Exclusion of Contingent or Unliquidated Personal Injury Tort Claims from Core Proceedings Under § 157(b)(2)(B) is not Alone a Basis for Dismissal of Chapter 7 Petition

Myah Drouin

St. John's University School of Law 

American Bankruptcy Institute Law Review Staff

In In re Nash Engineering Co., the United States District Court for the District of Connecticut vacating the Bankruptcy Court’s decision held that Nash Engineering's Chapter 7 case had a legitimate bankruptcy purpose, and that the exclusion of contingent or unliquidated personal injury tort claims from liquidation or estimation for the purposes of distribution in a Chapter 7 case under 28 U.S.C. § 157(b)(2)(B)[i] was not alone a basis for dismissal.[ii]

Nash Engineering (“Nash”), a vacuum pump manufacturer, ceased operations in 2004 after finding asbestos liability connected to its pumps.[iii] After settling with its primary insurance carrier, who agreed to provide $15 million for indemnity, Nash sought coverage for other additional insurance policies for its asbestos-related lawsuits.[iv] On October 19, 2021, Nash filed a voluntary Chapter 7 petition under title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Connecticut and listed insurance policies with potential coverage for asbestos claims among its remaining assets.[v] The Bankruptcy Court dismissed the debtor's case in accordance with section 707(a) of the Bankruptcy Code[vi], holding it lacked the power to liquidate contingent and unliquidated asbestos personal injury tort claims against the debtor-defendant, and that the debtor's case served no legitimate bankruptcy purpose allowing it to administer the case.[vii]

Section 157(b)(2)(B) of Title 28, United States Code classifies bankruptcy proceedings as either “core” or “non-core.”[viii] In non-core proceedings, a bankruptcy judge’s authority is limited to conducting a hearing and submitting factual and legal findings to the district court for final disposition subject to de novo review.[ix] Here, the Bankruptcy Court found that section 157(b)(2)(B) explicitly excluded the liquidation or estimation of contingent or unliquidated personal injury tort claims from “core proceedings.”[x] Nash’s case lacked a legitimate bankruptcy purpose, according to the Bankruptcy Court, because it “serves no purpose, results in no benefit for its creditors or the debtor, and only delays litigation already pending against the debtor.”[xi] As such, the Bankruptcy Court held that there was cause for dismissal.[xii]

            The Chapter 7 trustee and Nash's insurers, Century Indemnity Company and Pacific Employers Insurance Company, appealed to the District Court, which held that the Bankruptcy Court abused its discretion in its dismissal while depending on precedent “not binding” and “factually distinct” from Nash’s case.[xiii] The record was void of evidence that the debtor or trustee engaged in bad faith by using the bankruptcy process to manipulate outside proceedings.[xiv]The District Court found the record showed an effort by the debtor and trustee to “maximize the property available for creditors and ensure equitable distribution.”[xv] Even if Nash’s creditors, its tort victims, were to bring lawsuits, they would still benefit from the bankruptcy case.[xvi] Because, channeling claims through bankruptcy “promote[s] equitable distribution of debtor assets[,]” Nash’s case served a legitimate bankruptcy purpose.[xvii] While Nash’s potential lawsuits are intangible assets and considered estate property, the court found the estate was not fully dependent on the potential lawsuits, since Nash was awaiting “approximately $3 million due under a settlement with Century and PEIC.”[xviii]

The District Court also noted that “no case supporting the dismissal . . . in its entirety because of a 28 U.S.C. § 157(b)(2)(B) issue” had been cited by the Bankruptcy Court.[xix] While the textual interpretation of the statute and Congressional intent behind it support a finding that Nash’s claims are excluded from “core” bankruptcy proceedings, the District Court held that section 157(b)(2)(B) was not alone a basis for dismissal, as precedent shows that “resolutions are possible in these cases, even if they involve non-core proceedings.”[xx] The District Court held that rather than dismissing the case as one filed in bad faith, the Bankruptcy Court should have made explicit that the proceedings would not be used to “liquidate or estimate personal injury tort or wrongful death claims” for the purpose of distribution to claimants.[xxi]

While it remains true that any personal injury tort or wrongful death claims “must be tried in the district court where the bankruptcy case is pending or where the claim arose,” the Bankruptcy Court may, under section 157(c)(1), hear a non-core proceeding and submit its proposed findings and conclusions to the district court. In reaching this conclusion, the District Court emphasized that there is considerable case law showing that even issues “squarely limited” by section 157(b)(2)(B) have been adjudicated in bankruptcy courts elsewhere.[xxii] Thus, In re Nash Engineering Co. makes clear that in the context of asbestos-based personal injury tort claims, a bankruptcy court should not dismiss a petition for cause on section 157(c)(1) grounds alone. In so holding, the District Court established that the channeling of asbestos-related claims through the bankruptcy process is a legitimate use of Chapter 7.