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Anna Nicole Smith and Mass Torts in Bankruptcy

By Troy McKenzie

Stern v. Marshall presents another issue that deserves attention. In addition to the constitutional arguments, the respondent (the creditor) raised a statutory objection to the bankruptcy court's ability to hear and decide the debtor's counterclaim as a core proceeding. The judicial code (28 U.S.C. § 157(b)(2) and (b)(5)) limits the power of bankruptcy courts to adjudicate "personal injury tort and wrongful death claims" as core proceedings--provisions that come into play in mass tort bankruptcy cases.

I'd like to focus on why we have such a genuinely odd qualification of the jurisdiction of the bankruptcy courts.

The creditor's statutory argument before the Supreme Court is a pretty straightforward syllogism: A compulsory counterclaim to a noncore claim is also noncore. The creditor's claim was a noncore personal injury tort claim. Therefore, the adjudication of the debtor's counterclaim was not a core proceeding.

Put aside the questions (1) whether this statutory argument was raised in a timely fashion in the Supreme Court or the courts below, (2) whether the creditor's claim (a defamation claim) qualifies as a "personal injury tort" claim, and (3) whether the limitations on a bankruptcy court's powers with respect to such claims is really as severe as the creditor contends (courts have differed in how restrictively they interpret these provisions). What's the purpose of the restrictions on personal injury tort claims?

I've always assumed that these provisions were the result of pure interest-group politics. The language in § 157(b) was enacted in 1984, not long after Johns-Manville filed for bankruptcy to resolve a wave of personal injury asbestos claims. Advocates for personal injury plaintiffs--and the plaintiff's bar more generally--must have been the ones seeking to curb the jurisdiction of the bankruptcy courts, right?

Well, it turns out that the legislative history includes statements from Republican Senators Bob Dole and Strom Thurmond, who were in the majority at the time, in support of the limitation on bankruptcy courts' jurisdiction over personal injury tort claims. Orrin Hatch also supported the bill but wanted an even broader abstention provision that would have limited bankruptcy courts' jurisdiction more severely (he wanted bankruptcy judges to abstain from deciding virtually all state law claims without the parties' consent). Although the House was under Democratic control at the time, the language now included in § 157(b) apparently did not originate there. (The actual language in § 157(b) appears to have come from an amendment first proposed by Senator Dennis DeConcini, an Arizona Democrat.) All of this was wrapped up in the larger post-Northern Pipeline bankruptcy judges' bill, so the supporting statements by Dole, Thurmond, and Hatch could just reflect a grand compromise meant to get urgently needed legislation through Congress.

But maybe I've been wrong to think solely in terms of public choice theory and interest-group politics. Is there a sound reason, on the merits, for the limitation on core jurisdiction in § 157(b)? I've never understood why--especially in mass tort bankruptcy cases--a bankruptcy court's jurisdiction should be qualified that way. Are personal injury claims different in some meaningful way such that their adjudication should be excluded from the bankruptcy court's core jurisdiction? Perhaps the nonconsensual nature of personal injury tort claims justifies greater caution in their treatment in bankruptcy, but of course there are other tort creditors who are not consensual creditors. Their claims aren't touched by § 157(b). And, I would think that personal injury tort claimants would much prefer some form of priority instead of the jurisdictional provisions of § 157(b).  

Full post as published by Credit Slips on January 26, 2011 (boomark / email).