BANKRUPTCY JUDGE ASSESSES ROLE FOR RULING ON $6 BILLION TORT CLAIM

July 19, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

In a $6 billon class-action case against United Airlines, Bankruptcy Judge Eugene R. Wedoff had to decide whether there was an "accident" under the Warsaw Convention. But first Wedoff had to figure out whether he had jurisdiction to rule on this question of law. In re UAL Corp., 2004 WL 1234093 (Bankr. N.D. Ill., June 2).

Today's Trial Notebook looks at the jurisdictional issue, and the article on Tuesday will turn to Wedoff's analysis of whether there was an "accident" under the treaty.

Richard and Sharon Dorazio filed a complaint in Cook County Circuit Court, alleging that they suffered personal-injury from chemicals that United Airlines uses to kill any insects on planes that fly to New Zealand and Australia. The euphemism the airline industry invokes in referring to insect extermination is "disinsection."

In its bankruptcy case, United objected to the Dorazio claim, contending there was no "accident" as defined by the Warsaw Convention. In response, the Dorazios argued the Bankruptcy Court had no jurisdiction to resolve the merits of their personal-injury claims.

As Wedoff recounted, the complaint alleged the following:

- "For many years, United has known that the insecticides used in this disinsection process have caused illness and injury to passengers, but United has chosen not to warn its passengers 'that flying in [United's] disinsected aircraft causes certain passengers to experience noticeable bothersome symptoms that may be irritating and sensitizing.' "

- "United has been on notice that 'approximately 2 percent of people exposed to the compounds used in [United's] aircraft disinsection process will be irritated thereby.' "

- "In August 2000, the Dorazios flew in one of United's aircraft from Sydney, Australia, to Los Angeles, and Sharon Dorazio 'became very ill as a result of unauthorized exposure to pesticides used to disinsect the aircraft.'

- "The Dorazios seek to represent a class of passengers 'who have flown in one or more of [United's] disinsected aircraft,' and Sharon Dorazio seeks to represent a 'subclass of passengers who reacted to the pesticide exposure by having a severe limited duration illness.' "

As for damages, Wedoff noted, "The Dorazios' bankruptcy attorneys have explained that the claim of $6 billion is based on an estimate of three million class members with damages of approximately $2,000 each."

Here are some highlights of Wedoff's analysis of the jurisdictional issue (with various omissions not noted in the quoted text):

"The Dorazios have questioned whether this court has jurisdiction to rule on the debtors' claim objection. The objection -- insofar as it based on the Warsaw Convention -- is a purely legal one, requiring no resolution of disputed facts. Thus, the initial issue here is whether a bankruptcy judge has jurisdiction to disallow a personal-injury tort claim against a bankruptcy estate as a matter of law, rather on the basis of findings after trial."

Constitutional Jurisdiction

"Bankruptcy judges do not have the life tenure and protection from diminution of salary that Article III of the Constitution requires for federal judges," Wedoff noted. "Accordingly, the Supreme Court held in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), that there are constitutional limits on the extent to which Congress can confer jurisdiction on bankruptcy judges.

"Marathon addressed the grant of jurisdiction originally supporting the 1978 Bankruptcy Code, which allowed non-Article III bankruptcy judges to enter judgments not only in all 'civil proceedings arising under Title 11 [the Bankruptcy Code] or arising in ... cases under Title 11,' but also in proceedings that were merely 'related to' bankruptcy cases.

"Marathon held that this extensive jurisdictional grant exceeded Congress' power under Article I, section 8, of the Constitution to establish 'uniform laws on the subject of bankruptcies.' Specifically, the court held that Congress might appropriately allow a non-Article III judge jurisdiction over matters that were central to the operation of a bankruptcy system, but not over 'non-core' matters: '[T]he restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power must be distinguished from the adjudication of state-created private rights.'

"It has long been recognized," Wedoff continued, "that one of the essential, 'core' functions of bankruptcy is the allowance or disallowance of claims against the debtor's estate, without regard to the source of the claim.

" 'A bankruptcy court in which an estate is being administered has full power to inquire into the validity of any alleged debt or obligation of the bankrupt upon which a demand or claim against the estate is based. This is essential to the performance of the duties imposed upon it. When an alleged debt or obligation is ascertained to be invalid -- without lawful existence -- the claim based thereon is necessarily disallowed.' Lesser v. Gray, 236 U.S. 70, 74 (1915).

"Later, in Gardner v. State of New Jersey, 329 U.S. 565, 573 (1947), the Supreme Court emphasized that bankruptcy courts are 'duty-bound' to pass on claim objections, stating that the claims resolution process is 'of basic importance in the administration of a bankruptcy estate' and noting that without it, 'unmeritorious or excessive claims might dilute the participation of the legitimate claimants.'

"The power of the bankruptcy court to resolve claims against the estate has been held to trump any right to jury trial that a claim holder would enjoy in pursuing the claim outside of bankruptcy. Indeed, in Langenkamp v. Culp, 498 U.S. 42 (1990), the Supreme Court held that a creditor who files a claim against an estate in bankruptcy not only submits that claim to the equitable jurisdiction of the bankruptcy court, but also brings within the bankruptcy jurisdiction counterclaims of the estate that would otherwise require a jury trial.

"The rationale for this rule is that the need to determine a creditor's claim fully makes resolving the trustee's counterclaim 'integral to the restructuring of the debtor-creditor relationship' and so within the bankruptcy court's jurisdiction.

"Under these principles, the assertion of a claim against an estate in bankruptcy is sufficient to bring that claim within the bankruptcy jurisdiction, regardless of whether a right to jury trial would attach to the claim outside of bankruptcy and regardless of the nature of the claim -- whether it arises under federal or state law, and whether it involves a breach of contract, a personal-injury tort, or a property damage tort.

"As a matter central to the bankruptcy process, the Dorazios' claim against United is one that Congress could have placed within the jurisdiction of a non-Article III bankruptcy judge in accord with the Constitution. The Dorazios question, however, whether Congress has actually conferred this jurisdiction."

Statutory Jurisdiction

"Under the current jurisdictional system, enacted in response to Marathon," Wedoff explained, "jurisdiction over bankruptcy cases is given in the first instance to federal district courts. However, pursuant to 28 U.S.C. [sec]157(a), district courts may refer bankruptcy cases to the bankruptcy judges for their district.
"When presiding over a referred case, a bankruptcy judge has jurisdiction of two different types. First, as to 'core' proceedings within the case, a bankruptcy judge has jurisdiction under 28 U.S.C. [sec]157(b) to enter final orders and judgments.

"Second, as to non-core proceedings that are 'related to' the bankruptcy case, a bankruptcy judge has a more limited jurisdiction under 28 U.S.C. [sec]157(c) -- unless all of the parties to the proceeding consent to the bankruptcy judge entering a final order or judgment, the judge must submit proposed findings of fact and conclusions of law to the district court for that court's entry of a final order or judgment after de novo review."

Personal-Injury Exception

"Consistent with the constitutional limits of bankruptcy jurisdiction discussed above," Wedoff noted, "Congress included within the bankruptcy court's core jurisdiction 'allowance or disallowance of claims against the estate. However, this statutory grant of jurisdiction to adjudicate claims is subject to an exception for 'the liquidation or estimation of ... unliquidated personal-injury tort or wrongful-death claims against the estate.'

"Because the statute does not define 'liquidation' and 'estimation,' it is possible to argue that the debtors' objection seeks to 'liquidate or estimate' the Dorazios' claim, and so is excluded from core bankruptcy jurisdiction by the personal-injury exception in section 157(b)(2)(B)."

Pointing out that the 7th U.S. Circuit Court of Appeals has yet to rule on this question, Wedoff continued:

"Courts that have addressed this issue have developed two general approaches, giving the exception a broader or narrower scope depending on the meaning they attribute to 'liquidation or estimation.' See U.S. Lines Inc. v. U.S. Lines Reorganization Trust, 262 B.R. 223, 233 and n. 6 (S.D. N.Y. 2001) (collecting authorities).

"Decisions interpreting the personal-injury exception broadly start with the proposition that any disallowance of a personal-injury claim is a 'liquidation or estimation.'

"For example, In re Schepps Food Stores Inc., 169 B.R. 374 (Bankr. S.D. Texas 1994), in holding that the exception prevented the bankruptcy court from considering a statute of limitations defense to a personal-injury claim, equated denial of the claim on legal grounds with liquidation: '[T]he effect of a decision on the limitations issues is undeniable; it would be a final adjudication of the merits of [the personal-injury claimant's] state cause of action.... [To] disallow [the] claim based on a state statute of limitations defense ... would effectively liquidate the claim for purposes of distribution.'

"In contrast to this broad view of the personal-injury exception, the court in In re Dow Corning Corp., 215 B.R. 346, (Bankr. E.D. Mich. 1997), like others reading the exception more narrowly, interpreted 'liquidation or estimation' as involving only a determination of the amount of a claim, and thus found that it had jurisdiction to consider a summary judgment motion asserting that a personal-injury claim against a bankruptcy estate was legally unenforceable:

'[L]iquidation ... involves fixing the amount of a claim, but does not involve the determination of its validity. Hence, those aspects of the claims-allowance process of personal-injury and wrongful-death claims that are not part of the liquidation process are core proceedings that a bankruptcy court has the authority to hear and determine.'

"Several considerations indicate that the narrower reading of the personal-injury exception is more appropriate," Wedoff concluded.

"First, even in interpreting a technically complex statute, courts are required to use the ordinary meaning of common terms, at least if that meaning does not produce absurd results. The ordinary meanings of 'liquidate' and 'estimate,' as applied to a disputed claim, involve determining the amount of the claim rather than its validity."

"Second, the Bankruptcy Code itself distinguishes between determining the value of a claim and disallowing the claim as a matter of law.

"Third, interpreting the personal-injury exception narrowly -- as removing from bankruptcy court jurisdiction disputes over the valuation of claims against the estate but not disputes over their legal validity -- is consistent with related jurisdictional provisions of Title 28.

"Fourth, far from producing any absurdity, the narrower interpretation of the personal-injury exception advances the efficient resolution of claims and avoids placing unnecessary bankruptcy burdens on the district court.

"Finally, the legislative history of the personal-injury jurisdictional provisions does not indicate that they were intended to limit bankruptcy court jurisdiction over personal-injury claims beyond removing the trial of those claims to the district court."

"Accordingly," Wedoff decided, "an objection to the legal validity of a personal-injury tort claim does not fall within the personal-injury exception to the core bankruptcy jurisdiction conferred by section 157(b)(2)(B), and this court may enter a final order dealing with the debtors' pending objection to the Dorazios' claim."

The next question, covered in Tuesday's Trial Notebook, is whether there was an "accident" under the Warsaw Convention.

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