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Westfall v. MII Liquidation Inc.

September 11, 2007

WILLARD WESTFALL, INDIVIDUALLY AND ON BEHALF OF THE PURPORTED CLASS, APPELLANT,
v.
MII LIQUIDATION INC., APPELLEE.



The opinion of the court was delivered by: Hon. Roger T. Benitez United States District Judge

ORDER

Appellant Willard Westfall ("Appellant or Westfall"), on behalf of himself and the purported class, appeals an order of the United States Bankruptcy Court for the Southern District of California, the Honorable John J. Hargrove presiding. The order stems from Chapter 11 bankruptcy proceedings for MII Liquidation, Inc. ("MII"), and AHP Liquidation, LLC, ("AHP") (collectively, "Appellee" or "Debtors in Possession"). See Bankruptcy Case Nos. 05-6040 and 05-6041.*fn1 The order issued by Judge Hargrove sustained objections made by the Debtors in Possession regarding three Proofs of Claim (Claim Nos. 71, 73, and 85) that were filed by Westfall on behalf of himself and the purported class.

Since Appellant conceded Claim Nos. 71 and 73 as duplicative of Claim No. 85, the Bankruptcy Court properly disallowed both claims in their entirety. The Bankruptcy Court also denied the class portion of Claim No. 85 on substantive grounds, and limited Claim No. 85 solely to Westfall in his individual capacity.*fn2

Appellant urges this Court to reverse Judge Hargrove's decision denying the class portion of Claim No. 85 asserting that the Bankruptcy Court abused its discretion. That order is a final order, which confers jurisdiction upon this Court over this appeal pursuant to 28 U.S.C. § 158(a)(1). See also In Re Prestige Limited Partnership-Concord, 234 F.3d 1108, 1112-14 (9th Cir. 2000) (an order of the Bankruptcy Court disposing of an objection to a claim is a final order). Having read and considered the briefs and the record of proceedings below, and for the reasons that follow, the Court AFFIRMS the order of the Bankruptcy Court.

I. BACKGROUND

Prior to December 2003, the Debtors in Possession ran a business selling ephedra-based dietary supplements. They stopped selling these products in December 2003 and continued to market and sell only non-ephedra products. The non-ephedra business, however, was burdened by the substantial expenses resulting from the enormous volume of litigation initiated by consumers of their former ephedra-based dietary supplements.

Before the bankruptcy cases were filed, a majority of the ephedra-based lawsuits in federal court had been consolidated in a multi-district litigation ("MDL") court proceeding pending before the Honorable Jed Rakoff in the Southern District of New York. Since the bankruptcy cases were filed, almost all of the ephedra cases that were not already in the MDL were subsequently transferred to the MDL court for pretrial administration by the Judicial Panel on Multidistrict Litigation.

On March 16, 2004, Westfall and three other representative plaintiffs, Debra Kline, Dennis Kline, and Idella Westfall (collectively, "Westfall Plaintiffs") commenced a federal class action lawsuit against MII and other defendants ("Westfall Action"). The Westfall Action asserted personal injury claims relating to the consumption of ephedra-containing products. The Westfall Action was transferred from the Eastern District of Pennsylvania to the MDL proceeding on June 16, 2004.

MII negotiated a class action settlement with the Westfall Plaintiffs who moved for approval of the class action settlement and class certification in the MDL proceeding. After learning that the Debtors in Possession intended to file bankruptcy, Westfall sought permission to withdraw the class certification motion. However, this request was denied by Judge Rakoff. Judge Rakoff also ultimately denied class certification and preliminary approval of the class action settlement. An order, incorporating the statements of Judge Rakoff in open court, was entered on June 2, 2005. The order stated that an opinion setting forth the court's reasoning "will issue in due course." Judge Rakoff issued that opinion on September 11, 2005.

The Debtors in Possession formally filed their bankruptcy petitions on June 30, 2005, under Chapter 11 of the Bankruptcy Code.*fn3 The United States Trustee appointed the Official Committee of Unsecured Creditors ("OCC") on July 5, 2005. At the request of certain retailers who sold MII products, the Bankruptcy Court also directed the United States Trustee to appoint an Official Committee of Indemnity/Retailer Creditors ("OIC") in the MII case. On July 22, 2005, Westfall's counsel filed a Notice of Appearance and Request for Service of Papers for the bankruptcy case.

In September 2005, Westfall, without any of the other Westfall Plaintiffs, filed three Proofs of Claim on behalf of himself and the purported class.*fn4 Claim Nos. 71 and 73 listed the amount of the claim as "unliquidated." Claim No. 85 listed the amount of the claim as $125 million.

On November 3, 2005, the Bankruptcy Court approved a sale of certain non-ephedra related assets of the Debtors in Possession for a purchase price of approximately $12 million. The sale created a limited fund with which to satisfy all administrative expenses, trade claims, and uninsured and underinsured ephedra related claims. On November 10, 2005, the Appellee's filed an Ex Parte Application for Order: A) Setting a Claims Bar Date; B) Establishing Certain Additional Requirements for Ephedra Claims; C) Approving Form of Notice; and D) Granting Additional Relief ("Bar Date Application"). The Bar Date Application was drafted with the input of the OCC, certain retailers and a manufacturer of MII products, insurers for the Debtors in Possession, representatives of certain ephedra plaintiffs groups, and the MII shareholders. The OCC filed a joinder to the Bar Date Application on November 15, 2005.

On November 16, 2005, the Bankruptcy Court entered an order granting the Bar Date Application and approving the form of notice which was attached to the order (collectively, "Bar Date Order").*fn5 In addition, the Bar Date Notice set out the specific additional filing and reporting requirements for claimants asserting a claim against either of the Debtors in Possession based on personal-injury or wrongful-death claims, and any other claims that relate to the purchase or consumption of ephedra-based products as provided in the Bar Date Order. Failure to adhere to these specified requirements could result in the barring of potential claims.

On December 2, 2005, the Debtors in Possession served the Bar Date Notice on approximately 1,000 parties appearing on the Bankruptcy Court matrix, including counsel for Westfall.*fn6 In addition, the Bar Date Notice was published in the national newspaper USA Today on two ...


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