17: Unsecured Claims -- definition
© Charles Tabb 2010
Why “claim” matters (1)
• Only a claim may get paid in bankruptcy
distribution
– See O’Connor 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 Dr’s “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,
unreduced by any bk distribution
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
source of money
is the ONLY possible
– Justice O’Connor 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 DR’s finanical
past  ALL property, ALL claims, as of date of
bankruptcy, sort out in the bk case
Code definition
• 1st: “right to payment”
– § 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 VS DR
-- IF Dr does NOT pay CR, and G has to pay CR,
then G’s can go against Dr for reimbursement
(the purple arrow)
Unmatured?
• CR holds Dr’s 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 Dr’s 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
DR 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
• Frenville’s 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
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
– Victim’s 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 DR’s conduct but
before the victim’s exposure:
– Conduct
– Bankruptcy
– 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
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
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
– 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 can’t 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
Future CLASS: $100 MM
Claim
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 wouldn’t 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 doesn’t yet know
Courts have adopted similar “you’ve 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”
given the practical reality that:
– 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:
– That anyone in possession of site MUST comply
with environmental laws, including cleaning up
• Here, though, Dr had been dispossessed
– No protection from criminal prosecution
– Not discharge if “fine or penalty”
– Dr cannot keep polluting
O’Connor concurrence
• Justice O’Connor pointed out how decision
not necessarily bad for govt:
– Could fix “LIEN” on DR’s 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”
Tied to existence?
• One paradigm suggested:
 If the obligation depends on DR’s continued
existence, then ≠ claim
- i.e., if DR could avoid the obligation by
ceasing to exist, & going out of business, then
would not be a claim
- under this view, = claim if obligation is to
clean up prior pollution
- but ≠ claim if is to cease further pollution
Prevailing approach: dual purpose
• Most courts have not adopted the “continued
existence” paradigm
• Instead 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).
• Debtor’s 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 EI’s
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
EI’s 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