Treading Murky Waters: The Third Circuit's Search for When a Claim Arises in In re Grossman's, Inc.

IntroductionIn bankruptcy, there is a tension between the rights of a debtor to a "fresh start" and a creditor to due process.1 This tension is most common in cases where the creditor is a tort claimant who has been exposed to a debtor's tortious product or conduct prior to the debtor's filing of a bankruptcy petition, but has yet to manifest any injury.2 For these future claimants as well as the debtor, much hinges upon when a "claim" arises under the Bankruptcy Code ("Code") because if the claim arises pre-petition, it can be discharged by the Chapter Eleven debtor's Plan of Reorganization.3 This issue is at the heart of In re Grossman's, Inc., where, in 2010, the U.S. Court of Appeals for the Third Circuit overruled its 1984 decision in In re M. Frenville Co to hold that a claim arises when an individual has pre-petition exposure to a product or other conduct giving rise to an injury, which underlies a right to payment under the Code.4Courts have struggled to interpret the Code's definition of "claim" in the context of future tort claimants seeking relief from a Chapter Eleven debtor.5 The Code defines a claim as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured."6 The breadth of this definition implies that Congress intended that a debtor would be able to address all legal obligations during the bankruptcy proceeding.7Interpreting the definition of a claim under the Code, the Third Circuit in Frenville and Grossman's took opposing views of when a claim arises.8 In Frenville, the Third Circuit narrowly interpreted the definition of a claim despite its expansive treatment in the Code.9 It focused on the "right to payment" language in the definition and concluded that a right to payment does not exist until there is a cause of action under applicable state law.10 In Grossman's, however, the Third Circuit rejected the narrow Frenville approach and took a broader stance on when a claim arises under the Code.11 It held that an individual's prepetition exposure to a debtor's product or conduct constitutes a claim, even if the resulting injury manifests after the reorganization.12 To reach this conclusion, the court examined two tests circuit courts have used to determine when future tort claims constitute "claims" under the Code: the Conduct Test, which requires a debtor's pre-petition tortious conduct, and Pre-Petition Relationship Test, which requires both a debtor's pre-petition tortious conduct and some pre-petition relationship between the debtor and the claimant.13 The Grossman's court ultimately applied a test most resembling the latter.14This Comment argues that Grossman's analysis of the Conduct and Pre-Petition Relationship Tests and its ultimate application of the latter not only demonstrate how similar the two tests are, but also add to the confusion over when future tort claims constitute "claims" under the Code.15 Part I introduces Frenville and its state law accrual test.16 Part II focuses on Grossman's, highlighting the case's facts and procedure and discussing the demise of Frenville.17 It then describes the court's analysis of the Conduct Test and Pre-Petition Relationship Test, and its application of a test similar to the latter.18 Part III analyzes the similarity between these two tests, recognizes issues that Grossman's fails to resolve, and explains how the decision ultimately brings more confusion to this area of law.19I. The Frenville Accrual TestIn 1984, in In re M. Frenville Co., a Chapter Seven debtor's former accounting firm, "A&B," sought relief from an automatic stay to implead the debtor-company, "Frenville," as a third-party defendant to obtain indemnification under New York Law.20 A&B, an independent auditor and accountant for Frenville, sought this relief because several banks had filed suit against it for negligently and recklessly preparing Frenville's financial statements. …