Class 19: Unsecured Claims -- definition

Class 19: Unsecured Claims -- definition

17: Unsecured Claims -- definition Charles Tabb 2010 Why claim matters (1) Only a claim may get paid in bankruptcy distribution See OConnor concurrence in Kovacs This was the issue in Piper

Note must also be allowed Why claim matters (2) Only a claim may be discharged This was the issue in Kovacs, also in Jones v Chemetron

Why claim matters (3) Holder of a claim is stayed from collecting during bankruptcy See this at issue in the Robins and in other proceedings in Kovacs (see footnote 2) Impact of claim - individual For a DR who is a human being, if = claim

then Is discharged and Stayed facilitates Drs fresh start Impact no claim individual DR But if no claim, then Not discharged AND Not stayed AND

Not paid any $ in bk distribution So the CR can pursue DR fully to collect debt Impact of claim corporate DR, ch. 7 Cr shares in bk distribution If held claim then CR is out of luck Corporate DR ceases to exist after bk liquidation, so who cares that not discharged So the bankruptcy is the ONLY possible source of

money Justice OConnor made this point in Kovacs Impact of claim: corporate DR, ch. 11 Now CR is thrilled if no claim Not stayed Not discharged by terms of plan Can collect full amount vs. reorganized DR

Policy decision 1978 Expand scope of claim Prior law was more restricted Had to be provable eliminated many contingent, unliquidated claims from the bk case 1978 change: bring in EVERYTHING as of date of bk petition

Legislative history all legal obligations of the DR, no matter how remote or contingent, will be able to be dealt with in the bankruptcy. It permits the broadest possible relief. Consistent with approach to property Goal complete resolution of DRs finanical past ALL property, ALL claims, as of date of

bankruptcy, sort out in the bk case Code definition 1st: right to payment (Flip side of debt) 101(5), (A) & (B) So at minimum the Cr must have some potential possible right to get paid $ by Dr Look to state law to decide this Consistent with property of estate approach

Take non-bk law re: claims and property as find it Right to payment? example Assume that I call on you in class, and ask you a question, and you give an incorrect answer. I say, sorry, that is the wrong answer. I then file bankruptcy Do you have a claim vs. me? Only if state law says that me

telling you that you had the wrong answer = cause of action, which is very unlikely! Unliquidated? What if I crash into your car, but before you can get a judgment vs. me, I file bankruptcy? Do you have a claim? Sure your cause of action arose prior to bk filing

Fact has not yet been liquidated does not matter Is part of my financial past Disputed? What if I dispute your claim say it was your fault? You still have a claim Part of my financial past The Bk ct will sort this contested claim out

Contingent? Example: guarantee DR CR Guarantor -- G has contingent reimbursement claim against DR:

that is, IF Dr does NOT pay CR, and G has to pay CR, then Gs can go against Dr for reimbursement (the purple arrow) Unmatured? CR holds Drs promissory note, due in 2011 Dr files bankruptcy 2010 Cr has claim vs DR, even though unmatured

The DR issued the note to the Cr prior to Bk so was part of Drs pre-bk financial past Equitable remedy? What if Cr has an equitable remedy vs. DR, but under state law it would be possible for that remedy to be satisfied in alternative by payment of $? Then has a claim

See 101(5)(B) Difficult Q in environmental cleanup orders, see, e.g., Kovacs Estimation role Code gives bankruptcy court the express power to estimate the amount of claims if it would delay the bankruptcy case to fix otherwise

502(c) Timing problems Accelerating all possible rights to payment against DR that have roots in pre-bk past to the date of the bk petition may be tricky when that payment right is not fully realized until AFTER Bk Some stuff happens

full payment right Robins Robins conduct (manufacture, distribute Dalkon Shield; knew dangerous) Rebecca Grady uses defective product Robins files chapter 11

Grady manifests symptoms, discovery of injury under state law, right to sue in tort cognizable Grady sues Robins Why matters If Rebecca Grady claim: NOT stayed Can proceed with lawsuit vs Robins

If gets judgment can collect vs Robins Not limited by or bound by terms of any plan Grady would be better off than other CRs Would make very difficult for Robins to put together workable plan to deal with mass tort debt Example of Grady vs other Crs Robins filed ch 11 on August 21, 1985. Assume 2 injured parties, Grady and Jane Doe

Everything about Grady and Doe identical Robins same conduct Bought & used Dalkon shield same time Doe discover injury August 20, Grady Aug. 21 If Grady claim she will be treated better than Jane Doe * No Q that Doe has claim

When does claim arise? Issue: when does bankruptcy claim arise? Possibilities: DR (Robins) conduct (manufacture, distribute defective product) Victim exposed (Grady uses defective product) Victim manifests injury, so has state law cause of action

accrued state law test? Grady argued for last option that she did not have a bk claim until she had a right to sue under state law Which was when she discovered injury Which was post-filing Argues that this approach properly defers to the state law that creates the right to

payment in the 1st place Frenville Facts: Dr hire A & B accounting firm to prepare financials A & B acts gives financials to banks DR files bk Banks sue A & B Under state law, this is when A & B has action vs. DR

A & B alleges claim vs DR for indemnification 3rd Circuit held claim * No claim until could sue under state law wrong Frenvilles accrued state law approach has been universally panned as wrong. Why?

Is this like wrong answer hypo? Remember the hypo about whether you have a claim vs me because I told you that you gave the wrong answer We said have to look to state law to decide if have claim Is this same or different?

State/federal what/when Raises Q of what it is we defer to state law for in making the claim determination Identical issue AND resolution as for property of estate Look to STATE law to determine if these acts = a right to payment. i.e., the what BUT look to FEDERAL bankruptcy law to fix the when

Apply state/federal If telling you that you gave a wrong answer is simply not actionable under state law, then nothing about being in a federal bankruptcy case makes it a claim -- you just do not have a right to payment at all Robins application

So, too, in Robins, if under state law it just is not actionable to manufacture and distribute defective products that cause personal injury, then nothing about bankruptcy changes that result BUT if under state law it IS actionable, then we must turn to federal bk law to determine WHEN that claim arises

Applying federal timing Courts then look to the congressional goal of having the broadest possible scope of claims Including unliquidated, unmatured, contingent, disputed. What is the basis for establishing the date a tort claim can be brought (when there is a claim) under state law? The basis is the statute of limitations: dont want the statute to start running until the injured party

has the opportunity to discover the injury. accelerate In bankruptcy must accelerate all claims down to date of bankruptcy filing, even if no present right to sue under state law Examples how state law timing fails Thinking of this acceleration point, and the

language of Code 101(5), see that cannot have deference to state law timing rules Under state law, could not sue on an unmatured debt prior to the date of maturity Ditto a contingent claim, prior to occurrence of contingency Yet clear under 101(5) that DO have bk claim Holding Robins

4th Circuit holds that Grady DOES have a claim as of date of bankruptcy filing Said she had a contingent claim with contingency being manifestation of injury conduct or exposure? So 4th Circuit rejected the accrued state law theory for time of claim What did they use as test?

Robins conduct (manufacture, distribute defective product) OR Victims exposure to the defective product Said when the acts constituting the tort have occurred Robins: facts = exposure On the facts in Robins, Rebecca Grady WAS

exposed to the defective product prior to the bankruptcy filing, so court did not have to decide whether there would be a claim if the bk filing came after the DRs conduct but before the victims exposure. Here, it was: Conduct Exposure Bankruptcy

Conduct Bkptcy Exposure Effect of Robins holding Rebecca Grady has claim Cannot sue Robins outside of bankruptcy case and

collect Instead will participate IN the bankruptcy case File a proof of claim Vote on plan Be paid pursuant to bankruptcy plan Channeling function (i.e., get all pre-bankruptcy claims into the case to deal with Drs entire pre-B financial history).

Piper The Q of whether a bk claim arises when the Dr commits an act, i.e., conduct, or not until the Cr has been exposed, was squarely raised in Piper Aircraft case: Piper conduct (manufacture, sell defective planes) Bankruptcy filing Exposure: Victims in plane,

which crashes Piper Why matters Epstein as representative of class of future claimants filed $100MM proof of claim in the bankruptcy If allowed, then:

Future Claims class could vote on plan FC class would share in distribution under plan FC claims would be discharged by the confirmation of the plan Held no claim 11th Circuit held: NO CLAIM Rationale: the specific future claimants had not yet been identified; indeed, by definition

were unidentifiable Could be anyone in the world! No prepetition relationship with Piper Test: relationship Court required BOTH (1) Prepetition conduct by DR AND

(2) a relationship between claimant and DR: E.g., Contact, exposure, impact, or privity-when? TIMING: prior to confirmation of plan Would be able to identify the particular claimant for purposes of the bankruptcy case ramifications By holding that future claimants do NOT have a claim, Piper court is making it very difficult to deal

with mass tort cases in fair way EITHER Future claimants get windfall -> recover in full vs reorganized DR, whereas prior claimants get % OR Future claimants get nothing pot of $ all gone Any way to deal with future claims?

Piper court held could not have a claim if did not know the specific ID of claimant in time to deal with in the bankruptcy case Said it cant be anyone in the world Is that right? Any solutions? What about a class with a rep? Would it be possible to do what was tried (but

rejected) in Piper: create a class of future claimants Appoint a fiduciary to represent the interests of the class in the bankruptcy case Estimate $ of claims epidemiological stats Claim Future CLASS: $100 MM Collective?

Would this facilitate the collective action goal of bankruptcy? CR CR CR CR Future CLASS: $100 MM CR

What about Due Process? Jones v. Chemetron case pointed out due process violation if discharge claims of persons with no notice of or opportunity to participate in bankruptcy case, in which their rights are altered But wouldnt class rep model possibly allay DP concerns?

Timing issue in environmental cases The claim timing problem has arisen in pollution cases Facts: DR pollutes BK filed Govt finds out Issue does govt have claim for cleanup?

fair contemplation Similar problem to Piper DR has committed acts giving rise to liability But claimant doesnt yet know Courts have adopted similar youve got to know idea here as well Sometimes called fair contemplation test

Kovacs: Cleanup orders as claims a huge Q has been whether an injunctive order directing the Dr to clean up polluted property = claim Why matters? Dr hopes to discharge the cleanup obligation Kovacs Facts:

Dr Wm Kovacs CEO of polluting company State of Ohio consent decree ordering cleanup Not comply State had receiver appointed DR filed Bk issue Issue in Kovacs: was the cleanup obligation = claim?

If so, was dischargeable in Kovacs chapter 7 statute Definition of claim: can be an equitable remedy (including a cleanup order) IF also gives rise to a right to payment 101(5)(B) difficulty

The problem the courts have had in the environmental cleanup cases has been determining what the linkage must be between the equitable remedy and the right to payment Kovacs practical reality The Supreme Court in Kovacs found = claim How?

Dr could not clean up if he wanted to b/c had been replaced by a receiver All the state wanted from him was $ Not deciding Kovacs Court made clear was NOT holding: No protection from criminal prosecution Not discharge if fine or penalty Dr cannot keep polluting

OConnor concurrence Justice OConnor pointed out how decision not necessarily bad for govt: Could fix LIEN on DRs property for cleanup obligation Under Butner the state law property rights would be honored

Might need a claim to get paid anything If corporate DR, liquidating under chapter 7 Other approaches How have other courts dealt with the environmental case where facts are: Dr pollutes Cleanup order issued DR files bankruptcy

If DR still operating, must clean up 1st if the Dr is continuing its operations and is in possession of the site Must clean up Ongoing obligation to obey the law Which includes complying with cleanup orders Can government choose to take $ instead?

One factor does law allow the govt to opt to take $ from DR in lieu of forcing the DR to clean up itself? That is, can DR effectively buy off the cleanup obligation? If so, then = claim Prevailing approach: dual purpose

Most courts hold that if cleanup order has dual purpose of (i) cleaning up prior pollution AND (ii) ameliorating ongoing pollution, claim Under this view almost all cleanup orders claim What if government DOES clean up? What happens if govt does come in and clean

up pollution, then sues DR for reimbursement? Obviously = claim * Right to payment to be reimbursed for cleanup expenses Incentives? Think about incentives if have rule that (i) govt has claim (which then can be discharged) if

steps in and clean up but (ii) does NOT have claim (and thus is not dischargeable in bankruptcy) if does not clean up, but tries to get DR (or trustee) to do so Incentive for govt NOT to clean up itself Problem 5.1 Debtor employed (salary = $40,000) by Employer, Inc. (EI). Debtors employment contract contained a covenant not to compete after termination

of the contract for one year within thirty miles. Under state law such a covenant would be considered reasonable and thus enforceable. State law would allow EI to enforce the noncompete covenant by a negative injunction. The employment contract provided that EI also was entitled to liquidated damages of $5,000 if Debtor breached the contract and left EIs employment prior to the expiration of the contractual term. Debtor received offer from Competitor, Inc. (CI) at a salary of $75,000 a year. CI is located within the prohibited 30-mile radius under the noncompete clause. Debtor has six months remaining on her contract with EI. Debtor has unsecured debts of $33,000.

Debtor wants to know if she can file chapter 7 and thereby discharge EIs right to enforce the noncompete covenant by negative injunction, thus freeing her up to take the more lucrative job immediately issue Issue is whether under 101(5)(B) the equitable remedy (injunction to enforce non-compete clause) is a claim because there is a right to payment

held 7th circuit held claim The injunctive right itself has to be compensable in $ Note fresh start problem Case like 5.1 could implicate fresh start policy

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