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Third Circuit Extends Grossman’s “Claims” Test To Post-Petition, Pre-Confirmation Exposures

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On May 18, 2012, the Third Circuit Court of Appeals issued a decision reversing in part the Western District of Pennsylvania’s decision in Wright v. Owens Corning. In doing so, the Third Circuit extended the test used to determine when a “claim” arises under the Bankruptcy Code, first pronounced in JELD-WEN, Inc. v. Van Brunt (In re Grossman’s, Inc.), 607 F.3d 114 (3d Cir. 2010)—the successor to the much-maligned Frenville test—to include post-petition, pre-confirmation exposure to a product or other conduct that ultimately gave rise to the injury.

By way of background, the plaintiffs in this action, Messrs. Wright and West, purchased and installed Owens Corning shingles on their roofs in 1999 and 2005, respectively. Owens Corning filed for bankruptcy protection in October 2000. Notice of its 2002 claims bar date was mailed to known claimants and published twice in three newspapers of national circulation. The plan of reorganization, which provided for the discharge of all claims against Owens Corning arising prior to confirmation, was approved in 2006. Three years later, the Plaintiffs discovered leaks in their roofs caused by cracked shingles and commenced a class action in the Western District of Pennsylvania against Owens Corning alleging fraud and breach of warranty.

Frenville was the law of the Third Circuit at the time the Plaintiffs’ class action was filed. Under Frenville and its progeny, claims in the bankruptcy context did not arise until a cause of action accrued under applicable non-bankruptcy law, that is when a claimant possessed a right to payment. Thus, according to Frenville, the Plaintiffs did not possess claims against Owens Corning until the defects in the roofing shingles manifested in 2009. In 2010, however, the Third Circuit overruled the Frenville “accrual” test inGrossman’s and adopted a form of the majority rule that a “claim” arises when an individual is exposed prepetition to a product or other conduct giving rise to the injury. Based on Grossman’s, Owens Corning moved for summary judgment arguing that the Plaintiffs claims were discharged under the 2006 confirmed plan. The District Court held in favor of Owens Corning, finding that under Grossman’s the Plaintiffs claims had arisen by the time of confirmation and that the published notices of the bar date afforded them an appropriate level of procedural due process.

On appeal, the Third Circuit agreed that Mr. Wright, who was undoubtedly exposed to Owens Corning’s shingles prepetition having installed them in 1999, possessed a “claim” under the Grossman’s standard. The Court further held that Mr. West possessed a claim despite having been exposed to the shingles five years after Owens Corning filed for bankruptcy by extending its Grossman’s test to include post-petition, pre-confirmation exposure. The Court reasoned that extending the rule in this manner is consistent with the Bankruptcy Code’s expansive treatment of “claims” and the policies supporting its earlier departure from Frenville. However, recognizing the harshness of the result to the Plaintiffs (i.e. claims unexpectedly discharged as of 2006 by a ruling six years later), the Court reversed finding that procedural due process affords a “re-do” in this situation to ensure all claimants have equal rights and opportunities.

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