"It is only on a rare occasion that we overrule a prior precedential opinion," a Third Circuit en banc panel wrote last week, before doing just that in a bankruptcy case.
Mrs. Mary Van Brunt was diagnosed with cancer thirty years after purchasing items, allegedly containing asbestos, from a home improvement store for a remodeling project. She and her husband Gordon sued the store, or rather, its successor-in-interest, in state court. Nearly ten years before the disease was diagnosed, however, the store had filed for Chapter 11 bankruptcy and a reorganization plan had been confirmed. The question in this related federal case was whether the bankruptcy extinguished the asbestos-related claims. (Mrs. Van Brunt died while the case was pending and Mr. Van Brunt continued as a party.)
Relying on Third Circuit precedent, more than a quarter-century old, both the bankruptcy and district courts found the claims viable. Under that precedent, the so-called "accrual test," a claim accrues "when the underlying state law cause of action accrues." Here, the relevant state tort law indicates that asbestos-related claims accrue when "the injury manifests itself." Since Mrs. Van Brunt's symptoms and diagnosis came after the bankruptcy plan, her claims accrued after, and survived, the bankruptcy. While noting that both lower courts "correctly applied" the Third Circuit's test, the analysis did not end there.
The panel identified widespread criticism of the accrual test, from sister circuits and other courts. "Notwithstanding what appears to be universal disapproval, we decide cases before us based on our own examination of the issue, not on the views of other jurisdictions." Making this fresh examination, the Third Circuit found substance to the criticism and overruled its prior precedent. The Bankruptcy Code definition of claim is broad, including "unliquidated," "contingent," and "unmatured" claims. The accrual test unduly narrows that definition, the panel found.
Surveying various jurisdictions, the panel determined that a claim instead arises at initial exposure before the bankruptcy petition, "even though the injury manifested [itself] after the reorganization." Lest any victories be declared prematurely, though, the panel explained that due process, including notice, must also be considered. The Third Circuit reversed and remanded to the district court for this consideration, listing several possible factors to explore, such as "whether and/or when the claimants were aware of their vulnerability to asbestos."
As a Pepper Hamilton analysis observes, the holding "[a]t first blush . . . would appear to expand the universe of tort claims that can be discharged in Chapter 11 cases filed in the Third Circuit. However, it remains to be seen how the decision will be applied by the lower courts in determining whether claims have been discharged in particular cases."