Contributed by Debra A. Dandeneau.
“The shadow of Frenville fades, but more slowly than we would like.”  So concludes Justice Ambro, authoring the Third Circuit’s first decision to address the dischargeability of latent claims since the Third Circuit overturned its controversial Frenville decision with its 2010 decision in Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s Inc.).  Unfortunately, as the Third Circuit’s decision in Wright v. Owens Corning demonstrates, Frenville may be gone, but its effects linger on and appear to limit the extent to which debtors from the pre-Grossman’s era may discharge latent tort claims.
As we have discussed in this blog, in overturning Frenville, the Third Circuit in Grossman’s  embraced a two-part test for determining whether a claim has been discharged.  The new test focuses not just on when the facts giving rise to the claim occurred, but also on whether notions of due process require such claim not to be discharged.  Recent decisions within the Fifth Circuit addressed latent environmental tort and asbestos claims against reorganized Placid Oil and applied variations of this test to find that these latent claims had been discharged by confirmation of Placid Oil’s chapter 11 plan.  Because the asbestos claimant in Placid Oil had been an unknown creditor, the Fifth Circuit relied upon the tenets of Mullane  v.  Cent.  Hanover  Bank  & Trust Co. and the existence of publication notice to conclude that the claimant had received sufficient due process to discharge its claim, even though the claimant’s late wife had not developed any symptoms from her exposure to asbestos at the time of Placid Oil’s bankruptcy discharge.
In Wright, though, the Third Circuit felt constrained by its earlier decision in Frenville and held that two latent product liability claims, albeit claims capable of having been discharged, had not been discharged under Owens Corning’s chapter 11 plan.  Because the law under Frenville had been that extracontractual claims against a debtor were deemed to arise when the cause of action arose under applicable non-bankruptcy law, the Third Circuit concluded that, prior to Grossman’s, claimants such as those in Wright could not have known that they held dischargeable claims that they needed to assert.  Therefore, the court concluded, such claims were not afforded sufficient due process to have been discharged.
In November 2009, three years after Owens Corning emerged from its asbestos-driven chapter 11 case, two consumers attempted to bring a class action against the reorganized debtor on account of allegedly defective roofing shingles that had been manufactured by Owens Corning and purchased by the consumers, one prior to Owens Corning’s petition date and one after the petition date, but prior to confirmation of Owens Corning’s plan.  As to the prepetition purchase, Owens Corning argued that the claim was barred as a result of not having been filed by the bar date and discharged as a result of confirmation of Owens Corning’s plan.  For the postpetition, preconfirmation purchase, Owens Corning argued that the claim had been discharged as a result of confirmation.
Under Grossman’s, the Third Circuit held that the prepetition purchaser held a prepetition claim that would have been subject to the bar date and was dischargeable.  Moreover, because section 1141(d)(1)(A) of the Bankruptcy Code discharges claims arising prior to confirmation of a plan, the preconfirmation, postpetition purchaser also had a claim that was subject to discharge.  The Third Circuit, though, turned to the second prong of Grossman’s to determine whether the purchasers of the allegedly defective roofing shingles had been afforded sufficient due process to discharge their claims.

Both claimants admittedly were unknown to the Owens Corning debtors throughout their chapter 11 cases, and no concern was raised about the adequacy of the publication notice of the bar date or of confirmation.  Indeed, although the publication notice for the confirmation hearing was a fairly generic notice, the publication notice for Owens Corning’s bar date specifically advised the public that they should assert claims arising out of  “the  sale,  manufacture,  distribution,  installation  and/or marketing  of  products  by  any  of  the  Debtors,  including without limitation . . . roofing shingles.”  It certainly seems as if the Owens Corning debtors had taken sufficient steps to discharge unknown claims, at least under the due process principles adopted by the Fifth Circuit in Placid Oil.

As with the Fifth Circuit in Placid Oil, the Third Circuit did not seem particularly troubled that the claimants had not become aware of the facts relating to their claims during the course of the Owens Corning debtors’ chapter 11 cases.  Instead, the Third Circuit was racked with guilt over the issue that claimants, albeit completely unaware of any product defects, could have been misled by Frenville into believing that they need not assert any claims until they possessed a ripe cause of action against the debtors.  Accordingly, the Third Circuit concluded that due process required a “re-do” and precluded such claims from being  discharged by the Owens Corning debtors’ plan.

In so holding, the Third Circuit laid down a somewhat bright line for treatment of prepetition latent tort claims – if the debtor emerged from chapter 11 prior to the Grossman’s decision on June 2, 2010, then, absent other protection for such claims, latent claims would not have been discharged if they could not have given rise to a claim under Frenville.  The court did not stop there, though.  Because Grossman’s applied only to prepetition claims, the Third Circuit reasoned that holders of claims arising postpetition, but preconfirmation would not be capable of extrapolating the principles of Grossman’s.  Therefore, the Third Circuit held that, as to such creditors, due process requires that it only apply the principles of Grossman’s prospectively to cases confirmed from and after the date of Wright.

Notwithstanding its seemingly severe limitation on dischargeability of latent tort claims, the Third Circuit did caution that the issue of due process is a fact specific case, and in some circumstances the court could determine that an unknown creditor was afforded suficient due process for its latent claim to have been discharged.  Even for cases in the post-Grossman’s/post-Wright era, though, it is by no means clear that the Third Circuit will conclude that publication notice, by itself, will afford sufficient due process to holders of latent claims.  What should a plan proponent do, then, to ensure that the debtor obtains a fresh start from all its preconfirmation liabilities?

As one example, the Third Circuit noted the use of a future claimant’s representative in asbestos-related cases to protect the interests of unknown holders of asbestos claims.  Nothing prohibits the expansion of such concept to protect other types of claimants.  In fact, in the context of prepetition pedophile claims, bankruptcy courts have even used “future” claimants’ representatives to protect the interests of adults who were victims of prepetition childhood sex abuse, but who may suffer from repressed memory.  Nor did the Third Circuit suggest that a future claimants’ representative could be the exclusive means by which a debtor could protect the interests of unknown creditors.  Creating a class under the plan for unknown creditors, who would receive the same distribution as known, similarly situated creditors might also provide holders of any such latent claims with sufficient due process to discharge those claims.

While such protective measures may still be worth considering in the post-Grossman’s era, debtors that confirmed plans prior to Grossman’s will have to live with the protections, if any, they built into their plans and try to walk the path that the footsteps of Frenville left behind for determining dischargeability of claims.