3rd Circuit Changes Standard For Asbestos Claim Discharge

3rd Circuit Changes Standard For Asbestos Claim Discharge

PHILADELPHIA - (Mealey's) An en banc Third Circuit U.S. Court of Appeals on June 2 overruled a precedential holding outlining when an asbestos-related claim can be discharged by a bankrupt company's plan of reorganization, saying that the previous test for accrual was too narrow and that courts should decide whether discharge of a claim would comport with due process (In re:  Grossman's Inc., et al., No. 09-1563, 3rd Cir.).

In 1977, Mary Van Brunt purchased products containing asbestos from Grossman's Inc. when remodeling her home.  In April 1997, Grossman's filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for District of Delaware.  Grossman's plan of reorganization was confirmed in December 1997.  Van Brunt did not file a proof of claim before confirmation of the plan because, at the time, she was unaware of any claim she had because she manifested no symptoms related to asbestos exposure until 2006.  She was diagnosed with mesothelioma in March 2007.

Shortly after her diagnosis, Van Brunt sued JELD-WEN, the successor-in-interest to Grossman's, in a New York state court.  After Van Brunt filed the suit, JELD-WEN moved the Bankruptcy Court to reopen the Chapter 11 case, seeking a determination that the claims were discharged by the plan.  Van Brunt died in 2008, and Gordon Van Brunt was substituted as the representative of her estate.

The Bankruptcy Court concluded that the 1997 plan did not discharge Van Brunt's asbestos-related claims because they arose after the effective date of the plan.  In reaching the decision, the Bankruptcy Court relied on the Third Circuit's decision in Avellino & Beines v. M. Frenville Co. (744 F.2d 332 [2984]), which held that a "claim," as the term is defined by the Bankruptcy Code, arises when the underlying state law cause of action accrues.

For Van Brunt, applicable state law provides that a cause of action for asbestos-related injury does not accrue until the injury manifests; therefore, the Bankruptcy Court reasoned that Van Brunt had no "claim" subject to discharge in 1997 because Mary Van Brunt did not manifest symptoms of mesothelioma until 2006.  The U.S. District Court for the District of Delaware affirmed the Bankruptcy Court's decision in every respect but one, reversing the conclusion that a breach of warranty claim arose post-petition.  JELD-WEN appealed.

The District Court and Bankruptcy Court correctly applied the accrual test holding under Frenville, but the question remains as to whether Frenville should continued to be followed given what appears to be near universal disapproval of the holding, the Third Circuit said.

The appeals court said it was persuaded that Frenville's accrual test imposes too narrow an interpretation of a "claim" under the Bankruptcy Code and should be overruled.  Other courts have declined to follow Frenville because of its apparent conflict with the Bankruptcy Code's expansive treatment of the term "claim," the court said.

Due process safeguards in a Bankruptcy Code Section 524 plan of reorganization are of no help to Van Brunt because Grossman's plan of reorganization did not provide for a channeling injunction or trust to provide for claims made by individuals whose injuries were not manifest at the time of the bankruptcy petition, the appeals court said.

In such situations, whether a particular claim should be discharged must be decided on whether the discharge would comport with due process, which may invite inquiry into the adequacy of the notice of the claims bar date, the appeals court said.

Whether a particular claim has been discharged depends on factors applicable to a particular case and is best determined by the particular bankruptcy or district court, the appeals court said in remanding the case.

[Editor's Note:  Full coverage will be in the June 9 issue of Mealey's Asbestos Bankruptcy Report.  In the meantime, the opinion is available at www.mealeysonline.com or by calling the Customer Support Department at 1-800-833-9844.  Document #48-100609-032Z.  For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]

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