitable for the role due to their extensive experience with WARN Act class actions and their prior efforts in this case, including initiating proceedings and negotiating settlements.

Class Counsel requests fees totaling one-third of the settlement amount, equating to $79,000, which the Plaintiff has approved. Class Counsel has documented over ninety hours of work valued at approximately $54,285.50, with an expectation of additional fees between $10,000 and $15,000 for future work. These fees are deemed reasonable under Rule 23(h). 

In the Second Circuit, attorneys’ fees can be calculated using either the "lodestar" or percentage-of-fund methods. The lodestar method involves multiplying hours worked by a reasonable hourly rate, potentially adjusted by a multiplier based on litigation risks and attorney quality. The percentage method is preferred in contemporary practice. Regardless of the method, fees must meet six reasonableness criteria: time and labor expended, litigation complexity, risk, quality of representation, fee relative to settlement, and public policy considerations.

Class Counsel seeks attorneys’ fees of $79,000, which constitutes one-third of the Settlement amount. The fee calculation adheres to the percentage method and meets the Goldberger criteria for reasonableness. Class Counsel has documented over ninety hours of work through detailed time records, indicating no unreasonable time entries. The complexity and risks associated with class action litigation under the WARN Act, alongside the fact that Counsel worked without compensation, support a 1.45 multiplier for the fees. The Court deems these fees reasonable and approves the Settlement on a final basis, affirming the appropriateness of the Notice and compliance with Rule 23(a) and (b)(3). The Settlement is found to be fair under both Rule 23 and Bankruptcy Rule 9019. Each Class Member will receive $797, and issues related to class action management do not need consideration for settlement purposes. The argument for priority status regarding employee wages and benefits remains unresolved by the Court. Class Counsel incurred approximately $575 in expenses but is not seeking separate reimbursement for these costs. A separate order will formalize the final approval of the Settlement.