JELD-WEN, Inc v Van Brunt (In re Grossman’s Inc), (3d Cir No 09-1563, June 2, 2010)

CASE SNAPSHOT

The rules have changed in the Third Circuit for personal injury plaintiffs seeking recovery from bankrupt and reorganized debtors. After more than 25 years, the Third Circuit Court of Appeals recently overturned Avellino & Bienes v. M. Frenville Co. (Frenville), which long stood for the proposition that a “claim,” as defined in the Bankruptcy Code, arises when the underlying cause of action accrues, as determined by state law. In Grossman’s, the Third Circuit held that a bankruptcy “claim” arises when a person is exposed to a product or conduct prior to the filing of a debtor’s bankruptcy petition, and such product or conduct gives rise to an injury underlying a right to payment under the Bankruptcy Code. Consequently, latent products-liability injuries that arise after a Third Circuit debtor’s reorganization are now more likely to fall within the Bankruptcy Code’s broad definition of “claim,” rendering them capable of being discharged through a debtor’s plan of reorganization. The court cautioned, however, that the dischargeability of such a claim depends upon satisfaction of the claimant’s fundamental due process rights, including adequate notice of the bankruptcy case and key deadlines therein.

FACTUAL BACKGROUND  

In 1977, Gloria Van Brunt purchased asbestos-containing products from a retail company called Grossman’s. Grossman’s filed for bankruptcy in April 1997. Ms. Van Brunt first manifested symptoms of mesothelioma (a cancer caused by asbestos exposure) in 2006 and was diagnosed in 2007. Grossman’s provided notice by publication of the deadline to file proofs of claim in its bankruptcy case; Ms. Van Brunt did not file a proof of claim. Grossman’s plan of reorganization, which was confirmed by the Bankruptcy Court in December 1997, purported to discharge all claims that arose prior to the plan’s effective date.  

Soon after her diagnosis, Ms. Van Brunt filed suit in New York state court against JELD-WEN, Grossman’s successor-in-interest. JELD-WEN moved to reopen Grossman’s bankruptcy case, seeking a determination that Ms. Van Brunt’s claims had been discharged by the plan of reorganization confirmed 10 years earlier.  

In determining whether Ms. Van Brunt’s claims were discharged by Grossman’s plan of reorganization, both the bankruptcy and district courts followed the Third Circuit Court of Appeals’ holding in Frenville—a claim arises when a cause of action accrues under state law. Under New York law, a cause of action for asbestos-related injury accrues when the injury manifests itself. Since Ms. Van Brunt did not experience symptoms until nearly 10 years after confirmation of Grossman’s reorganization plan, both the bankruptcy and district courts concluded that Ms. Van Brunt did not have a “claim” against Grossman’s within the meaning of the Bankruptcy Code. Therefore, Ms. Van Brunt’s productsliability claims were not discharged by Grossman’s plan of reorganization. JELDWEN appealed from the district court’s holding.

THE COURT ADOPTS A NEW TEST

The Court of Appeals acknowledged that the bankruptcy and district courts correctly applied Frenville’s “accrual test” in holding that Ms. Van Brunt did not have a “claim” capable of being discharged by Grossman’s bankruptcy plan. Being aware of significant contrary authority, however, the Third Circuit Court of Appeals elected to consider whether Frenville should be overruled. In this case, the Third Circuit Court of Appeals found that the accrual test imposes too narrow an interpretation of the term “claim,” and overruled Frenville.

In considering whether to overrule Frenville, the court recognized the refusal of other courts, including various circuit courts, to follow the accrual test because it results in a more narrow interpretation of the term “claim” than the Bankruptcy Code’s definition requires. Section 105(8) of the Bankruptcy Code defines “claim” as “[a] right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, mature, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured . . . .” Overruling Frenville thus enabled the Third Circuit to reconcile the inherent conflict between the accrual test and the Bankruptcy Code’s broad definition of “claim,” which enables bankruptcy courts to address all of a debtor’s legal obligations, including those that are remote or contingent.

In establishing the new test, the court considered the approach of its sister courts in various circuits that had declined to adopt Frenville in deciding the issue of when a “claim” arises. Although these specific tests vary, the Third Circuit noted a commonality that it described as “approaching consensus . . . 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.”

After extensively considering the existing case law in the various circuits, the court overruled Frenville in favor of a new test that provides “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.”

APPLICATION OF THE NEW TEST TO MS. VAN BRUNT

The Third Circuit went on to apply this test to Ms. Van Brunt. Under the newly established test, the court found that Ms. Van Brunt’s claims arose in 1977 when she was exposed to the asbestos-containing products. The court noted that this did not necessarily mean that Ms. Van Brunt’s claim had been discharged, however.

The Court of Appeals remanded this case to the District Court, instructing the lower court to determine whether Ms. Van Brunt’s claims were discharged by Grossman’s plan of reorganization. The Third Circuit instructed that whether Ms. Van Brunt’s claim was discharged through Grossman’s plan of reorganization would depend upon satisfaction by Grossman’s of her due process rights, including receipt of adequate notice of the bankruptcy case sufficient to protect her claim.

The Third Circuit then enumerated several factors that the lower courts may consider when evaluating the adequacy of the notice provided claimants, including Ms. Van Brunt. These factors include: 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 of the debtor came to the claimants’ attention; whether the claimants were known or unknown creditors; whether the claimants had a plausible 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 under section 524(g) of the Bankruptcy Code for future claimants. (Section 524(g) was enacted specifically to establish procedures for asbestos claims, such as the one in this case.)

PRACTICAL CONSIDERATIONS

Products-liability cases illustrate the inherent tension between a debtor’s ability to achieve a fresh start through the bankruptcy process, and an injured party’s ability to recover damages from a debtor when such injuries do not manifest themselves for many years. By overruling Frenville, the court affords debtors in the Third Circuit with comfort that latent injuries arising post-reorganization constitute a “claim” within the meaning of the Bankruptcy Code, if the exposure or conduct giving rise to such injuries occurred prior to the inception of a debtor’s bankruptcy case.

Notwithstanding the Third Circuit’s holding in Grossman’s, however, debtors are cautioned that whether a discharge of such claims will occur through a plan of reorganization must be determined on a case-by-case basis. Accordingly, to maximize the likelihood of obtaining a discharge of claims that result from products-liability injuries that are asymptomatic at the time of reorganization, debtors who anticipate such claims are cautioned to carefully consider whether their actions during the bankruptcy case are capable of satisfying a potential claimant’s constitutional due process rights, which include providing adequate notice of the bankruptcy case and key deadlines.