Third Circuit Chips Away at Frenville's Controversial Holding

The Bankruptcy Code defines “claim” as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured….”[1] Congress intended the “broadest possible” definition, and that the Code “contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case … [and] permits the broadest possible relief in the bankruptcy court.”[2] Despite this broad definition and the seemingly clear congressional intent, the Third Circuit adopted an exceedingly narrow test for determining when a claim arises in the now infamous In re M. Frenville Co. case.[3] Recently, however, the court has broadened its view of when a claim arises, bringing it more in line with congressional intent and its sister circuits.

When a Claim Arises under the Frenville “Accrual Test”

Under the Frenville “accrual test,” “the existence of a valid claim depend[ed] [up]on: (1) whether the claimant possessed a right to payment; and (2) when that right arose as determined by reference to the relevant non-bankruptcy law.”[4] The issue in Frenville was “whether the automatic stay … is applicable when the debtor’s acts which form the basis of a suit occurred pre-petition but the actual cause of action which is being instituted did not arise until after the filing of a bankruptcy petition.”[5]

Frenville’s creditors sued its former accountants, Avellino & Bienes (A&B), post-petition for negligently preparing Frenville’s financial statements. A&B sought relief from the stay in order to bring indemnification and contribution claims against Frenville. Frenville countered that A&B’s claims were subject to the automatic stay.

The crucial issue was when “A&B’s right to payment [arose], for the automatic stay … applies only to claims that arise pre-petition.”[6] Under state law, A&B’s claim arose not at the time of the commission of the act (pre-petition), but rather post-petition, when A&B could assert its claims under state law against Frenville.[7] Thus, the court held that A&B’s claim against Frenville was not stayed because it did not accrue until post-petition.

Third Circuit Overrules Frenville

After more than 25 years of universal rejection, the court revisited Frenville in JELD-WEN Inc. v. Van Brunt (In re Grossman’s Inc.).[8] Van Brunt, the plaintiff in Grossman’s, purchased asbestos-containing products from Grossman’s pre-petition. Van Brunt did not manifest any asbestos-related injuries until almost 10 years after confirmation of Grossman’s plan. She then asserted a claim against JELD-WEN, Grossman’s successor in interest. Applying Frenville and state law, the bankruptcy court held that “[Grossman’s] 1997 [plan] did not discharge the Van Brunt’s asbestos-related claims because they arose after the effective date of the Plan.”[9]

On appeal, recognizing that the accrual test was “universally rejected,” the Court decided that it was time to “consider whether the reasoning applied by our colleagues elsewhere is persuasive.”[10] Recognizing that the Supreme Court had noted that “claim” should be given the broadest applicable definition,[11] the court examined two tests applied by other circuits, the “conduct test” and the “relationship test.” A claim arises under the “conduct test” “when the acts giving rise to … liability were performed, not when the harm caused by those acts manifested,”[12] and under the “relationship test,” “from a debtor’s pre-petition tortious conduct where there is also some pre-petition relationship between the debtor and the claimant, such as the purchase, use, operation of, or exposure to the debtor’s product.”[13]

The court overruled Frenville, “persuaded that the widespread criticism of Frenville’s accrual test is justified, as it imposes too narrow an interpretation of a ‘claim’ under the [Code],[14] and adopted a new standard: “a ‘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.”[15]

Grossman’s Is Not Limited to Tort Claims

In In re Ruitenberg, the court clarified that the Grossman’s holding was not limited to tort cases.[16] Candace and Paul Ruitenberg were divorcing when both filed individual chapter 7 bankruptcies. Candace filed a claim in Paul’s case for equitable distribution of Paul’s marital property. Whether Candace’s claim was classified as a pre- or post-petition claim was critical, since she would receive a larger recovery if the claim was deemed to be made pre-petition.[17] The court easily disposed of Paul’s chapter 7 trustee’s argument that “Grossman’s should be read narrowly to apply only to tort-related claims,” and held that Grossman’s “spoke more broadly of the problems with the accrual test.”[18] “Thus … the underlying rationale of the case and the language of § 101(5) favor a broader rejection of the Frenville accrual test.”[19] Nor did the contingent nature of Candace’s claim “change the fact that the right to payment exists … and thereby constitutes a ‘claim’….[20]

The Accrual Test Still Applies to Certain Potential Latent Claimants

While Grossman’s and Ruitenberg brought Third Circuit jurisprudence more in line with other circuits, the court preserved the accrual test for two classes of latent claimants in Wright v. Owens Corning.[21] Those latent claimants continue to haunt debtors despite their confirmed reorganization plans.

“The first group comprises those who hold claims based on Grossman’s rejection of the Frenville test – that is persons exposed to a debtor’s conduct or product pre-petition…. Due process requires the application of the Frenville test for plans proposed and confirmed before June 2, 2010.”[22] The second group consists of persons holding post-petition, pre-confirmation claims against a debtor, under reorganization plans proposed and confirmed prior to its decision in Wright, which could have also mistakenly believed that they did not hold claims under either Frenville or Grossman’s until their claims accrued under state law.[23] In such instances, application of Grossman’s would leave the plaintiffs as newfound creditors with no way to assert their claims, and “[d]ue process affords a re-do … to be sure all claimants have equal right.[24]

Thus, while Frenville is fading from memory, it still casts a shadow that creditors, debtors and their counsel must not lose sight of.

[1] 11 U.S.C. § 101(5).

[2] H.R. Rep. No. 95-595, at 309 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6266; S. Rep. No. 95-989, at 21, reprinted in 1978 U.S.C.C.A.N. 5787, 5807.

[3] In re Frenville Co., 744 F.2d 332 (3d Cir. 1984).

[4] JELD-WEN Inc. v. Van Brunt (In re Grossman’s Inc.), 607 F.3d 114, 119 (3d Cir. 2010) (internal quotes and cites omitted).

[5] Frenville, 744 F.2d at 334.

[6] Id. at 336.

[7] Id. at 337 (internal cite omitted).

[8] JELD-WEN Inc. v. Van Brunt (In re Grossman’s Inc.), 607 F.3d 114 (2010).

[9] JELD-WEN, 607 F.3d at 118.

[10] Id. at 121.

[11] Id. citing FCC v. NextWave Pers. Commc’ns Inc., 537 U.S. 293, 302 (2003).

[12] Id. at 122 (internal cites omitted).

[13] Id. at 123.

[14] Id. at 121.