Third Circuit Overrules Frenville

October 20, 2010

In overruling the often criticized case of Matter of M. Frenville Co., Inc., 744 F.2d 332 (3d Cir. 1984), the Third Circuit Court of Appeals in In re Grossman’s Inc., 607 F.3d 114 (3d Cir. 2010) held that a “claim” arises for purposes of a “right to payment” under the Bankruptcy Code, when an individual is exposed to a product or other conduct giving rise to the injury.  Thus, in surveying applicable case law, the Court specifically overruled the “accrual test” for evaluating when a claim arose as determined in Frenville.

In Grossman’s, the Court found that a tort claimant who had been exposed to asbestos while remodeling her home in 1977 with products allegedly containing asbestos and purchased at a Grossman’s store, held a pre-petition, dischargeable claim in the chapter 11 case of Grossman’s which filed in 1997.  Therefore, the claimant was barred from pursuing her claim against the successor-in-interest to Grossman’s.  The tort claimant never filed a claim in the chapter 11 case and indeed never even knew she had a claim as she manifested no symptoms related to asbestos exposure until 2006.  While Grossman’s did provide notice of the bar date by publication, there was never any suggestion in the publication notice that Grossman’s might have future asbestos liability.  The Court found that Grossman’s chapter 11 plan discharged all claims that arose before the Plan’s effective date, including the claim of the tort claimant.  Because the claimant’s exposure occurred pre-petition, her right to payment for purposes of when her claim arose under the Bankruptcy Code, occurred pre-petition as well.

Applying the accrual test in Frenville, both the bankruptcy court and the district court found that the tort claims arose for bankruptcy purposes when the underlying state law cause of action accrued.  Applying New York law, the cause of action accrued in 2006, post-petition, when the claimant manifested symptoms of mesothelioma.  Thus, these courts both found that the claims arose post-petition and were not discharged by Grossman’s chapter 11 plan.

Noting the unfairness of the result to the claimant, the Court remanded the case to determine whether the discharge of the tort claim comported with due process in light of the fact that the claimant’s injuries had not manifested themselves at the time of the bankruptcy filing and the lack of procedural safeguards evidenced in the case to protect future claimants.