Restructuring

Contributed by Katherine Doorley
As Ursula the Sea Witch once said, “Life’s full of tough choices, isn’t it?”  The Sixth Circuit was recently faced with its own “tough choice” on choice of law in Sutherland v. DCC Litigation Facility, Inc., No. 13-1497 (6th Cir. Feb. 20, 2015).  In Sutherland, the Sixth Circuit was asked to determine which state’s statute of limitations rules should apply to a lawsuit filed in North Carolina by a Virginia resident, which was subsequently transferred to Michigan.  The Sixth Circuit analyzed the venue transfer rules and ultimately determined that the statute of limitations rules of the state where the lawsuit was originally filed should be applied. 
Background
In 1988 Pamela Sutherland, a Virginia resident, received breast implants in North Carolina.  In 1993, Sutherland filed a lawsuit in the United States District Court for the Middle District of North Carolina asserting that the silicone in her implants was causing a wide range of health issues.  Sutherland’s lawsuit was transferred by a multidistrict litigation panel to the Northern District of Alabama, where a class settlement was entered in 1994.  Sutherland opted out of the settlement.  In 1995, Dow Corning filed for bankruptcy in the United States Bankruptcy Court for the Eastern District of Michigan, and Sutherland’s lawsuit was transferred there.
As part of its reorganization, Dow Corning created and funded the DCC Litigation Facility (the DCC) to deal with opt-out claims such as Sutherland’s.  In May 2012, the DCC filed several motions for summary judgment on Sutherland’s claims, in which the DCC argued that Sutherland’s claim was time-barred by the relevant statute of limitations.
The district court granted summary judgment to DCC on statute of limitations grounds, applying Michigan’s statute of limitations rules after concluding the exact question of which choice-of-law principles were at issue, despite the fact that North Carolina, Virginia or Michigan law could potentially have applied, and the end result, whether Sutherland’s claim was barred differed depending on which state’s statute of limitations was applied.  The district court reasoned that the laws in “both” jurisdictions were consistent with “other possible sources” of law, mooting any potential conflict.  On appeal, the Sixth Circuit reversed and remanded.
Choice of Law
The Sixth Circuit first noted that Sutherland’s claims were transferred to the Eastern District of Michigan pursuant to section 157(b)(5) of the United States Code, which provides that the “district court shall order that personal injury tort and wrongful death claims [  ] be tried in the district court 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 case is pending.”
The question of whether a change of venue under 28 U.S.C. § 157(b)(5) changes which state’s law governs, or whether change of venue under that provision has no impact on choice of law was a question of first impression for the Sixth Circuit.
The Sixth Circuit stated that there was “no question” that if Sutherland’s suit was a diversity case transferred as part of a multidistrict litigation, the district court would have been bound to apply North Carolina’s choice of law rules and the change of venue would have had no impact on which state’s choice-of-law rules were applied.  Citing two U.S. Supreme Court decisions (Van Dusen v. Barrack and Ferens v. John Deere Company), the Sixth Circuit noted that at least three reasons supported finding that change of venue does not change the applicable law.  Specifically, a change of venue (i) “should not deprive parties of state-law advantages that exist absent diversity jurisdiction,” (ii) “should not create or multiply opportunities for forum shopping” and (iii) a decision to transfer venue “should turn on considerations of convenience and the interest of justice rather than on the possible prejudice resulting from a change of law.”
Because section 157(b)(5) is a venue-transferring provision, the Sixth Circuit asserted that it should not be used to deprive Sutherland of her choice of forum and any accompanying “state law advantage” that would exist absent a transfer.  Additionally, because the debtor has the ability to choose where it files for bankruptcy, applying the law of the state where the bankruptcy court is located would create opportunities for forum shopping.  Allowing transfers under section 157(b)(5) to change the applicable substantive law could also lead to courts being “justifiably reluctant” to transfer cases, which could frustrate the provision’s goal of centralizing mass tort and personal injury litigation related to bankruptcy cases.
The Sixth Circuit also cited the Second Circuit’s decision in In re Coudert Brothers LLP.  There, the Second Circuit determined which choice of law rule to apply to a preexisting tort claim later considered as an adversary proceeding in bankruptcy.  The Second Circuit noted that it “would be fundamentally unfair to allow [the] bankruptcy . . . to deprive [the plaintiff] of the state-law advantages adhering to the exercise of its venue privilege.”  In Coudert Brothers, the plaintiff had filed suit in Connecticut, and the case was transferred to New York because of the defendant’s bankruptcy.  The Second Circuit found that to apply the law of the forum state “would be to allow the defendant . . . to use a device of federal law (the bankruptcy code) to choose the forum and accompanying choice of law — a practice forbidden by [Van Dusen and Ferens].”
The Sixth Circuit applied the Coudert Brothers reasoning to venue transfers under section 157(b)(5).  Specifically, the Sixth Circuit held that because Sutherland had filed her suit in North Carolina, and the suit was only transferred to Michigan due to Dow Corning’s bankruptcy, North Carolina’s choice of law rules should still govern Sutherland’s state law claims.  The Sixth Circuit remanded the case to allow the district court to apply North Carolina law.
Conclusion
Potential debtors facing numerous personal injury or wrongful death claims should be mindful of the Sixth Circuit’s conclusions in Sutherland.  While a bankruptcy filing would allow for consolidation of such claims in a single forum; it may not necessarily result in the application of more favorable state choice-of-law or substantive law for already filed cases.  To the extent potential debtors are confident that they could consolidate any  future-filed  suits in their jurisdiction of choice, the ruling in Sutherland is unlikely to impact those suits.