Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Once a defendant in one or more state or federal lawsuits files for reorganization under Chapter 11 of the Bankruptcy Code, various provisions of the code, as well as the Judiciary Code, provide the defendant, now the “debtor,” with an array of tools that may dramatically affect where nonbankruptcy litigation involving the debtor will take place. ‘Twinlab’ is a good placeto start on selection tools A recent opinion by Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York provides an excellent starting point for examining these forum selection tools. In re Twin Laboratories Inc. and Twinlab Corp., 2003 U.S. Dist. Lexis 19674. Personal injury actions were filed throughout the United States by various plaintiffs alleging personal injuries resulting from the ingestion of dietary supplements, most of which contained ephedra, manufactured by the defendants Twin Laboratories Inc. and Twinlab Corp. (collectively, “Twinlab”). Twinlab filed for reorganization under Chapter 11. First, and most basic, the filing of the Chapter 11 case in the Southern District of New York resulted in an automatic stay of the personal injury cases filed in state and federal courts against the debtors. 11 U.S.C. 362(a). The debtors then invoked 28 U.S.C. 157(b)(5), seeking to transfer all of the personal injury actions to the southern district. That provision provides that: “The district court shall order that the personal injury tort and wrongful death claims shall be tried in the district court in the district in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy is pending.” Rakoff noted that this mandatory-sounding language had to be read together with 28 U.S.C. 1334. Section 1334(b) provides that the district court “shall have original but not exclusive jurisdiction of all civil proceedings arising under Title 11 or arising in or related to a case under Title 11.” However, � 1334(c)(1) contains an abstention provision that allows “the district court in the interest of justice, or in the interest of comity with State courts or with respect to State law” to decline to assume jurisdiction over the case. Rakoff then noted that most courts of appeals agree with the 2d U.S. Circuit Court of Appeals that a motion for transfer under � 157(b), as well as attempts to obtain jurisdiction under � 1334(b), require an abstention analysis. Although such an analysis is required, however, “transfer should be the rule, abstention the exception” quoting In re Pan American Corp., 950 F.2d 839, 845 (2d Cir. 1991). It is plain that this statutory scheme seeks to balance considerations of federalism with, as Rakoff put it: “the strong legislative presumption favoring transfer under � 157(b)(5).” Moving to the abstention analysis, Rakoff set forth the 2d Circuit’s 12-factor � 1334(c) abstention test: (1) The effect or lack thereof on the efficient administration of the estate if a court recommends abstention; (2) the extent to which state law issues predominate over bankruptcy issues; (3) the difficulty or unsettled nature of the applicable state law; (4) the presence of a related proceeding commenced in state court or other nonbankruptcy court; (5) the jurisdictional basis, if any, other than 28 U.S.C. 1334; (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; (7) the substance rather than form of an asserted “core” proceeding; (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court; (9) the burden [on] the court’s docket; (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; (11) the existence of a right to a jury trial; (12) the presence in the proceeding of nondebtor parties. He then found that the first, third, fourth, fifth, eighth, 11th and, “to a lesser extent,” 12th factors favored transfer, while only the second factor, predominance of state law issues, appeared to favor abstention. But because the state law issues were neither difficult, unsettled nor unfamiliar to a federal court, Rakoff was persuaded that application of the factors strongly favored granting the transfer motion. In deciding against the plaintiffs who sought to stay in state court, he noted the artful pleading engaged in by some of the plaintiffs’ counsel. For example, one of the cases had been filed as a class action in an Illinois state court. The plaintiffs’ counsel sought to avoid federal jurisdiction by disclaiming damages in excess of $74,999.99, and by purporting expressly to exclude claims for personal injuries. These obvious “do not remove me” ploys proved unavailing because it was otherwise plain that the complaint had alleged a garden-variety personal injury case. The result in the Twinlab case is unsurprising. Quite clearly, allowing the debtor to consolidate all cases filed against it in the court in which its Chapter 11 case is pending under � 157(b)(5) has the potential for greater efficiencies, especially in terms of facilitating negotiations that, it is to be hoped, would result in a successful plan of reorganization that provides for the resolution of the personal injury cases through settlements as well. The Twinlab case, however, is just the tip of the iceberg. The reach of the bankruptcy jurisdiction may go far deeper than we have seen in Twinlab. Mass tort cases have given rise to a more controversial use of � 1334(b) and � 157(b)(5). In the typical mass tort case, the debtor is not the only party on the hook from a personal injury liability perspective. The debtor’s corporate parents, or co-defendants, generally have been named in state or federal court personal injury actions. The automatic stay that protects the debtor does not extend to such parties. May these defendants invoke sections 1334(b) or 157(b)(5) to transfer all of the cases to the district in which the debtor’s Chapter 11 case is pending? The answer is a qualified yes. A look at the procedural maneuvering in the silicone breast-implant litigation provides a good discussion of the relevant issues. See In re Dow Corning Corp., 86 F.3d 482, 486 (6th Cir. 1996). When a class action settlement fell apart, Dow Corning, a major defendant, filed for bankruptcy protection under Chapter 11 in the U.S. District Court for the Eastern District of Michigan. At that time, all breast-implant claims against it were automatically stayed. However, the claims against Dow Corning’s two shareholders, Dow Chemical and Corning Inc., and the other nondebtor defendants were not stayed automatically. Following the Chapter 11 filing, Dow Chemical, Corning Inc., 3M, Baxter and Bristol-Myers Squibb removed cases in which those companies were named defendants with Dow Corning from state to federal court pursuant to 28 U.S.C. 1452(a). Next, Dow Corning filed a motion pursuant to � 157(b)(5) to transfer to the Eastern District of Michigan all breast-implant personal injury claims pending against it and its shareholders, Dow Chemical and Corning Inc. Dow Chemical and Corning Inc. joined in Dow Corning’s motion. Baxter, Bristol-Myers Squibb and 3M then also moved, pursuant to � 157(b)(5), to transfer the personal injury cases in which those manufacturers were named as defendants with Dow Corning. With respect to cases against Dow Corning, the district court asserted jurisdiction and permitted transfer. The district court, however, denied the remainder of the transfer motions finding that it lacked subject-matter jurisdiction over the claims because they were not “related to” Dow Corning’s bankruptcy proceeding as required by � 1334(b). The 6th Circuit reversed and remanded. The 6th Circuit expands the meaning of ‘related to’ Citing the “primary goal [of] establishing a mechanism for resolving the claims at issue in the most fair and equitable manner possible,” the 6th Circuit adopted an expansive definition of “related to” jurisdiction. The 6th Circuit found that the tort claims against the nondebtors were sufficiently related to the tort claims against Dow Corning because the former could give rise to contribution or indemnification claims among the nondebtors, which could have an impact on the debtor’s estate. The court also found that � 157(b)(5) granted the district court handling the bankruptcy the power to transfer all the cases to itself. The 6th Circuit then ordered the district court to determine on remand whether to abstain under � 1334(c). On remand, the district court held that the actions against the nondebtors were subject to mandatory and discretionary abstention. Section 1334(c)(2) provides for mandatory abstention “if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.” The 6th Circuit then granted mandamus in favor of Dow Chemical and Corning, Dow Corning’s corporate parents, holding that an individualized determination must be made in each case to determine the impact of the case on the debtor’s estate. See In re Dow Corning Corp., 113 F.3d 565, 569, 572 (1997). In addition, the 6th Circuit found that discretionary abstention under 28 U.S.C. 1334(c)(1) was also “wholly inappropriate” given the court’s prior acknowledgment of the “significant impact that our resolution of these issues will have on the future course of [bankruptcy] litigation.” With respect to the other co-defendants, the 6th Circuit did not see the same urgency for transfer and accordingly denied their petition for mandamus. Nonetheless, it is plain that the filing of bankruptcy, together with the broad reach of the “related to” jurisdictional provision and the transfer power, provides a very potent tool for aggregation and global resolution in connection with Chapter 11 reorganization. Georgene M. Vairo is a professor of law and William M. Rains fellow at Loyola Law School, Los Angeles. She can be reached at [email protected].

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.