One fundamental aspect of bankruptcy law is that debtors can receive new starts on establishing good credit after emerging from the bankruptcy process. A company’s capacity to discharge liabilities is one of the primary motivators for pursuing protection under Chapter 11 bankruptcy. Consequently, it should come as no surprise that ensuring necessary steps are taken for a successful discharge plays a critical role. Without successfully discharging prepetition claims, a reorganized debtor can end up facing additional liabilities, reducing value for plan stakeholders.

The recent Third Court decision, Sweeney v. Alcon Laboratories, tackled due process requirements for unknown claimants and unknown claims. Under bankruptcy law, publication is constitutionally sufficient to satisfy due process requirements in situations where claimants are not identified at the time of discharge. No bright-line rule, however, exists about the content of such notice. As a result, this case will likely play an influential role in defining the boundaries involving the publication notice for Chapter 11 debtors addressing when the content of a publication notice should include information about unidentified claimants.

How the Case Arose

In 1975, the plaintiff was injected with a medical dye that has since been connected to a life-changing medical condition. The Eastman Kodak Company (EKC) produced a chemical included in the dye. In 2009, the plaintiff began to experience symptoms associated with a condition caused by the dye. Ultimately in 2014, the plaintiff was diagnosed with the condition. Following his diagnosis, the plaintiff’s medical provider confirmed the illness was due to exposure to the medical dye. 

Concurrently, EKC underwent financial difficulties as the role of traditional film struggled to compete with digital technology. In 2012, the company filed for Chapter 11 bankruptcy. The confirmation plan led to the discharge and termination of all claims initiated against Kodak as well as the establishment of an injunction against prosecuting any claims. Kodak’s bankruptcy filing as well as the bankruptcy court’s confirmation of the plan happened before the plaintiff’s 2014 diagnosis. 

In 2016, the plaintiff commenced legal action against EKC, which led EKC to move to dismiss the lawsuit due to the discharge of claims order. The District Court granted Kodak’s motion to dismiss. The plaintiff appealed. 

How Bankruptcy Law Applied to the Case

Confirming a reorganization plan almost always discharges a debtor from any debt originated before the date of confirmation. Following a claim’s discharge, a claimant cannot recover a debt as a personal liability. Following the discharge of a claim, a claimant is prohibited from recovering a debt as a personal liability. 

The discharge of a debtor can be challenged and set aside, though, provided a claimant can present a persuasive due process argument that notice was insufficient. 

The Fifth Amendment’s Due Process Clause grants individuals the right of due process of law before the government can take away rights that impact a person’s life, liberty, or property. One of the most critical aspects of deciding whether due process rights were satisfied is the question of notice and whether a person has the constitutional right to be updated about whether their property is subject to seizure by a court of law. 

When claimants are not identified to a debtor, bankruptcy questions can present unique questions about due process and whether notice was satisfied. 

In this case, EKC and the plaintiff agreed that because the plaintiff’s claim arose before the petition and because the plaintiff’s claim originated before the petition. The plaintiff also did not timely present a proof of the claim. To determine whether EKC fulfilled due process requirements, the court analyzed: (1) whether Kodak should have made an assessment about the plaintiff’s claim through reasonably diligent efforts, and (2) whether the publication by EKC satisfied due process requirements. 

A debtor has a duty to review its books and the nature of claims it faces to assess the identity of claimants. A debtor is expected to exercise reasonable diligence, which means locating those claims and claimants that are reasonably ascertainable. The Third Circuit has noted that a debtor is not obligated to participate in open-ended 

In reaching its decision, the court also noted that debtors are not required to engage in open-ended investigation and also are not required to find every potential creditor and require these creditors to make claims against the debtor. The exact degree of assessment involved, the court found, depends on the situations surrounding the case. The court rejected a rule that publication notice discharges all prepetition claims held by unknown individuals. The court also held that if a debtor’s reasonable diligent efforts displayed the existence of potential claimants, due process requires these claims to be announced in relevant notices. 

The court ultimately found no evidence to find that EKC’s publication notice was lacking or did not satisfy due process requirements. The court also found that the plaintiff did not present any evidence that early lawsuits regarding the danger of the medical dye were in EKC’s records. The court found that the mere existence of the case was not adequate to put Kodak on notice. Consequently, the court determined that even when viewed in a light most favorable to the plaintiff, the complaint does not support that EKC should have determined that the medical dye claim had been made against the company. 

What This Case Means

This case could likely prove persuasive in helping companies who want to pursue bankruptcy avoid some potential lawsuits for liabilities related to defective products in whose production the company was involved. Companies should also make sure to do everything possible to satisfy due process requirements. 

For plaintiffs who have been harmed by defective products manufactured by companies who are now proceeding through bankruptcy, this case means the plaintiffs should gather as strong of a case as possible before attempting to argue that due process requirements were not satisfied. 

Obtain the Assistance of a Knowledgeable Bankruptcy Lawyer

The bankruptcy process is full of challenges, but an experienced attorney can help you navigate this process. Do not hesitate to contact attorney Melanie Tavare today to schedule a free case evaluation.