A recent decision from the United States Bankruptcy Court for the Western District of Texas touched on two popular bankruptcy topics: notice requirements and the effect of a bankruptcy discharge on claims. As we have previously discussed herehere, and here these issues play an important role in the reorganization process. 

In AMPAM Power Plumbing, L.P. v. Capstone Building Corporation (In re AMPAM Power Plumbing), the bankruptcy court found that claims arising from a postpetition, pre-confirmation contract were properly barred by the debtor’s discharge where the creditor received actual notice of the debtor’s bankruptcy case.

Background

In 2003, the debtor, AMPAM Power Plumbing L.P., filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas. The debtor’s plan of reorganization was confirmed on July 30, 2004. After the petition date, but prior to confirmation, Capstone Building Corporation and the debtor entered into a contract under which the debtor was to provide plumbing services to Capstone in connection with a project at a local university. At some point after the parties executed the contract, but prior to the confirmation date, the debtor advised Capstone of the pendency of its bankruptcy case.

The work the debtor was required to provide to Capstone was largely completed by the confirmation date, with the exception of “punch list items” to be provided by the debtor and an additional meeting to be attended by its representative. By August 2004, a certificate of substantial completion was issued on the project. Capstone was unaware of any potential issues related to the debtor’s work until February 16, 2011, long after the debtor’s plan was confirmed.

Several years after confirmation, Capstone filed a state court complaint against the reorganized debtor in which Capstone asserted contractual indemnity and contribution claims related to the debtor’s work on the project. The debtor reopened its chapter 11 case and sought to enforce the discharge.

Analysis

The court began by noting that the claims held by Capstone at confirmation were “future claims.” The court explained that future claims are those claims that, arise from a debtor’s pre-petition conduct but do not manifest any injury until after confirmation. To determine proper treatment of such future claims, the court noted, “it is essential first to ascertain whether the claimant held a pre-confirmation claim and then determine whether the pre-confirmation claim may be discharged by confirmation within the restraints of constitutional due process.”

To determine whether the debtor held a pre-confirmation claim, the court first looked to the definition of the term “claim” in the Bankruptcy Code. Section 101(5)(A) defines 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.” Observing that Congress intended to apply the broadest possible definition to the term “claim,” the court noted that several approaches have emerged on the manner in which the term “claim” must be interpreted, particularly in the context of future claims. The court applied the prepetition relationship test set forth in the Fifth Circuit’s decision in In re Piper Aircraft Corp.. Under the Piper test, a claim arises at the time of the “debtor’s [tortious] conduct forming the basis of liability only if the claimant had some type of specific relationship with the debtor at that time.” The court found that the contractual relationship between the debtor and Capstone existed prior to confirmation of the debtor’s chapter 11 plan. Citing to section 1141(d)(1)(A) of the Bankruptcy Code, which provides that the confirmation of a plan “discharges the debtor from any debt that arose before the date of such confirmation,” the court concluded that the definition of the word “claim” also extended to postpetition but pre-confirmation conduct. The court further found that a claim arising from a pre-confirmation, non-executory contract, such as the claim at issue before it, is similar to any other pre-petition claim, and would be discharged by confirmation of the debtor’s plan. The court concluded that Capstone’s claims arose at the time the debtor’s wrongful conduct forming the basis for liability occurred.

The court next examined when the debtor’s conduct occurred that formed the basis of the alleged liability.

In asserting that the conduct in question arose post-confirmation, Capstone pointed to the incomplete “punch list” items, meetings attended by the debtor post-confirmation, and a one-year warranty executed two days after confirmation. The court concluded that the basis for liability in the state court suit was the work the debtor completed prior to confirmation, not the limited post-confirmation activities, and accordingly, the claim arose at the time that conduct took place, even though the resulting injury had not manifested by the confirmation date. Therefore, the court held that Capstone’s claims were pre-confirmation claims against the debtor for its work on the project.

Having concluded that Capstone’s claims were pre-confirmation claims, the court next analyzed whether Capstone’s claims should have been discharged under the debtor’s plan. The analysis turned on whether Capstone had received proper notice of the debtor’s bankruptcy. Observing that although the broad definition of “claim” was designed to further the debtor’s interest in obtaining a fresh start, due process can properly act as a restraint on the debtor’s efforts to bar creditors from pursuing claims. Due process requires that notice be “reasonably calculated, under all circumstances, to inform interest parties of the pendency” of a proceeding. The amount of notice required depends on whether a creditor is “known” or “unknown.”

In the Fifth Circuit, actual notice is required only for known creditors, which are defined as those creditors that the debtor possesses specific information about a manifested injury against, to make the claim more than “merely foreseeable.” While the court noted that Capstone may technically have been an “unknown creditor” because Capstone’s injury had not manifested pre-confirmation, it was undisputed that Capstone received actual notice of the pendency of the bankruptcy. The court concluded that this actual notice satisfied even the more onerous due process requirements for notice to known creditors.

Capstone asserted that because it was not aware of any defect in the debtor’s work at the time Capstone received notice of the bankruptcy case, Capstone was unable to protect its rights and therefore discharge of its claims would deprive Capstone of due process. The court dismissed Capstone’s argument noting that the Fifth Circuit has held that claimants are not deprived of due process even when, at the time they receive notice of the bankruptcy, they are unaware of any injury. Ultimately, the court concluded that Capstone’s claims were properly discharged by the confirmation of the debtor’s plan.

Conclusion

While the debtor’s discharge was enforced in AMPAM, it is unclear whether the court would have concluded that there was no violation of due process if Capstone had not received actual notice of the debtor’s bankruptcy. Debtors would be well served to ensure that parties with whom they deal during the pendency of their cases receive actual notice of the case.