Restructuring

Courts have applied various standards for determining when a “claim” arises for the purposes of the Bankruptcy Code, particularly in the tort context.  A recent decision from the United States Bankruptcy Court for the Western District of Pennsylvania illustrates that the standard may differ depending on whether the claim in question is a creditor’s claim against the debtor’s estate or a debtor’s claim against a third-party. 
The sequence of events in In re Harber is as follows:  Mrs. Harber underwent two hip replacement surgeries between 2007 and 2008.  During both surgeries, the surgeon implanted products manufactured by DePuy Orthopaedics, Inc. (“DePuy”).  Three years later, Mrs. Harber received a letter from the hospital, alerting her that a small number of patients with similar hip implants were experiencing problems that could potentially warrant further treatment.  Upon receiving this letter, Mrs. Harber retained the services of a law firm and joined a class action lawsuit against DePuy.
Mrs. Harber and her husband filed a chapter 7 petition in January 2014 and identified the claim against DePuy on their schedules as contingent and unliquidated.  In September 2014, the bankruptcy court closed the case but excepted the potential claim against DePuy from abandonment.  In November 2014, Mrs. Harber learned that metal from the hip replacement hardware had entered her bloodstream.  Mrs. Harber subsequently underwent surgery on her left hip in January 2015.  In May 2015, the Harbers were offered $142,000 to settle the claim against DePuy.  After learning of the settlement offer, the chapter 7 trustee moved to reopen the Harbers’ bankruptcy case and the court granted the request.
The issue was whether the Harbers’ claim against DePuy was property of the bankruptcy estate.  The Harbers contended that it was not property of the bankruptcy estate.  They advocated the “accrual approach,” which considers when a cause of action accrues under state law.  Under applicable Pennsylvania law, a cause of action involving a latent injury accrues when the plaintiff discovers the injury.  Since Mrs. Harber did not sustain any injury until well after the bankruptcy case was closed, the Harbers argued that the claim against DePuy was not property of the bankruptcy estate.
The chapter 7 trustee asserted that any proceeds that the Harbers received from DePuy in a settlement were property of the bankruptcy estate.  The trustee relied on In re Grossman’s, where the Third Circuit rejected the accrual approach and held that a claim arises when an individual is exposed prepetition to a product giving rise to an injury, which underlies a “right to payment” under the Bankruptcy Code.  Because Mrs. Harber underwent the hip replacement surgery prepetition, the trustee argued that her claim against DePuy was property of the estate.
In a blow to the trustee, the bankruptcy court distinguished the Third Circuit’s Grossman decision.  The court held that the Grossman analysis focused on whether a claim, as defined in section 101(5) of the Bankruptcy Code, existed against the debtor’s estate.  By contrast, the question in Harber was whether Mrs. Harber’s claim against a third-party was property of the estate under section 541 of the Bankruptcy Code.  The court explained that a distinction between these two scenarios is “rooted in Congressional intent.”  The House Committee comments to section 101(5) reflect Congressional intent for an expansive definition of “claim” against a bankruptcy estate.  The comments on section 541 are, in the court’s view, “more reserved” and reflect a Congressional intent not to expand the debtor’s rights against others any more than they existed at the commencement of the case.
Therefore, the court concluded that although Third Circuit precedent rejected the “accrual approach” for purposes of determining when a claim against the estate arose, it was the proper test for determining whether a debtor’s claim against a third party arose, so as not to expand debtors’ rights against third parties.  Since Mrs. Harber did not have a viable claim against DePuy on the petition date, the claim was not property of the bankruptcy estate.
Separately, the court also held that the Mrs. Harber’s claim was not “sufficiently rooted” in the Harbers’ prepetition past so as to constitute property of the estate under the Supreme Court’s decision in Segal v. Rochelle because she did not manifest any injury or incur any damages until after the bankruptcy petition was filed.
Creditors of a debtor holding tort claims against a third-party should be mindful that, absent some prepetition manifestation of injury or incurrence of damages, the tort claims may not be property of estate.  And, as was the case in Harper, creditors will not be entitled to the proceeds of such claims.
Moshe Fink is an Associate at Weil Gotshal & Manges, LLP in New York.