In 2018, Danning, Gill, Diamond & Kollitz, LLP, concluded its representation of the Official Committee of Unsecured Creditors appointed in In re Pacific 9 Transportation, Inc., Bankr. Case No. 2:16-bk-15447-WB (Bankr. C.D. Cal.). The case presented a number of interesting issues that continue to plague trucking companies operating out of Los Angeles ports.
The debtor was an intermodal trucking company engaged in the transport of shipping containers from the Ports of Los Angeles and Long Beach to nearby destinations. Prior to bankruptcy, all of the debtor’s truck drivers were hired as “owner operators,” paid as independent contractors, rather than as employees. Like many other trucking companies in the last several years, the debtor was sued by former workers for violations of California employment laws, particularly for the misclassification of its employees as independent contractors and violations of wage and hour laws. A class action and numerous individual actions were filed against the debtor. Dozens of individual employees obtained, or were on track to obtain, labor commissioner awards and judgments against the debtor. Although the debtor attempted to settle with the class action plaintiff, the number of potential class members who opted out of the class made a class action resolution infeasible. Faced with tens of millions of dollars in liabilities, the debtor filed a chapter 11 bankruptcy petition.
A creditors’ committee was quickly formed and shortly thereafter the committee selected DGDK as its general counsel. The committee was comprised of truck drivers in varying positions, including the class action plaintiff, individual plaintiffs who had already obtained awards against the debtor, and those whose claims were still in progress. The committee acted swiftly to investigate the debtor’s business and financial affairs.
The committee actively participated in the case to ensure not only that the debtor complied with its duties under the Bankruptcy Code, but that it also engaged in lawful employment practices under California law. During the case, the debtor started to transition from its prior “owner operator” business model to a business model reliant on employee drivers. The transition was not easy. Among other things: consistent with its prior employment model, the debtor did not own very many trucks; there was a shortage of qualified truck drivers; and ironically, despite the fact that some former employees were suing the debtor for not treating them as employees, the debtor reported that many current drivers were reluctant to change to employee status and preferred to be treated as independent contractors. Making matters worse, the debtor was at a competitive disadvantage against competitors that continued to use the independent contractor model. Moreover, negative publicity from the labor disputes resulted in a loss of business and revenue necessary to fund a successful reorganization.
The committee initially opposed a plan that insufficiently addressed the debtor’s legal problems and did not provide adequate payment to its creditors. However, after extensive negotiations with the debtor and among the creditor constituents, the committee and the debtor succeeded in jointly confirming a plan of reorganization that resulted in payment of millions of dollars to the debtor’s creditors. The plan became effective in January 2018.
A few observations regarding the committee’s efforts to achieve a chapter 11 plan that was in the best interests of creditors:
- Before the bankruptcy, the truck drivers comprising the committee successfully litigated their employee misclassification claims against the debtor. However, after bankruptcy, the committee members were necessarily focused on maximizing financial recoveries to all creditors. The debtor indicated that converting to an employee-based model would be difficult and costly, suggesting there may be a misalignment between the committee members’ economic and adjudicated interests. Ultimately, however, the debtor needed to convert its business model to confirm a feasible plan and to successfully reorganize. The committee vigorously encouraged that process, which proved effective for all parties.
- Outside of bankruptcy, creditors often compete for a debtor’s assets. Bankruptcy is intended to stop the “race to the courthouse.” In bankruptcy, unsecured creditors share in the same pool of funds. Thus, it is in the best interest of all creditors to maximize the debtor’s assets and, thereby, the overall distribution to creditors. Here, through the committee, the creditors united to achieve a maximum recovery and, at the same time, negotiated among themselves for a mutually agreeable distribution among differently situated truck driver creditors—class action members versus individually represented plaintiffs. This approach ensured a fair outcome with a substantial dividend to all creditors.