Earlier this week, the Third Circuit affirmed a federal bankruptcy court’s dismissal of a mesothelioma claim against a bankrupt oil company that arose as an adversary proceeding fifteen years after the bankruptcy plan was confirmed and discharged all outstanding claims.  The Circuit held that because the parties conceded the claim arose at the time of the victim’s asbestos exposure, which pre-dated the defendant’s bankruptcy, and because the bankrupt defendant provided adequate constructive notice to any potential claimants at the time the bankruptcy plan was confirmed, the claim was discharged as a matter of law.  This holding, however, was not without misgivings by both the majority and the dissenting opinions, which each pointed out potential adverse policy consequences of such a ruling and invited future legislation or jurisprudence to push back against this outcome and potentially change the liability exposure for defendants in asbestos and other latent disease cases.

In 1986, Placid Oil Company – an owner and operator of a natural gas production and processing facility – filed for bankruptcy.  The court declared that January 31, 1987 would be the deadline by which potential creditors could file claims against the company; and subject to the bankruptcy process, the oil company then published notices in major newspapers, informing potential creditors of the bankruptcy proceedings and the process by which to file claims before the deadline.  In 1988, the bankruptcy plan was confirmed, and all claims against the company that arose before that date but were not yet filed were discharged pursuant to the bankruptcy order.

In 2003, the wife of a former employee of the bankrupt oil company was diagnosed with mesothelioma and died, allegedly as a result of years of laundering her husband’s uniforms which were covered in asbestos fibers from his work with asbestos-containing insulation at the oil company.  The deceased’s family filed claims for wrongful death against the oil company in Louisiana State court.  The oil company responded by moving the entire action to an adversary proceeding in federal bankruptcy court and seeking summary judgment on the grounds that the claim was already discharged pursuant to the confirmation of the 1988 bankruptcy plan.  For purposes of the motion, the oil company’s responsibility for the deceased’s asbestos exposure and resulting illness was not contested; rather the only issue was whether the claim was discharged by the bankruptcy order.  The deceased’s family argued that they were known creditors at the time of the bankruptcy and therefore should have received direct notice of the bankruptcy plan; and alternatively argued that even if they were not known creditors, the constructive notice issued to the public through newspaper advertisements was insufficient under procedural due process to discharge their claim because there was no specific mention of potential asbestos-related claims.  The family of the deceased relied heavily in their arguments on the policy implications of discharging claims like theirs in bankruptcy in light of the fact that mesothelioma has such a long latency period from the time of asbestos exposure.

Under bankruptcy law, a known creditor at the time of a bankruptcy proceeding (meaning a party that the entity in bankruptcy actually knows – or can reasonably ascertain through diligence – to hold a claim against them) must be given direct notice of the bankruptcy proceedings and their rights as a creditor, while unknown creditors need receive only constructive notice, which can be accomplished through publication in a national newspaper.  The deceased’s family argued that because the oil company knew of the asbestos exposure to their former employee and possibly to his family as well – and therefore knew of the foreseeable future injury to a family member – they were known creditors.  According to the Third Circuit, however, knowing of an event that gives rise to the risk of injury is not sufficient to qualify the potentially injured party as a known creditor without a known “manifested injury.”  This is true not only for asbestos-related claims - where the actual disease must be known at the time of the bankruptcy, and not just the exposure - but also applies to other latent diseases as well as environmental claims.  Ultimately, a mere foreseeable injury based on a known exposure does not create a known creditor prior to the time the injury occurs.  The Third Circuit further held that constructive notice to unknown creditors does not require enumeration of specific potential claims, even those based on known exposures, but requires only notification of the process for filing a proof of claim in general, as well as information about the consequences of not filing before the deadline.

The Third Circuit therefore affirmed the dismissal of the adversary proceeding on the grounds that the deceased’s family was not a known creditor at the time of the bankruptcy proceeding, and they were given adequate constructive notice that any claims they might wish to bring in the future based on circumstances that took place prior to the bankruptcy would be discharged.  The opinion also noted that Congress may wish to pass legislation  addressing the predicament its holding creates for victims of latent disease.  The dissent, meanwhile - focusing again heavily on the policy implications of discharging a mesothelioma claim fifteen years before the victim experiences any symptom of the disease –  indicated that a more proper analysis in a latent-disease case would find that the claim arose not at the time of the exposure, but rather at the time the disease was diagnosed, which would mean that the claims of the deceased’s family in this instance could not in fact have been discharged by the bankruptcy, which as a matter of law discharged only claims that had already arisen but were not yet filed.  In a footnote, the majority opinion also indicated that the dissent’s analysis might be correct, but refused to address this issue because it was not briefed by the deceased’s family, who instead conceded that the claim arose prior to the bankruptcy, at the time of the asbestos exposure.

What is most interesting about this case is not the holding itself, but the dicta and the dissent, indicating a possible call to action for legislative change in this area, if not a future legal holding consistent with the dissent on a properly briefed case, either of which would reopen liability concerns for a large number of companies that were previously involved in – or have acquired companies previously involved in – the manufacture, distribution, or sale of asbestos-containing products, or other defendants in latent disease cases that stem from toxic exposures.  Asbestos use, for the most part, ended in the early 1980s when the risks and hazards of asbestos exposure became widely known.  Thirty years, later, however, new diagnoses of asbestos-related diseases are still occurring, and it is now understood by scientists that such diseases – often the result of secondary exposures, as in this case – are likely to continue well into the future.  Legislative changes or legal opinions that allow these diseases to form the basis of claims against companies that believed their liability to be discharged by successful bankruptcy proceedings would change the landscape for future asbestos-related tort litigation as well as litigation involving other diseases with long latency periods or secondary exposure risks.