Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

In this proceeding, the United States Bankruptcy Court for the District of Delaware held that it possessed subject matter jurisdiction to determine the amount of workers’ compensation benefits owed by American Airlines to a former employee of debtor Trans World Airlines. The matter was a core proceeding because it related to a claim filed against the debtor’s estate, even though the debtor was not liable for the claim. However, because the obligation was one assumed by American Airlines under the terms of the Bankruptcy Court’s order approving the sale of TWA’s assets to American, the Bankruptcy Court was required to interpret its own sale order, and thus this was a core proceeding.

In 1986, Salvatore DiGioia, a former employee of debtor Trans World Airlines, Inc, suffered an on-the-job injury, which was classified as creating a permanent total disability by the New York Workers’ Compensation Board. TWA was obligated to pay DiGioia workers’ compensation benefits under its 1983 collective bargaining agreement with DiGioia’s union, and did so until 2001. On January 10, 2001 TWA filed its bankruptcy petition in the United States Bankruptcy Court for the District of Delaware. On March 12, 2001, the Court approved an Asset Purchase Agreement, under which TWA sold substantially all its assets to American Airlines, Inc. That agreement included a conveyance of the obligation to pay DiGioia’s workers’ compensation benefits. However, when TWA’s obligation to pay ended, American did not fulfill its obligation under the APA to make the payments to DiGioia.

In May, 2001, DiGioia filed a proof of claim against TWA for unpaid benefits. In March, 2007, the Court sustained an objection to the proof of claim because the obligation did not belong to the TWA Inc. Post Confirmation Estate. Shortly thereafter, DiGioia filed a motion to compel American to pay the accrued but unpaid workers’ compensation benefits, as well as all future obligations, with cost of living adjustments. American objected to the motion, not on the basis that it had no obligation to pay, but based on its argument that the Court lacked subject matter jurisdiction to determine the amount of compensation owed and the method used to calculate future payments.

The basis of American’s objection was that the Court should not decide whether DiGioia was entitled to cost of living adjustments because this was not a core proceeding under 28 U.S.C. § 157(b), and because the Court lacked “related to” jurisdiction under 28 U.S.C. § 157(c)(1). In support of this position, American argued that the issue is dependent on interpretation of New York state law, did not involve a substantive right under the Bankruptcy Code, and was not a proceeding that could arise only in the context of a bankruptcy case. American further argued that the Court lacked “related to” jurisdiction because the outcome would have no effect on TWA or its estate and did not have a close nexus to the debtor’s bankruptcy plan.

The Court determined that this was a core proceeding under 28 U.S.C. § 157(b)(2)(B), regarding allowance or disallowance of claims against the estate. Although DiGioia’s request for relief was against American and not TWA, the request arose out of his claim against the estate of TWA. The Court also found that it was a core proceeding under 28 U.S.C. § 157(b)(2)(N) because it related to an order approving the sale of property. This dispute required the Court to interpret its own sale order, and the rights and obligations of the parties thereunder. Under Third Circuit precedent, a proceeding is core when it requires the Court to interpret its own sale order.

American also argued that the Court lacked jurisdiction to calculate the amount of future workers’ compensation benefits owed to DiGioia. However, the Court pointed out that American conceded that the Third Circuit’s holding in American Airlines, Inc. v. Robinson (In re Trans World Airlines, Inc.), 180 Fed. Appx. 330 (3d Cir. 2006) was res judicata with respect to American’s liability to DiGioia. In the Robinson case, which presented almost identical facts to those presented in this proceeding, the Bankruptcy Court determined the disputed amount of the liability assumed by American, the allowance of interest, and an undisputed cost of living adjustment. The Third Circuit affirmed the Bankruptcy Court’s findings and exercise of jurisdiction. In the Robinson case, American did not dispute the Court’s jurisdiction to rule on issues other than the existence of liability. The Court found that American’s position in this proceeding was inconsistent with its position in the Robinson matter, and, moreover, seemed to ignore the Third Circuit’s holding in Robinson. Therefore, the Court held that it had subject matter jurisdiction to determine the amount of American’s monthly obligation to DiGioia.