Restructuring

Claims estimation can be an important tool for a chapter 11 debtor, particularly to pave the way for proposing a chapter 11 plan.  How a bankruptcy court estimates wrongful death and personal injury tort claims (which have a jury trial right) is an interesting issue that was recently discussed by the Bankruptcy Court for the Central District of California in In re North American Health Care, Inc.
The chapter 11 debtors were a nursing facility and its sister services corporation that were facing a number of tort claim lawsuits sounding in elder abuse, wrongful death, personal injury, and other related causes of action.  Each of the tort claimants filed a proof of claim against the debtors in an unliquidated amount.  While certain of the plaintiffs alleged millions of dollars of damages, others had not put the debtors on notice of the amount of damages they sought.
Given the unliquidated nature of the tort claims and their unknown magnitude, the court was concerned whether the Debtors could propose or confirm a plan within any reasonable amount of time.  Therefore, the court ordered the debtors to propose a framework for resolving, or if not resolved, quantifying the amount of, the tort claims.
The debtors proposed a tort claims resolution proposal (“TCRP”) that had two parts:  first, a mediation process, whereby the parties could agree on a settlement amount; and, second, if the claim was not resolved through mediation, estimation of the claim for purposes of plan voting and confirmation, and distribution.  Although the court approved the mediation process, it denied the TCRP related to estimation of claims for distribution purposes and instead modified the procedure to permit estimation in the aggregate for purposes of voting and plan confirmation only.
At the outset, the court noted that section 502(c) of the Bankruptcy Code requires estimation of contingent or unliquidated claims of creditors if liquidating the claims outside of bankruptcy would “unduly delay” the case’s administration.  It was not disputed that liquidation of the tort claims, which would take several years to liquidate through trial if relief from the stay were granted, would unduly delay administration of the bankruptcy case.
Having determined that estimation was mandatory, the court had to decide how to estimate the tort claims.  A bankruptcy court has broad discretion in determining how to estimate a claim.  Neither the Bankruptcy Code nor the Bankruptcy Rules establish the means by which to estimate claims, and therefore bankruptcy courts use whatever method is best suited to the particular contingencies at issue.  In this case, the court concluded that “the scope of unliquidated claim estimation . . . should be confined to the extent necessary to accomplish the overarching goal of avoiding undue delay in the case’s administration.”
To narrowly tailor the relief to meet the “all-important plan feasibility requirement,” the court determined that it could estimate the unliquidated tort claims in the aggregate, and that estimation of the individual claim component of the aggregate amount was not necessary for plan confirmation purposes.  In addition, the court determined that estimation of the claims on an individual basis for purposes of distribution under a chapter 11 plan would slow the reorganization process because the court’s jurisdiction would be limited to issuing proposed findings of fact and conclusions of law to the district court, which would then be subject to that court’s review.  However, estimation of the tort claims in the aggregate for voting on and confirming a chapter 11 plan was a core matter, and would move the case forward.
Finally, the court sought to avoid an outcome where the tort claimants were effectively deprived of their Seventh Amendment jury trial right.  The Court noted that although it could estimate the claims for voting and plan confirmation purposes without a jury trial, it would not cap distributions to the tort claimants, and any order confirming the plan would contain a provision for any tort claims not resolved through mediation to be liquidated or settled in state or federal court lawsuits.  However, the court would permit non-settling tort claimants that did not want to wait for distributions to elect for the court to determine the amount of their claim for all purposes, including distribution.
This case is a reminder of the wide latitude and discretion that courts have in fashioning estimation procedures, and that full litigation of a claim after estimation may be appropriate to protect a claimant’s rights.  However, debtors and creditors should also keep in mind that estimation of uncertain claims may have benefits, such as permitting a quicker payout to creditors and promoting fairness among creditors in distributions.