Frenville - Gone But Not Forgotten: Third Circuit Prohibits Retroactive Application Of Grossman's

The ability to discharge debts (i.e., liability on a claim) is essential to the fundamental goal of chapter 11 of the Bankruptcy Code – providing debtors with a fresh start by resolving all claims that arose before confirmation of the debtor's plan of reorganization. In determining the universe of debts eligible for discharge, Third Circuit courts labored for many years under Avellino v. M. Frenville Co. (In re M. Frenville Co.), 744 F.2d 332 (3d Cir. 1984), which held that a claim arises when a right to payment accrues under applicable nonbankruptcy law. Courts in other jurisdictions almost unanimously rejected Frenville's "accrual" test because it seemed to be at odds with the Bankruptcy Code's broad definition of "claim".

On June 2, 2010, in Jeld-Wen, Inc. v. Van Brunt (In re Grossman's Inc.), 607 F.3d 114 (3d Cir. 2010), the Third Circuit reversed course on the highly criticized accrual test, overruling Frenville and adopting an amalgam of the "conduct" test and "prepetition relationship" test used by other courts to determine when a claim arises for purposes of the Bankruptcy Code. Under the Third Circuit's new test, a claim arises when an individual is exposed prepetition to a product or other conduct giving rise to an injury, which underlies a right to payment under the Bankruptcy Code. Grossman's expanded the range of debts that could be discharged in bankruptcy, and arguably signaled a new, more debtor-friendly era in the Third Circuit.

However, on May 18, 2010, the Third Circuit issued a decision in Wright v. Owens Corning, Case No. 11-2026 (3d Cir. May 18, 2012) holding that due process concerns may preclude retroactive application of Grossman's to certain unknown future claims and, accordingly, the debts on account of such claims may survive a chapter 11 discharge. Thus, Owens Corning indicates that the fresh starts received by some reorganized debtors may not be quite as fresh as originally anticipated.

Background

Owens Corning and certain of its subsidiaries, manufacturers of fiberglass and related products, commenced chapter 11 cases in October 2000. The Bankruptcy Court established April 15, 2002 as the bar date, and Owens Corning published notice of the bar date in several national publications, among other media outlets. In June 2006, Owens Corning filed a proposed plan of reorganization, and similarly published notices of the plan and corresponding disclosure statement, and subsequently, the September 2006 confirmation date of the plan. In accordance with section 1141 of the Bankruptcy Code, which provides that "confirmation of a plan . . . discharges the debtor from any debt that arose prior to the date of such confirmation", Owens Cornings' plan provided for the discharge all claims relating to Owens Corning arising before the confirmation date.

Nearly seven years prior, in late 1998 or early 1999, Patricia Wright hired a contractor who installed Owens Corning shingles on her roof. In 2005, Kevin West hired a contractor who likewise installed Owens Corning shingles on his roof. In 2009 – after confirmation of the plan – both customers discovered leaks...