ALERT: Eighth Circuit Court of Appeals Rejects “Reasonably Foreseeable” Standard for Extent of Notice to Creditors

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February 6, 2018

The Eight Circuit Court of Appeals recently weighed in on the extent to which a debtor must search for “known” creditors in order to provide sufficient notice of its bankruptcy and satisfy due process. In Dahlin v. Lyondell Chemical Co., ___ F.3d ___ (8th Cir. Jan. 26, 2018), the Eighth Circuit determined that a “known” creditor is one that is reasonably ascertainable, and a debtor need not perform more than one reasonably diligent search to unveil the identity of “known” creditors.

As a general proposition, in order for a debtor to receive a discharge of its debts in bankruptcy, the debtor must provide notice to creditors of the bankruptcy case and the deadline for creditors to assert a claim against the debtor. “Known” creditors must be provided with actual notice, while “unknown” creditors may receive notice by publication. Known creditors are those who are either known to the debtor or whose identity is “reasonable ascertainable” through “reasonably diligent efforts.”

In Dahlin, Cheri Dahlin sued Lyondell Chemical Company for wrongful death alleging that her husband’s acute myeloid leukemia was caused by his exposure to benzene at the debtor’s facility. Dahlin’s husband had worked for two companies as a commercial truck driver between 1990 and 1995 at a facility in Clinton, Iowa, during which time he was exposed to benzene. The debtor took over the Clinton facility in 1997 and subsequently filed for Chapter 11 bankruptcy in 2009. The bankruptcy court confirmed a reorganization plan in 2010. Dahlin’s husband was diagnosed in 2012 and passed away shortly thereafter. Dahlin brought her lawsuit after confirmation of the debtor’s reorganization plan. 

Lyondell moved for summary judgment arguing that Dahlin’s pre-confirmation claim was discharged in bankruptcy. The district court denied the motion, holding that while the claim arose pre-confirmation, the discharge was not binding on Dahlin because she had received inadequate notice of the bankruptcy. Although defendants complied with Fed. R. Bankr. P. 1005 and 2002(n) by listing the names used within the eight years before filing the bankruptcy petition, the notice failed to list the names of the three companies that were the owners of the Clinton facility when Dahlin’s husband worked there. The district court reasoned that, despite compliance with the bankruptcy rules, the publication notice was insufficient to satisfy due process because defendants should have known of their potential liability for future benzene claims. Using this “foreseeability” test, the district court concluded that the defendants should have listed the names of those three previous owner companies. Dahlin later won her jury trial and was awarded damages.

The Eighth vacated the judgment and remanded the case, rejecting the district court’s use of the “reasonably foreseeable” standard. There had been no dispute that Dahlin’s cause of action constituted a claim that arose pre-confirmation and that defendants had conducted a reasonably diligent search for creditors. This search produced over one million reasonably ascertainable creditors; Dahlin’s husband was not one of those identified. The Eighth Circuit stated that applying the district court’s rule would require defendants “to conduct another search beyond a reasonably diligent search for known creditors” and noted that a debtor “need not undertake impracticable and extended searches . . . in the name of due process.” In rejecting the foreseeability test, the Eighth Circuit agreed with the Third Circuit in Chemetron Corp. v. Jones, 72 F.2d 341 (3d Cir. 1995) that “[d]ebtors cannot be required to provide actual notice to anyone who potentially could have been affected by their actions” and that only those creditors whose identities are known or reasonably ascertainable are entitled to more than notice by publication.

The Eighth Circuit’s holding provides some clarity regarding the extent to which a debtor must attempt to identify potential creditors. While the bankruptcy rules may not always be co-extensive with due process requirements, a debtor that conducts a reasonably diligent search for “known” creditors and provides detailed publication notice to “unknown” creditors, in accordance with the bankruptcy rules, may have a strong argument that due process has been satisfied.