Restructuring

Contributed by Debra A. Dandeneau.
After years of living with Frenville, one of the most criticized bankruptcy cases for its reliance upon state law to define when a claim arises for bankruptcy purposes, the Third Circuit turned things around with its 2010 decision in Jeld-Wen, Inc. v. Gordan van Brunt (In re Grossman’s Inc.).  Not only did Jeld-Wen overrule Frenville, but it also became the first case to separate the notion of when a claim arises from the separate issue of whether sufficient due process to discharge the claim was afforded the claimant.  Although other circuits have focused on fairness issues in defining when a claim arises, they often ended up developing muddled definitions of “claim” to address what are more appropriately characterized as due process concerns.  The Third Circuit seems to have started something, though, and a recent decision by the bankruptcy court in Placid Oil shows that other courts may be catching on and similarly adopting a broad definition of “claim,” with a separate inquiry on whether due process permits such claim to have been discharged.  As a Fifth Circuit decision involving another claim against Placid Oil demonstrates, the renewed emphasis on due process likely shifts the focus back to what actions would have been reasonable for the debtor to take in addressing latent claims and away from what might be fair to the claimant.
Twenty years after it emerged from bankruptcy in 1988, Placid Oil sought to reopen its chapter 11 case to enforce its discharge injunction against plaintiffs who had brought suit against Placid Oil on account of asbestos-related personal injury and wrongful death claims.  The parties stipulated that the claims arose out of exposure to fibers from asbestos-containing insulation used at the Placid Oil plant where Mr. Williams, one of the plaintiffs, had worked.  Although Mr. Williams himself evidenced no injuries from exposure to asbestos, his wife had been exposed to asbestos fibers as a result of handling and washing Mr. Williams’s work clothes.  In 2003, Mrs. Williams developed mesothelioma, her health rapidly deteriorated, and within the same year she passed away.
As the Third Circuit did in Jeld-Wen, the Placid Oil bankruptcy court separated its analysis of whether the plaintiffs’ claims had been discharged into two parts:

(1)  Did the plaintiffs’ claims arise prepetition?

(2)  If they did, were the plaintiffs afforded sufficient due process at the time of the confirmation of Placid Oil’s plan such that their claims were discharged under the plan?

On the first issue, the bankruptcy court applied the Fifth Circuit’s “prepetition relationship” test developed in Lemelle to determine when the claim arose.  Although that test had been used by the Fifth Circuit to determine that the claims of owners of a defective manufactured home had not arisen prepetition because the homeowners had had no apparent prepetition privity or contact with the debtor, the Fifth Circuit in Lemelle did include “exposure” in its litany of prepetition relationships that would give rise to a prepetition claim.  Accordingly, because any asbestos exposure of Mrs. Williams undoubtedly had occurred prepetition, claims related to such exposure were prepetition claims.
As in Jeld-Wen, the inquiry did not end there. The bankruptcy court then turned to the issue of whether the plaintiffs had been afforded sufficient due process to discharge their claims.  Although Placid Oil had published notices of its bar date and confirmation hearing — and Mr. Williams, as an employee of Placid Oil, certainly was aware of these events — none of the plaintiffs had any reason to suspect that Mrs. Williams, or anyone else for that matter, might develop complications from exposure to asbestos fibers.  Indeed, not only did Mrs. Williams’ symptoms only appear many years after Placid Oil’s emergence from chapter 11, but at the time of Placid Oil’s chapter 11 case, Placid Oil itself had never had an asbestos-related claim asserted against it.  Even in the 20 years after confirmation of Placid Oil’s plan, Placid Oil only had been sued nine times on account of asbestos-related personal injury or wrongful death claims.
In Jeld-Wen, the Third Circuit likewise found that an asbestos plaintiff’s personal injury claim arose prepetition, but remanded the case to the bankruptcy court to determine whether the plaintiff had been afforded sufficient due process to discharge her claim.  Because the parties later settled the issue, we have no further insights from that decision on what might constitute sufficient due process in the context of a latent personal injury claim.  In Placid Oil, though, the bankruptcy court addressed the issue head on.  The bankruptcy court found the undisputed facts significant as they demonstrated not just that Mrs. Williams herself was an unknown claimant, but that Placid Oil did not have sufficient knowledge of the potential of such types of claims being asserted to justify taking more extreme steps to afford unknown claimants due process, such as the appointment of a future claimants’ representative.  The court noted that “Due process requires reaonable notice under the circumstances,” but “the law does not require unreasonable acts in the name of due process.”  Therefore, the bankruptcy court refused to impose on the debtor any obligation to do more than publish notice of its confirmation, which it did.  Accordingly, even though Mrs. Williams had no way of ascertaining that she had been exposed to asbestos fibers as a result of her husband’s job activities, the bankruptcy court found that she had been afforded due process, and the claims asserted by her surviving family members had been discharged in Placid Oil’s chapter 11 case.
The Placid Oil bankruptcy court’s decision comes on the heels of a Fifth Circuit decision, also involving Placid Oil, in which the Fifth Circuit concluded that latent environmental cleanup claims with respect to a prepetition oil and gas lease by Placid Oil had been discharged in Placid Oil’s chapter 11 case.  The Fifth Circuit’s decision focuses exclusively on the due process issue as Placid Oil’s lease ended well before its petition date, and, therefore, no one disputed that any claim arose prepetition.  In the environmental dispute, an entity that purchased property from Placid Oil’s former lessor after Placid Oil’s emergence from chapter 11 argued that its predecessor in interest (Placid Oil’s former lessor) had been a known creditor of Placid Oil and should have received actual notice of the bar date and confirmation.  Although unclear, apparently the purchaser was asserting that, because the predecessor’s claim should not have been discharged in Placid Oil’s case, the purchaser could now bring an environmental claim against the reorganized Placid Oil.
Holding that Placid Oil had no obligation to give its former lessor actual notice, the Fifth Circuit’s decision also shows the limits that courts place on a debtor’s obligation to afford claimants due process.  Although some studies conducted prior to Placid Oil’s chapter 11 case may have indicated that the leased property was contaminated, the Fifth Circuit determined that the bankruptcy court had not been clearly erroneous in concluding that the former lessor was an unknown creditor bound by publication notice because the record contained “no specific information that reasonably suggests” that Placid Oil “knew of any claims relating to the [leased] property.”  Among other things, the Fifth Circuit noted that (1) the predecessor had never filed an environmental complaint against Placid Oil, (2) because Placid Oil had “tens of thousands” of leaseholds, it would have required a “tremendous effort” to provide actual notice to all lessors, and (3) as the purchaser itself only discovered the environmental contamination six years after it purchased the property, the environmental damage likely was not reasonably identifiable.
Notwithstanding these two decisions, what reasonable steps any debtor should take to afford unknown creditors holding latent claims sufficient due process still remains a fact-intensive inquiry.  Courts remain reluctant to impose significant burdens on debtors to seek out and protect the rights of unknown creditors.  At what point, though, should a debtor make the extra effort to protect against unknown claims?  For example, if a handful of asbestos personal injury claims had been asserted against Placid Oil prior to its chapter 11 filing, should Placid Oil have been required to seek the appointment of a future claimants’ representative to protect the interests of unknown creditors?  (General Motors voluntarily did this, but it did so as a result of approximately 29,000 asbestos-related personal injury claims that were pending against it at the time of its chapter 11 filing.)  If Placid Oil had only hundreds of present and former oil and gas leases and not “tens of thousands,” would that have made a difference to the Fifth Circuit?
By shifting the focus away from the ill-defined notion of “fairness” developed by some courts to the constitutional requirement of due process, the inquiry appears to shift back to what the debtor knew and reasonably could and should have done to protect the rights of unknown creditors.  The nature of the debtor’s business, the level of information available to the debtor, the burden on the debtor’s estate of obtaining better information, and the debtor’s awareness of similar claims all may factor into the analysis of what the debtor reasonably should do with respect to unknown claims.  Assuming that the debtor is careful in its chapter 11 case to take all reasonable steps, though, this approach might afford debtors an opportunity to obtain a true “fresh start” with respect to unknown claims.