Third Circuit to injured plaintiffs- your claim can be discharged before you know it exists

When a defendant files for bankruptcy, anyone with a potential damages claim is at risk that their claim will be discharged and lost. But what about the plaintiff who does not know he/she has been injured? Under two recent rulings of the Third Circuit Court of Appeals, these claims can still be discharged so long as the claimant has been “exposed to a debtor’s product or conduct” before the bankruptcy was filed. In a more recent 2012 decision (Wright v Corning), that Court held that in a reorganization bankruptcy, even such claims where the exposure happened before the debtor’s plan has been confirmed (something that happens usually many months after the bankrutpcy is started) can likewise be discharged. The Court held that notice by publication is sufficient to alert claimants “that by being exposed to a debtor’s product or conduct, they might hold claims even if no damage is then evident”.

The facts in Wright v Corning illustrate the problem. In 1998, Wright purchased Owens Corning roof shingles which were installed on her house. The defects in these did not become apparent until 2009 when they started leaking. Corning filed its bankruptcy in 2000. Notice to potential claimants for defective shingles and other products was given by publication in local and national papers. In 2005, West purchased shingles which also turned out to be defective. This purchase was AFTER the bankruptcy filing, but BEFORE Corning’s reorganization plan was confirmed.

The Court, following the majority rule elsewhere, held that both sets of claims would be treated as debts that would be discharged by the bankruptcy filing and plan confirmation. This did not happen in this case because until 2010, the Court’s rule had been that such claims did not exist until the damages became apparent, and thus it was a denial of due process to sand-bag them, since at the time in 2005, they were entitled to rely on the old rule in effect. However, for any cases filed since 2010, claimants will not get such a “do-over”.

This should strike non-bankruptcy practitioners as unfair. However, the Court relied on the broad statutory definition of claim, which affords debtors seeking bankruptcy relief the broadest scope of protection against future claims.

Note that this same rule also applies when the defendant is an individual filing under Chapter 7 or Chapter 13.

Any time a potential plaintiff might have a possible claim, early and affirmative action in a defendant’s bankruptcy is critical. No doubt many deserving claimants whose damages become apparent after the bankruptcy will lose out. Hopefully, Congress will address this, or insurance will be available.

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