Opinion
I. INTRODUCTION
Under federal bankruptcy law, the discharge of liability for an unliquidated, contingent or unmatured claim can bar a suit to collect a debt. (11 U.S.C. §§ 101(2), 524(a), 1141(d)(1)(A).)
Defendant contends the April 22, 2003 order approving the reorganization plan and discharge order bars Mr. Flores’s family from recovering damages
We emphasize the narrow nature of our ruling. We merely hold defendant has failed to demonstrate, at the demurrer stage, that the April 22, 2003 approval of the reorganization plan bars all of the first amended complaint’s claims. And we reach our decision based on the limited record of bankruptcy proceedings provided by defendant.
II. PROCEDURAL HISTORY
A. The First Amended Complaint
In reviewing an order after a demurrer is sustained without leave to amend, all well-pleaded factual allegations must be assumed as true. (Naegele v. R.J. Reynolds Tobacco Co. (2002)
1. Overview
Defendant demurred to the first amended complaint on the grounds any claims against it were discharged by the April 22, 2003 approval of the reorganization plan and entry of the discharge order. Defendant requested judicial notice of portions of the bankruptcy court’s April 22, 2003 reorganization plan. We summarize the pertinent portion of the April 22, 2003 findings of fact and conclusions of law and reorganization plan.
2. Notice findings
As will be noted, at issue here is the sufficiency of the proof of notice to plaintiffs of the contemplated confirmation of the reorganization plan and discharge order. The bankruptcy court made two findings relevant to the notice issue. In the reorganization plan, the bankruptcy court found that notice of the confirmation hearing was provided by publication, “The Debtors published the Confirmation Hearing Notice in The Wall Street Journal (National Edition), The New York Times (National Edition) and USA Today (National Edition) on March 7, 2003. . . .” Additionally, in the reorganization plan, the bankruptcy court found in connection with known claimants: “Due, adequate and sufficient notice of the Disclosure Statement and Plan and of the Confirmation Hearing, along with all the deadlines for voting on or filing objections to the Plan, has been given to all known holders of Claims in accordance with the procedures set forth in the Solicitation Procedures Order. The Disclosure Statement, Original Plan, Ballots, Solicitation Procedures Order, Confirmation Hearing Notice, Unimpaired Creditors Notice, Notice of Nonvoting Status, the Unsecured Creditors’ Committee’s solicitation statement with respect to the Original Plan, and the Financial Institution’s Committee’s solicitation statement with respect to the Original Plan were transmitted and served in substantial compliance with the Solicitation Procedures Order and the Bankruptcy Rules, and such transmittal and service were adequate and sufficient. Adequate and sufficient notice of the Confirmation Hearing and the other bar dates and hearings described in the Solicitation Procedures Order was given in compliance with the Bankruptcy Rules and the Solicitation Procedures Order, and no other or further notice is or shall be required.”
3. Injunctive provisions
Paragraph 12 of the reorganization plan provides, “Except as otherwise specifically provided in the Plan and except as may be necessary to enforce or remedy a breach of Plan, the Debtors, and all Persons who have held, hold
Paragraph 39 of the reorganization plan states, “Pursuant to sections 105(a) and 1142 of the Bankruptcy Code, and notwithstanding the entry of this Confirmation Order or the occurrence of the Effective Date, the Court shall retain exclusive jurisdiction as provided in this Plan over all matters arising out of and related to, the Chapter 11 Cases and the Plan to the fullest extent permitted by law, including among other items and matters, jurisdiction over those items and matters set forth in Article XIV of the Plan.” Article XIV of the reorganization plan states: “Pursuant to sections 105(a) and 1142 of the Bankruptcy Code, the Bankruptcy Court shall have exclusive jurisdiction of all matters arising out of, and related to, the Chapter 11 Cases and this Plan, including, among others, the following matters: [][] (k) to hear and determine disputes arising in connection with the interpretation, implementation or enforcement of this Plan or the Confirmation Order including disputes arising under agreements, documents or instruments executed in connection this Plan; ['ll] . . . [][] (o) to hear and determine all disputes involving the existence, nature or scope of the Debtors’ discharge. . . .”
4. Discharge orders
Article 12.2 of the reorganization plan discharges all known and unknown debts: “Discharge of the Debtors. Pursuant to section 1141(d) of the Bankruptcy Code, except as otherwise specifically provided in this Plan or in the Confirmation Order, the distributions and rights that are provided in this Plan shall be in complete satisfaction, discharge, and release, effective as of the Confirmation Date (but subject to the occurrence of the Effective Date), of Claims and Courses of Action, whether known or unknown, against liabilities of, liens on, obligations of, rights against, and interests in the Debtors or any of their assets or properties, regardless of whether any property shall have been distributed or retained pursuant to this Plan on the account of such Claims, rights, and interests. . . .”
Plaintiffs argued the bankruptcy orders did not discharge their asbestos claim which is a “unique tort” because asbestos injuries are normally latent; the absence of notice of the bankruptcy proceedings does not satisfy due process standards when the claimant’s injuries have not manifested; and without manifestation, an asbestos claimant would either lack knowledge of the injury or could not be identified as a victim. Plaintiffs argued defendant’s notice of the contemplated reorganization plan was inadequate. Plaintiffs argued notice by publication was inadequate to provide reasonable notice to potential asbestos claimants of the proposed reorganization plan. And, plaintiffs argued there were no provisions in the confirmation order addressing potential asbestos claimants. Plaintiffs asserted the trial court should apply the “fair contemplation” analysis utilized by the Ninth Circuit Court of Appeals. Under the fair contemplation law, no discharge may occur if the claimant could not reasonably contemplate the existence of the claim prior to the debtor’s reorganization. According to plaintiffs, the trial court had subject matter jurisdiction over their claims against defendant, which are outside the bankruptcy estate. As can be noted, plaintiffs expressly asserted enforcement of the April 22, 2003 reorganization plan would violate their due process rights.
D. Reply to Opposition
In reply, defendant asserted plaintiffs cannot dispute that federal bankruptcy law provides that an asbestos claim arises at the moment of contact; the notice was adequate as a matter of law; it was not required to comply with standards requiring a trust to administer asbestos claims that manifest postconfirmation due to the latent nature of mesothelioma; and it has had no pending asbestos litigation. Defendant further argued the bankruptcy court had exclusive jurisdiction over the interpretation, implementation and scope of its order; plaintiffs’ remedy against defendant was to file an action for a determination and adjudication of whether the claims are discharged in bankruptcy court; plaintiffs are required to secure an order lifting the bankruptcy court’s injunction order before proceeding with this action; and in article XIV of the reorganization plan, jurisdiction was retained to adjudicate questions about the existence, nature and scope of the discharge. Defendant presented no new judicially noticeable materials in connection with the reply.
E. The Trial Court’s Ruling
The trial court ruled that, because defendant was not being sued as a manufacturer or producer of asbestos products, the trust issues were not pertinent. Rather, defendant was being sued on various premises liability
III. DISCUSSION
A. Standard of Review
The Supreme Court has defined our task as follows: “On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. We give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law. [Citations.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment; if it can be, the trial court has abused its discretion and we reverse.” (City of Dinuba v. County of Tulare (2007)
In order for the demurrer to be sustained, the first amended complaint and the judicially noticeable reorganization plan must demonstrate plaintiffs’ claims are in fact barred by the bankruptcy court’s discharge order. (Casterson v. Superior Court (2002)
B. Jurisdiction
Defendant argues no state court has jurisdiction to determine whether the debts were discharged. According to defendant the issue of the application of the April 22, 2003 findings and orders should have been resolved by the bankruptcy court. And defendant argues the bankruptcy court retained exclusive jurisdiction to interpret the breadth and scope of the discharge order. Generally, state and federal courts have concurrent jurisdiction to decide whether a claim within a discharge order is a discharged debt. (28 U.S.C. § 1334(b) [“[T]he district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”]; In re Pavelich, supra,
1. Overview of the problem
The first amended complaint alleges Mr. Flores was exposed to asbestos while working as a subcontractor at defendant’s Riverside store sometime in or around 1989 or 1990. The first amended complaint does not allege when Mr. Flores discovered he was exposed to asbestos. Further, there is no allegation as to when Mr. Flores knew or should have known he had contracted malignant mesothelioma. Defendant filed its chapter 11 bankruptcy petition on January 22, 2002. There is no evidence Mr. Flores or any of the plaintiffs had notice of the bankruptcy proceedings; Mr. Flores’s claim or that of any plaintiff was listed on the schedule of debts; and Mr. Flores or plaintiffs received actual notice of the hearing where the reorganization plan was approved. The bankruptcy court confirmed the reorganization plan on April 22, 2003. The reorganization plan discharged all known and unknown claims against defendant.
Plaintiffs argue the bankruptcy documents cannot show a discharge as a matter of law. First, plaintiffs argue their asbestos claim could not be statutorily discharged. Plaintiffs reason they (and Mr. Flores) could not fairly contemplate his asbestos claim on April 22, 2003, when the order approving the reorganization plan was entered. Second, plaintiffs argue there is no evidence or allegations they had prior notice of the hearing which resulted in the April 22, 2003 approval of the reorganization plan. We will only resolve the latter due process contention.
2. Statutory requirement that a claim exist in order for it to be discharged
Once a reorganization plan is confirmed, all of the debtor’s debts that arose before the confirmation date are discharged. (§ 1141(d)(1)(A); FCC v. NextWave Personal Communications Inc. (2003)
A debt is defined as a liability on a claim. (§ 101(12); FCC v. NextWave Personal Communications Inc., supra,
Federal courts have recognized three different rules for determining whether a prepetition claim where the injury manifested itself after the discharge order is a claim within the meaning of section 101(5)(A). The first test is the Fourth Circuit “conduct” rule. (Grady v. A.H. Robins Co., Inc. (4th Cir. 1988)
The second rule is the Ninth Circuit “reasonable contemplation” test. (California Dept. of Health Services v. Jensen (9th Cir. 1993)
The third rule is a mixture of the “conduct” and “fair contemplation” tests. The Third Circuit recognizes that in the asbestos exposure context, the pertinent date is when exposure occurs: “Irrespective of the title used, there seems to be something approaching a consensus among the courts that a prerequisite for recognizing a ‘claim’ is that the claimant’s exposure to a product giving rise to the ‘claim’ occurred pre-petition, even though the injury manifested after the reorganization. We agree and hold that a ‘claim’ arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a ‘right to payment’ under the Bankruptcy Code.” (In re Grossman’s Inc., supra,
The parties urge us to choose one of these tests or variations thereof. We decline to do so. Because we are not going to choose which standard to adopt, we have merely synthesized the various tests for purposes of clarity. Likewise, we do not decide whether there is sufficient evidence of statutory
3. Notice of the hearing when the reorganization plan was approved
As noted, prior to the plan confirmation hearing, a debtor is statutorily and by rule entitled to notice of the contemplated discharge. (§ 102(1), 1128(a), Fed. Rules Bankr.Proc., rule 2002(b), 11 U.S.C.) But the notice must also comply with Fourteenth Amendment due process requirements. (United Student Aid Funds, Inc. v. Espinosa (2010) 559 U.S._,_[
Later, the United States Department of Education and the lender attempted to recoup the unpaid interest. The lender asserted the discharge order was void in part on due process grounds. (Espinosa, supra, 559 U.S. at pp. _-_ ._ [130 S.Ct. at pp. 1374-1375, 1378].) The United States Supreme Court identified the constitutional due process test in the notice context: “Due process requires notice ‘reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.’ Mullane v. Central Hanover Bank & Trust Co. [(1950)]
But in Espinosa, the United States Supreme Court held no due process violation occurred. This was because the lender had actual notice of Mr. Espinosa’s proposed reorganization plan. As noted, the bankruptcy court clerk sent a copy of Mr. Espinosa’s proposed reorganization plan to the lender prior to the hearing where it was approved. This provided actual notice. (Espinosa, supra, 559 U.S. at p._[
But defendant argues that notice was published in The New York Times, USA Today and The Wall Street Journal. Actual notice to known creditors, or those whose identities are reasonably ascertainable, is required in bankruptcy proceedings. (Tulsa Professional Collection Services v. Pope (1988)
If a creditor’s identity is known or reasonably ascertainable, service by publication does not comply with the Fourteenth Amendment due process clause notice requirement—actual notice is constitutionally required. (Tulsa Professional Collection Services v. Pope, supra, 485 U.S. at pp. 489-490; Mennonite Board of Missions v. Adams (1983)
We wish to reemphasize the limited nature of our holding. We have not construed or modified the confirmation plan. Nor have we held the confirmation does not apply to plaintiffs if there was proper notice given to them. Our holding is very limited—defendant has provided insufficient evidence the confirmation plan may constitutionally apply to plaintiffs and thus requires dismissal. Plaintiffs have expressly objected on due process grounds to the application of the confirmation plan to them. Mr. Flores’s alleged injuries initially arise in the context of a prepetition exposure to asbestos. There is no evidence as to when Mr. Flores became aware he had contracted malignant mesothelioma. Defendant has provided only a portion of the bankruptcy court documents. No judicially noticeable documents shed any light on the issue of whether Mr. Flores’s or plaintiffs’ identities were reasonably ascertainable so as to permit service of any notice by publication. We obviously express no views on what would happen if a more expansive showing were made on the due process issue in judgment on the pleadings, summary judgment or in limine motions. As to plaintiffs, this lawsuit is at its preliminary stages. Whether there is additional, possibly dispositive, evidence on the due process issue remains to be seen. (See Kasky v. Nike, supra,
The demurrer dismissal order is reversed. Plaintiffs, Rachel, Adrian and Christian Flores, are to recover their costs incurred on appeal from defendant, Kmart Corporation.
Armstrong, J., and Mosk, J., concurred.
Notes
Unless otherwise noted, all future statutory references are to title 11 of the United States Code.