The United States Court of Appeals for the Third Circuit on June 2, 2010, sitting en banc, overruled its own precedential holding in Avellino & Beines v. M. Frenville Co. (Frenville), 744 F.2d 332 (3d Cir. 1984), to hold that in the context of asbestos-related tort claims, a “claim” under the Bankruptcy Code arises when an individual is exposed pre-petition to a product giving rise to an injury rather than when the injury manifests itself. JED-WEN, Inc. v. Van Brunt (In re Grossman’s), No. 1563, slip op. at 18 (3d Cir. June 2, 2010).
Background
In 1977, Mary Van Brunt purchased products that allegedly contained asbestos from the home im-provement and lumber retailer Grossman’s. Grossman’s subsequently filed for bankruptcy pro-tection under chapter 11 of the Bankruptcy Code. Grossman’s confirmed chapter 11 plan purported to discharge all claims against it that arose before its chapter 11 plan of reorganization’s effective date in 1997. 11 U.S.C. §1141(d). Ms. Van Brunt had not filed any claims against Grossman’s by the deadline to file claims. It was not until 2006 that Ms. Van Brunt began to manifest symptoms of mesothelioma, a cancer linked to asbestos expo-sure, and she died in 2008.1 JELD-WEN is the suc-cessor-in-interest to Grossman’s, as it acquired all the stock of and subsequently merged with Grossman’s pursuant to its plan of reorganization.
The Bankruptcy Court, affirmed by the District Court, held that Grossman’s plan of reorganization did not discharge the Van Brunts’ asbestos-related tort claims because the claims did not arise pre-petition. JELD-WEN appealed this decision to the Third Circuit Court of Appeals.
The Frenville Decision
In its ruling, the Bankruptcy Court applied Frenville and held that the Van Brunts’ tort claims arose after the effective date of the plan. JELD-WEN, Inc. v. Van Brunt, 389 B.R. 384 (Bankr. D. Del. 2008).
Under the Bankruptcy Code, confirmation of a plan of reorganization “discharges the debtor from any debt that arose before the date of such confirma-tion.” 11 U.S.C. § 1141(d)(1)(A). The Third Circuit in Frenville narrowly interpreted the terms ‘“debt” and “claim” and held that the existence of a valid claim depends on (1) whether the claimant pos-sessed a right to payment and (2) whether that right to payment arose, as determined by relevant non-bankruptcy law, pre petition. See Kilbarr Corp. v. Gen. Servs. Admin. Office of Supply & Servs., 836 F.2d 825, 830 (3d Cir. 1988) (citing Frenville, 744 F.2d at 336).
Under New York law, which was the applicable state law in Frenville, the right to payment for an asbestos-related injury accrues only when the in jury manifests itself; not when the claimant was first ex-posed to the asbestos. Accordingly, applying the Fren-ville accrual test, the Bankruptcy Court reasoned that although Mary Van Brunts’ alleged underlying asbestos exposure occurred prepetition, the injury only mani-fested itself post-petition, and thus she did not have a pre-petition “claim” subject to discharge by Grossman’s plan of reorganization. This decision allowed the Van Brunts to proceed with their claims in New York state court.
Case Law Outside of the Third Circuit
In its opinion, the Third Circuit Court of Appeals sum-marized the applicable law in courts outside of the Third Circuit regarding at what point a “claim” is deemed to arise. It explained that most other circuit courts, district courts and bankruptcy courts have declined to follow Frenville because its narrow interpretation of a “claim” conflicts with the Bankruptcy Code’s intended broad treatment of such term Grossman’s, slip op. at 10-11. As the Court noted, the Frenville accrual test does not ac-count for the fact that a “claim” may exist under the Bankruptcy Code prior to the time that a “right to pay-ment” is deemed to exist under state law. Id. at 11.
Courts outside the Third Circuit have generally followed two tests, to determine when a claim is deemed to arise for purposes of the Bankruptcy Code—the “conduct test” or the “pre-petition test.” Id. at 12. Under the con-duct test and variants thereof, adopted by the Fourth and Tenth Circuits, a claim is deemed to arise when the acts giving rise to the debtor’s liability were performed, not when the harm caused by those acts was manifested. Id. at 13 (citing to Grady v. A.H. Robins Co., 839 F.2d 198, 201 (4th Cir. 1988) (court held that because inser-tion of intrauterine contraceptive device was pre-petition, it constituted a pre-petition contingent claim)). Under the pre-petition relationship test and variants thereof, adopted by the Second, Fifth, Ninth and Elev-enth Circuits, 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. at 14-15 (citing Lemelle V. Univ. Mfg. Corp., 18 F.3d 1268, 1270-71 (5th Cir. 1994) (court could not find that the plaintiff’s claims were dis-charged in the debtor’s bankruptcy absent any evidence of any pre-petition contact, privity or other relationship between the debtor and the plaintiff)). This test operates similarly to the conduct test, but requires a pre-petition relationship with the debtor and the putative claimant. Id. at 17.
The Third Circuit In re Grossman’s Decision
Although the Court of Appeals found that the Bank-ruptcy and District Courts properly applied the Frenville accrual test, In re Goodman’s presented the Third Circuit with an opportunity to re-examine its decision in Fren-ville. The Court of Appeals explained that determining when a claim arises has significant implications, such as whether or not a claim is discharged. Whereas a broad discharge of claims provides debtors with a fresh start, it may disadvantage potential claimants whose injuries are not manifested until after the opportunity to file proofs of claim in bankruptcy has elapsed. Further, discharging claims without providing adequate notice of those claims to potential claimants (because the injury may not yet have manifested itself) raises constitutional questions under the due process clause of the Four-teenth Amendment. Id. at 12.
The Court of Appeals concluded that regardless of which variation of the conduct test or pre-petition test is ap-plied, most courts have reached a consensus that in order for a claim to be recognized, the claimant’s expo-sure to a product giving rise to such claim must have occurred pre-petition, even though the injury may only manifest itself after confirmation of a debtor’s plan of reorganization. Id. at 18. Accordingly, the Court of Ap-peals held that the Van Brunts’ claims arose in 1977, the year Mary Van Brunt alleged that Grossman’s prod-ucts exposed her to asbestos.
Due Process Considerations
Notwithstanding the Court of Appeals’ finding that the Van Brunts’ claims arose pre-petition, in its decision the Court of Appeals stopped short of granting JELD-WEN a discharge of the Van Brunts’ claims. It explained, “[a]ny application of the test to be applied cannot be divorced from fundamental principles of due process” and “[w]ithout notice of a bankruptcy claim,” such as asbes-tos-related illness that does not manifest itself until af-ter confirmation of a bankruptcy plan of reorganization, “the claimant will not have a meaningful opportunity to protect his or her claim.” Id. at 18-19. Congress had previously reacted to these due process implications of discharging future claims of individuals whose injuries were not manifested pre-petition, and who therefore did not file proofs of claim in the bankruptcy case, by enact-ing § 524(g) of the Bankruptcy Code, which authorizes a debtor to establish a trust from which only future asbes-tos-related claims are paid. In the Van Brunts’ case, however, § 524(g) is inapplicable since Grossman’s plan of reorganization did not provide for any such trust be-cause Grossman’s had not yet been faced with any suits concerning asbestos-related injuries at the time its plan of reorganization was confirmed.
The Court of Appeals reasoned that whether a discharge of the Van Brunts’ claims would comport with due proc-ess should entail a fact-specific inquiry and is best de-termined by the appropriate Bankruptcy Court or Dis-trict Court. Id. at 21. Specifically, courts may consider, among other factors, “the circumstances of the initial exposure to asbestos, whether and/or when the claim-ants 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 un-known creditors, whether the claimants had a colorable claim at the time of the bar date, and other circum-stances specific to the parties, including whether it was reasonable or possible for the debtor to establish a trust for future claimants as provided by § 542(g).” Accord-ingly, the Court of Appeals remanded the case to the District Court to determine whether discharging the Van Brunts’ claims would comport with due process re-quirements.
Conclusion and Implications
The fact-specific inquiry that the Court of Appeals has advocated in In re Grossman’s renders the chances of recovery for asbestos-related injury claimants rather uncertain after a debtor’s plan of reorganization is con-firmed. The decision does, however, clarify that asbes-tos-related injury claims, as well as other mass-tort type exposure, of those who manifest symptoms only post-petition will not necessarily be able to recover after con-firmation of a debtor’s plan of reorganization on the basis of state law governing their claims. Stay tuned for the District Court’s decision on whether the Van Brunts’ claims will be deemed discharged by Grossman’s plan of reorganization.