Like most companies that file for chapter 11 protection, many debtors in the health care industry may have outstanding liabilities that have not been finally adjudicated as of the petition date. This can include tort claims based on allegations of medical malpractice, elder abuse, patient dumping, violations of a patient’s bill of right or various other allegations of improper care. Bankruptcy courts can estimate the value of these claims to facilitate the speedy confirmation of a debtor’s plan without subjecting the debtor to a lengthy trial during its restructuring.

Claim Estimation in Bankruptcy

When the validity or amount of a creditor’s claim has not yet been determined as of the commencement of the debtor’s bankruptcy case, the claim is considered to be contingent or unliquidated. One of the primary goals of a chapter 11 restructuring is a quick and efficient restructuring of a debtor’s business. Tort claims that may take years to litigate in conventional fora can present an obstacle to a quick and efficient restructuring.

In recognition of this potential for delay, section 502(c) of the Bankruptcy Code requires a bankruptcy court to estimate the amount of any contingent or unliquidated claims if the liquidation of the claims would “unduly delay” the case’s administration. The bankruptcy court has broad discretion in how it estimates claims, provided that the estimation serves the underlying purposes of the Bankruptcy Code and permits the case to go forward in an expedient manner. This provides a debtor with a powerful mechanism to estimate the value of tort claims for the purposes of voting on a chapter 11 plan and aiding the court’s analysis of whether a debtor can satisfy the feasibility requirements of section 1129 of the Bankruptcy Code.

A Recent Case Involving a Health Care Provider

In In re North American Health Care, Inc., 544 B.R. 684 (Bankr. C.D. Cal. 2016), the bankruptcy court considered a debtor’s motion for an order approving a tort claim resolution proposal that asked the court to estimate tort claims individually for purposes of voting and distributions under a confirmed plan. Six tort claimants had filed proofs of claim in unliquidated amounts based on allegations of elder abuse, wrongful death, infliction of mental distress and other causes of action. Five of the underlying actions related to the claims were pending in California state court, and the final action was pending in the U.S. District Court for the Central District of California.

Recognizing that it would take several years to adjudicate the tort claims, the court ordered the debtors to propose a framework for resolving the claims or, if no resolution could be reached, quantifying the amount of the claims. The debtors’ proposed procedures involved two steps. First, the debtors and each tort claimant would attempt to reach a settlement through mediation. If mediation failed, the second step would require the court to estimate the amount of each non-settling creditor’s claim pursuant to section 502(c) for purposes of voting on the plan and determining distributions under the plan.

With respect to the estimation of unresolved claims, however, the court acknowledged that its powers are somewhat limited. Noting that the purpose of claim estimation is to assist a debtor in developing an exit strategy out of bankruptcy, the court concluded that the unresolved tort claims should be estimated on an aggregate basis for the purpose of voting on a proposed chapter 11 plan, but not necessarily for the purpose of determining the distribution to each creditor. In recognition of the fact that not all tort claimants would prefer the uncertainty, time and expense that additional litigation would entail, the court did allow each tort claimant to elect for the bankruptcy court to determine the amount of their claims for all purposes, including distribution.

As a practical matter, the court also noted that estimation is by its very nature a second-best method of arriving at the amount of an unliquidated wrongful death/personal injury claim, and Congress has subordinated the goal of accuracy to the overarching goal of avoiding undue delay in the case’s administration. In fact, the Bankruptcy Code does not define or even provide any guidance as to the method of claim estimation that a bankruptcy court should use under section 502(c).

Conclusion and Takeaways

The framework provided by section 502(c) enables a debtor that faces significant tort liabilities to confirm a plan and restructure its affairs in an expedient and orderly manner. Without the protection of the Bankruptcy Code’s automatic stay, many health care providers are inundated by lawsuits that are both expensive and time-consuming as the company battles with claimants in state and federal courts.

Bankruptcy protection and the claim estimation process may not preclude lengthy litigation altogether, but they will allow a debtor to regain a sense of control as it focuses on its restructuring efforts instead of the defense of multiple litigation proceedings. Finally, if the debtor is experiencing liquidity issues but expects to have a positive cash flow post-confirmation, the terms of a confirmed plan may permit the debtor to pay allowed tort claims over time as opposed to in lump sums that are immediately due and payable.