Hexcel Corp. v. Stepan Co. (In re Hexcel Corp.)

In 1986, the state of New Jersey subjected Hexcel Corporation (debtor) to an environmental-cleanup order. In 1993, Hexcel filed for bankruptcy. The bankruptcy court approved Hexcel’s reorganization plan in 1995. In 1997, some New Jersey residents brought a class action against Stepan Company (creditor), asserting that Stepan had harmed them by discharging pollutants. In 1998, Stepan filed a third-party complaint in the class action against Hexcel, which might have contributed to the pollution. Section 1141 of the United States Bankruptcy Code (code) provided that claims arising before a debtor’s bankruptcy petition were discharged in bankruptcy even if the claimant neither accepted the reorganization plan nor filed a claim. The code defined “claim” broadly. One key case held that contingent claims, that is, debts the debtor had to pay only because an extrinsic event occurred, were discharged in bankruptcy if the extrinsic event was reasonably contemplated by the creditor and debtor at the time of its occurrence. Hexcel asked the bankruptcy court to enjoin Stepan’s suit, asserting that Stepan’s claim arose before Hexcel’s petition for bankruptcy. The Ninth Circuit had held that a claim based on federal environmental statutes arose prepetition if the claim was based on prepetition conduct that could be fairly contemplated to give rise to possible future claims—the so-called fair-contemplation test. The bankruptcy court ruled that the 1986 cleanup order did not give Stepan or Hexcel a basis for reasonable contemplation that Hexcel would be drawn into mass tort litigation in the future. The bankruptcy court denied Hexcel’s request to order a preliminary injunction blocking Stepan’s suit. Hexcel appealed, arguing that the bankruptcy court should have determined when Stepan’s claim arose by asking when the debtor’s conduct upon which the claim was based had occurred—the so-called debtor’s-conduct test.