Chapter 11 filings are often precipitated by the entry of a judgment against the debtor which is appealed. The parties must then argue about whether a chapter 11 plan is feasible and otherwise confirmable in the light of uncertainty over the amount of what might be the debtor's biggest liability.
Bankruptcy Code section 502(c) provides a solution to this dilemma by stating that the bankruptcy court "shall" estimate a contingent or unliquidated claim, "the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case." This power was restricted early on by an amendment to 28 U.S.C. section 157, which expressly withholds jurisdiction to estimate an unliquidated personal injury claim. This jurisdictional limitation is a major factor which shapes mass tort chapter 11 cases, such as the Archdiocese case now pending in my hometown of San Diego.
Athough lawyers in a sense have a professional duty to estimate claims as they advise clients to litigate and settle them, bankruptcy judges seem reluctant to estimate claims, at least expressly under section 502(c). Its sort of like getting a doctor to guess out loud. In fact, up until very recently, the BAP's decision in In re Audre, Inc., 216 B.R. 19 (Bankr. App. 9th Cir.1997), barred bankruptcy judges from estimating claims represented by state court judgments that were on appeal. The rationale was that: (i) these claims really aren't contingent or unliquidated; and (ii) estimating them was to allow a collateral attack contrary to the Rooker-Feldman doctrine.
In an earlier post, I reported on In re Lopez, 2007 WL 1128811 (March 27, 2007), in which the 9th Circuit BAP abrogated Audre, on the basis of recent Supreme Court decisions which reminded us that Rooker - Feldman was a doctrine of narrow applicability.
The Ninth Circuit has taken another lick at the dead horse of Rooker-Feldman. In re Harbin, 2007 WL 1203545, (April 25, 2007) was a case in which a state court jury had entered a big verdict against the debtor, the trial judge had granted JNOV, and the defense judgment was on appeal. The Bankruptcy Court had confirmed a plan which provided for 100% payment to creditors except for the claim on appeal. The confirmation order apparently provided that if the appeal were successful the claim could be reopened as in In re Cobe, 229 B.R. 15, 18 (Bankr. App.9th Cir. 1998). A basis for this decision was the bankruptcy court's conclusion that Rooker-Feldman "precluded the court from taking into consideration the possibility" that the appeal would be successful.
In a split decision, the Ninth Circuit upheld a District Court judgment reversing the confirmation order, holding that a bankruptcy court "must evaluate the possible effect of a debtor's ongoing civil case with a potential creditor" in determining the feasibility of a chapter 11 plan.
Oh, incidentally, it looks like the JNOV was reinstated by the California Court of Appeal a long time ago in an unpublished decision, a fact not mentioned in the Ninth Circuit's opinion. See, Sherman v. Harbin, 2004 WL 1843288 (2004). Guess that's why the Ninth Circuit appeal wasn't moot.
The problem with Harbin, at least in cases not involving personal injury claims: Section 506(c) says that a claim shall be estimated. It doesn't authorize a bankruptcy court to decline to estimate a claim and then to consider the uncertain status of the claim in determining feasibility.
