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Eighth Circuit rejects foreseeability test for notice to unknown creditors

In Dahlin v. Lyondell Chemical Co., 2018 U.S. App. LEXIS 1956 (8th Cir. Jan. 26, 2018), the Eighth Circuit Court of Appeals rejected an argument that bankruptcy debtors were required by due process to provide more prominent notice of a case filing than they did, such that the notice might have been seen by unknown creditors with claims to assert.

In 2014, Cheri Dahlin sued Lyondell Chemical Company and certain of its affiliates (“Lyondell”), alleging that her husband’s exposure to benzene at a Lyondell-owned plant caused his disease and death. In 2009, prior to the filing of the suit, Lyondell had petitioned for chapter 11 bankruptcy, and in 2010 the bankruptcy court had confirmed a reorganization plan discharging all existing debts. As part of the bankruptcy proceeding, Lyondell had provided notice by publication listing, in compliance with Rule 1005 and 2002(n) of the Federal Rules of Bankruptcy Procedure, each name it had used for the prior eight years. The names of the company that had owned the plant during the period of alleged exposure, however, were not listed, because they had not been used within the eight years prior to the filing of the petition.

At the district court, Lyondell moved for summary judgment, arguing that Dahlin’s claim arose prior to the confirmation of the bankruptcy plan and therefore had been discharged. The district court held that the claim had indeed arisen prior to confirmation, but denied summary judgment. In the district court’s view, the discharge was not binding on Dahlin because the notice was constitutionally inadequate on due process grounds. Courts have held that the notice to creditors required by due process depends on whether a creditor is known or unknown. In the case of an unknown creditor, a debtor need only provide notice by publication. While the district court held that Dahlin was an unknown creditor entitled only to notice by publication, it nonetheless found the notice by publication inadequate because the defendants should have known that there were tort claimants like Dahlin. The district court held that the notice by publication should have provided better notice to such claimants. Such notice might have been accomplished by including in the publication reference to benzene, the plant at issue, or the names of the companies whose operations may have given rise to benzene exposure—even the companies outside the eight-year window provided for in the bankruptcy rules.

The Eighth Circuit reversed. It agreed with the district court that “[t]he circumstances of a case might require a debtor to provide more information than necessary under the bankruptcy rules.” Dahlin at *9. Here, however, the Eighth Circuit found that no such circumstances were present. The Eighth Circuit pointed to Lyondell’s extensive efforts to find creditors, including hiring a consultant to review its “employee, vendor, accounts payable, and contract registers.” Dahlin at 10. This search did not turn up Dahlin or her husband. The Eighth Circuit resisted requiring a debtor in bankruptcy to carry out an additional search beyond its search for creditors within its own books and records. “By the district court’s rationale,” the court reasoned, “the over 90 debtors should have analyzed the bases of every type of toxic tort that could be claimed against them and expanded the notice accordingly,” the sort of burdensome extended search that courts have not required as a matter of due process. Id.

The Eighth Circuit rejected the district court’s foreseeability rationale, relying on a Third Circuit case, Chemetron Corp. v. Jones, 72 F.3d 341 (3rd Cir. 1995). In Chemetron, the plaintiffs had argued that they were known creditors, requiring more than notice by publication, because their claims were reasonably foreseeable to the defendant. The Third Circuit instead held that the standard was whether the claimants were “reasonably ascertainable,” a standard that it found the Chemetron plaintiffs did not meet. The Eighth Circuit held that, likewise here, reasonable foreseeability was not the appropriate standard for determining that a notice by publication compliant with the Federal Rules of Bankruptcy Procedure required additional information as a matter of due process.