Restructuring

Contributed by Danielle Donovan
In the seemingly never-ending post-Stern quest to elucidate what constitutes a “core” versus “non-core” matter – and exactly what impact that distinction has on the bankruptcy court’s authority to enter a final judgment – the Bankruptcy Court for the Southern District of New York recently set out to answer the question of whether a claim for intentional infliction of emotional distress properly is considered a “personal injury tort claim” for purposes of 28 U.S.C. § 157(b)(5).  As explained by Judge Glenn in In re Residential Capital, LLC, if the answer is “yes,” absent consent of the parties, only a district court may try and enter a final judgment on the claim. 
What Got the Claimants so Riled Up
In 2010, the claimants in ResCap commenced an action against the debtors alleging that the debtors had wrongfully foreclosed on the claimants’ home after agreeing to approve a permanent loan modification.  The complaint asserted various causes of action, including fraud, negligent misrepresentation, breach of contract, promissory estoppel, and intentional infliction of emotional distress.
The emotional distress claim was rooted in the allegedly wrongful foreclosure.  Claimants alleged that the Rescap defendants had engaged in conduct “that they knew, or should have known . . . would cause the [claimants] to suffer and which did, in fact, cause [the claimants] to suffer severe . . . mental and emotional pain, grief, sorrow, anger, worry, and anxiety.”  The claimants also submitted to the bankruptcy court affidavits describing the physical manifestations of their emotional distress.
Too Touchy-Feely for the Bankruptcy Court?
Not surprisingly, the parties in ResCap did not see eye-to-eye on whether the claimants’ emotional distress claim constituted a personal injury tort claim under section 157(b)(5).
Although determination of a claim against a debtor typically falls squarely within the bankruptcy court’s “core” jurisdiction, section 157(b)(5) excludes from such jurisdiction the liquidation and estimation of personal injury tort and wrongful death claims.  Section 157(b)(5) requires “personal injury tort and wrongful death claims [to] 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.”  Moreover, 28 U.S.C. § 1411(a) preserves any applicable jury trial right of an individual asserting a personal injury or wrongful death claim.
In Stern, the Supreme Court held that section 157(b)(5) is not jurisdictional.  That is, the parties may consent to the resolution of a personal injury tort claim in the bankruptcy court.  Obviously, that’s not what went down here.
The first places to look to solve this dispute naturally would have been the Bankruptcy Code and Second Circuit precedent.  But, the Bankruptcy Code does not define “personal injury tort,” and the Second Circuit has not addressed the issue.  Lower courts in the Second Circuit and elsewhere, however, have adopted three different approaches to determine whether a particular claim constitutes a personal injury tort claim within the meaning of section 157(b)(5):

1. “Straight and Narrow”

Courts that have adopted the “narrow view” have defined a personal injury tort claim as “a tort claim with trauma or bodily injury.”  Under this approach, courts consider whether the claim is a personal injury tort “in the traditional, plain meaning sense of those words” (e.g., a classic “slip-and-fall”).  A psychiatric impairment that transcends mere shame and humiliation also could pass as a personal injury tort claim.

2. “Hey – I’m Flexible”

Other courts have adopted the “broader view,” which, in Boyer v. Balanoff, the Bankruptcy Court for the Northern District of New York described as viewing the term “personal injury tort” as embracing “a broad category of private or civil wrongs or injuries for which a court provides a remedy in the form of an action for damages, and includes damage to an individual’s person and any invasion of personal rights, such as libel, slander, and mental suffering.”  Pretty flexible, indeed.

3. “Let’s Meet in the Middle”

The remaining courts have adopted a “hybrid view,” which requires a more in-depth analysis of the underlying claim.  Where a claim falls within the definition of “personal injury tort claim” under either the narrow or broader view, but is rooted in another claim sounding in contract, property tort, etc., the court will reserve the right to adjudicate such claim.  The hybrid approach essentially focuses on the “gravamen” of the claim.  If emotional distress is not the context and central focus of the claim, and merely is tangential to and asserted in connection with another claim unrelated to physical injury or emotional distress, a court taking the hybrid approach will hear and enter a judgment on the emotional distress claim.  As the court in ResCap aptly articulated, “if an IIED claim is the tail wagging the dog, section 157(b)(5) should not require dislodging the claim from bankruptcy court resolution of a portion of a claim asserted against a debtor.”
Getting Down to the Heart of the Matter
In ResCap, the bankruptcy court held that it is most appropriate to take the hybrid approach in determining whether an emotional distress claim constitutes a personal injury tort claim under section 157(b)(5).  Though the court acknowledged that such factors are not controlling, in reaching its decision, the court considered concerns of judicial economy, efficient and consistent administration of the claims allowance process, and too easily permitting claimants to evade bankruptcy court adjudication merely by tacking on an emotional distress claim to other claims.   The court noted that it would have reached the same result whether it had taken the narrow or hybrid view – the claimants’ emotional distress claim was not a personal injury tort claim.  The physical effects of the emotional distress did not rise to the level of bodily trauma; nor did they fall within the “plain-meaning sense” of a personal injury tort.  Moreover, the “gravamen” of the claimants’ emotional distress claim was the allegedly wrongful foreclosure.
We have to admit, ResCap toyed with our emotions a bit.  At first, it looked like the bankruptcy court was going to give us a definition of “personal injury tort claim.”  The silver lining is that if a court is following the hybrid approach, the definition may not matter as much.  What the ResCap court did do was instruct us that courts ought to try to get down to the heart of the matter because it’s about the gravamen of the claim.
In some cases, the bankruptcy court may be the best place to go to settle your emotions. . .
Danielle Donovan is an Associate at Weil, Gotshal & Manges LLP in New York.