By: Melanie Spergel
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In an interesting twist, the Third Circuit in Wright v. Owens Corning[1] held that the Court’s change in its interpretation of what constitutes a claim meant that the notice given to parties who held claims under the revised interpretation but not under the one applicable at the time of notice would deprive those claimants of due process; therefore their claims were not dischargeable.[2] The debtor, Owens Corning, manufactured the allegedly defective roofing shingles that were installed on the two plaintiffs’ homes.[3] The debtor twice published notice in several local and national newspapers in an attempt to reach unknown holders of claims against the estate.[4] The debtor’s confirmed chapter 11 reorganization plan (“the Plan”) purported to extinguish all claims that arose prior to the confirmation date, including claims held by parties who only received publication notice.[5] Several years later, the plaintiffs discovered cracks in their roofing shingles, which one plaintiff had installed pre-petition and the other had installed post-petition but pre-confirmation.[6] The plaintiffs sued the reorganized debtor, and claimed that the Plan could not have discharged their claims because the plaintiffs were not claim holders at the time notice of Plan confirmation was published.[7] As such, the plaintiffs claimed that they had not received constitutionally adequate notice.[8] The Third Circuit agreed that the plaintiffs were deprived of due process but recognized that the deprivation was a result of the Third Circuit’s change in standards for when a claim arises.[9]
The Third Circuit applied its standard from Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s Inc.),[10] which states that a claim arises when an individual is exposed pre-petition to a product or conduct giving rise to an injury.[11] In Grossman’s, the Third Circuit overturned its standard from Avellino v. M. Frenville Co. (In re M. Frenville Co.)[12] that claims arise when injury manifests.[13] In Owens Corning, the Third Circuit extended the Grossman’s standard to all pre-confirmation conduct.[14] Accordingly, the Third Circuit found that both plaintiffs’ claims arose upon exposure to the debtor’s product, even though one plaintiff installed the shingles post-petition but pre-confirmation.[15] In so holding, the Third Circuit emphasized that any alternative standard for determining when claims arise would both “separate artificially” individuals affected pre- and post-petition and jeopardize the debtor’s chance of emerging from bankruptcy with a “fresh start.”[16]
However, the Third Circuit held that discharging the plaintiffs’ claims pursuant to the Grossman’s standard would implicate due process concerns because of inadequate notice.[17] Although publication notice is generally sufficient to apprise unknown claimants in satisfaction of due process, the Third Circuit found that the change in standards from Frenville to Grossman’s created “exceptional circumstances” warranting additional protections for the plaintiffs.[18] Because Frenville was the controlling law when the debtor published notice, the Third Circuit reasoned that retroactive application of the Grossman’s standardwould violate due process.[19] Specifically, since the plaintiffs’ roofing shingles had not yet cracked, the debtor’s notice could not have informed the plaintiffs of their opportunity to assert claims because, at the time of the notice, Frenville dictated that their claims would not arise until injury manifested.[20] To reconcile these due process concerns, the Third Circuit held that the plaintiffs’ claims were not discharged and remanded the case for further proceedings.[21]
The Third Circuit’s decision has different implications for two groups of creditors in determining the status of claims that arise from the extension of the Grossman’s test to include post-petition, pre-confirmation exposure.[22] The first group consists of creditors who were exposed to a debtor’s conduct pre-petition and held claims as a result of the shift from the standard in Frenville to the one in Grossman’s.[23] For these creditors, due process requires that Frenville continue to apply for cases in which the debtor proposed and confirmed reorganizations plans prior to the June 2, 2010, decision date of Grossman’s.[24] Conversely, creditors exposed to a debtor’s conduct after that date are deemed to understand that they held claims.[25] For the second group—comprised of creditors like the plaintiffs who hold claims based on this decision’s extension of Grossman’s to post-petition but pre-confirmation claims—Frenville will continue to apply to claims where reorganization plans were confirmed prior to the Owens Corning decision.[26] After addressing the change in standards, the Third Circuit noted in closing that “[t]he shadow of Frenville fades, but more slowly than we would like.”[27]
[1] 679 F.3d 101 (3d Cir. 2012).
[2] Id. at 109.
[3] Id. at 102.
[4] Id. at 103.
[5] Id.
[6] See id.
[7] Id. at 104.
[8] Id.
[9] The Third Circuit noted that the district court “correctly determined” that the plaintiffs held claims under the Bankruptcy Code. Id. at 109. Moreover, the Third Circuit explained that under its recently adopted Grossman’s test, individuals must recognize that they may hold claims based on exposure to debtor’s product or conduct, irrespective of whether injury has manifested. Id. at 106.
[10] 607 F.3d 114 (3d Cir. 2010).
[11] Wright, 679 F.3d at 106.
[12] 744 F.2d 332 (3d Cir. 1984).
[13] Wright, 679 F.3d at 104.
[14] Id. at 107.
[15] Id. at 106–07.
[16] Id. at 107.
[17] Id. at 108.
[18] Id. at n.7.
[19] Id. at 108.
[20] Id.
[21] Id. at 102–03.
[22] Id. at 109.
[23] Id.
[24] Id.
[25] Id.
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