A fundamental tenet of bankruptcy law is that a debtor will have the ability to get a fresh start once it emerges. A company’s ability to discharge liabilities is among the primary drivers for seeking protection under chapter 11 and, thus, it is of no surprise that ensuring necessary steps are taken for a successful discharge is of utmost importance. Absent a successful discharge of prepetition claims, the reorganized debtor may be saddled with additional liabilities, reducing value for plan stakeholders. The recent Third Circuit unreported decision – Sweeney v. Alcon Laboratories, No. 20-2066 ES, 2021 WL 1546031 (3d Cir. Apr. 20, 2021) – addressed certain due process requirements for bankruptcy notices with respect to unknown claimants and unknown claims. It is well established that notice by publication is constitutionally sufficient to satisfy due process requirements where claimants are unknown at the time of discharge, but there is no bright line rule governing the content of such notice. Sweeney is instructive in focusing the blurry boundaries of publication notice by providing a chapter 11 debtor with directional guidance on when the content of publication notice should include information regarding unknown claimants.
Framing the Issue
In 1975, fifteen-year-old John Sweeney (“Plaintiff”) was injected with Pantopaque – a medical-imaging dye product that has been linked to a severe debilitating condition known as adhesive arachnoiditis as early as 1945 – to treat injuries he sustained while playing football. The Eastman Kodak Company (“Kodak”) manufactured iophendylate, a chemical component of Pantopaque. Pantopaque-related patients had filed various lawsuits against Kodak in the 1980s and 1990s.
In 2009, Plaintiff began experiencing various symptoms associated with adhesive arachnoiditis, and he was diagnosed with the condition in 2014. Soon after Plaintiff’s diagnosis, a neurosurgeon confirmed that Plaintiff’s condition was linked to his exposure to Pantopaque.
Meanwhile, Kodak struggled to adapt to the emergence of digital camera technology. The company filed for chapter 11 protection in January 2012, and the bankruptcy court confirmed Kodak’s plan of reorganization (the “Plan”) in August 2013. A consequence of confirmation of the Plan was the discharge and termination of all claims against Kodak, known or unknown, and an injunction against the commencement or prosecution of any claims or causes of action so discharged. Importantly, Kodak’s bankruptcy filing, the notice of the bar date for the filing of claims against Kodak, and the bankruptcy court’s confirmation of the Plan all occurred prior to Plaintiff’s 2014 diagnosis.
In 2016, Plaintiff filed a personal injury lawsuit against Kodak and Kodak moved to dismiss the lawsuit given the discharge of claims granted in its bankruptcy case. The District Court granted Kodak’s motion to dismiss on the basis that Kodak’s publication of the deadline for filing proofs of claims and notice of the confirmation hearing in reputable nationally circulated newspapers and one local periodical was sufficient to satisfy due process. Plaintiff subsequently appealed, conceding that the manner of notice was sufficient but arguing that the content of such notices were deficient because due process required Kodak to include in its notices language announcing that individuals injured as a result of Pantopaque exposure might have claims against Kodak.
II. Due Process Concerns
Subject to certain limited circumstances, the confirmation of a reorganization plan discharges the debtor from any debt that arose prior to the date of confirmation, regardless of whether the claimant has accepted the plan. 11 U.S.C. § 1141(d)(1)(A). Once a claim is discharged, a claimant is enjoined from taking any action to recover such debt as a personal liability of the debtor. 11 U.S.C. § 524(a)(2). A debtor’s discharge may be challenged and set aside if a claimant has a tenable due process argument that notice was inadequate for discharge. Indeed, a claim otherwise subject to discharge may not be discharged if due process is not satisfied.
The Due Process Clause of the Fifth Amendment guarantees the “due process of law” before the federal government may deprive someone of “life, liberty, or property.” U.S. Const. amend. V. Notice is a critical component of due process, as an individual has the constitutional right to know whether her property is subject to seizure through court proceedings. Given the implications of discharge, bankruptcy cases involving claimants unknown to the debtor who themselves may not know they have a claim pose unique due process issues on the bankruptcy process.
Both Kodak and Plaintiff agreed that because Plaintiff’s claim arose prepetition and because Plaintiff didn’t timely file a proof of claim, Plaintiff’s claim was barred pursuant to sections 1141 and 524 of the Bankruptcy Code unless Kodak’s notices did not satisfy due process. To determine whether Kodak’s notice satisfied due process, the court examined two issues: (1) whether Kodak, through reasonably diligent efforts, should have ascertained the existence of Plaintiff’s claims; and (2) if not, whether notice by publication was sufficient to satisfy due process.
Publication Notice: Where to Focus
I. Reasonable Diligence
The onus is on a debtor to examine its books and records and, through a reasonable level of diligence, ascertain the nature of claims against it and the identity of claimants. Reasonable diligence does not equate to an endless investigation and the standard imposed is intended to capture those claims and claimants that are reasonably ascertainable. The Third Circuit noted that a debtor need not conduct a “vast, open-ended investigation,” nor must it “search out each conceivable or possible creditor and urge that person or entity to make a claim against it.” Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3d Cir. 1995) (quoting In re Charter Co., 125 B.R. 650, 654 (M.D. Fla. 1991)). Furthermore, “impracticable and extended searches for missing or unknown persons are not required in the name of due process.” Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 317-18 (1950).
As is often the case when a reasonableness standard is involved, the ultimate determination as to whether the standard is satisfied is specific to the facts and circumstances at hand. The court in Sweeney explicitly rejected a bright-line rule that publication notice, regardless of content, will discharge all prepetition claims held by unknown persons. The court held that if the debtor’s reasonably diligent efforts revealed the existence, but not the identities, of potential claimants, “due process would require that the nature of those claims be announced in the relevant notices.” Sweeney, WL 1546031, at *3.
Looking through the lens most favorable to Plaintiff, the facts before the Court did not support a conclusion that Kodak’s publication notice was deficient. As a threshold matter, Plaintiff did not allege, and there was no evidence before the court, that the Pantopaque lawsuits in the 1980s and 1990s were in Kodak’s books and records as of the petition date and during the bankruptcy case. According to the court, the mere existence of the cases is not sufficient to put Kodak on notice unless Plaintiff can prove that Kodak had knowledge of the Pantopaque claimants in its own books and records. Ultimately, the court held, “[e]ven when viewed in the light most favorable to Plaintiff, the Fifth Amended Complaint does not support the inference that Kodak, through reasonably diligent efforts, should have ascertained the existence of Pantopaque claims against it.” Id. at *4.
II. Notice by Publication – Developing the Right Snapshot
There is a clear difference between known and unknown creditors and the level of notice required for each to satisfy due process concerns. Courts have established a practical limit to a debtor’s duty to notify creditors, and actual notice is required only for “known” creditors. In the alternative, for persons who cannot be identified or located after a reasonable level of inquiry, publication notice is sufficient. Publication notice satisfies due process in this instance “… where it is not reasonably possible or practicable to give more adequate warning,” as “in the case of persons missing or unknown.” Mullane, 339 U.S. at 317. In Chemetron, the Third Circuit held that known claimants must be “reasonably ascertainable” and not “reasonably foreseeable,” and because the claimants were unknown, “notice by publication was sufficient to satisfy the requirements of due process.” 72 F.3d at 345-6.
The Third Circuit’s decision in Sweeney weighed the injustice of barring Plaintiff’s claim despite the impossibility of bringing the claim prior to or during the bankruptcy case and the burden on Kodak to notice reasonably ascertainable parties. The court ultimately sided with Kodak, stating that “to hold otherwise would dramatically expand the burdens borne by debtors.” Sweeney, WL 1546031, at *4.
It is important to note that because of Plaintiff’s failure to allege Kodak had actual or constructive notice of Pantopaque claimants at the time of filing, the court stopped short of analyzing the sufficiency of the content of the notice – namely, whether Kodak should have included information related to the nature of discharged claims in its notice. For now, we simply know that the notice must be reasonable in all respects.