I am proud to introduce a contributing "blogger" to the Delaware Bankruptcy Litigation Blog.  As a frequent author and speaker on corporate bankruptcy, Michael Temin needs no introduction.  Michael is senior counsel with Fox Rothschild, a contributing author to Collier on Bankruptcy, Collier Bankruptcy Practice Guide and co-editor of the Pennsylvania Ethics Handbook (2008).  The following is Michael’s summary of a recent Third Circuit decision in the Grossman’s bankruptcy.  I want to thank Michael for sharing his work with us and look forward to his future posts on this blog.

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In 1984 a Third Circuit panel decided that the automatic stay did not apply to a right to payment which arose under applicable state law after a bankruptcy petition was filed. Avellino & Bienes v. M. Frenville Co., 744 F.2d 332 (3d Cir. 1984). The Third Circuit tradition is that the holding of a panel in a precedential opinion is binding on subsequent panels. Until this year Frenville remained good Third Circuit law notwithstanding universal rejection by other circuits.

In In re Grossman’s Inc., 607 F.3d 114 (3d Cir. 2010), the Third Circuit en banc overruled Frenville. After discussing the conduct test (a claim arises when the acts giving rise to the defendant’s liability were performed, not when the harm caused by the acts was manifested) and the pre-petition relationship test (a claim arises from a debtor’s pre-petition tortious conduct where there is also some pre-petition relationship between the debtor and the claimant), the Third Circuit held that a tort claim arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury which underlies a “right to payment” under the Bankruptcy Code.

The inquiry then shifts from whether there is a claim as defined by the Bankruptcy Code to whether the claim can be discharged. Here we shift from the Bankruptcy Code to the Constitution. Discharge of  potential future tort  claims without providing adequate notice raises questions under the Fourteenth Amendment. See Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). Without notice of a bankruptcy claim, a claimant will not have meaningful opportunity to protect his or her claim.

The court remanded to the lower courts to determine whether the claim in this case had been discharged by the plan of reorganization. It identified factors which the lower courts may wish to consider in making that determination. The court said:

In determining whether an asbestos claim has been discharged, the court may wish to consider, inter alia, the circumstances of the initial exposure to asbestos, whether and/or when the claimants were aware of their vulnerability to asbestos, whether the notice of the claims bar date came to their attention, whether the claimants were known or unknown creditors, whether the claimant had a colorable claim at the time of the bar date and other circumstances specific to the parties, including whether it was reasonable or possible for the debtor to establish a trust for future claimants as provided by section 524(g).

Cf. In re General Motors Corp.,  407 B.R.463, 507 (Bankr. S.D.N.Y. 2009) where the bankruptcy court approved a plan which discharged future asbestos claims "to the fullest extent constitutionally permissible." Now instead of arguing whether a claim has arisen to avoid the effects of a plan discharge, claimants in the Third Circuit will have to argue that it is constitutionally impermissible to discharge them, a much more difficult task.

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Michael L. Temin is senior counsel in Fox Rothschild’s Financial Services Department.  You can reach Michael at 215 299-3835 or mtemin@foxrothschild.com.