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Posted: March 28, 2014

Case Remanded To EDNY To Determine What Plaintiff Knew Or Could Have Known Regarding Its Claims Before Defendants’ Bankruptcy Discharge

On March 27, 2014, the Second Circuit issued a decision in DPWN Holdings (USA), Inc. v. United Airlines, Inc., No. 12-4867-cv, discussing the standard for determining whether a post-bankruptcy-discharge lawsuit can be brought based on pre-discharge claims.

In DPWN Holdings, the EDNY denied the defendants’ motion to “dismiss an antitrust price-fixing claim,” rejecting the defendants’ argument that “the plaintiff had sufficient notice of the availability of the claim against a Chapter 11 debtor to satisfy due process requirements and render the claim discharged.” The Second Circuit reversed, explaining that:

The basic legal principles relevant to this appeal are not in dispute. Under the Bankruptcy Code, confirmation of a Chapter 11 reorganization plan discharges the debtor from any debt that arose before the date of confirmation. In this context, a debt is defined to mean liability on a claim, and the term claim means 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. . . . The discharge of such claims serves the bankruptcy policy of providing debtors with a fresh start to permit their continued operation free of pre-bankruptcy debts. However, a claim cannot be discharged if the claimant is denied due process because of lack of adequate notice. And whether notice comports with due process requirements turns on the reasonableness of the notice, a flexible standard that often turns on what the debtor or the claimant knew about the claim or, with reasonable diligence, should have known.

(Internal quotations and citations omitted). The Second Circuit noted, however, a competing interest:

[I]n the context of a claim for damages based on the debtor’s alleged violation of law, two competing policies will be in tension. On the one hand is the policy sought to be vindicated by the statute alleged to be violated, here the Sherman Antitrust Act. That policy – promoting competition – is enhanced by limiting the circumstances in which the claim is discharged. On the other hand is the policy sought to be vindicated by the Bankruptcy Code. That policy – providing a debtor emerging from bankruptcy with a “fresh start” – is enhanced by expanding the circumstances in which a claim is discharged. Moreover, a debtor will normally be less likely to be charged with knowledge that it has violated the law than that it owes money unrelated to a law violation.

Finding that the trial court had been too accepting of the plaintiff’s conclusory allegation that it “could not have discovered [the defendants’] alleged antitrust violations until after confirmation of the plan,” the Second Circuit remanded the matter to the trial court, instructing it:

On such reconsideration the District Court must determine what aspects of [the defendants’] alleged price-fixing conduct were known by [the plaintiff], or reasonably ascertainable, prior to plan confirmation, whether the allegations of the class action complaint were sufficient to alert [the plaintiff] to its antitrust claim, and whether a post-confirmation claim would have been entertained. If [the plaintiff] lacked such knowledge, the inquiry will then shift to whether [the defendants] knew or should have known of its potential antitrust liability such that due process required it to notify [the plaintiff] of the potential claim. At least these matters must be considered before a determination can be made whether [the plaintiff] would be denied due process if its potential antitrust claim was discharged.

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