United States: Implications for Asbestos-Related Future Claims: In re Grossman's Inc.

INTRODUCTION

In an en banc decision filed on June 2, 2010, the Third Circuit held that a "claim," as that term is defined by the Bankruptcy Code, "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." In re Grossman's Inc., 2010 WL 2131291, Slip. Op., at 18 (3d Cir. June 2, 2010) (citing 11 U.S.C. § 101(5)). In so holding, the court reversed longstanding circuit precedent holding that a claim arises for bankruptcy purposes when the underlying state law cause of action accrues. See Avellino & Bienes v. M. Frenville Co. (Matter of M. Frenville Co.), 744 F.2d 332 (3d Cir. 1984). This memorandum outlines the case and the practical implications for clients facing potential unknown future tort claims.

The common understanding of a "future claim" is a tort claim that arises from wrongful or negligent conduct that already has occurred, where the effects are not known (or fully known) for years thereafter. See American Products, Inc., v. Windsor, 521 U.S. 591, 628 (1997). Asbestos-related personal injury claims are the principal kind of future claims that have been dealt with in chapter 11. In the bankruptcy context, future claims affect the ability of a chapter 11 debtor to obtain a discharge of all claims arising prior to the confirmation of the debtor's plan. Courts in bankruptcy cases struggle to balance the overarching fresh start policy of the Bankruptcy Code with the due process concerns that accompany the possibility that the holders of tort claims may be unaware that they have claims until well after plan confirmation.

BACKGROUND

Grossman's filed for Chapter 11 bankruptcy in April 1997 and provided notice by publication of the deadline for filing proofs of claims. At that point, there was no suggestion that Grossman's might have future asbestos liability. Grossman's confirmed a plan of reorganization in December 1997 that purported to discharge all claims that arose before the Plan's effective date.

In 2006, Mary Van Brunt manifested symptoms of mesothelioma, a cancer linked to asbestos exposure. She sued the successor-in-interest to Grossman's (JELD-WEN) and other companies for tort and breach of warranty for allegedly manufacturing the asbestos-tainted products causing her illness. JELD-WEN moved to reopen the Chapter 11 case, seeking a determination that her claim was discharged by the Plan.

HOLDING

The Bankruptcy Court and the District Court followed circuit precedent in Matter of Frenville Co., 744 F.2d 332 (3d Cir. 1984) and held that the Plan did not discharge Van Brunt's claim. Under Frenville, a claim arises under the Bankruptcy Code when the underlying state law cause of action accrues. 744 F.2d at 337. The applicable state law provided that an asbestos-related claim does not arise until the injury manifests itself, which in this case was in 2006, ten years after the effective date of the Plan.

The Third Circuit noted significant authority, bordering on universal disapproval, in other circuits contrary to the "accrual test" used in Frenville to determine when a claim arises under the Bankruptcy Code. Other circuits and the Supreme Court note that the Code adopts a very broad definition of a "claim" to include "all legal obligations of the debtor, no matter how remote or contingent . . . [to] permit[] the broadest possible relief in the bankruptcy court." In re Grossman's Inc., Slip. Op. at 10-11 (quoting H.R. Rep. No. 95-595, at 309 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6266; S.Rep. No. 95-989, at 21, reprinted in 1978 U.S.C.C.A.N. 5787, 5807; citing Vanston Bondholders Protective Comm. V. Green, 329 U.S. 156, 162-63 (1946)). The Third Circuit overruled Frenville because it imposed too narrow an interpretation of a "claim" under the Bankruptcy Code.

The court then discussed the tension between Congress' intent to give debtors a fresh start through bankruptcy by maximizing the scope of the liabilities discharged upon confirmation of a plan and the due process concerns inherent in discharging future tort claims without providing adequate notice to potential future claimants. Some courts resolve this tension by holding that a claim arises "when the acts giving rise to liability were performed, not when the harm caused by those acts was manifested." Grady v. A.H. Robins Co., 839 F.2d 198, 201 (4th Cir. 1998) ("conduct test"). Others adopt a more narrow view of the term "claim" and hold that "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." Grossman's, Slip. Op. at 14 (citing In re Piper Aircraft, Corp., 58 F.3d 1573, 1576 (11th Cir. 1995) ("pre-petition relationship test"). Without deciding whether and to what extent a pre-petition relationship between the debtor and the claimant is necessary for a claim to arise, (or whether a potential claimant can ever satisfy the "conduct test" but not the "pre-petition relationship test") the Third Circuit held that a claim arises when an individual is exposed pre-petition to a product or conduct giving rise to an injury.

Regardless of whether a claim arises under the Bankruptcy Code, however, inadequate notice to a claimant of a potential bankruptcy claim precludes discharge of the claim in bankruptcy. In re Grossman's Inc., Slip. Op. at 18-19. To reconcile the debtor's need for discharge with unknown future claimants' need for legal redress, the court cited with approval the plan of reorganization in In the Matter of John-Mansville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986), which established a trust in excess of $2.5 billion out of which all present and future asbestos-related claims were to be paid whenever such claims manifested.

DISCHARGE OF FUTURE CLAIMS UNDER 11 U.S.C. § 524(g)

The court in Grossman's also discussed 11 U.S.C. § 524(g), which authorizes courts "'to enjoin entities from taking legal action for the purpose of . . . collecting, recovering, or receiving payment or recovery with respect to any [asbestos-related] claim or demand' through the establishment of a trust from which asbestos-related claims and demands are paid." Id., Slip. Op. at 19 (quoting 11 U.S.C. § 524(g)(1)(B)). Both the debtor and the trust must satisfy certain standards under § 524 (g) in order to qualify for a channeling injunction directing all future claims to the trust.¹ These standards attempt to balance two goals -- protecting the due process rights of future claimants while providing debtors burdened with asbestos injury claims a method to provide for future unknown claims without crippling the debtor's reorganization. Id., Slip. Op. at 20 (quoting 140 Cong. Rec. S4523 (Apr. 20, 1994)). The Debtor in Grossman's could not avail itself of the protections of § 524(g) because the provision applies only in situations where the debtor can establish that a principal liability sought to be discharged in bankruptcy is present and future asbestos claims. See 11 U.S.C. § 524 (g)(2)(B)(i)(I).

PRACTICAL IMPLICATIONS

After holding that the assertion of liability of the claimant in fact constituted a claim, the Third Circuit in Grossman's remanded to the district court (or the appropriate bankruptcy court) to determine whether discharge of the asbestos-related claim would comport with due process. This determination depends on factors applicable to the particular case, such as "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 came to their attention, whether the claimants were known or unknown creditors, whether the claimants had a colorable 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 for future claimants under § 524(g)." Id., Slip. Op. at 22. Given these factors, it should be clear that resolving the question whether a claim is discharged can lead to lengthy and expensive court proceedings, with no guarantee that a future claim will be discharged by the court.

What Grossman's brings to the fore is that the principal impediment to the discharge of a future claim is due process. Thus with the overruling of Frenville, it will remain difficult to discharge future tort claims in bankruptcy, at least in the mass tort context, where the claimants have been exposed to a toxic substance pre-petition but have no manifestation of disease or other bases to know they are contingent creditors.

Footnote

^{1. "To qualify for [the] protections [of § 524(g)], a court must find that the debtor has been named in an action for damages allegedly caused by asbestos, that the debtor is likely to be subject to substantial demands for payment in the future arising out of the same or similar conduct, that the amounts and timing of such future claims are uncertain, and that permitting the pursuit of such claims outside the trust mechanism would threaten the plan's attempts to deal equitably with current and future demands. 11 U.S.C. §§ 524(g)(2)(B)(i)(I), (ii)(I-III). The trust itself must . . . assume the liabilities of the debtor for current and future claims and must be funded at least in part by the securities of the debtor; the trust must either own, or be entitled to own, the majority of the voting shares of the debtor, its parent, or its subsidiary; the trust must use its assets to pay future claims and demands; and the trust must provide for mechanisms ensuring its ability to value and pay present and future claimants in substantially the same manner. 11 U.S.C. §§ 524(g)(2)(B)(i)(I) - (IV), (ii)(V)." In re Combustion Engineering, Inc., 391 F.3d 190, 234 (3d Cir. 2005) (cited in In re Grossman's, Slip.Op. at fn.12).}

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