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

Heading: When a Claim Arises

Text: Our decision to overrule Frenville leaves a void in our jurisprudence as to when a claim arises. That decision has various implications. One such implication involves the application of the automatic stay provided in § 362 of the Bankruptcy Code which operates to stay the commencement or continuation of any action or proceeding that was or could have been commenced against the debtor. See 11 U.S.C. § 362(a)(1). The Fourth Circuit has stated, `[t]he automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors.' Grady, 839 F.2d at 200 (quoting H.R.Rep. No. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97; S.Rep. No. 95-989, at 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840). It is applicable, however, only to stay a claim that arose pre-petition. See 11 U.S.C. § 362(a)(1). Principal among the effects of the determination when a claim arises is the effect on the dischargeability of a claim. Under 11 U.S.C. § 1141(d)(1)(A) of the Code, the confirmation of a plan of reorganization discharges the debtor from any debt that arose before the date of such confirmation .... A debt is defined as liability on a claim, id. § 101(12), which in turn is defined as a right to payment, id. § 101(5). This is consistent with Congress' intent to provide debtors with a fresh start, an objective, noted the Second Circuit, made more feasible by maximizing the scope of a discharge. United States v. LTV Corp. (In re Chateaugay), 944 F.2d 997, 1002 (2d Cir.1991). On the other hand, a broad discharge may disadvantage potential claimants, such as tort claimants, whose injuries were allegedly caused by the debtor but which have not yet manifested and who therefore had no reason to file claims in the bankruptcy. These competing considerations have not been resolved consistently by the cases decided to date. Moreover, the determination when a claim arises has significant due process implications. If potential future tort claimants have not filed claims because they are unaware of their injuries, they might challenge the effectiveness of any purported notice of the claims bar date. Discharge of such claims without providing adequate notice raises questions under the Fourteenth Amendment. See Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). The courts have generally divided into two groups on the decision as to when a claim arises for purposes of the Code, with numerous variations. One group has applied the conduct test and the other has applied what has been termed the pre-petition relationship test. Illustrative of the cases that have adopted the conduct test is the decision of the Fourth Circuit in Grady, 839 F.2d at 201. In Grady, the plaintiff had inserted a Dalkon Shield intrauterine contraceptive device several years before the manufacturer filed a petition for Chapter 11 bankruptcy. Id. at 199. The plaintiff alleged that she experienced injuries from the Dalkon Shield, including the need for a hysterectomy. Id. The district court, which did not refer the case to the bankruptcy court, determined that the plaintiff's claim arose when the acts giving rise to [the defendant's] liability were performed, not when the harm caused by those acts was manifested. Id. (citation omitted). The court of appeals affirmed, finding that the plaintiff held a contingent claim that arose before the commencement of the bankruptcy case. Id. at 202-03. The court cautioned that it was not deciding whether Grady's claim or those of [future tort claimants] are dischargeable in this case. Id. at 203. It held only that because the Dalkon Shield was inserted in the claimant before the filing of the bankruptcy petition, it constituted a claim within the meaning of the automatic stay, 11 U.S.C. § 362(a)(1), i.e., a pre-petition claim. [8] Id. In contrast, the Eleventh Circuit criticized a conduct test that would enable individuals to hold a claim against a debtor by virtue of their potential future exposure to the debtor's product, regardless of whether the claimant had any relationship or contact with the debtor. In re Piper, 58 F.3d at 1577. It stated that approach would define a claim too broadly in certain circumstances and would stretch the scope of § 101(5) too far. Id. Similarly, a commentator observed that under the conduct test, [c]laimants who did not use or have any exposure to the dangerous product until long after the bankruptcy case has concluded would nonetheless be subject to the terms of a preexisting confirmed Chapter 11 plan. Alan N. Resnick, Bankruptcy as a Vehicle for Resolving Enterprise-Threatening Mass Tort Liability, 148 U. Pa. L.Rev.2045, 2071 (2000). These claimants may be unidentifiable because of their lack of contact with the debtor or the product and, accordingly, may not have had the benefit of notice and an opportunity to participate in the bankruptcy case. Id. Some of the courts concerned that the conduct test may be too broad have adopted what has been referred to as a pre-petition relationship test. See In re Piper, 58 F.3d at 1576. Under this test, a claim arises from a debtor's pre-petition tortious conduct where there is also some pre-petition relationship between the debtor and the claimant, such as a purchase, use, operation of, or exposure to the debtor's product. Id.; see also Lemelle v. Univ. Mfg. Corp., 18 F.3d 1268, 1277 (5th Cir.1994); cf. In re Chateaugay, 944 F.2d at 1004-05. [9] One commentator opined that [t]he `pre-petition relationship test' ameliorates the problem often attributed to the `conduct test'that a bankruptcy proceeding cannot identify and afford due process to claimants. Barbara J. Houser, Chapter 11 as a Mass Tort Solution, 31 Loy. L.A. L.Rev. 451, 465 (1998). In Lemelle, the plaintiff brought a wrongful death action against the successor corporation of a mobile home manufacturer that had emerged from Chapter 11 proceedings. 18 F.3d at 1270-71. The plaintiff alleged that the decedent's death was caused by the manufacturer's defective mobile home design and construction. Id. The decedent died in a fire allegedly caused by the manufacturing defect about two years after the debtor's plan of reorganization was confirmed and approximately fifteen years after the design and manufacture of the mobile home. Id. at 1271. The district court determined that the plan of reorganization discharged all of the debtor's obligations, including the liability on the tort claim. Id. at 1274. The Fifth Circuit reversed, noting that in order for the plaintiff's wrongful death claim to have been discharged in the debtor's bankruptcy, at a minimum, there must be evidence that would permit the debtor to identify, during the course of the bankruptcy proceedings, potential victims and thereby permit notice to these potential victims of the pendency of the proceedings. Id. at 1277 (citation omitted). The court found that the record was devoid of any evidence of any pre-petition contact, privity, or other relationship between [the debtor], on the one hand, and [the plaintiff] or the decedents, on the other. Id. The court concluded that absent any such evidence, the district court could not find that the claims asserted by [the plaintiff] were discharged in [the debtor's] bankruptcy proceedings. Id. The court reasoned that even the broad definition of `claim' cannot be extended to include ... claimants whom the record indicates were completely unknown and unidentified at the time [the debtor] filed its petition and whose rights depended entirely on the fortuity of future occurrences. Id. The Second Circuit followed a similar approach in an environmental regulatory context. In In re Chateaugay, 944 F.2d at 1004-05, the court held that the EPA's post-confirmation costs of responding to a release of hazardous waste, even if not yet incurred at the time of bankruptcy, involved claims under § 101(5). The court reasoned that [t]he relationship between environmental regulating agencies and those subject to regulation provides sufficient `contemplation' of contingencies to bring most ultimately maturing payment obligations based on pre-petition conduct within the definition of `claims' [under the Bankruptcy Code]. Id. at 1005. A somewhat modified approach was taken by the Eleventh Circuit in a case involving the bankruptcy of Piper Aircraft, Inc., a manufacturer of general aviation aircraft and spare aircraft parts. In re Piper, 58 F.3d 1573. The bankruptcy court, affirmed by the district court, held that a class of future claimants who might assert, after confirmation of the debtor's plan of reorganization, personal injury or property damage claims against Piper based on its aircraft products that were manufactured or sold before the confirmation date, did not have claims under § 101(5). See id. at 1575-76. The bankruptcy and district courts had adopted the pre-petition relationship test which, according to the court of appeals, requires some prepetition relationship, such as contact, exposure, impact, or privity, between the debtor's pre-petition conduct and the claimant in order for the claimant to have a § 101(5) claim. Id. at 1576 (internal quotation and citation omitted). The court of appeals agreed that the pre-petition relationship test was generally superior to either our test in Frenville, id. at 1576 n. 2, or the conduct test adopted by other courts of appeals, id. at 1576-77. It also held that claimants having contact with the debtor's product post-petition, but prior to confirmation, also could be identified during the course of the bankruptcy procedure. Id. It thus framed what it chose to denominate as the  Piper  test as follows: [A]n individual has a § 101(5) claim against a debtor manufacturer if (i) events occurring before confirmation create a relationship, such as contact, exposure, impact, or privity, between the claimant and the debtor's product; and (ii) the basis for liability is the debtor's prepetition conduct in designing, manufacturing and selling the allegedly defective or dangerous product. Id. at 1577. The court stated that [t]he debtor's prepetition conduct gives rise to a claim to be administered in a case only if there is a relationship established before confirmation between an identifiable claimant or group of claimants and that prepetition conduct. Id. The court of appeals observed that the courts applying the conduct test also presume some prepetition relationship between the debtor's conduct and the claimant. Id.; cf. In re Parker, 313 F.3d at 1270 n. 1 (noting that the relationship in the case before us would meet either [the conduct] test [or the prepetition relationship test]). The pre-petition relationship test operates much like the conduct test, but it requires a pre-petition relationship between the debtor and the putative claimant. See In re Pan Am. Hosp., 364 B.R. at 845 (discussing same). The pre-petition relationship test in Piper has been criticized for narrowing the definition of claim under 11 U.S.C. § 101(5). See e.g., Michelle M. Morgan, The Denial of Future Tort Claims in In re Piper Aircraft: Will the Court's Quick-Fix Solution Keep the Debtor Flying High or Bring it Crashing Down?, 27 Loy. U. Chi. L.J. 27, 31-35 (1995). In a final report issued in 1997, the National Bankruptcy Review Commission proposed a definition of claim that incorporated the conduct test, albeit with some limitations, rather than the pre-petition relationship test. [10] See Nat'l Bankr.Rev. Comm'n, Bankruptcy: The Next Twenty Years, National Bankruptcy Review Commission Final Report at 326 (Oct. 20, 1997), reprinted in Volume G Collier on Bankruptcy App. Pt. 44-332 (Alan N. Resnick & Henry J. Sommer, eds., 15th ed. rev.2009). In addition, various bankruptcy courts have followed a form of the conduct test when considering the existence of an asbestos-related claim. See, e.g., In re Quigley Co., 383 B.R. 19, 27 (Bankr.S.D.N.Y. 2008) (If the Asbestos PI Claimant was exposed to asbestos before the Quigley petition date, he or she holds a `claim.'); In re Lloyd E. Mitchell, Inc., 373 B.R. 416, 424 (Bankr.D.Md.2007) (A claim [for asbestos-related injury by a `non-manifesting' asbestos victim] arises upon exposure, not manifestation. (citing Grady, 839 F.2d at 198)). Irrespective of the title used, there seems to be something approaching a consensus among the courts that a prerequisite for recognizing a claim is that the claimant's exposure to a product giving rise to the claim occurred pre-petition, even though the injury manifested after the reorganization. We agree and hold that a claim arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a right to payment under the Bankruptcy Code. See 11 U.S.C. § 101(5). Applied to the Van Brunts, it means that their claims arose sometime in 1977, the date Mary Van Brunt alleged that Grossman's product exposed her to asbestos. That does not necessarily mean that the Van Brunts' claims were discharged by the Plan of Reorganization. Any application of the test to be applied cannot be divorced from fundamental principles of due process. [11] Notice is [a]n elementary and fundamental requirement of due process in any proceeding which is to be accorded finality.... Mullane, 339 U.S. at 314, 70 S.Ct. 652. Without notice of a bankruptcy claim, the claimant will not have a meaningful opportunity to protect his or her claim. See 11 U.S.C. § 342(a) (There shall be given such notice as is appropriate ... of an order for relief... under [the Bankruptcy Code].). Inadequate notice therefore precludes discharge of a claim in bankruptcy. Chemetron, 72 F.3d at 346. This issue has arisen starkly in the situation presented by persons with asbestos injuries that are not manifested until years or even decades after exposure. The most innovative approach yet to the asbestos problem was adopted by the New York bankruptcy court as part of the Manville plan of reorganization. See In the Matter of Johns-Manville Corp., 68 B.R. 618 (Bankr.S.D.N.Y.1986). In an effort to grapple with a social, economic and legal crisis of national importance within the statutory framework of [C]hapter 11, the bankruptcy court oversaw the largely consensual plan leading to the establishment of a trust out of which all asbestos health-related claims were to be paid. Id. at 621. The trust was designed to satisfy the claims of all victims, whenever their disease manifest[ed], (the Manville Trust). Id. at 628. Manville agreed to fund the trust in an amount that, over time, was in excess of approximately $2.5 billion. Id. at 621. The Manville Trust was the basis for Congress' effort to deal with the problem of asbestos claims on a national basis, which it did by enacting § 524(g) of the Bankruptcy Code as part of the Bankruptcy Reform Act of 1994. See H.R.Rep. No. 103-835, at 40 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3348-49. Section 524(g) authorizes courts to enjoin entities from taking legal action for the purpose of ... collecting, recovering, or receiving payment or recovery with respect to any [asbestos-related] claim or demand through the establishment of a trust from which asbestos-related claims and demands are paid. 11 U.S.C. § 524(g)(1)(B). This court summarized the statutory prerequisites imposed by § 524(g) in In re Combustion Engineering, Inc., 391 F.3d 190, 234 n. 45 (3d Cir.2005). [12] It is apparent from the legislative history of § 524(g) that Congress was concerned that future claims by presently unknown claimants could cripple the debtor's reorganization. Senator Graham stated during floor debate on the bill that § 524(g) provides companies who are seeking to fairly address the burden of thousands of current asbestos injury claims and unknown future claims ... a method to pay their current asbestos claims and provide for equitable treatment of future asbestos claims. 140 Cong. Rec. S4523 (Apr. 20, 1994) (emphasis added). The House of Representatives Committee on the Judiciary wrote in its report that § 524(g) was included in the bill to offer similar certitude to other asbestos trust/injunction mechanisms that meet the same kind of high standards with respect to regard for the rights of claimants, present and future, as displayed in [ Johns-Manville and a case following it, In re UNR Indus., Inc., 71 B.R. 467, 473 (Bankr. N.D.Ill.1987)]. H.R.Rep. No. 103-835, at 41 (1994), reprinted in 1994 U.S.C.C.A.N. 3349. By enacting § 524(g), Congress took account of the due process implications of discharging future claims of individuals whose injuries were not manifest at the time of the bankruptcy petition. We observed in Combustion Engineering that [m]any of the[ ] requirements [in § 524(g)] are specifically tailored to protect the due process rights of future claimants. For example, a court employing a § 524(g) channeling injunction must determine that the injunction is fair and equitable to future claimants, 11 U.S.C. § 524(g)(4)(B)(ii), and must appoint a futures representative to represent their interests. 11 U.S.C. § 524(g)(4)(B)(I). The court must also determine that the plan treats present claims and future demands that involve similar claims in substantially the same manner. 11 U.S.C. § 524(g)(2)(B)(ii)(V). Finally, the statute requires that a 75% super-majority of claimants whose claims are to be addressed by the trust vote in favor of the plan. 11 U.S.C. § 524(g)(2)(B)(ii)(IV)(bb). In re Combustion Eng'g, 391 F.3d at 234 n. 45. The due process safeguards in § 524(g) are of no help to the Van Brunts as Grossman's Plan of Reorganization did not provide for a channeling injunction or trust under that provision. [13] A court therefore must decide whether discharge of the Van Brunts' claims would comport with due process, which may invite inquiry into the adequacy of the notice of the claims bar date. The only open matter before the District Court is JELD-WEN's request for a declaration that the Van Brunts' claims had been discharged. Whether a particular claim has been discharged by a plan of reorganization depends on factors applicable to the particular case and is best determined by the appropriate bankruptcy court or the district court. In determining whether an asbestos claim has been discharged, the court may wish to consider, inter alia, the circumstances of the initial exposure to asbestos, whether and/or when the claimants were aware of their vulnerability to asbestos, whether the notice of the claims bar date came to their attention, whether the claimants were known or unknown creditors, whether the claimants had a colorable claim at the time of the bar date, and other circumstances specific to the parties, including whether it was reasonable or possible for the debtor to establish a trust for future claimants as provided by § 524(g). These are not factors for consideration in the first instance by this court sitting en banc. Both the Bankruptcy Court and the District Court held that the Van Brunts' state law claims survived under Frenville. Neither had any reason to consider whether the Van Brunts' claims were discharged.