Opinion ID: 147678
Heading Depth: 2
Heading Rank: 1

Heading: The Frenville Accrual Test

Text: In 1980, M. Frenville Co. was the subject of an involuntary petition for bankruptcy filed in New Jersey under Chapter 7 of the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 701 et seq. (the Code). See Frenville, 744 F.2d at 333. Thereafter, involuntary petitions under Chapter 7 of the Code were filed against two principals of the company. [5] Id. Later that year, four banks filed a lawsuit in a New York state court against the company's former accountants, Avellino & Bienes (A & B), alleging that A & B negligently and recklessly prepared the company's pre-petition financial statements and seeking damages for their alleged losses exceeding five million dollars. Id. at 333-34. A & B filed a complaint in the bankruptcy court in New Jersey seeking relief from the automatic stay in order to implead Frenville as a third-party defendant in order to obtain indemnification or contribution under New York law. Id. at 333-34. The bankruptcy court, affirmed by the district court, held that the automatic stay barred A & B's action. Id. at 334. A & B appealed. We reversed, holding that because the automatic stay applied only to claims that arose pre-petition, under New York law A & B did not have a right to payment for its claim for indemnification or contribution from Frenville until after the banks filed their suit against A & B. Id. at 337. It followed that A & B's claim against Frenville arose post-petition even though the conduct upon which A & B's liability was predicated (negligent preparation of Frenville's financial statements) occurred pre-petition. Id. at 336-37. It followed that the automatic stay was inapplicable. We emphasized that the crucial issue was when the right to payment arose as determined by reference to the New York law that governed the indemnification claim. Id. at 336. This court subsequently summarized Frenville as holding that the existence of a valid claim depends on: (1) whether the claimant possessed a right to payment; and (2) when that right arose as determined by reference to the relevant non-bankruptcy law. Kilbarr Corp. v. Gen. Servs. Admin., Office of Supply & Servs. (In re Remington Rand Corp.), 836 F.2d 825, 830 (3d Cir.1988) (citing Frenville, 744 F.2d at 336). The Frenville test for determining when a claim arises has been referred to as the accrual test. In the case before us, the District Court and Bankruptcy Court correctly applied the accrual test in holding that the Van Brunts' tort claims were not discharged by the Plan of Reorganization. According to Frenville, the claims arose for bankruptcy purposes when the underlying state law cause of action accrued. See Frenville, 744 F.2d at 337. The New York tort cause of action accrued in 2006 when Ms. Van Brunt manifested symptoms of mesothelioma. [6] The claims were therefore post-petition under Frenville. The question remains, however, whether we should continue to follow Frenville and its accrual test. We have recognized that [s]ignificant authority [contrary to Frenville ] exists in other circuits.... Jones v. Chemetron Corp., 212 F.3d 199, 205-06 (3d Cir.2000). A sister circuit has described our approach in Frenville as universally rejected. Cadleway Props., Inc. v. Andrews (In re Andrews), 239 F.3d 708, 710 n. 7 (5th Cir.2001). The courts of appeals that have considered Frenville have uniformly declined to follow it. See Watson v. Parker (In re Parker), 313 F.3d 1267, 1269-70 (10th Cir.2002); In re Andrews, 239 F.3d at 710 n. 7; Am. Law Ctr. PC v. Stanley (In re Jastrem), 253 F.3d 438, 442 (9th Cir.2001); Epstein v. Official Comm. of Unsecured Creditors of the Estate of Piper Aircraft Corp. (In re Piper Aircraft, Corp.), 58 F.3d 1573, 1576 n. 2 (11th Cir. 1995); Woburn Assocs. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1, 8 n. 9 (1st Cir.1992); Grady v. A.H. Robins Co., 839 F.2d 198, 200-02 (4th Cir.1988); see also Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air. Corp. (In re W.R. Grace & Co.), 281 B.R. 852, 860 (Bankr.D.Del.2002) ( Frenville has proved a remarkably unpopular decision and no other Circuit Court of Appeals has followed it.). At least one bankruptcy court has stated that Frenville may be fairly characterized as one of the most criticized and least followed precedents decided under the current Bankruptcy Code. Firearms Imp. & Exp. Corp. v. United Capital Ins. Co. (In re Firearms Imp. & Exp. Corp.), 131 B.R. 1009, 1015 (Bankr. S.D.Fla.1991); see also In re Pan Am. Hosp. Corp., 364 B.R. 839, 843 (Bankr. S.D.Fla.2007) (noting that the decision has been sharply criticized and widely rejected by other courts). In addition to the cases cited above, JELD-WEN cites numerous district court and bankruptcy court decisions that have declined to follow Frenville. [7] The criticism has been echoed by commentators. See, e.g., Ralph R. Mabey & Annette W. Jarvis, In re Frenville: A Critique by the National Bankruptcy Conference's Committee on Claims and Distributions, 42 Bus. Law. 697 (1987). Notwithstanding what appears to be universal disapproval, we decide cases before us based on our own examination of the issue, not on the views of other jurisdictions. Nevertheless, those widely held views impel us to consider whether the reasoning applied by our colleagues elsewhere is persuasive. Courts have declined to follow Frenville because of its apparent conflict with the Bankruptcy Code's expansive treatment of the term claim. The Bankruptcy Code, which was adopted by the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549 (1978), 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.... 11 U.S.C. § 101(5) (2008) (emphasis added). The House and Senate Reports make explicit that the effect of the definition is a significant departure from [then] present law which did not define claim. H.R.Rep. No. 95-595, at 309 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6266; S.Rep. No. 95-989, at 21, reprinted in 1978 U.S.C.C.A.N. 5787, 5807. In adopting the new definition of claim, the Reports state that [b]y this broadest possible definition [of the term `claim'] ... the bill contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case ... [and] permits the broadest possible relief in the bankruptcy court. H.R.Rep. No. 95-595, at 309. The Supreme Court has likewise noted that claim has the broadest available definition.... FCC v. NextWave Pers. Commc'ns Inc., 537 U.S. 293, 302, 123 S.Ct. 832, 154 L.Ed.2d 863 (2003) (quoting Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)); see also In re Remington Rand, 836 F.2d at 826, 829 (Congress defined `claim' in the broadest possible terms ... and unambiguously stated its intent to address all possible legal obligations in defining a bankruptcy claim ....) (citations omitted). The Supreme Court has stated that, [i]n determining what claims are allowable and how a debtor's assets shall be distributed, a bankruptcy court does not apply the law of the state where it sits.... [B]ankruptcy courts must administer and enforce the Bankruptcy Act as interpreted by this Court in accordance with authority granted by Congress to determine how and what claims shall be allowed under equitable principles. Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 162-63, 67 S.Ct. 237, 91 L.Ed. 162 (1946). The Frenville court focused on the right to payment language in § 101(5) and, according to some courts, impos[ed] too narrow an interpretation on the term claim, Piper, 58 F.3d at 1576 n. 2, by failing to give sufficient weight to the words modifying it: contingent, unmatured, and unliquidated. The accrual test in Frenville does not account for the fact that a claim can exist under the Code before a right to payment exists under state law. We are persuaded that the widespread criticism of Frenville's accrual test is justified, as it imposes too narrow an interpretation of a claim under the Bankruptcy Code. Accordingly, the Frenville accrual test should be and now is overruled.