Grady v. A.H. Robins Co., Inc.
| Decision Date | 04 February 1988 |
| Docket Number | 86-1692,Nos. 86-1691,s. 86-1691 |
| Citation | 839 F.2d 198 |
| Parties | 18 Collier Bankr.Cas.2d 176, 17 Bankr.Ct.Dec. 265, Bankr. L. Rep. P 72,188 Rebecca GRADY, Plaintiff-Appellant, v. A.H. ROBINS COMPANY, INCORPORATED, Defendant-Appellee. The Official Unsecured Creditors Committee of A.H. Robins Company, Incorporated; Dalkon Shield Claimants' Committee; Official Committee of Equity Security Holders, Intervenor. LEGAL REPRESENTATIVE FOR the FUTURE TORT CLAIMANTS, Plaintiff-Appellant, v. A.H. ROBINS COMPANY, INCORPORATED, Defendant-Appellee. The Official Unsecured Creditors Committee of A.H. Robins Company, Incorporated; Dalkon Shield Claimants' Committee; Official Committee of Equity Security Holders, Intervenor. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Stanley K. Joynes, III (Rilee, Cantor, Arkema & Edmonds, Samuel M. Walker, Jr., Coates & Comess, Richmond, Va., Stephen H. Fredkin, Salinas, Cal., on brief), for plaintiffs-appellants.
Harold S. Novikoff (Wachtell, Lipton, Rosen & Katz, on brief); Michael L. Cook (Skadden, Arps, Slate, Meagher & Flom, New York City, Mays & Valentine, Richmond, Va., Cadwalader, Wickersham & Taft, Berlack, Israels & Liberman, New York City, on brief), for defendants-appellees.
Before RUSSELL, WIDENER and CHAPMAN, Circuit Judges.
Rebecca Grady and the Legal Representative of the Future Claimants appeal an order of the district court deciding that Mrs. Grady's claim against A.H. Robins Co., Inc. (Robins) arose prior to the date Robins sought protection under the Bankruptcy Code and therefore was subject to the automatic stay provision of 11 U.S.C. Sec. 362(a)(1). In re A.H. Robins Co., Inc. 63 B.R. 986 (Brktcy.E.D.Va.1986). We affirm. 1
Robins, a pharmaceutical company, was the manufacturer and marketer of the Dalkon Shield, an interuterine contraceptive device, from 1971 to 1974. Production was discontinued in 1974 because of mounting concerns about the device's safety. See A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir.1986). Because of the overwhelming number of claims filed against it because of the Dalkon Shield, Robins filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Sec. 1101 et seq, on August 21, 1985.
Mrs. Grady had had inserted a Dalkon Shield some years before but thought that the device had fallen out. 2 On August 21, 1985, she was admitted to Salinas Valley Memorial Hospital, Salinas, California, complaining of abdominal pain, fever and chills. X-rays and sonograms revealed the presence of the Dalkon Shield. On August 28, 1985, the Dalkon Shield was surgically removed. Mrs. Grady was discharged from the hospital but not long after returned to her physician, complaining of persistent pain, fever and chills. She was again admitted to the hospital on November 14, 1985, on which admission she was diagnosed as having pelvic inflammatory disease, and underwent a hysterectomy. She blames the Dalkon Shield for those injuries.
On October 15, 1985 (almost two months after Robins filed its petition for reorganization), Mrs. Grady filed a civil action against Robins in the United States District Court for the Northern District of California. Grady v. A.H. Robins Co., Inc., Action No. 85-20635-SW. The case was subsequently transferred to the Eastern District of Virginia. Grady v. A.H. Robins Co., Inc., CA No. 86-0303-R.
Mrs. Grady then filed a motion in the bankruptcy court, seeking a decision that her claim did not arise before the filing of the petition so that it would not be stayed by the automatic stay provision of the Code. If the claim arose when the Dalkon Shield was inserted into her, the district court reasoned, then it would be considered a claim under the Bankruptcy Code and its prosecution would be stayed by the provisions of 11 U.S.C. Sec. 362(a)(1). If, however, the claim was found to arise when the injuries became apparent, then it might not be a claim for bankruptcy purposes and the automatic stay provision would be inapplicable.
The bankruptcy court determined that Mrs. Grady's claim against Robins arose when the acts giving rise to Robins' liability were performed, not when the harm caused by those acts was manifested. Robins, 63 B.R. at 993. The court rejected Mrs. Grady's contention that the court must look to state law to determine when her cause of action accrued and equate that with a right to payment. It concluded that the court must follow federal law in determining when the claim arose. Robins, 63 B.R. at 992-3. It held that the right to payment under 11 U.S.C. Sec. 101(4)(A) of Mrs. Grady's claim arose when the acts giving rise to the liability were performed and thus the claim was pre-petition under 11 U.S.C. Sec. 362(a)(1).
We emphasize the narrowness of the district court's holding. It held only that the automatic stay provision of 11 U.S.C. Sec. 362 applied, and we have recited its reasoning to arrive at that conclusion. It did not decide whether or not Mrs. Grady's claim would constitute an administrative expense under 11 U.S.C. Sec. 503(b)(1)(A), and it also did not decide whether or not the Future Tort Claimants would have a dischargeable claim within the reorganization case. 63 B.R. 994 n. 16, n. 17. We affirm, although our reasoning may vary somewhat from that of the district court.
Section 362 of the Bankruptcy Code, 11 U.S.C. Sec. 362, provides in part:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, ... operates as a stay, applicable to all entities, of--
(1) the commencement or continuation, including the issuance of employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
* * *
The legislative history of the Code reveals the importance of Sec. 362 stay provision:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.
House Report No. 95-595, 95th Cong. 1st Sess. 340-1 (1977); Senate Report No. 95-989, 95th Cong.2d Sess. 54-55 (1978); reprinted in 1978 U.S.Code Cong. & Adm.News 5787 at 5840 and 6296-97.
The district court correctly noted that the automatic stay is particularly critical to a debtor seeking to reorganize under Chapter 11 because he needs breathing room to restructure his affairs. Robins, 63 B.R. at 988, citing Matter of Baldwin-United Corp., 48 B.R. 901, 902 (Bkrtcy.S.D.Ohio 1985). While the importance of Sec. 362 cannot be over-emphasized, its coverage extends only to claims against the debtor that arose prior to the filing of its petition.
11 U.S.C. Sec. 101(4), as pertinent, defines a claim to be a
(A) right to a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured;
Congress intended that the definition of claim in the Code be as broad as possible, noting that H.R.Rep. No. 595, 95th Cong., 1st Sess. 309 (1977), S.Rep. No. 989, 95th Cong., 2d Sess. 21-22 (1978), reprinted in 1978 U.S.Code Cong. & Adm.News, 5787 at 5807-08 and 6266. The courts have consistently recognized the very broad definition to be given to claims. E.g. Ohio v. Kovacs, 469 U.S. 274, 279, 105 S.Ct. 705, 707, 83 L.Ed.2d 649 (1985); Robinson v. McGuigan, 776 F.2d 30, 34 (2d Cir.1985), rev'd Sub. Nom. on other grounds, Kelly v. Robinson, --- U.S. ----, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986); Matter of M. Frenville Co., Inc., 744 F.2d 332, 336 (3d Cir.1984), cert. den. 469 U.S. 1160, 105 S.Ct. 911, 83 L.Ed.2d 925 (1985); In re Edge, 60 B.R. 690, 692-94 (Brktcy.M.D.Tenn.1986); In re Johns-Manville Corp., 57 B.R. 680, 686-88 (Bkrtcy.S.D.N.Y.1986).
While the parties agree that the term claim is broadly defined under the Bankruptcy Code, they disagree over whether Mrs. Grady's suit falls within that definition. Mrs. Grady primarily relies upon Matter of M. Frenville Co., supra, to support her contention that her claim falls outside the protection of the automatic stay.
Prior to filing its petition, Frenville, an independent auditing firm, had employed Avellina and Bienes (A & B), an accounting firm, to prepare its financial statement. After the bankruptcy petition was filed, several banks which had received the financial statement sued A & B, claiming that the statement was negligently prepared. A & B moved for relief from the automatic stay in order that it could bring Frenville into those lawsuits as a third-party defendant for their indemnification.
The court concluded that a pre-petition act by a debtor giving rise to later liability is not enough to bring an action within the definition of a claim. It held that the right to payment must exist pre-petition before a claim can exist. Frenville, 744 F.2d at 335-36. Because the Bankruptcy Code does not provide when a right to payment arises, the court turned to state law for its answer. 3 Because A & B had had no right under state law to seek indemnification from Frenville before the banks filed their suit, the claim was held to arise post-petition and therefore was not barred by the automatic stay provision of Sec. 362(a)(1).
Mrs. Grady argues that her cause of action against Robins did not accrue until after...
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