Bankruptcy and State Defensive Litigation Chief CounselNational Association of Attorneys General
Karen Cordry, NAAG Bankruptcy Counsel
This article was adapted and expanded with permission from an article originally published in the ABI Journal, Vol. XXXV, No. 1, January 2016. The American Bankruptcy Institute is a multi-disciplinary, non-partisan organization devoted to bankruptcy issues. ABI has more than 12,000 members, representing all facets of the insolvency field. For more information, visit abi.org. As an indication of the salience of the issue, a much longer and more detailed article dealing with similar issues for class actions was published in 2017. Alexander Aiken, Class Action Notice in the Digital Age, University of Pennsylvania Law School, Penn Law: Legal Scholarship Repository, http://scholarship.law.upenn.edu/prize_paper.
Attorneys general have reason to be concerned with the adequacy of notice provisions for many reasons. In my role as bankruptcy counsel for NAAG, I look at the issues in that context, where debtors seeks to bind the world at large to their discharge – including those with “future claims” where the debtor’s misconduct in creating environmental pollution or in exposing its workers and neighbors to toxic chemicals creates the potential for illnesses that may not manifest themselves until years or decades after the case is filed. In other actions, the debtor may seek to deal with consumer protection violations that affect numerous persons who individually have small claims but collectively are owed meaningful amounts. Or the debtor may have sold gift cards up until the day that it filed bankruptcy but now seeks to be given permission to limit the use of those cards during its going out of business sales. Outside of bankruptcy, many of the same issues may arise in terms of determining how to give notice of class actions, or multi-district litigation or settlements of other matters that the attorney general has authority to police.
In Mullane v. Central Hanover Bank & Trust Co., the U.S. Supreme Court laid out the parameters for what is necessary to provide adequate notice for due process purposes.1 Its admonitions in that case have been cited so often that they have long since passed from the realm of meaningful holding to be analyzed and applied into the more exalted status of rote cliché. The language is dutifully quoted by lower courts just before they go on to approve notice provisions that they well know are useless in the real world, but that they hold may be used to cut off the rights of those who have been given such “notice” because “Mullane said it was ‘good enough.’”
When read carefully, though, Mullane requires that courts must constantly examine the methods of notice they are using to ensure that they are actually requiring that notice be given in the most effective way that is both possible and practicable under the circumstances at the time. What might have been the “best we can do” when Mullane was issued, has, I suggest, become wholly outdated in an era of electronic communications and social media and no longer represents what is either possible or practical. As such, Mullane dictates that courts must rethink their approach to giving notice by taking advantage of these new means and the possibilities that they open up that suggest it may actually be realistic to think that those who need to know of events in a case will actually receive that knowledge. And, in doing so, the new approaches may turn out to benefit those giving the notice by allowing them to better defend against later collateral attacks at a relatively low cost. In analyzing what should be required, it is useful to return first to take a new look at Mullane’s analysis.
What Did Mullane Actually Say?
Mullane dealt with a trustee bank that operated a pooled investment fund covering 113 small trusts. The bank could provide a periodic accounting of its services that would, when approved by the court, protect it thereafter from any lawsuits challenging the actions covered by that accounting. Under state law, notice of the submission of the accounting to the court and the request for review had to be published for four weeks. The notice listed the 113 trusts but did not name the individual beneficiaries and the law did not require that any attempt be made to give direct notice to them. As part of this review process, Mr. Mullane was appointed special guardian for the beneficiaries; as such, he argued that the publication provisions did not provide adequate notice to the beneficiaries to allow them to protect their rights against any misconduct by the trustee bank. The Supreme Court concurred.
The Court began by agreeing with the bank that it was important to provide a forum for a global review of its trusteeship so it could be protected from unending exposure to lingering claims. Such an accounting would be akin to the value of a bankruptcy proceeding in that it would bring all potential claims into a single forum at a single time so they could be heard and definitively resolved. On the other hand, that benefit, the Court held, was only available “provided [the] procedure accords full opportunity to appear and be heard” to those to be bound thereby.2
In describing what the “full opportunity” would require, the Court noted that, while personal service is the classic form of notice, “[a] construction of the Due Process Clause which would place impossible or impractical obstacles in the way could not be justified.”3 However, “[a]n elementary and fundamental requirement of due process . . . is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”4 When notice is a person’s due, “process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.”5 That would appear to suggest that efforts to give actual notice must always be made by the plaintiff if it is to obtain the benefit of protection from those absent parties because anything less is often little more than a “mere gesture.”
However, the Court then turned to the practical problems that arise when the names or addresses of potential claimants are unknown such that direct notice simply may not be possible. It conceded that alternative forms of notice might need to be considered in some circumstances.
The reasonableness, and hence the constitutional validity, of any chosen method may be defended on the ground that it is, in itself, reasonably certain to inform those affected, . . . or, where conditions do not reasonably permit such notice, that the form chosen is not substantially less likely to bring home notice than other of the feasible and customary substitutes.6
The Court agreed that “[i]t would be idle to pretend that publication alone . . . is a reliable means of acquainting interested parties of the fact that their rights are before the courts;” so if publication notice had to stand or fall on whether it was really equivalent to actual notice in terms of its effectiveness, “we are unable to regard this as more than a feint.”7 Publication notice is only allowed when “it is not reasonably possible or practicable to give more adequate warning;” because “[h]owever great the odds that publication will never reach the eyes of such unknown parties, it is not in the typical case, much more likely to fail than any of the choices open to legislators endeavoring to prescribe the best notice practicable.”8 Thus, publication notice was allowed, not because it was expected to be effective in most cases, but because it “might” do something and it was the best that could be done for those unknown entities.
On the other hand, for beneficiaries whose names and addresses were known, direct mail was required because it was perfectly practicable, in that “mails today are . . . an efficient and inexpensive means of communication.”9 The bottom line, the Court stated, was that laws rarely require less than the “business world accepts for its own purposes. . . . Would . . . a ‘prudent man of business,’ counting his pennies but finding it in his interest to convey information to many persons whose names and addresses are in his files [only use publication notice]? We are not satisfied that [he] would.”10
That summation is the most useful version of the test, because it directs courts to what is the true issue. What would a person who is really interested in reaching others do, keeping in mind the best available technology of the day, while still recognizing that there are rarely unlimited funds to spend on such notice? In Mullane’s day, a postage stamp cost $.03 an ounce—equivalent to $.32 today, an amount that, while cheaper than current costs, was not negligible even then. However, since the fund held $3 million in assets, the cost of sending letters to the known beneficiaries of the 113 trusts, even with the production costs added to the $.03 in postage, was clearly still a minimal expense compared to the total fund assets, which made Mr. Mullane’s argument in favor of direct notice much easier. The issue is more difficult when postage and processing costs become a higher percentage of a small claim such as those that may occur in many consumer class actions. At some point, the burden of such mailing costs may become prohibitive and bankruptcy courts are exquisitely sensitive to that issue in the context of a debtor that cannot pay all of its debts. Other courts also must consider many of the same issues in the context of determining how much notice they can give, versus how far any order they enter can extend in terms of binding the world to its terms.
What Are We Doing Now? Can We Do Better?
With those competing imperatives, how does the current state of the law measure up? Not that well I suggest, at least in the area of bankruptcy law. As we see below, in comparing notices under class actions (which have a number of similar features to bankruptcy proceedings), the difference between what plaintiffs choose to do (who really do want to reach their class members) and what debtors (normally the defendants) propose to do to give notice to those wishing to file claims against them (and what courts require them to do) is often quite stark. In either arena, though, courts would be well-advised to look to the expertise of those who do try to reach large numbers of unknown parties to get their attention and involvement; namely, those who run social media campaigns for companies or politicians.
In that regard, the message of Mullane is clear – adequate notice must start with a view not to the least that a begrudging defendant hopes to get by with, but rather with what an eager party seeking to reach others would do, albeit tempered by considerations of costs and feasibility. Discussions in the case law (at least that of the bankruptcy courts) rarely seem to start with that approach; rather there is a reflexive clinging to the old analysis. If personal service or service by mail is not economically feasible or there are unknown persons who cannot be reached by mail, there is an automatic default to the single publication notice in the national edition of The Wall Street Journal. The failure to adequately consider electronic alternatives is surprising in that bankruptcy courts, in particular, and other courts in general, have actively moved to using such technology for filing pleadings and serving known creditors to cut down on their own burdens. But, when issues arise with respect to giving notice to unknown parties, the virtues of the electronic world are largely ignored.
In the 65 years since Mullane was decided, expensive long-distance calls, letters delivered by human beings, visits to the library to research topics, and shopping trips done in local stores have been replaced by unlimited talk and text plans, email, research via Google, and shopping on the Internet. In turn, “prudent business people” learned years ago that they needed to use these new methods to get their message out in the marketplace. Businesses now do everything they can to glean emails and Facebook contacts from anyone that they interact with and then use that data to bombard potential customers with tailored advertisements and marketing emails every . . . single . . . day. Why? Because it’s cheap and easy to do so.
Facebook, for instance, has 1.59 billion members who visit daily and 2.41 billion who visit at least once a month. It has a sophisticated set of algorithms to target postings to those who are most receptive, so that someone who posts about cats or dogs or travel will find ads reflecting those interests.11 When businesses have information to impart, they post it on their websites and their Facebook and Instagram pages, they tweet it out, and they buy ads in online publications that their customers would be likely to read. Politicians take the same approach to Facebook and to more localized sites, such as Nextdoor.com. There is no reason why the courts and those who litigate before them should ignore these new realities.
To be sure, some aspects of using alternative methods of communications to give notice of the commencement of actions may require changes to the rules for bankruptcy and other courts, particularly with respect to whether it would be sufficient for service on known creditors. But, in view of the strong encouragement under Fed. R. Civ. P 4(d) for defendants to waive traditional personal service and acknowledge receipt of a mailed document, there would seem to be little conceptual problem with setting up similar provisions for documents that are emailed to a defendant with a request that they acknowledge service. In bankruptcy court, the rules do not require personal service of even summonses in most cases. Instead, plaintiffs may simply send the documents by mail and that is deemed sufficient to establish personal jurisdiction anywhere in the United States.12 Similarly, bankruptcy rules require only a minimum of one publication notice if the defendant cannot be served by a more definitive method.14 With that relaxed view of what is needed, there is little reason to think that adding email service provisions with a request to execute the waiver of service form would not pass muster more broadly.
The more useful aspects of electronic media, though, are the vastly improved possibilities for conveying information to the great range of persons who fall outside the “known creditor” category. The Supreme Court rightly recognized in Mullane that the use of publication notice was often little more than a meaningless formality that it allowed because, at the time, there was nothing better. And certainly, the passage of bar dates and confirmation of a plan in many large bankruptcy cases are often followed by later anguished cries from those who had lost their rights because the debtor met the “publish once in The Wall Street Journal” standard and they never saw that “notice” to them. So too, with class actions and large settlements, there may often be persons that the parties seek to bind who receive actual notice only when it is too late to object or to opt out because they did not see the publication notice in time.
When there was no better alternative, one could perhaps brush aside such complaints, but in the current reality, that excuse is no longer good enough. And, indeed, outside of bankruptcy, it is clear that parties actually trying to reach potential litigants routinely made far more robust efforts even prior to the growth of social media. Class action noticing requirements make for an interesting comparison because they too use a bar date of sorts, in the form of an opt-out date for putative class members to remove themselves from the binding effect of the suit. Thus, it is also necessary in class actions to consider what notice is required and the standard is far stricter than what is routinely allowed in bankruptcy cases. In Hecht v. United Collection Bureau, Inc.,14 for instance, the Second Circuit held a single publication of the opt-out date in USA Today was not sufficient notice to Ms. Hecht and that it would violate due process to bar her from bringing her own suit against the class action defendant. The Second Circuit stated that “[w]e are aware of no case in our Circuit holding that a single notice published in a single publication satisfied either due process or Rule 23(b)(3). To the contrary, when courts have approved notice by publication, they have tended to do so where the notices either ran more than once or appeared in more than one publication. . . . It is difficult to imagine a manner of providing notice more akin to the ‘mere gesture’ deprecated in Mullane, . . . than the [notice here].”15
By contrast, in Carlough v. Amchem Products,16 the court described an ambitious program to provide adequate notice to a class of potential asbestos victims sufficient to allow certification of a massive opt-out class that would settle pending and future cases against several asbestos manufacturers and bind the vast majority of those who might bring suit against them – without the manufacturers needing to file bankruptcy.17 The notice plan would give the 9,000 plaintiffs who had already filed suit individual notice by first class mail; the parties enlisted the assistance of 56 national unions and relevant local unions to obtain names and addresses of members so mailings could be sent to them; notice packets were sent to more than 1,000 attorneys who had filed suit against the manufacturers seeking information on other potential plaintiffs, and a robust process of publication was carried out, beginning with half- or full-page newspaper ads in the sports section of the Sunday edition of 292 papers as well as Parade magazine and multiple television ad appearances. The placement was based on expert advice as to when the largest circulation would occur and where ads would be mostly likely to be seen by the primary target audience of middle-aged males. The parties also sought media stories, public service announcements, and articles in relevant trade publications.18 The district court analyzed the efforts under the Mullane standard and concluded that it met the obligations set out there. In the end, though, the Third Circuit and the Supreme Court rejected the certification of this class.19 Those decisions did not fault the notice process in terms of the efforts made to provide information, but both expressed concerns over whether any noticing process could be adequate to make persons with no manifest illness understand the nature of their options and the need to take action at that early stage.20
In the end, a number of these companies did end up filing bankruptcy and the noticing programs there were almost certainly far less robust. Certainly, the typical bankruptcy noticing proposal bears no resemblance to this approach. Asbestos plans (as incorporated into the Bankruptcy Code via Section 524(g)) tend instead to use the concept of future claimants and trust funds that do not require present action by claimants without manifested illnesses. The notice issues therefore have less relevance to those parties. The problem is where the same level of control is exerted over claimants who either are unknown now or who have claims that have not yet manifested themselves but where provision is not made for them in the plan.
Bankruptcy, even more than other litigation, seeks to pull in all potential liability of the debtor, even where it concededly does not rise to the level of a current cause of action under state law. Yet, the notice given is often far less – and the difference is not only in how the notice is attempted but also in the content of the notice. Class action notices, as a matter of course, describe the nature of the actions and injuries that are being alleged and/or settled. Conversely, albeit with a few exceptions, most courts subscribe to the view expressed in Dahlin v. Lyondell Chem. Co., 881 F.3d 599 (8th Cir. 2018)21, that
The notice did not need to mention benzene claims or the Clinton facility in order to satisfy due process. See In re Placid Oil Co., 753 F.3d 151, 158 (5th Cir. 2014) (“We have never required bar date notices to contain information about specific potential claims.”).
By the same token the court also had no problem with the fact that the notice did not list the names used by the debtors more than eight years prior to the filing dates (which were the names of the companies when the contamination took place) since Bankruptcy Rule 1005 set an 8-year cutoff.22
What Are Some Possibilities?
So, if the Amchem notice program may have been at the far end of the scale and certainly was enormously expensive at that time, the issue for parties now is what would a social-media-savvy noticing program entail? And, how far could it go to achieving the same results at a fraction of the cost that was needed 20 years ago? And, if such a program can be carried out at a low-cost, will bankruptcy noticing debates lose some of their excuses for failing to require debtors to actually convey useful information to potential creditors?23
To begin with, a debtor should be required to post a banner atop its website stating that it is in bankruptcy, giving the case number, and including a hyperlink to a website with more information. Notice of bar dates can be later added with a link to the claim form for ready reference by anyone visiting the site. The same information should also be posted on a debtor’s Facebook page and any other social media sites it maintains. These actions will cost the debtor essentially nothing and will reach those who visit the debtor’s websites regularly or who check those sites if they hear rumors about a bankruptcy filing. Those same links should also lead to a “FAQ” page that could contain details such as all of the debtor’s former names and locations where it operated, the types of allegations that were being brought against it, and significant deadlines and actions in the case, with the latter being written in layman’s language. One of the great values of providing information electronically is that the length and detail of the information presented becomes essentially irrelevant, both as to cost and as to accessibility if search tools are provided. Thus, there would be no need to artificially truncate the listing of names and it would be easier to argue for more information about the substance of the case.
If the debtor argues that such widely visible information might be detrimental to its reorganization because customers might not want to deal with a bankrupt entity, the basic answer would be “Tough.” No one has a right to hide its financial status once the case has been filed. U.S. Trustee guidelines require debtors to list their “DIP” [debtor-in-possession] status on their checks so vendors will know; its customers have an equal right to and need for that information. And, indeed, providing such information may well prove beneficial to the debtor. Many debtors, for instance, obtain permission at the beginning of their cases to maintain their existing consumer programs such as warranty provisions. Those reassurances – and any proposed changes thereto – can be included prominently on the website as well and should go a long way to ensuring that customers are not discouraged from continuing to deal with them. The upside of such visible notice—and visible promise—is that a case like Owens Corning might not happen again.24
In the Owens Corning case, the debtor filed bankruptcy primarily to deal with its asbestos liabilities, not its current building products. As a result, it requested and was allowed to maintain its warranty programs throughout its case and customers who bought shingles during the case were promised that their purchase would be protected. Those shingle purchasers naturally did not believe they needed to file a contingent proof of claim based on the possibility that their shingles might fail since, after all, they had a warranty. But the debtor’s plan provided that it had the option as to recognizing warranties post-confirmation. No notice of that change was sent to those who purchased shingles during the case and Owens Corning argued that it could not have even done so since the customers bought them through retailers, not the debtor itself. But there was also no widespread public dissemination of information about that change, nor any information posted on its website or otherwise given to any parties. As a result, when customers did have shingles that failed prematurely, the debtor used the plan language to both disclaim the warranty and point to the shingle customers’ lack of a filed proof of claim.
Some of the blame for that result undoubtedly rests on the court and creditors’ committee, both of whom should never have allowed such a proposal to be included in the plan, in light of the earlier promises. But if there was a general requirement that significant actions in the case affecting consumers as a whole should be posted on the debtor’s website, this provision might never have made its way into the plan. (Attorneys general might well also push for having such notices sent to them on a routine basis, as well, in case they wanted to intervene to point out that such an action would undoubtedly violate their “unfair and deceptive acts and practices” statutes.) Certainly, it would seem necessary that a public posting of a promise to protect consumers by maintaining warranties would need to have an equally public repudiation to avoid fraud claims.
Likewise, Texaco, which filed bankruptcy solely in order to avoid posting a $9+ billion appeal bond in a dispute with Pennzoil, made every effort to maintain business as usual and its plan provided for full payment of all existing claims as well as retaining shareholder equity. But the plan did have a standard discharge order that barred liability to any party that had not filed a proof of claim including unknown future claimants. Thus, a landowner who sued years later over contamination on his land was barred from proceeding.25 There are some mitigating factors supporting the court’s decision in that particular case, but there could readily be situations in which the debtor’s plan purported to leave rights intact while instead quietly eliminating many potential claims of those who were currently unknown and/or had future claims. No notice provision is perfect, but publicly posting notice as to the effect of the plan in layman’s language on the debtor’s website would have at least two salutary effects. First, the need to approve the posting would concentrate the attention of the court and the creditor’s committee on this point and make them think through the consequences of what was being proposed. Second, the posting on the website would undoubtedly be seen by a wider audience than would receive the bankruptcy pleadings. At least some of those in that wider audience (including plaintiffs’ attorneys!) might be more likely to recognize the issue and know that they needed to act on it and be able to inform others.
The basis for forcing a defendant in a class action to post a similar notion may be less strong at least prior to certification. But when a court has decided to allow the action to move ahead and efforts are being made to notify all members of the class – known and unknown – so they can exercise their opt-out rights, the scenario is very similar to the case in bankruptcy. The company’s own website is clearly the first place a party with a defective product might choose to go to see if a problem has been noted, to try to file a complaint, or to research the issue. Having such information readily visible on the site is a necessary means of getting out the required notice – and certainly what the defendant would do if it were a party actually trying to get notice to those persons in a cost-effective way.
After notice was posted on relevant websites, tracking mechanisms could conceivably allow debtors to see who (or at least what screen names) visited their site and clicked through the links. If so, this would allow the debtor to request email addresses at a later time to show that those persons had “actual knowledge” and, in turn, would allow the debtor to more effectively enforce bar dates against those persons. Those capabilities could also tell the debtor and the court how successful its notice efforts are, as opposed to the total lack of information about the effect of a newspaper notice.
Debtors and defendants might also be required to use social media ads to make further outreach efforts when appropriate. Some class action plaintiffs have already run pop-up notices on video game apps; why not bankruptcy debtors and other parties who are being required to inform the world at large? The science of placing ads, whether on websites, as part of search engine responses, or on social media platforms such as Facebook, Instagram or Twitter, so they are most likely to be seen by those who have a particular interest in them, is highly developed. “Prudent businessmen” use such information every day to decide where to place ads for their products. Debtors and defendants can too. Indeed, many of them probably already have identified those sites and are in the habit of using them to pitch their products. There is no reason that they should not use the same methods to inform those customers and/or victims about their filings and where they can find information about the case if they need to file claims or opt in or out of litigation based on those same product purchases.
Debtors and defendants should also be required to send information on critical actions to their entire email list. While “snail mailing” the full customer base might be too expensive absent reason to believe they might be creditors, that argument disappears if email is available. An entity that emails its customers every day to ask them to buy its goods can hardly complain if it is required to send an additional email to give them critical information about its case. Similarly, debtors and defendants should be required to give email notice to other groups, such as employees and pensioners for whom they have such addresses and to make contacts with groups such as unions representing employees who may also maintain email addresses. This latter source may be particularly useful for employees in the trades and construction industries who may work for many employers over their career but who stay affiliated with the same union.
And this is actually taking place to at least some degree already. In the PG&E bankruptcy, the debtor affirmatively noted that it had to take additional steps to notify many creditors, “in light of the destruction of structures to which notices of a Bar Date would customarily be sent” – a polite way of saying thousands of people were widely scattered because they had been burned out of house and home. PG&E did propose, like Takata, to use newspaper advertising, a dedicated website, notice to all persons who had filed insurance claims via information furnished by the insurers, as well as
(1) a broad-based geographic effort to provide notice to a large majority of online adults in the six affected counties using available data related to adult online usage, and (2) digital matching to precisely target a known universe of individuals who have moved within or out of the affected counties in the past year . . .
This digital effort is estimated to reach approximately 750,000 individuals, or approximately 70% of the adult population estimated to be approximately 1 million individuals, in the six affected counties through a combination of Facebook, Google Display Network™, and targeted news website ads.26
One cannot fully evaluate that claim, however, since the actual noticing plan, i.e., how many ad buys will be attempted, how many times given persons might be expected to see them, etc., does not appear to be included in the motion or in the order approving it, although it was apparently entered into the record at a recent hearing, for which the transcript is not yet available.
It does appear that objections were raised by at least one prominent plaintiff’s firm which argued that more time should be allowed before the bar date was imposed (i.e., January 20 versus the date set of October 21) and that there should be more use of social media than was being proposed, noting that with thousands of people not being in their homes, such ads on Facebook Twitter, and Instagram might be the only source of information they would see. While expressing respect for her position, Judge Montali refused to order changes, stating (according to the report) that “[w]e can’t hold up the train for that last holdout,” saying that there is always someone who can’t be reached or chooses not to file and that he did not believe that increasing the number of times a victim saw the notice would change their behavior.27
It is far from clear that he is correct in that observation – one can readily find references on the Internet to the “Rule of 7,” i.e., that one must see an ad seven times before it really penetrates the haze of competing messages enough to be recalled and acted upon. That result may be less true for an issue with high salience for a party, such as notice about how to be paid for the destruction of one’s home, but it is still likely that any given party may well miss many of the ads that are targeted to them, so it is not clear how effective this program will be. It does at least indicate that the debtors and courts are recognizing that using social media is a viable alternative means of providing valuable information to those who might not, for whatever reasons, otherwise learn of it. Again, while this case came up in the context of bankruptcy, the same issue might well arise in a non-bankruptcy context if the scale of claims against PG&E had been somewhat smaller so that it had not needed to enter bankruptcy.
Similarly, these same issues may arise if the attorneys general and/or class action plaintiffs reach settlements with opioid defendants that provide for payments to individual users – it is likely that these persons too will be difficult to identify directly so that use of social media options to supplement more traditional means of giving notice will be very useful in trying to reach those persons to inform them of their rights.
One final point to keep in mind in thinking about these issues is that using nontraditional means to disseminate this information may well be beneficial to debtors and defendants in the long run in addition to the more obvious benefit to plaintiffs. The more the former parties can show that there was widespread public knowledge of their cases and relevant dates therein, the more certain it can be that it can enforce its discharge and sale orders in bankruptcy, or class action or attorney general settlements in the non-bankruptcy context.
One final example where this arises for attorneys general is in the context of the use of gift cards in bankruptcy. They are a particularly problematic form of claim in bankruptcy. Debtors and their representatives may see merely an unsecured loan to a debtor that may, at best, be entitled to treatment under the consumer priority. The consumer buyer, on the other hand, surely does not think she has made a loan to the company. If she (and the recipient to whom she gave the card) think about it at all, they most likely conceptualize the card as the equivalent of cash left with the store in trust for the recipient, just in a more elegant form. As such, they assume they should be able to treat the cards like cash, and the states believe the assumption is reasonable and any failure to provide such treatment is unfair and deceptive. That is particularly true when, as is often the case, there is a strong push to sell gift cards from Thanksgiving through Christmas by retailers who then file bankruptcy in January when it turns out the season was not as successful as they had hoped. Retailers know they are in trouble when they are selling these gift cards, but customers do not, and in the states’ views, pushing such sales come close to (or crosses) the line into actual fraud.
Thus, the states routinely press for gift cards to be accepted throughout going out-of-business sales because this is the best way for consumers to receive their full value. Debtors often disagree since they would love to be able to simply keep those funds or to force customers to spend the money when the prices are still relatively high. The state traditionally resists this position by the debtor, but if the bankruptcy court disagrees, what is the best way to make sure notice gets out to affected parties so they have the best chance of being able to use the cards? The debtor normally will not even know who bought the card, much less who it was given to. This is a classic situation in which only the use of broad-gauged social media publicity is likely to provide any real chance that those who are most affected will learn what they need to do to protect themselves as much as they can. Indeed, the states were able to force use of such communications efforts in some instances.
Even where the debtor might eventually “win” its challenge to using such methods, it seems likely that the litigation costs and bad publicity could well outweigh whatever it saved by means of its recalcitrance. In the Borders Bookstores filing, for instance, Borders refused to notify its customer database about the bankruptcy or that they could and should use the cards before the going out of business sales concluded because it said it didn’t know which, if any, of them had bought cards. (To which the logical answer would seem to be, “so what? Why shouldn’t you do something that costs you nothing?) The Second Circuit eventually upheld their position with respect to whether such card holders could file late proofs of claim,28 and there was enough other publicity about the shutdown that most consumers did learn what they needed to do, but what did that fight really gain them? Why deny their loyal consumer base critical information when it would be most useful to them? Would not that bar date litigation have been more easily disposed of had the debtor been able to show that it had given notice to everyone for which it did have email addresses? The district court in Borders noted that “It seems apparent a solution could be devised to provide notice that is more targeted than publication. Whether an email to Borders’ broader customer base, social media platforms, or some other form of communications would appropriately meet due-process requirements is an open question.”29
The Radio Shack bankruptcy was an example of what can be done where states are involved. The states insisted that gift cards be recognized during the relatively brief sale period and sought to protect rights of consumers who wanted to submit claims based on unused cards. The State of Texas filed an adversary complaint30 (supported by another 24 jurisdictions) seeking a declaratory judgment that proofs of claim for the approximately $43 million of unredeemed gift cards should all be treated as priority claims, that Texas could file a claim for its citizens’ cards, and that it should be able to collect the funds and transfer them to the state’s unclaimed property fund (where consumers could reclaim them). The motion noted that the debtors had not provided any notice, actual or constructive, to holders of gift cards with respect to what rights they had to file claims or any bar date notice applicable to such claims. The parties eventually reached a settlement that provided for a simplified proof of claim for gift cards, a notice process, and agreement on which category of cards would receive priority treatment (i.e., only those bought by consumer themselves).31 The debtor was required to provide email notices to all holders for whom the debtor had addresses dating back to Jan. 1, 2000; first-class mail by postcard to holders with such information for cards issued after Jan. 1, 2013 (at a cost of about $40,000); a press release and website; and digital publication notice via “banner ads” to be placed on Facebook and Google websites for 30 days. The cost for up to 31 million views on Facebook was budgeted at $25,000, and the cost for 650,000 views on Google at $20,000.32
In a later filing, the debtor reported that the Facebook ads generated 1.6 million viewings with 53,001 “click-throughs” to the main website and that the Google ads were viewed 10 million times with 8,034 click-throughs. The report also noted that the specific gift card web page was viewed 5,544 times, and that 3,352 claims were filed for gift cards.33 Thus, this process appears to have worked to allow a large number of persons to file claims for their cards. Indeed, the numbers may be somewhat low because there was still several months for claims to be filed and the entity that purchased some stores was also supposed to recognize the cards. It seems unlikely that a traditional publication notice approach would have resulted in anywhere near that number of claims. In short, using this process, the debtor was able to resolve substantial litigation, give actual notice to the extent possible, and utilize effective means of publication notice that actually served to produce demonstrable results, all for less than $100,000.
Gift cards are an example of where conventional thinking about noticing has often led to an impasse. Debtors rarely have detailed or up-to-date contact information about the current holders and the amounts are typically fairly small for any given creditor so the cost needed to provide notice must also be low if the effort is to be worthwhile. Thus, the debtor has a large and intractable liability that it wants to deal with (since gift cards never expire) – and it wants to do so quickly and effectively without the possibility of lingering class actions, especially ones that seek priority status or threaten to upset its reorganization or sale plans. And, to the extent that any vestige of the company will remain, it is clearly in the best interests of the reorganized debtor or a buyer that it be viewed favorably by consumers. Thus, there are a variety of reasons why all parties should want to come up with viable means of notice that actually ensure that these claims will be fairly dealt with.
The same will often be true outside of bankruptcy in consumer cases where there are large numbers of relatively small individual claims and less than perfect information about how to get notice to those parties. Even if addresses exist, paper mailing will be slower and far more expensive than if the debtor can use email and links to websites where there is no limit on how much information can be provided. And, for unknown creditors, the use of targeted social media efforts will be far more likely than traditional publication notice to come to the attention of those affected. That is, after all, what Mullane requires – to do the best one can with what actually exists at the time. If there is now a way to give notice to the full universe of interested parties that actually has a chance of reaching them, it is long past time to ensure that is done34.
The examples cited here only scratch the surface and the states have taken steps to raise these issues in a number of cases in which they have been involved. They do not have the resources to be the general ombudsman on this issue, however. Hopefully, all parties in the system will voluntarily recognize the value of bringing bankruptcy noticing into the 21st century. While initially deciding on the parameters of an effective social media noticing program may take more effort than simply cutting and pasting the paragraph offering to run “an ad in The Wall Street Journal,” the states can assume that the creative lawyers working in this field will quickly learn about the available resources and will put them to good use, at least when they are pressed to do so. And, if bankruptcy firm partners and judges are not fully comfortable with this “brave new world” of social media, those new lawyers coming out of law school are up to date on the new technology and will be happy to supply that needed expertise. A win-win-win situation indeed.
- 339 U.S. 306 (1950).
- Mullane, supra n.2 at 313.
- Id. at 313–14.
- Id. at 314.
- Id. at 315. (Emphases added.).
- Id. at 316. (Emphasis added.).
- Id. at 317. (Emphasis added).
- The Court, perhaps, might have been thinking of the classic scene in Miracle on 34h Street, in the theaters only three years earlier, when Kris Kringle’s lawyer, Mr. Gailey won his case with the help of the Post Office:Mr. Gailey: Your Honor, the figures I have just quoted indicate an efficiently run organizationProsecutor Mara: The state of New York admires the Post Office. It is efficient, authoritative, and prosperous. We’re happy to concede Mr Gailey’s claims.Mr. Gailey: For the record?Mr. Mara: For the record.
- Mullane at 319–20 (emphasis added).
- See, e.g., https://www.facebook.com/business/products/ads.
- See Bankruptcy Rule 7004(b), (d), and (f).
- See Bankruptcy Rule 7004(c).
- 691 F.3d 218 (2nd Cir. 2012).
- Id. at 224-225 (internal citations omitted).
- 158 F.R.D. 314 (E.D. Penn. 1993).
- According to a later decision, Amchem Products v. Georgine, 521 U.S. 591, 597 (1997), the class action would involve hundreds of thousands, and perhaps millions of potential claimants.
- Id. at 321-29.
- See Georgine v. Amchem Products, Inc., 83 F.3d 610 (3d Cir. 1996) and Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997).
- Amchem, supra n.20, 83 F.3d at 628 at 628 (“Even if they fully appreciate the significance of class notice, those without current afflictions may not have the information or foresight needed to decide, intelligently, whether to stay in or opt out. . . . Because we have concluded that the class in this case cannot satisfy the requirements [for certification], we need not rule, definitively, on the notice given here. In accord with the Third Circuit, however, see 83 F. 3d, at 633–634, we recognize the gravity of the question whether class action notice sufficient under the Constitution and Rule 23 could ever be given to legions so unselfconscious and amorphous.”).
- 881 F.3d 599 (8th Cir. 2018).
- The reasoning underlying that limitation is itself indicative of the somewhat cavalier attitude of the bankruptcy courts to notice issues – it set the time limit because, according to the Advisory Committee Notes, that was the time period between when individuals could obtain successive Chapter 7 discharges. There is no explanation as to why that time period would have any relevance to how much information needs to be conveyed with respect to corporations that receive no discharge in Chapter 7 and who may change their names in ways that leave potential claimants totally in the dark.
- To be sure, in some cases, debtors have used much more extensive programs. One such example is the recent bankruptcy of TK Holdings, Inc. et al.,. Case No. 17-11375 (Del.), the parent of the manufacturer of the exploding Takata airbags contained in tens of millions of cars owned by unknown claimants. Partially due to a desire to avoid more deaths and injuries and partially because the company was already the subject of numerous class actions, regulatory proceedings and recall notices, TK did decide that it intended to provide notice via a broad-ranging program “including: (i) domestic and international publication, (ii) internet banner advertising and paid internet search listings, (iii) informational releases, (iv) a social media campaign, and (v) a dedicated website and call center. As described below, these noticing media are being designed in unison to ensure the broadest, yet most targeted and efficient, noticing program practicable.”.
- See Wright v. Owens Corning, 450 B.R. 541 (W.D. Penn. 2011), rev’d on other grounds, 679 F.3d 101 (3rd Cir. 2012).
- In re Texaco, 182 B.R. 937 (Bankr. S.D. N.Y. 1995).
- Bar Date Motion of Debtors at 21, In re PG&E Corp. and Pacific Gas and Electric Co., No. 19-30088, (Bankr. N.D. Cal. May 1, 2019), ECF No. 1784.
- Hannah Albarazi, PG&E Wildfire Claims Must Be Filed By Oct. 21, Judge Says, Law360 (June 26, 2019, 10:14 PM EDT),https://www.law360.com/articles/1173372/pg-e-wildfire-claims-must-be-filed-by-oct-21-judge-says.
- See In re BGI, Inc. f/k/a Borders Group Inc., 772 F.3d 102 (2nd Cir. 2014).
- Quotation from hearing cited in Marion M. Quirk, “Gift Cards and Their Disparate Treatment in Chapter 11 Cases,” ABI Journal, Vol. XXXIII, No. 4. (April 2014).
- State of Texas v. RS Legacy Corp. f/k/a RadioShack Corp. (Adversary Proceeding No. 15-50870).
- Order Authorizing and Approving Settlement, In re RS Legacy Corporation, No. 15-10197 (Bankr. D.Del. Sept. 16, 2015).
- Id. at 16.
- Radio Shack Unused Gift Cards Notice, E-Blast and Website Report, In re RS Legacy Corp., No. 15-10197 (Bankr. D.Del. Feb. 16, 2016), ECF Doc. 3789. (Notably, again, this was only for persons who did not choose to use the cards during the going out of business sales, where they could be utilized throughout the entire process.).
- Certainly, the universe of personal injury lawyers have discovered this, as anyone who watches channels showing vintage TV shows can attest, after being barraged with a litany of ads asking if “I or a loved one suffer from [disease X]” and pointing me to a website or phone number to help me obtain “substantial compensation!”.