While it’s beginning to look at lot like Christmas, it’s also beginning to look like the accrual test will decide whether a claim belongs to the debtor, not to the debtor’s bankrupt estate. At the same time, the circuits are now in agreement that the accrual test does not decide whether a claim against the debtor has been discharged in bankruptcy.

Frenville

There is no longer a circuit split regarding the test to determine when a claim arose against a bankruptcy estate and was therefore discharged. There is less clarity in knowing whether a claim against a third party belongs to the estate or the debtor.

In Avellino & Bienes v. M. Frenville Co. (In re M. Frenville Co.), 744 F.2d 332 (3d Cir. 1984), the Third Circuit had held that a creditor’s claim against a debtor was not discharged in bankruptcy if it had not arisen under state law before bankruptcy. Third Circuit sat en banc in 2010, overruled Frenville and sided with seven other circuits. See Jeld-Wen Inc. v. Van Brunt (In re Grossman’s Inc.), 607 F.3d 114 (3d Cir. 2010).

In Grossman’s, the Third Circuit held that an asbestos claim is presumptively discharged if exposure occurred before bankruptcy, even though injury was not manifest until years after bankruptcy. The en banc court reasoned that Frenville was contrary to the broad definition given to the word “claim” in the Bankruptcy Code.

As shown by a decision four years ago from the Sixth Circuit and by a December 18 opinion by a district judge in Tampa, Fla., the discredited Frenville concept still holds water in deciding whether a claim belongs to the estate or the debtor.

Exposure to a Carcinogen Before Bankruptcy

The debtor filed her chapter 7 petition and received her discharge in 2010 [yup, 14 years ago]. Beginning in 1987, the debtor was a user of Roundup, an herbicide. She was diagnosed with cancer in 2007 and filed bankruptcy when she was unable to work.

In 2015, the World Health Organization announced a causal link between cancer and glyphosate, an ingredient in Roundup. The debtor learned about the link in 2018 and filed a claim in the Roundup mass tort class action. The debtor’s tort lawyer reached a tentative settlement of the claim and notified the U.S. Trustee. The settlement called for the debtor to receive about $107,000.

A chapter 7 trustee was appointed, and the 2010 case was reopened. The trustee obtained approval of the settlement and agreed to release more than $31,000 to the debtor after paying attorneys’ fees and medical liens. The trustee retained $15,000 to cover one unpaid claim from the chapter 7 case and claim for almost $13,000 in newly arising professional fees and costs in the reopened 2010 chapter 7 case. To await a decision about ownership of the $15,000, the trustee held the funds in trust pending further order of the bankruptcy court.

The debtor filed a motion seeking a declaration that the $15,000 belonged to the debtor. The trustee responded with a motion on the pleadings, asking the bankruptcy judge to rule that the $15,000 was estate property.

The bankruptcy court ruled in favor of the trustee, deciding that the settlement proceeds were estate property. The bankruptcy court reasoned that all of the elements of a negligence claim existed in 2010 when the debtor filed her chapter 7 petition, because the debtor already had been exposed to the carcinogen. The bankruptcy court believed that discovery of the existence of the claim was not an element.

The debtor appealed.

Head

Circuit Judge John L. Badalamenti reversed. The debtor was represented pro bono by Laurie Blanton from the Venice, Fla., office of Holland Law Group PA.

In his opinion on December 18, Judge Badalamenti began discussing the merits by saying that federal law determines whether a debtor’s interest in property is property of the estate. On the other hand, that the nature and existence of a debtor’s property interest is a question of state law.

Naturally, Judge Badalamenti said that the definition of property of the estate in Section 541 is “broad.” He quoted the Eleventh Circuit for saying that “virtually all of a debtor’s assets and legal and equitable interest in property as of the commencement of the bankruptcy case vest in the bankruptcy estate upon the filing of the petition.” Calderon v. U.S. Bank Nat’l Assoc. as Trustee for SG Mortgage Sec. Trust 2006 FRE2 Asset Backed Certificates Series 2006-FRE2, 860 F. App’x 686, 687 (11th Cir. 2021).

On the other hand, Judge Badalamenti cited the Eleventh Circuit for the proposition that state law determines when a claim arises in the bankruptcy context. He then pointed to the Florida Legislature as having “made an exception regarding when product liability claims accrue.” These days, he said, a claim “generally . . . accrues [under Florida law] when the last element constituting the cause of action occurs.”

The Florida Supreme Court interpreted the Florida statute as having made an “‘exception . . . for claims of fraud and products liability in which the accrual of the causes of action is delayed until the plaintiff either knows or should know that the last element of the cause of action occurred.’ Davis v. Monahan, 832 So. 2d 708, 709 (Fla. 2002) (citing Fla. Stat. Ann. § 95.031).”

The Florida Supreme Court also held that the delayed discovery doctrine delays the accrual of the cause of action and is not simply a tolling of the statute of limitations.

Applying the law to the facts of the case, Judge Badalamenti read the record to mean “that [the] Debtor neither knew nor reasonably should have known that exposure to the defective product caused her medical malady diagnosis as of the filing of her Chapter 7 bankruptcy case on March 26, 2010.” More specifically, he said that “the undisputed record establishes that Debtor did not become aware of the legal cause of her medical malady diagnosis –– exposure to a toxic product in 1986 –– until 2018, which is approximately eight years after she filed her Chapter 7 petition.”

Judge Badalamenti reversed and remanded to the bankruptcy court for further proceedings “consistent with this Opinion.”

Observations

The Sixth Circuit reached the same conclusion in 2021 in Church Joint Venture LP v. Blasingame (In re Blasingame), 986 F.3d 633 (6th Cir. Jan. 26, 2021). To read ABI’s report, click here.

The Cincinnati-based appeals court held that a malpractice claim belonged to the debtors, not to the chapter 7 estate, because the claim did not accrue under state law until after the debtors had lost their discharges.

It’s a breath of fresh air to see courts employing a sense of equity rather than a rigid application of statutory language to arrive at a conclusion in favor of a debtor. It’s looking more likely that the definition of a “claim” will have different meanings, depending on whether the claim is by or against the estate. Two definitions make sense to this writer.

With regard to claims against an estate, a broad definition of “claim” is efficacious. Companies could not reorganize in chapter 11 if they were to be sued after bankruptcy based on claims that did not manifest until after discharge. Usually, due process problems are solved by the creation of trusts for late-arising claims and by the appointment of future claims representatives.

In the case of claims by a debtor, a broad definition can be unfair. The issue arises with regard to medical malpractice and mass tort claims that do not manifest until after bankruptcy. Should a trustee swoop down and snatch away a claim that did not manifest until years after bankruptcy? Should debtors lose the fruits of a claim when malpractice caused actual pain and suffering or necessitated subsequent surgeries?

Having one definition is appealing but doesn’t account for laudable human sympathies. Is the bankruptcy court still essentially a court of equity or an institution that must unthinkingly apply Section 541 and its definition of a “claim”?