An Analysis of in Re Piper Aircraft Corporation - Tara Adyanthaya

• Publication year: 1996

CASENOTES

An Analysis of In re Piper Aircraft Corporation

In In re Piper Aircraft Corp.,¹ the Eleventh Circuit Court of Appeals determined when future claimants hold claims within the meaning of section 101(5) of the United States Bankruptcy Code (the "Bankruptcy Code").² Piper Aircraft Corporation³ filed for bankruptcy and attempted to reorganize under Chapter 11 of the Bankruptcy Code.⁴ Because many Piper aircraft were operational at the time of the filing,⁵ it was a statistical certainty that individuals would be injured in accidents after confirmation of the reorganization plan, but arising out of or relating to products manufactured, sold, designed, or distributed by Piper prior to confirmation.⁶ The bankruptcy court appointed a Legal Representative to protect the interests of these future claimants⁷ in the Piper case.⁸ The Legal Representative filed a proof of claim on behalf of the future claimants in an amount exceeding one-hundred million dollars.⁹ The Official Committee of Unsecured Creditors and Piper objected to the claim on grounds that the future claimants did not hold claims within the meaning of section 101(5) of the Bankruptcy Code.¹⁰ The bankruptcy court held that future claimants did not hold claims because there was no prepetition exposure to specific identifiable defective products and because there was no prepetition relationship between the debtor and the broadly defined class of future claimants.¹¹ The Legal Representative appealed. The district court affirmed, holding that future claimants did not have claims absent some prepetition exposure to a defective product.¹² The Legal Representative appealed to the Eleventh Circuit. The Eleventh Circuit affirmed the district court's holding but formulated a new test to determine when future claimants hold claims.¹³ The court held that a claim is established only when (1) there is a preconfirmation relationship between an identifiable claimant and the debtor, and (2) the basis for the liability arises out of the debtor's prepetition conduct.¹⁴

When Congress promulgated section 101(5), it intended to define "claim" more broadly than the term was defined under prior bankruptcy law.¹⁵ The former Bankruptcy Act of 1898 defined "claim" very narrowly. Under the Act, a claim had to be both "proved" and "allowed" to be treated under and bound by a reorganization plan.¹⁶ Because of this narrow definition, a debtor was prevented from treating in its plan certain contingent claims that were not "provable" at the time of reorganization. This limitation allowed such claims to be asserted against a reorganized debtor.¹⁷ Two consequences of this narrow definition of "claim" contravened established bankruptcy policy: first, it allowed similarly situated creditors to be treated differently, and second, it often led to the failure of the reorganization process.¹⁸ The legislative history of section 101(5) reflects Congressional intent in revising the definition of claim: "By this broadest possible definition . . . this bill 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. It permits the broadest possible relief in the bankruptcy court."¹⁹ Since the enactment of the Bankruptcy Code, virtually all courts have agreed that the definition of claim should be an expansive one.²⁰ What has not been agreed upon is how far this definition should be expanded.²¹ Three important theories have emerged to help answer this question: the Accrued State Law Claim Test, the Conduct Test, and the Prepetition Relationship Test. The Accrued State Law Claim Test, the narrowest interpretation of claim, provides that there is no claim for bankruptcy purposes until a cause of action has accrued under state law.²² In In re Frenville,²³ the Third Circuit Court of Appeals applied the Accrued State Law Claim Test and held that an indemnification claim against the debtor arising after the petition date was not a claim under section 101(5).²⁴ The issue before the court was whether the automatic stay provision of section 362(a) of the Bankruptcy Code²⁵ applied when the debtor's acts forming the basis of the suit occurred prepetition but the actual cause of action could not be asserted until postpetition.²⁶ Under New York law, a suit for indemnification could be commenced only at or after the time the party seeking relief serves an answer.²⁷ Because the suit for which the party was seeking relief was filed fourteen months after the filing of the bankruptcy petition, the court found there was no prepetition claim subject to the automatic stay.²⁸ The court found that the automatic stay provision was not applicable because the "claim" for indemnification could not have been commenced before the filing of the bankruptcy petition.²⁹ Additionally, the court found the party had not met the requirement that one have a "right to payment"³⁰ necessary to sustain a claim under the Code.³¹ According to New York law, a right to payment does not arise in a claim for indemnification until the party seeking indemnification has made the payment for which it seeks relief.³² The court found its holding was in keeping with Congressional policy that only those claims that arise prepetition can be discharged.³³ However, Frenville and its progeny have been criticized as ignoring the intent of Congress to define claims broadly in the bankruptcy context.³⁴ State law and federal nonbank- ruptcy law do not override the bankruptcy policies of an equitable distribution to creditors and a fresh start to the debtor.³⁵ For these reasons, all courts outside the Third Circuit that have considered the Accrued State Law Claim Test have rejected it.³⁶ Courts have been more receptive to the Conduct Test, although some courts have found this test provides too broad of a scope in some situations.³⁷ Under this test, a right to payment arises when the conduct giving rise to the alleged liability occurs.³⁸ The leading case describing and adopting the Conduct Test is In re A.H. Robins Co.³⁹ In this case, the Fourth Circuit Court of Appeals considered when a claim based upon the prepetition insertion of a Dalkon Shield⁴⁰ arises if the claimant's injury is not manifested until postpetition.⁴¹ The court explained that if the claim arose upon insertion of the device, it would be considered a claim under the Bankruptcy Code, and its prosecution would be stayed.⁴² But if the claim arose when injury became apparent, it could not be a claim for bankruptcy purposes, and the automatic stay would not apply.⁴³ The Fourth Circuit categorized the claim before it as "contingent"; that is, the claim arose prepetition when the device was inserted, with the right to payment contingent upon the manifestation of a future injury.⁴⁴ Because contingent claims are treatable in a reorganization plan, a claim arising from prepetition insertion of a Dalkon Shield with injury manifested postpetition would be dischargeable in the plan. The court based its decision on: (1) a literal reading of the Code's definition of claim,⁴⁵ (2) the Congressional intent that "claim" be given a broad interpretation,⁴⁶ and (3) the district court's equitable power to assure the orderly conduct...