X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
With the recent surge of asbestos litigation naming an ever increasing number of companies as defendants in courts throughout the United States, the need for centralization of these cases for an efficient, streamlined resolution has never been greater. The Chapter 11 filings by many of the defendants named in these cases provides an avenue to consolidate the asbestos cases in the district courts sitting in the districts where the Chapter 11 cases are pending. Specifically, � 157(b)(5) of Title 28 of the United States Code grants to the district court sitting in the district where the bankruptcy case is pending the exclusive authority to fix venue for all personal injury and wrongful death claims related to a Chapter 11 case. Moreover, � 1334(b) of Title 28 grants to district courts original, but not exclusive, jurisdiction over all civil proceedings “related to” a bankruptcy case. Thus, the ability to consolidate under � 157(b)(5) necessarily involves an analysis of the reach of the “related to” jurisdiction of bankruptcy courts under � 1334(b). INCREASE IN CLAIMS While the number of asbestos manufacturers has dwindled, the number of companies named in asbestos cases has increased. Naming as defendants companies only tangentially related, or even unrelated, to asbestos production is part of a recent dramatic increase in asbestos claims. These new defendants range “from oil companies, to automobile manufacturers, to utilities, to hospitals and colleges. Many are household names, such as Ford Motor Co., Campbell Soup Co., AT&T Corp., and 3M Co., the maker of Scotch� tape and Post-it� notes.” [FOOTNOTE 1]Meanwhile, transaction costs remain astronomical. It has been reported that 60 cents out of each dollar paid by defendants go to lawyers, not victims. These costs do not appear to have declined. Section 157(b)(5) broadly bestows upon the district court authority to transfer actions pending in other courts, including actions in state court. [FOOTNOTE 2]While courts have not questioned the venue fixing power of the district court under � 157(b)(5), they have differed on the reach of “related to” jurisdiction under � 1334(b). The section states: (b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts 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. The Bankruptcy Code does not define what matters are “related to” a bankruptcy. The U.S. Supreme Court, however, has confirmed that the scope of a district court’s “related to” jurisdiction under � 1334(b) is extremely broad. In Celotex Corp. v. Edwards, it observed that: Congress did not delineate the scope of “related to” jurisdiction, but its choice of words suggests a grant of some breadth. The jurisdictional grant in � 1334(b) was a distinct departure from the jurisdiction conferred under previous Acts, which had been limited to either possession of property by the debtor or consent as a basis for jurisdiction . … [FOOTNOTE 3] Accordingly, while a court’s jurisdiction under � 1334(b) is extremely broad, the jurisdictional grant is not precisely defined and courts have differed on what matters are “related to” a bankruptcy. THE ‘PACOR’ CASE In Pacor v. Higgins, [FOOTNOTE 4]Higgins sued Pacor for work-related asbestos exposure. Pacor was a distributor of asbestos manufactured by Johns-Manville, and it impleaded Johns-Manville in the litigation seeking indemnification. Manville subsequently filed for Chapter 11. Pacor removed Higgins’ lawsuit to federal court and moved to transfer the claims to where the Manville Chapter 11 case was pending. The district court denied the motion. On appeal, the 3rd U.S. Circuit Court of Appeals articulated the influential “conceivable effect” test for related to jurisdiction: The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. [FOOTNOTE 5] An action has a “conceivable effect” on the estate if the outcome of the action “could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” [FOOTNOTE 6] Notwithstanding the breadth of the test, the 3rd Circuit held that the personal injury claims asserted by Higgins were not “related to” the Manville Chapter 11 case. The court found that the claims against Pacor were “a mere precursor to the potential third party claim for indemnification” from Manville, because “Manville is not a party to the Higgins-Pacor action” and so Manville “could not be bound by res judicata or collateral estoppel.” [FOOTNOTE 7]The court amplified that, because “there could be no automatic creation of liability against Manville on account of a judgment against Pacor,” the conceivable effect test was not satisfied. [FOOTNOTE 8] Pacor’s“conceivable effect” test has been interpreted as providing for federal jurisdiction even where the claims at issue are unliquidated and contingent, and between two non-debtor litigants. [FOOTNOTE 9]Other courts have cited Pacorfor the proposition, that “related to” jurisdiction does not exist in litigation between non-debtors unless such litigation has an “automatic” effect upon the debtor’s estate, in the form of a binding judgment or indisputable contractual right to indemnity. The Delaware district court decision in In re Federal-Mogul Global, Inc., for instance, stated that “reliance on the term ‘conceivable’ in Pacor… confuses the issues of whether a third-party dispute will inevitably or automatically affect the bankruptcy.” [FOOTNOTE 10] Thus, Pacorhas been cited as standing for inconsistent principles: that “related to” jurisdiction exists if it is “conceivable” that a claim may affect a bankruptcy case and, conversely, that it exists only if a claim “automatically” affects a case. ‘FEDERAL-MOGUL’ DECISION Federal-Mogul and its subsidiaries are one of the world’s largest manufacturers of auto parts, a number of which contain asbestos. On Oct. 1, 2001, Federal-Mogul filed a Chapter 11 petition to stem a “torrent of lawsuits alleging personal injuries to hundreds of thousands of individuals.” [FOOTNOTE 11] Soon after the filing, other defendants in asbestos lawsuits nationwide, including Ford, DaimlerChrysler and General Motors, began removing claims that were pending against them and Federal-Mogul as co-defendants from state to federal district courts under the bankruptcy removal statute. [FOOTNOTE 12]The defendants then moved to transfer the claims to the court where Federal-Mogul’s Chapter 11 was pending, contending that the removed claims were “related to” the Federal-Mogul bankruptcy. Arguing they had contribution and indemnity claims against Federal-Mogul for any liability they incurred based on injuries arising from Federal-Mogul’s auto parts, the auto manufacturers sought to have all of the plaintiffs’ claims adjudicated against them and the Chapter 11 debtor in a single forum. The district judge denied the auto manufacturers’ motion to transfer, and the auto manufacturers appealed. The 3rd Circuit did not directly address Pacor, finding that it remained “a step away from reaching the merits of whether the District Court has ‘related to’ jurisdiction.” [FOOTNOTE 13]The court only reached the issue of appellate jurisdiction and, finding none, declined to rule on the merits. In dicta, however, the 3rd Circuit described the test for “related to” jurisdiction under the Pacortest as follows: The test articulated in Pacorfor whether a lawsuit could “conceivably” have an effect on the bankruptcy proceeding inquires whether the allegedly related lawsuit would affect the bankruptcy proceedings without the intervention of yet another lawsuit. [FOOTNOTE 14] Prior to Federal-Mogul, the authorities in the 3rd Circuit appeared to have been pulling away from the holding of Pacorthat “automatic” liability was required for bankruptcy jurisdiction to exist. For instance, in In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, the 3rd Circuit stated that “[a] key word in this test is ‘conceivable.’ Certainty, or even likelihood, is not a requirement. Bankruptcy jurisdiction will exist so long as it is possible that a proceeding may impact on the ‘debtor’s rights, liabilities, options, or freedom of action’ or the ‘handling and administration of the bankrupt estate.’” [FOOTNOTE 15]Likewise, in In re Foundation for New Era Philanthropy, the Eastern District of Pennsylvania explained that, “decisions in the 3rd Circuit since Pacor, particularly In re Marcus Hook Dev. Park, Inc., 943 F.2d at 264-65, suggest that ‘automatic liability is not a prerequisite for a finding of related to jurisdiction.’” [FOOTNOTE 16] SUPREME COURT AND ‘CELOTEX’ In Celotex Corporation v. Edwards, [FOOTNOTE 17]Edwards filed an asbestos injury lawsuit against Celotex in federal district court in Texas, and obtained judgment against it for more than $280,000. [FOOTNOTE 18]Celotex posted a bond with Northbrook Property and Casualty Insurance Company to stay execution on the judgment while it pursued an appeal, and allowed Northbrook to hold money as collateral. [FOOTNOTE 19]Celotex thereafter filed a Chapter 11 petition in Florida. As a result of the “automatic stay” imposed by � 362 of the Bankruptcy Code, all actions against Celotex were automatically stayed. [FOOTNOTE 20]Because the collateral under the bond was held by Northbrook rather than the debtor, the bankruptcy court entered an injunction against any party executing on supersedeas bonds posted by Celotex. The plaintiffs moved in the trial court in Texas for leave to execute on the bond, and the Texas court granted the motion notwithstanding the Florida bankruptcy court’s injunction. The issue presented to the Supreme Court was whether the bankruptcy court had jurisdiction to enjoin execution on the bond as “related to” Celotex’s bankruptcy under 28 U.S.C. � 1334(b). [FOOTNOTE 21]At the outset, the Court “agree[d] with the views” set forth in the 3rd Circuit’s Pacordecision regarding the “conceivable effect” test, reasoning: the “related to” language of � 1334(b) must be read to give district courts (and bankruptcy courts under � 157(a)) jurisdiction over more than simple proceedings involving property of the debtor or of the estate. [FOOTNOTE 22] Importantly, both the Supreme Court and 3rd Circuit in Pacorobserved that the proceedings “need not necessarily be against the debtor or against the debtor’s property” to be “related to” a bankruptcy case. [FOOTNOTE 23]The Court held that the bankruptcy court’s injunction was properly based on “related to” jurisdiction, and that collection on the supersedeas bond was therefore enjoined. 4TH CIRCUIT DECISION In A.H. Robins v. Piccinin, [FOOTNOTE 24]a Chapter 11 debtor that had produced the Dalkon Shield intrauterine device filed for bankruptcy to halt an avalanche of personal injury lawsuits that had been filed against it throughout the United States. The debtor moved for orders staying and transferring all personal injury claims filed against both it and other non-debtor defendants. The district court granted the motion as to both the debtor and non-debtor co-defendants. [FOOTNOTE 25] On appeal, the 4th U.S. Circuit Court of Appeals affirmed the district court’s ruling that litigation against non-debtors should be stayed. [FOOTNOTE 26]Citing the Pacordecision’s “conceivable effect” test, the 4th Circuit rejected plaintiffs’ argument that the district court erred when it entered its “order of November 9, 1985, fixing the venue for the trial of all Dalkon Shield cases and providing for the transfer of such cases to the District Court for the Eastern District of Virginia at Richmond.” [FOOTNOTE 27]The 4th Circuit further stated that “the district court in this case had the power under the statute to fix the trial venue in its district for all the Dalkon Shield cases.” [FOOTNOTE 28] ‘DOW CORNING’ DECISION The 6th U.S. Circuit Court of Appeals for the 6th Circuit in In re Dow Corning [FOOTNOTE 29]also addressed the reach of bankruptcy related to jurisdiction. Dow Corning was the leading producer of silicone gel breast implants. Personal injury tort claims mounted against Dow Corning and, when an attempted global class settlement disintegrated, it filed a Chapter 11 petition in the Eastern District of Michigan. After its filing, Dow Corning removed the breast implant claims from state courts nationwide and moved to transfer them under � 157(b)(5). Other manufacturers of breast implants named as co-defendants likewise moved to transfer personal injury claims against them. The district court granted Dow Corning’s motion, but denied the motions filed by the other manufacturers. On appeal, the 6th Circuit ruled that the venue fixing power extended beyond the claims against the debtor. The 6th Circuit also cited the 3rd Circuit’s decision in In re Marcus Hook Dev. Park Inc., and stated that “automatic liability is not necessarily a prerequisite for a finding of ‘related’ to jurisdiction.” [FOOTNOTE 30]The court further observed that “Our Circuit has held that Section 1334(b) ‘does not require a finding of definite liability of an estate as a condition precedent to holding an action related to a bankruptcy proceeding.’” [FOOTNOTE 31] The 6th Circuit has since reaffirmed its holding. Revisiting its 1996 ruling a year later in another and related appeal in the Dow Corning case, the 6th Circuit amplified that: In In re Dow Corning Corp., 86 F.3d at 482, this Court … held that the Eastern District of Michigan had ‘related to’ jurisdiction over breast-implant claims against not only the debtor, Dow Corning, but also its shareholders and certain other nondebtor defendants. We further held that 28 U.S.C. � 157(b)(5) granted the district court authority to transfer the cases against the nondebtors to the Eastern District of Michigan. [FOOTNOTE 32] 5TH CIRCUIT DECISION The 5th U.S. Circuit Court of Appeals in Arnold v. Garlock [FOOTNOTE 33]also analyzed the reach of related to jurisdiction under � 1334(b). In that case, asbestos plaintiffs commenced actions against Garlock, Inc. in Texas state court. After Federal-Mogul filed for Chapter 11, Garlock removed the claims against it under � 1452(b) and filed a motion in the district court in Texas to transfer the claims to be administered as part of Federal-Mogul’s Chapter 11 case. The 5th Circuit confirmed that it followed the “conceivable effect” test articulated in Pacor. [FOOTNOTE 34]The 5th Circuit also noted that unasserted claims held by non-debtor co-defendants could provide a basis for related to jurisdiction: In In re Dow Corning, 86 F.3d 482 (6th Cir. 1996), where a relatively small number of non-debtor co-defendants were closely related to the pending breast implant litigation against debtor Dow Corning, a claim of contribution by the co-defendants against Dow Corning, even if only intended and not yet asserted, was sufficient to invoke “related to” bankruptcy jurisdiction. [FOOTNOTE 35] Notwithstanding, the 5th Circuit held it lacked federal jurisdiction to consider a non-debtor co-defendant’s motion to transfer. In that case, however, all claims against Federal-Mogul had been dismissed with prejudice. [FOOTNOTE 36]As a result, the 5th Circuit held that, without any claims against the Chapter 11 debtor that would affect its administration or the amount of money received by its creditors, “related to” jurisdiction was lacking. [FOOTNOTE 37] CONCLUSION As observed by the Supreme Court some years ago, this nation faces an “asbestos-litigation crisis.” [FOOTNOTE 38]The increasing number of asbestos cases and the staggering litigation costs associated with defending these actions are pushing more and more companies to seek the protection of the Bankruptcy Code. As a consequence of these mounting costs, where most of the money is spent on defense costs and legal fees, the funds simply are not getting to the true victims of asbestos. These costs can be minimized by centralizing related claims in a single forum for a consolidated resolution of related issues. Unfortunately, as discussed, the circuits have not been uniform in defining the reach of “related to” jurisdiction under � 1334(b). John H. Bae is a partner, and Jason D. White is an associate, in the financial restructuring department of Cadwalader, Wickersham & Taft ( www.cadwalader.com.) ::::FOOTNOTES:::: FN 1Mark A. Behrens, “Some Proposals for Courts Interested in Helping Sick Claimants and Solving Serious Problems in Asbestos Litigation,” 54 Baylor L. Rev. 331 notes 47, 48 and accompanying text (Spring 2002). FN 2 See Calumet National Bank v. Levine, 179 B.R. 117, 122 n.7 (N.D. Ind. 1995). Accord Pan Am Corporation v. Pan American World Airways( In re Pan Am Corp.), 16 F.3d 513, 516 (2d Cir. 1994) (“the plain language of section 157(b)(5) authorized the district court to transfer [the] cases from Florida state court” to the district court). FN 3 Celotex Corp. v. Edwards, 514 U.S. 300, 307-08 (1995) (internal footnotes omitted). FN 4 Pacor v. Higgins, 743 F.2d 984, 986 (3d Cir. 1984). FN 5 Id.at 994. FN 6 Id. FN 7 Id.at 995. FN 8 Id. FN 9 E.g., In re Dow Corning Corp., 86 F.3d 482, 491 (6th Cir. 1996). FN 10 In re Federal-Mogul Global, Inc., Ch. 11 Case No. 01-10578 at *18 (Bankr. D. Del. Feb. 15, 2002). FN 11Debtors’ Informational Brief, In re Federal-Mogul Global, Inc. et al., Chapter 11 Case No. 01-10578 at 3-8 (Bankr. D. Del. Oct. 1, 2001). FN 1228 U.S.C. � 1452(a) provides that “any party” may remove a “claim or cause of action in a civil action” to the federal district court “where such civil action is pending” if the district court has jurisdiction under 28 U.S.C. � 1334. FN 13 In re Federal-Mogul Global, Inc., __ F.3d __, 2002 WL 1763923 at *12 (3d Cir. 2002). FN 14 Id.at 9. FN 15 In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 264 (3d Cir. 1991) (citations omitted). FN 16 Adams v. Prudential Securities, Inc.( In re Foundation for New Era Philanthropy), 201 B.R. 382, 392 note 10 (Bankr. E.D. Pa. 1996) (citing In re Dow Corning Corp., 86 F.3d at 491). FN 17 Celotex Corp. v. Edwards, 514 U.S. 300 (1995). FN 18 Id.at 302. FN 19 Id. FN 20 See11 U.S.C. � 362(a), which provides that the filing of a bankruptcy petition “operates as a stay” against the commencement or continuation of actions against the debtor to enforce a claim or judgment, as well as “any act to obtain possession of property” of the debtor. FN 21 Id.at 307. FN 22 Id.at 308. FN 23 Id. FN 24 A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 996 (4th Cir. 1986). FN 25 See In re A.H. Robins Co., Chapter 11 Case No. 85-01307-R (E.D. Va. Nov. 9, 1985). FN 26 A.H. Robins Co., 788 F.2d at 1009. FN 27 Id.(italics added) FN 28 Id.at 1010 (italics added). The 4th Circuit remanded, however, because the debtors had failed to give proper notice of the transfer motion to all claimants subject to the motion. Id.at 1015-16. FN 29 Lindsey v. O’Brien, Tanski, Tanzer & Young Healthcare Providers( In re Dow Corning Corp.), 86 F.3d 482 (6th Cir. 1996); cert. denied, 522 U.S. 977 (1997). FN 3086 F.3d at 482. FN 31 Id.(citing In re Salem, 783 F.2d at 635). FN 32 Lindsey v. Dow Corning Corp.( In re Dow Corning Corp.),111 F.3d 565, 568 (6th Cir. 1997) (italics added). FN 33 Arnold v. Garlock, 278 F.3d 426 (5th Cir. 2001). FN 34 Id.at 434 (citations omitted). FN 35 Id.at 435 (italics added). FN 36 Id.at 440 (“such dismissal was with prejudice and, under Texas law, [this] eliminated Garlock’s contribution claim against the debtor”). FN 37 Id.at 435 (“Garlock’s contribution claim is invalid and therefore no ‘related to’ jurisdiction could exist in this case”). FN 38 Amchem v. Windsor, 521 U.S. 591, 597 (1997).

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.