Opinion ID: 4208813
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Heading: When a Claim Arises Under the Bankruptcy Code

Text: ¶15 Subject to certain statutory exceptions not pertinent here, a Chapter 7 discharge discharges a debtor from all debts that arose before the date of the order for Chapter 7 relief. See 11 U.S.C. § 727(b) (2012). The Bankruptcy Code defines the term “debt” to mean “liability on a claim.” 11 U.S.C. § 101(12) (2012). “Claim,” in turn, is broadly defined to mean “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.” 11 U.S.C. § 101(5)(A). This expansive definition is no accident. “In the case of a claim . . . , the legislative history shows that Congress intended that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in bankruptcy. The Code contemplates the broadest possible relief in the bankruptcy court.” Grady v. A.H. Robins Co., 839 F.2d 198, 202 (4th Cir. 1988); accord In re Parker, 313 F.3d 1267, 1269–70 (10th Cir. 2002). ¶16 Although the Code does not separately define “contingent claim,” courts have described a “contingent debt” as one that the debtor will be called on to pay only upon the occurrence or happening of an extrinsic event that will trigger the liability of the debtor to the alleged creditor. See, e.g., In re City of Detroit, 548 B.R. 748, 762 (Bankr. E.D. Mich. 2016). Thus, a right to payment that at the time of the bankruptcy filing is not yet enforceable under non-bankruptcy law (e.g., a claim that has not yet accrued under the rules ordinarily applicable to non-bankruptcy claims) may nonetheless constitute a claim that is dischargeable in the bankruptcy case. See In re Huffy Corp., 424 B.R. 295, 301 (Bankr. S.D. Ohio 2010); see also In re Fretter, Inc., No. 96-15177, 2000 7 WL 1780256, at  (Bankr. N.D. Ohio Sept. 29, 2000) (“A claim does not arise post-petition simply because the time for payment is triggered by an event that happens after the filing of the petition. As a result, ‘it is possible that a right to payment that is not yet enforceable at the time of filing [sic] of the petition under non-bankruptcy law, may be defined as a claim within Section 101(5)(A) of the Bankruptcy Code.’”) (quoting In re R.H. Macy & Co., 236 B.R. 583, 589 (Bankr. S.D.N.Y. 1999)); In re Edge, 60 B.R. 690, 701 (Bankr. M.D. Tenn. 1986) (“The policies that guide interpretation of the Bankruptcy Code are served by the conclusion that a claim arises at the time of the negligent act, notwithstanding that access to other courts or the running of a statute of limitation may be timed from some other point in the relationship between tortfeasor and victim.”). ¶17 In determining whether a contingent debt constitutes a pre-petition claim, finding that a claim arose “at the earliest point possible” will, in most circumstances, “best serve the policy goals underlying the bankruptcy process.” Saint Catherine Hosp. of Ind., LLC v. Ind. Family & Soc. Servs. Admin., 800 F.3d 312, 317 (7th Cir. 2015). This rule, however, is not without limits: The expansive definition of claim and its legislative history “surely points us in a direction, but provides little indication of how far we should travel [in delimiting a contingent claim].” After all, a contingent right to payment is, by definition, a right to payment that, because it is contingent, is not yet and may never be a right to payment. In the strangely appropriate language of philosopher Martin Heidegger, it might be said to exist somewhere on a continuum between being and nonbeing. At some point on that continuum, a right to payment becomes so contingent that it cannot fairly be deemed a right to payment at all. In re CD Realty Partners, 205 B.R. 651, 656 (Bankr. D. Mass. 1997) (quoting In re Chateaugay Corp., 944 F.2d 997, 1003 (2d Cir. 1991)). 8 ¶18 Attempts to define this point have yielded three primary approaches for determining when a claim arises for bankruptcy purposes. ¶19 Under the “accrual test,” a claim arises only when a creditor’s cause of action accrues under the pertinent non-bankruptcy law. See In re M. Frenville Co., 744 F.2d 332, 337 (3d Cir. 1984), overruled by In re Grossman’s Inc., 607 F.3d 114, 121 (3d Cir. 2010). In the years after it was first adopted in Frenville, the accrual test garnered widespread criticism for not capturing the breadth of relief envisioned by the Bankruptcy Code. See Grossman’s, 607 F.3d at 120–21 (discussing post-Frenville case law and other authority). Frenville has since been overruled by the Third Circuit, see id. at 121, and no court now appears to follow the Frenville approach, see In re Andrews, 239 F.3d 708, 710 n.7 (5th Cir. 2001) (describing Frenville’s approach as having been “universally rejected”). ¶20 Under the “conduct test,” a claim arises at the time of the debtor’s conduct that gives rise to the claim, even if the actual injury or accrual of a cause of action does not occur until after the bankruptcy filing. Huffy, 424 B.R. at 304. Applying this test, courts have concluded that a claim arose under the Bankruptcy Code in a wide array of circumstances in which the claim had not yet accrued under non-bankruptcy law. See, e.g., Parker, 313 F.3d at 1270 (concluding that the claimant’s legal malpractice claim arose on the date that the malpractice allegedly occurred, which was prior to the filing of the debtor’s petition); In re Rainbows United, Inc., 547 B.R. 430, 432 (Bankr. D. Kan. 2016) (concluding that a corporate officer’s indemnity claim against the corporation to recover the payroll taxes that she paid as a “responsible person” on the corporation’s 9 behalf arose when, prior to the bankruptcy petition, the corporation failed to remit the taxes at issue; even though the IRS did not assess the liability against the officer until years later, federal law made it likely that she would be liable for the unpaid taxes when the corporation did not remit them). Indeed, in some cases, courts have concluded that a claim arose under the Bankruptcy Code even though the claimant’s injury did not manifest itself until long after the bankruptcy proceeding had concluded. See, e.g., Grossman’s, 607 F.3d at 117, 125 (concluding that the claimant’s asbestos-related claims arose for bankruptcy purposes at the time the claimant was exposed to the debtor’s asbestos-containing product, even though she did not manifest symptoms of asbestos-related illness until almost thirty years after the exposure and almost ten years after the bankruptcy court had confirmed the debtor’s plan of reorganization). ¶21 Because the conduct test, unlike the accrual test, sweeps broadly enough to capture contingent claims, it has been described as “the one more in tune with the plain language and the policy underlying the Bankruptcy Code.” Parker, 313 F.3d at 1269. At the same time, however, because its application may result in discharging creditors’ claims before they receive notice of the bankruptcy case or even have reason to know that their claims exist, the conduct test has drawn criticism “for failing to address the due process rights of creditors” in such cases. Huffy, 424 B.R. at 304. ¶22 To address these due process concerns, a third approach, described variously as the “fair contemplation,” “foreseeability,” “pre-petition relationship,” or “narrow conduct” test, has emerged. City of Detroit, 548 B.R. at 763. This approach considers whether a pre-petition relationship such as a contract, exposure, impact, or privity 10 existed between the debtor and creditor such that a possible claim could be deemed to have been within the fair contemplation of the creditor at the time the debtor’s petition was filed. Id. Under this test, a claim is considered to have arisen pre-petition if the creditor could have ascertained through the exercise of reasonable due diligence that it had a claim at the time the petition was filed. Id. Courts have observed that this test ameliorates the above-noted concern that a bankruptcy proceeding cannot identify and afford due process to claimants with certain unmatured or contingent claims. See, e.g., Saint Catherine Hosp., 800 F.3d at 316. ¶23 The Clarks argue, and Hardegger concedes, that the conduct test is the applicable test here. In light of the foregoing authority and the facts now before us (including the fact that the Clarks notified Hardegger of their bankruptcy proceedings after C2H2 did not remit the payroll taxes at issue, thus obviating any due process concern), we agree.2 Accordingly, we turn to the question of whether Hardegger’s contribution claim arose pre- or post-petition.