ORDER
The issue presented on this appeal is whether the bankruptcy court applied the correct legal standard when it used the “fair contemplation” test set forth in
In re Jensen,
I.
On December 6, 1993, Hexcel Corporation, plaintiff and appellant in this action, petitioned for bankruptcy. On January 12, 1995, the plan of reorganization was approved by the bankruptcy court.
On December 9, 1997, a group of New Jersey residents filed a class action lawsuit in New Jersey state court against Stepan Company, defendant and appellee in this action. The complaint alleges that Stepan discharged toxic pollutants in the area, and that the resulting contamination has caused the plaintiffs bodily injury, death, and property damage. The plaintiffs in the class action seek compensatory and punitive damages as relief for their injuries.
On September 11, 1998, Stepan filed a third-party complaint in the New Jersey action against all those who could have contributed to the contamination. Step-an’s complaint included Hexcel, because public records indicated that Hexcel had owned and operated a plant in the area that was the subject of a 1986 state cleanup order.
Hexcel sought an injunction in the bankruptcy court to prevent Stepan from pursuing this third-party complaint against it. Hexcel contended that Stepan’s claim “arose” prior to Hexcel’s bankruptcy petition in 1993, and therefore any debt resulting from this claim was discharged by the reorganization pursuant to 11 U.S.C. § 1141. 1
The bankruptcy court rejected this argument and denied Hexcel’s motion for preliminary injunction, finding that Hexcel had failed to show a likelihood of success on its assertion that Stepan’s claim arose prior to the 1993 petition. In making this determination, the court applied the test from the Ninth Circuit case of
In re Jensen,
This Court granted Hexcel leave to appeal this ruling pursuant to 28 U.S.C. § 158(a)(3).
II.
The standard for district court review of a ruling by a bankruptcy court is identical to the standard used by circuit courts reviewing district court decisions: clearly erroneous review of factual findings and de novo review of legal conclusions.
See In re Morgan,
Ill:
11 U.S.C. § 1141 provides, with limited exceptions not applicable here, that all claims against the debtor that “arose” prior to the debtor’s bankruptcy proceedings are discharged. This discharge is effective regardless of whether the claimant has accepted the plan or has even filed a claim in the bankruptcy case. 11 U.S.C. § 114(a). 2
The Code defines a pre-petition claim as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” 11 U.S.C. § 101(5)(A). Congress indicated that the word “claim” is to be given the “broadest possible definition” to ensure that “all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.” H.R.Rep. No. 95-595 (1977) reprinted in 1978 U.S.C.C.A.N. 5963, 6266. Thus, if Stepan can be deemed to have had a “contingent” claim against Hexcel prior to Hexcel’s bankruptcy proceedings, Stepan’s present indemnity action against Hexcel must be discharged pursuant to section 1141.
However, despite the broad reach of section 101(5), the definition of a “claim” for bankruptcy purposes is not boundless. For example, this section does
An examination of the statutory scheme embodied in the Bankruptcy Code further supports this reading of section 101(5). As the courts have recognized, “[n]otice is the cornerstone underpinning Bankruptcy Code procedure.”
In re Savage Industries, Inc.,
IV.
Although this distinction between future claims not subject to contemplation by the parties that fall outside the purview of section 101(5) and contingent, foreseeable claims that fall within the Code appears straightforward, the case law has created some confusion regarding the circumstances under which a claim may be discharged. Courts throughout the country have applied a number of different legal tests to conduct this inquiry. However, although these different tests might at first appear to support different outcomes with respect to the case at hand, closer examination reveals that a common thread runs through the large majority of these cases: the claim of a creditor which stems from the pre-petition conduct of the debtor should not be discharged if the parties could not reasonably contemplate the potential existence of the future claim prior to the reorganization.
For example, one test that courts have used in evaluating the dischargeability of future claims is the “relationship” or
“Pip
er” test, which requires either a pre-petition or pre-confirmation relationship, “such as contact, exposure, impact, or privity, between the debtor’s pre-petition conduct and the claimant.”
Epstein v. Official Committee of Unsecured Creditors of Estate of Piper Aircraft Corp. (“In re Piper”),
This test appears to incorporate, at least implicitly, the notion that a future claim must be within the reasonable contemplation of the parties. If a relationship exists between the pre-petition conduct of the debtor and an
identifiable
potential claimant, it typically follows that the parties can fairly contemplate the
possible
existence of a claim against the debtor. This proposition was made explicit in
In re Russell,
A second method for determining whether a claim arose pre-petition or post-petition is the test urged by Hexcel here— the debtor’s conduct test. This test provides that a claim, for bankruptcy purposes, arises upon the occurrence of the debtor’s conduct that ultimately gave rise to the subsequent cause of action. For example, this test was applied in the asbestos liability case of
In re Johns-Manville Corp.,
The debtor’s conduct test would appear to allow for the possibility that a creditor’s claim is automatically discharged if the conduct giving rise to the claim occurred pre-petition,
even if the creditor had no way of knowing of the claim at the time.
However, even in these cases, courts applying the debtor’s conduct test left room for protection of individuals with future, unknown claims. In both cases, the debtors were well aware of the damage their products had caused by the time of the bankruptcy proceeding; thus, the debtors and the bankruptcy courts anticipated that future claims would arise from unknown individuals who had been exposed to the harmful product, but who would not become aware of their claims until after the reorganization. Accordingly, trust funds were created during reorganization in order to compensate these prospective injuries, and representatives were appointed to articulate the interests of the future claimants during the proceedings.
See In re A.H. Robins,
The Ninth Circuit bankruptcy appellate panel has also recently applied the debt- or’s conduct test, holding that a lender bank’s claim for negligent construction was a contingent claim falling within the scope of section 101(5) since the defective construction occurred pre-petition, even though the bank did not discover the defect until after the debtor’s bankruptcy proceedings had been, completed.
In re Hassanally,
It would not be inequitable to apply the conduct test to these facts.... Lenders should fairly contemplate the possibility of negligent construction. They have the opportunity to protect against that risk through their inspections ... and ought to have constructive notice that there might be defects.
Id. at 54 n. 11 (emphasis added).
Finally, the Ninth Circuit in Jensen adopted the “fair contemplation” test, at least in the context of claims brought pursuant to CERCLA or similar state statutes. 5 In Jensen, the State of California brought a claim against the bankrupt debtor for hazardous waste cleanup costs pursuant to a state statute similar to CERCLA. 6 Although the state incurred the costs of the cleanup after the debtor’s bankruptcy proceedings, the conduct that caused the harm occurred pre-petition. Id. at 926-27. The Bankruptcy Appellate Panel (“BAP”) ruled that the state’s claim against the debtor arose pre-petition and had therefore been discharged in bankruptcy, on the grounds that “claims in bankruptcy arise based upon the debtor’s conduct.” Id. at 927.
The Ninth Circuit rejected the BAP’s application of the debtor’s conduct test, ruling instead that, at least in the CERCLLA context, a claim may only be deemed to have arisen pre-petition if it is “based upon pre-petition conduct that can fairly be contemplated by the parties at the time of the debtors’ bankruptcy.”
Id.
at 930 (quoting
In re Nat’l Gypsum Co.,
By holding that the fair contemplation test must be applied in the CERCLA context, it appears that the
Jensen
court was implying that the debtor’s conduct test should be applied under most other circumstances.
8
Hexcel seizes upon this apparent implication by arguing that outside the CERCLA context, the debtor’s conduct test must be applied, and claims stemming from pre-petition conduct must be discharged,
even
if this would result in the discharge of a claim that the parties would had no way of contemplating prior to the bankruptcy. However, nothing in the
Jensen
decision supports this extreme conclusion. In fact, as mentioned above, the court explicitly stated that “nothing in the legislative history or the Code suggests that Congress intended to discharge a creditor’s rights before the creditor knew or should have known that its rights existed.”
Jensen,
Therefore, although it is generally true that “claims in bankruptcy arise from the debtor’s conduct,”
Zelis,
Accordingly, it would have been error for the bankruptcy court to discharge Stepan’s indemnity claim against Hexcel without first determining that the parties could fairly contemplate the claim prior to the termination of the bankruptcy proceedings.
V.
This conclusion is further supported by the potential constitutional problems that could arise if the Court were to interpret the Bankruptcy Code in a manner that required the discharge of Stepan’s claim. It is possible that such an interpretation could deprive Stepan of a property interest (its state law tort claim against Hexcel) without adequate notice in violation of the
Due process concerns usually arise in the bankruptcy context when the debtor has failed to provide adequate notice to potential creditors that it has filed for bankruptcy. Although the Bankruptcy Code contains numerous provisions requiring such notice—e.g., 11 U.S.C. §§ 1109(b), 1128(a)—these provisions are “founded in fundamental notions of procedural due process.”
In re Savage Industries,
Hexcel argues that it addressed these concerns during bankruptcy by publishing notice of the proceedings in the Wall Street Journal so that any potential claimant that Hexcel could not identify would be alerted of the need to assert its interests in the bankruptcy court. Hexcel may be correct that this publication was sufficient to satisfy its notice obligation to creditors
who could contemplate that they might have a claim.
It is difficult to imagine, however, how the announcement of a bankruptcy proceeding published in the Wall Street Journal could possibly satisfy due process concerns for a potential creditor who had no way of knowing that it may have a claim against the debtor some time in the future.
See, e.g., In re Pettibone,
Courts have discussed the due process problems that could arise from the discharge of a creditor’s claim before the parties could contemplate that the claim existed. For example, in
In re Kewanee Boiler Corp.,
Even if a contingent “claim” could by some stretch of § 101(5) be held by Smith pre-petition, this would raise other serious questions under the Code and Constitution. Such ruling would force Smith to be bound by proceedings in which he did not and could not participate. Fifth Amendment Due Process concerns are clearly at issue in a case like this ...
Id.
at 528-29. The court went on to point out that although some courts have ruled that this due process concern may be adequately addressed by the establishment of a trust fund for future claimants and the appointment of a representative to articulate the interests of future claimants during the confirmation process, no such mechanism was created in connection with the boiler manufacturer’s bankruptcy proceedings.
Id.
at 531. The court concluded that “[procedural due process and requirements of meaningful notice are in
The Second Circuit, in dicta, has also recognized the potential due process problems associated with the discharge of future claims that could not be contemplated by the parties pre-petition:
Defining claims to include any ultimate right to payment arising from pre-petition conduct by the debtor comports with the theoretical model of assuring that all assets of the debtor are available to those seeking recovery for pre-petition conduct. But such an interpretation of “claim” yields questionable results. Consider, for example, a company that builds bridges around the world. It can estimate that of 10,000 bridges it builds, one will fail, causing 10 deaths. Having built 10,000 bridges, it becomes insolvent and files a petition in bankruptcy. Is there a “claim” on behalf of the 10 people who will be killed when they drive across the one bridge that will fail someday in the future? If the only test is whether the ultimate right to payment will arise out of the debtor’s pre-petition conduct, the future victims have a [pre-petition] “claim.” Yet it must be obvious that enormous practical and perhaps constitutional problems would arise from recognition of such a claim. The potential victims are not only unidentified, but there is no way to identify them. Sheer fortuity will determine who will be on that one bridge when it crashes.
In re Chateaugay Corp.,
Here, according to the preliminary factual findings of the bankruptcy court, the parties could not have contemplated the possibility that Stepan might have a right to payment from Hexcel in the future. Neither the New Jersey class plaintiffs nor Stepan knew or should have known of the potential health and property damage allegedly caused by Hexcel. Even Hexcel admits that it could not identify Stepan pre-petition as a future claimant, nor could it conceive of the set of facts that gave rise to Stepan’s present indemnity claim. Accordingly, the due process concerns raised by the courts Kewanee and Chateaugay are equally applicable here. The existence of these concerns bolsters the conclusion that a future claim that cannot be contemplated by the parties is not discharged under the Bankruptcy Code, even if that claim stems from the pre-petition conduct of the debtor.
VI.
This holding is not at odds with the basic notion that a claim in bankruptcy stems from the debtor’s conduct.
See In re Zelis,
IT IS SO ORDERED.
Notes
. Section 1141 provides, with limited exceptions not applicable here, that all claims against a debtor in a bankruptcy case that arose before confirmation of the reorganization plan are discharged.
. However, potential claimants must be given notice that their interests may be affected by the bankruptcy proceeding. See, e.g., 11 U.S.C. §§ 1109(b), 1128(a).
. This position is further supported by the Ninth Circuit decision of
In re Jensen,
relied on by the bankruptcy court in this case. In
Jensen,
the court stated that “nothing in the legislative history or the Code suggests that Congress intended to discharge a creditor’s rights before the creditor knew or should have known that its rights existed.”
. To the extent that the relationship test might be defined so broadly as to include future claims that cannot be contemplated, the Ninth Circuit has criticized it: "The relationship approach, when defined ... broadly, undermines the rationale for considering whether or not a relationship exists,” namely, "that a creditor with a relationship
may anticipate its potential claim." Jensen,
. Actually, a fourth major test used by the courts to determine whether a claim arises pre-petition or post-petition is the "state-law accrual” test articulated by the Third Circuit in
In re M. Frenville Co., Inc.,
. For the purpose of simplicity, the Court shall hereinafter follow the Jensen court's lead and refer to the state’s claim in Jensen as a "CERCLA claim.”
. The Court then went on to affirm the BAP's ruling that the claim was discharged, on the grounds that the state could have fairly contemplated, prior to the reorganization, that it may have had a claim against the debtor. See id. at 931.
. Indeed, courts in this jurisdiction have applied this test in a number of
post-Jensen
cases.
See, e.g., In re Hassanally, supra; In re Zelis,
. Stepan nonetheless anticipates Hexcel's argument in this regard, responding that even if the debtor’s conduct test must be applied to unknown future claims outside the context of lensen, this case is sufficiently comparable to Jensen to warrant the application of the fair contemplation test. Stepan's argument, simply stated, is that this case also involves the problem of environmental contamination, thereby invoking competing policy concerns similar to those identified in Jensen. There are two flaws in this argument. First, the Jensen court was clear that the policy interest it sought to protect was "CERCLA's goal of cleaning up the environment quickly,” Id. at 930, whereas the New Jersey class action simply entails an effort to seek compensatory and punitive damages pursuant to common law tort claims. Second, and more fundamentally, the Jensen court was charged with the peculiar task of reconciling two competing policy objectives explicitly set forth by Congress. See id. at 928. Accordingly, the rationale of Jensen does not appear to apply in this case. However, as explained herein, the peculiar policy concerns at play in Jensen need not be present to justify a holding that future claims that cannot be contemplated by the parties prior to bankruptcy may not be discharged.
. Again, this analysis assumes the correctness of the bankruptcy court’s factual finding that the parties could not fairly contemplate the existence of a future claim by Stepan against Hexcel. The Court expresses no opinion in this regard. Nothing in this decision should influence the bankruptcy court's resolution of this factual question at the permanent injunction stage of the litigation.