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Court Restates Claims Dischargeable in Bankruptcy

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By Tanya Roth, Esq. on May 23, 2012 10:03 AM

Despite a bankruptcy reorganization, Owens Corning Sales LLC can still be liable for its supposedly defective roof shingles, ruled the Third Circuit Court of Appeals last week.

The decision of the Third Circuit Court of Appeals established a new test for determining when a claim exists under Chapter 11 of the Bankruptcy Code. Generally, under a bankruptcy, many claims are extinguished or discharged. But some claims survive bankruptcy and others fall into a grey area.

The case sheds some new light on the types of debts that are dischargeable in bankruptcy.

The bankruptcy proceedings began in 2000, when Owens Corning was facing several issues involving asbestos liability. In 2006, after publishing notice of bankruptcy for potential creditors, the bankruptcy plan was confirmed by a bankruptcy judge and the company's claims were extinguished.

Subsequently, two customers found issues with the product and sued Owens Corning for the standard products liability claims-- breach of warranty, fraud, negligence and strict liability. The claims arose when the defects became apparent, which was years after the bankruptcy had already been confirmed.

Under the Grossman rule of the Third Circuit, a claim that arose prior to the bankruptcy filing would still be valid. Thus, under a Grossman test, the claims of the plaintiffs against Owens Corning would be null.

The court, however, dropped the Grossman test, saying that it didn't apply retroactively. The Grossman case came out in 2010, after the claims in the current case arose.

The Third Circuit Court of Appeals agreed that the plaintiffs' claims were not discharged in the bankruptcy and remanded the case back for further proceedings.

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