The Third Circuit Court of Appeals issued an en banc opinion (pdf) today in which it overruled the Frenville standard for determining the existence of a "claim" for purposes of Section 101(5) of the Bankruptcy Code.
The decision, In re Grossman’s, Inc., involved a claimant (Van Brunt) whose symptoms did not manifest until years following a Chapter 11 case in which the debtor’s plan of reorganization had been confirmed. It will affect all bankruptcy proceedings in Delaware, and thus will have a very significant impact on how unknown potential tort and environmental claims are resolved in large Chapter 11 cases.
Under the Frenville "accrual" standard, a "claim" under Section 101(5) was not deemed to exist until a "right to payment" arose under applicable state law. Because such a right requires a manifestation of symptoms with respect to asbestos exposure, the lower courts had held that Van Brunt’s claim did not exist at the time that the Grossman’s plan was confirmed and therefore could not have been discharged by the plan. However, because Frenville has been rejected by nearly every court outside of the Third Circuit, the successor to Grossman’s asked the Third Circuit to overrule that standard. The court, sitting en banc, agreed.
The Third Circuit noted that some courts have adopted a "conduct" test, in which the prepetition conduct of the claimant, such as the use of a product that gives rise to a later injury, is determinative as to whether a "claim" exists. Other courts have criticized this approach as too harsh and violative of due process rights, particularly in tort cases, and have required the existence of some level of prepetition relationship, contact, or privity between the debtor and the claimant before a "claim" can arise.
The Third Circuit appears to be trying to come down in the middle of these two tests, recognizing on the one hand the need to define "claims" in as broad a manner as possible, so as to facilitate the Bankruptcy Code’s fresh start policy, and on the other hand the imperatives of fairness and due process. The court, though determining that Van Brunt had a "claim" that existed at the time of the chapter 11 case, did not opine on whether such "claim" was discharged by Grossman’s plan. It instead remanded the case so that the lower courts could make appropriate findings as to the manner of the bar date notice given during the chapter 11 case and whether, under the circumstances, a discharge of the claim would comport with Van Brunt’s due process rights.
Congress has dealt with this problem in mass tort asbestos cases through Section 524(g), pursuant to which a special trust can be created to deal precisely with the type of unmanifested future claims that arose in Grossman’s. The plan of reorganization in Grossman’s, however, did not contain such a trust, so the sufficiency of the due process afforded Van Brunt must be addressed directly. Whichever way the lower courts rule on this issue, it will in high likelihood come before the Third Circuit again.