In Re: WCI Communities Inc.

Filing 23

MEMORANDUM. Signed by Judge Gregory M. Sleet on 7/22/2015. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELA WARE
INRE:

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WCI COMMUNITIES, INC., et al.,

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Debtors.

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WCI COMMUNITIES, INC.,
Appellant,

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LESINA AT HAMMOCK BAY
CONDOMINIUM ASSOCIATION, INC.,
Appellee.

Chapter 11
Banl<r. Case No. 08-11643-KJC

C.A. No. 13-1397-GMS

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MEMORANDUM
I.

INTRODUCTION
Presently before the court is an appeal by WCI Communities, Inc. ("WCI"), from the May

17, 2013 Order and Opinion (collectively, the "Bankruptcy Court Opinion"), of the United StatesBankruptcy Court for the District of Delaware. (D.I. 1-1, 1-5). That Opinion granted appellee's
request for declaratory judgment that the Debtor's confirmed plan of reorganization did not
discharge certain claims it now seeks to raise against WCI. (D .I. 1-1 ). For the reasons that follow,
the court will affirm the Bankruptcy Court's Opinion.

II.

BACKGROUND
On August 4, 2008, WCI Communities, Inc. and over 100 of its subsidiaries (the

"Debtor"), 1 filed for chapter 11 bankruptcy relief in the United States Bankruptcy Court for the

1

Although captioned as the same name, the Debtor WCI Communities, Inc. is a different legal entity than
the appellant WCI Communities, Inc. The court will explain this distinction in more detail below.

District of Delaware. (Bankr. Case No. 08-11643, D.I. 1). Prior to bankruptcy, the Debtor
constructed homes and operated residential communities.
As part of its restructuring plan (the "Plan"), the Debtor formed three new subsidiaries,
which all filed voluntary petitions for chapter 11 bankruptcy relief on July 1, 2009. (D.I. 1-5 at
3). The Bankruptcy Court then permitted the bankruptcy cases of these new subsidiaries to be
administered jointly with the Debtor's bankruptcy. (Bankr. Case No. 08-11643, D.I. 2099). The
Plan provided that the Debtor would transfer substantially all of the assets of its subsidiaries to
itself, and then would transfer those assets to the one of the newly formed entities. (D.I. 1-5 at 4).
This new entity adopted the name WCI Communities, Inc. and became the Disbursing Agent under
the Plan. (Id.). This new entity is the appellant in this case. (Id.).
The Bankruptcy Court set February 2, 2009 as the bar date for fiiing claims against the
Debtor's estate. (D.I. 11-1). The Bankruptcy Court issued an order confirming the Debtor's Plan
on August 26, 2009 (the "Confirmation Order"), which took effect on September 3, 2009. (D.I.
11-8, 11-9). The Confirmation Order provided for a general discharge of all claims against the
Debtor and a permanent injunction barring any holders of claims from asserting those claims
against the Debtor, its successors or assigns. (D.I. 11-8 at ifif 53, 69).
Prior to filing bankruptcy, the Debtor had developed the Lesina condominium complex.
The appellee in this case, Lesina at Hammock Bay Condominium Association, Inc. ("the
Association"), is an independent non-profit organization that administers and manages that
condominium complex.

Pursuant to its Articles of Incorporation, three board of directors

appointed by the Debtor would initially manage the Association, and once "Turnover" 2 occurred,
the unit owners could then elect their own board of directors. (D.I. 11-12 at 378). Prior to

2

Florida condominium law sets forth strict guidelines detailing when a condominium developer must
"Turnover" the association. See Fla. Stat. Ann.§ 718.301(1)).

2

Turnover, the Debtor-controlled Association filed a broad proof of claim in the Debtor's
bankruptcy, specifically including claims for "any defect in workmanship in common areas ...
any unfinished common areas which the Debtor was obligated, but failed, to complete ... [and]
assessment funding of association dues for unsold units that the Debtor holds in inventory .... "
(D.I. 11-4 at 103). The proof of claim characterized the debt as unliquidated and contingent. (Id.).
After the Bankruptcy Court confirmed the Debtor's Plan, WCI turned control of the
Association over to the unit owners. (D.I. 1-5 at 7; see D.I. 11-12 at 381). After Turnover, the
unit owners' Association hired engineering firms to assess potential construction defects at the
Lesina Condominium. (D.I. 11-13 at 417). The engineering firms notified the Association that it
discovered various defects, and the Association sent notice of these claims to WCI. (Id. at 412).
The parties disputed whether the Debtor's Confirmation Order discharged the
Association's alleged claims. To resolve that dispute, the Association filed a motion in the
Bankruptcy Court pursuant to 11 U.S.C. § 105(a) (the "Motion"), seeking the following
declaratory relief: (I) A determination that the reorganized Debtor is unjustified in threatening
sanctions if movant commences a Florida state court lawsuit against the "new" WCI, and (II) A
determination that WCI' s obligation to pay outstanding condominium assessments and deficit
funding is not impeded by the Debtor's plan. (D.I. 11-10 at 248). The Association stated that it
intends to file statutory claims against WCI in Florida state court for: "(l) accumulated association
assessments and deficit funding, and (2) statutory warranties for construction defects." (Id. at
249). 3 WCI objected, principally arguing that the Debtor's Confirmation Order and 11 U.S.C. §
l 14l(d) discharged the Association's claims. (D.I. 11-11at287).

3

WCI did not seek a stay of the Bankruptcy Court's decision pending appeal, thus, the Association has since
initiated suit in Florida state court. (D.I. 12 at 1).

3

While the Motion was pending, the United States Court of Appeals for the Third Circuit
issued its opinion in Wright v. Owens Corning, 679 F.3d 101 (3d Cir. 2012). Wright construed
two prior Third Circuit opinions: .Avellino & Bienes v. M Frenville Co. (Jn re M Frenville Co.),
744 F.2d 332 (3d Cir. 1984), and Jeld-Wen, Inc. v. Van Brunt (In re Grossman's Inc.), 607 F.3d
114 (3d Cir. 2010). Frenville first established the applicable test for determining when a claim
arose for the purposes of the Bankruptcy Code. In re Frenville, 744 F.2d at 336. Grossman's later
reversed Frenville, and supplied a new method for fixing when a claim arose. In re Grossman's

Inc., 607 F.3d at 125. Finally, Wright carved out instances where due process requires that a court
must still apply the Frenville test, rather than the Grossman's test. Wright, 679 F.3d at 108.
Because Wright potentially impacted the Association's claims, the Bankruptcy Court requested
supplemental briefing on the effect of that decision. (D.I. 1-5 at 2; see D.I. 11-17, 11-18).
The Bankruptcy Court's Opinion granted the Association's Motion, finding that the
Confirmation Order did not discharge the Association's claims. (D.I. 1-1, 1-5). It reasoned that
based on Wright, the Frenville test controlled the Association's claims, which did not "arise" until
the Turnover date. (D.I. 11 at 12). Because Turnover occurred after the date of confirmation of
the Debtor's Plan, the Bankruptcy Court further found that the Association did not hold "claims"
subject to discharge under the Bankruptcy Code. (D.I. 1). WCI timely appealed to this court. The
parties have briefed4 all relevant issues and the matter is ripe for judgment. (See D.I. 10, 12, 15). 5

III.

PARTIES' CONTENTIONS

WCI argues that the Bankruptcy Court misinterpreted Wright. (D.I. 10 at 20). In its view,
the Grossman's test, not the Frenville test, should govern when the Association's claims arose.

4
The court has also considered the Association's Surreply Brief(D.I. 16), WCI's Motion to Amend/Correct
to Supplement the Appellate Record (D.1. 19), and the responses thereto (D.1. 17, 20, 21).
5
Pursuant to Fed. R. Bankr. P. 8019(b), the court finds that oral argument is unnecessary because the facts
and legal arguments are adequately presented in the briefs and record, and the decisional process would not be
significantly aided by oral argument.

4

First, WCI maintains that Grossman's applies retroactively to all earlier cases. (Id). Under
Grossman's standard, WCI contends that the Association's claims arose pre-confirmation when it
was first exposed to the product or conduct that caused the alleged injury. (Id). Second, WCI
argues that the Debtor provided the Association with sufficient due process, therefore, the
reasoning in Wright does not apply to the Association's claims. (Id at 22). Finally, WCI asserts
that the Bankruptcy Court erred by alternatively concluding that the Association's claims arose
from entirely post-confirmation conduct. (Id at 27). WCI requests that this Court reverse the
Bankruptcy Court's May 17, 2013 Order.
In response, the Association maintains that the Bankruptcy Court co1Tectly applied Wright
and found that the Frenville test should apply to their claims. (D.I. 12 at 34). Under the Frenville
test, the Association asserts that its claims did not arise until after the Bankruptcy Court confirmed
the Debtors' plan. (Id). The Association disclaims WCI's interpretation of Wright, arguing that
WCI's due process argument is irrelevant in light of Wright's straightforward rule. (Id at 35).
The Association requests that this court affirm the Bankruptcy Court's Opinion.

IV.

STANDARD OF REVIEW
The court has jurisdiction over this matter pursuant to 28 U.S.C. § 158(a)(l). When

reviewing a case on appeal, the court reviews the bankruptcy court's legal determinations de nova,
its factual findings for clear error, and its exercise of discretion for abuse thereof. In re United
Healthcare Systems, Inc., 396 F.3d 247, 249 (3d Cir. 2005). When reviewing the Bankruptcy
Court's interpretation of its own orders, the District Court applies a "bifurcated approach" - it
assesses great weight to the Bankruptcy Court's construction of its own language, but reviews de
nova any attendant legal conclusions. In re Shenango Grp. Inc., 501F.3d338, 346 (3d Cir. 2007).
The dispositive portion of the Bankruptcy Court's analysis rested upon its interpretation of Third

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Circuit precedent and applicable Florida condominium law (see D.I. 1-5 at 12), rather than its own
language in the Confirmation Order, thus this court will engage in de nova review.

V.

DISCUSSION
This appeal focuses on when a "claim" arises under the Bankruptcy Code. Determining

when a claim arises under the Code impacts whether a debtor's confirmed plan discharges that
underlying debt. 11 U.S.C. § 1141(d) ("the confirmation of a plan ... discharges the debtor from
any debt that arose before the date of such confirmation ....") (emphasis added). The outcome
of this dispute hinges upon whether the Association's asserted statutory claims "arose" prior to the
date of the debtor's plan confirmation.

1.

Third Circuit Precedent

Whether a claim "arose" prior to the date of the debtor's plan confirmation is an evolving
issue in the Third Circuit. In Frenville, the Third Circuit first announced the "accrual test" for
determining when a claim arose. The accrual test instructs that the validity of a claim depends on:
(1) whether the claimant possessed a right to payment, and (2) when that right arose under relevant

non-bankruptcy law. In re Frenville, 744 F.2d at 336; see In re Remington Rand Corp., 836 F.2d
825, 830 (3d Cir. 1988)).
In Frenville, the Third Circuit analyzed when an accounting firm's claims for
indemnification and contribution against a debtor "arose" under the Bankruptcy Code for purposes
of the automatic stay. Frenville, 744 F.2d at 334. According to New York state law in effect at
the time, a defendant could not seek indemnification or contribution from a third party defendant
until it was named a defendant in the suit for which it sought indemnity or contribution. Id at 337.
At the time the debtor filed bankruptcy, no party had filed suit against the accounting firm. Thus,
the Third Circuit reasoned that because "[the accounting firm] did not have a claim for

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indemnification or contribution until the banks filed their suit," ... "[the firm's] claim, as well as
its cause of action, arose post-petition." Id.
After "universal disapproval" of Frenville 's accrual test, the Third Circuit revisited the
issue in In re Grossman's Inc., 607 F.3d 114 (3d Cir. 2010). Grossman's overruled the accrual
test, and "h[e]ld that a 'claim' arises when an individual is exposed pre-petition to a product or
other conduct giving rise to an injury, which underlies a 'right to payment' under the Bankruptcy
Code." In re Grossman's Inc., 607 F.3d at 125 (citing 11 U.S.C. § 101(5)). The claimant in that
case had alleged claims based on asbestos exposure. Id. Under this new test, the Court concluded
"that [the claimant's] claims arose sometime in 1977, the date [she] alleged that Grossman's
product exposed her to asbestos." Id.
Most recently, the Third Circuit in Wright, 679 F.3d 101, addressed the retroactive
application of the new Grossman 'stest regarding due process concerns. Owens Coming had filed
for chapter 11 bankruptcy protection in October 2000 and the Bankruptcy Court confirmed its plan
of reorganization on September 26, 2006. Id. at 103. After confirmation, two plaintiffs filed a
putative class action complaint against Owens Coming seeking damages for defectively
manufactured roofing shingles.

Id. The district court dismissed the action, finding that the

plaintiffs' claims were discharged by the confirmed plan in Owens Corning's earlier bankruptcy
case, as analyzed under the Grossman's test. Id Both plaintiffs had installed the shingles (and
thus had been exposed to the allegedly defective product) prior to the date of the deptor's plan
confirmation. Id The district court had concluded that under Grossman's, the claims "arose"
prior to confirmation and were discharged. Id at 104.
Although both plaintiffs held claims as outlined by the Grossman 's test, the Third Circuit
nevertheless found that discharging these claims would violate the plaintiffs' due process rights.
Id at 107. Wright explained:
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At the time the Plaintiffs received their notices, Frenville was the law in our Circuit
(though we refrain from saying "good" law). As noted, under the Frenville test the
Plaintiffs did not hold "claims" under the Bankruptcy Code. On reading the notices,
the Plaintiffs could only understand that their rights would not be affected in any
way by the referenced proceedings, and thus, correctly, would not have taken any
action to ensure that their interests were represented. Not until we overturned
Frenville and established our new test for determining when a claim exists under
the Code did the Plaintiffs unexpectedly hold "claims" that arguably could be
discharged in the proceedings addressed in the notices. By that time, however, the
bar date had passed, the Confirmation Order had been entered, and the
Confirmation Date had occurred, each of which affected the Plaintiffs' newfound
claim status without an opportunity for them to be heard. Due process affords a redo in these special situations to be sure all claimants have equal rights.
Id at 108. The due process issue in Wright resulted from the retroactive application of the
Grossman's test and the fact that it caused claims to potentially "arise" earlier than the Frenville

test. Consequently, previous claimants who had operated under the correct conclusion that they
did not hold claims under the Frenville test, could now potentially have those claims discharged
in an earlier bankruptcy, without notice or an opportunity to be heard. To rectify this problem,
the Wright Court:
[He]Id that, for persons who have 'claims' under the Bankruptcy Code based solely
on the retroactive effect of the rule announced in Grossman's, those claims are not
discharged when the notice given to those persons was with the understanding that
they did not hold claims.
[For] those [claimants] who hold claims based on Grossman's rejection of the
Frenville test-that is, persons exposed to a debtor's conduct or product pre-petition
... due process calls for the outcome of the Frenville test to apply for bankruptcy
cases in which reorganization plans are proposed and confirmed prior to June 2,
2010, when Grossman's was decided. After that date, persons exposed to a debtor's
conduct or product pre-petition are deemed to understand that they held claims.
Id at 109. "[I]f a claimant is not afforded due process, a plan of reorganization and confirmation

order that purport to discharge claims will not do so." Id at 107 n.6. The Court therefore
concluded that "[b]ecause at the time of the Confirmation Date Frenville controlled the status of
their 'claims,' the Plaintiffs were not afforded due process. Accordingly their claims were not

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discharged by the Plan and Confirmation Order, and they retained their cause of action against
Owens Corning." Id
Because the date of confirmation of the Debtor's Plan occurred prior to June 2, 2010, the
Bankruptcy Court applied the Frenville accrual test to determine when the Association's claims
arose. (D .I. 1-5 at 11 ). This required analyzing when the Association first had a "right to payment"
under Florida law. Id (citing Frenville, 744 F.2d at 337). The Bankruptcy Court determined that
because the Association's claims did not accrue under Florida law until the Turnover - which
occurred after the date of confirmation of the Debtor's plan - they did not "arise" prior to
confirmation. (D.I. 1-5 at 11; see Fla. Stat. Ann. § 718.111(3)). Accordingly, the Bankruptcy
Court concluded that the Association's claims did not fall within the scope of the Debtors'
discharge. (D.I. 1-5 at 12).

2.

Review of the Bankruptcy Court's Application of Wright

WCI first argues that the Bankruptcy Court misinterpreted the Third Circuit's decision in
Wright. (D.I. 10 at 20). It contends that Grossman's applies retroactively to all cases; therefore,
the Bankruptcy Court incorrectly applied the Frenville accrual test. (Id). In its view, "[h]ad the
Bankruptcy Court retroactively applied Grossman's, as instructed by Grossman's and [Wright], it
would have concluded that the Association's claims arose before the 2009 effective date, in 2007
when construction on the Tower was completed." (Id. at 21).
This argument ignores the Third Circuit's fully developed reasoning in Wright. Although
the Third Circuit in Wright "appl[ied] the Grossman's test retroactively to conclude that [the
plaintiff] held a claim[,]" it further explained that "for persons who have 'claims' under the
Bankruptcy Code based solely on the retroactive effect of the rule announced in Grossman's, those
claims are not discharged when the notice given to those persons was with the understanding that
they did not hold claims." Wright, 679 F.3d at 108. Thus, although the Grossman's test does
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apply retroactively, Wright qualified that this application cannot deprive claimants of due process
rights. To the extent that it does violate those rights, Wright carved out an exception and mandated
that the Frenville test, not the Grossman's test, must apply. The Association's claims fit squarely
within that carve out. The Bankruptcy Court confirmed the Debtor's Plan prior to the Third
Circuit's issuance of the Grossman's opinion.

(See D.l. 11-8).

Retroactive application of

Grossman's in this instance would violate the Association's due process rights according to
Wright. Since Frenville governed whether the Association held a "claim" prior to the Debtor's
confirmation, it did not have notice that Grossman's would retroactively apply to discharge those
claims. The Association "hold[s] claims based on Grossman's rejection of the Frenville test" in a
case confirmed prior to June 2, 2010, and thus "due process calls for the outcome of the Frenville
test to apply." Id at 109. The Bankruptcy Court correctly concluded that Frenville applied to
determine when the Association's claims arose.
WCI next argues that the Bankruptcy Court erred because the Association received due
process by filing a claim against the Debtor's estate and having an opportunity to participate in the
bankruptcy case. (D .I. 10 at 22). In WCI' s view, Wright does not establish a bright-line test based
solely on the date of the debtor's plan confirmation; rather, it only requires that a court apply the
Frenville test to cases confirmed prior to June 2, 2010 if the claimant was not afforded due process.
(D.I. IO at 25). WCI maintains that if a party is afforded due process, which it argues occurred
here, then Wright does not mandate that the Frenville test must apply. In other words, WCI posits
that if a party (in a bankruptcy case confirmed prior to June 2, 2010) chooses to file a proof of
claim and participate in a bankruptcy case, even if it does not yet hold a "claim" as recognized by
the Frenville test, the debtor's confirmed plan can nevertheless discharge that claim.
WCI does provide some support for its argument. It cites a footnote in Wright that in its
view indicates that the Third Circuit did not intend for Frenville to apply per se to all claims in
IO

bankruptcy cases confirmed prior to June2, 2010. See Wright, 679 F.3d at 108 n.7 ("[O]urholding
is not a bright-line rule that all persons with unknown future claims once governed by Frenville
could not have been provided due process regardless of the adequacy of notice to those future
claimants."). WCI also relies on In re Flintkote, 486 B.R. 99, 113 (Bankr. D. Del. 2012), which
opined that Wright's holding only extends to a "'special situation' where [a creditor] was an
unknown claimant who was unaware of the fact that [the debtor] is in bankruptcy or that [the
creditor] might eventually [have a claim]."
The court need not address the merits of WCI's argument. There is no basis for WCI's
premise that the Association was afforded due process because it filed a proof of claim and
participated in the Debtor's bankruptcy case. Whether a party receives proper due process depends
on the circumstances of a particular case. See Grossman's, 607 F.3d at 127. The Supreme Court
has provided that at minimum, due process requires notice and an opportunity to be heard. See

Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 313 (1950).

Under these

circumstances, the court will not impute the actions of the Debtor-controlled Association to the
unit owners for purposes of due process. First, as the Bankruptcy Court correctly noted, prior to
Turnover, the Debtor-controlled Association could not have asserted the statutory claims that the
unit owners' Association now seeks to raise. "[The Florida Condominium] statute provides that
an association's cause of action does not accrue until the unit owners have acquired control over
the association." Charley Toppino & Sons, Inc. v. Seawatch at Marathon Condo. Ass'n, Inc., 658
So. 2d 922, 925 (Fla. 1994) (quoting Regency Wood Condominium, Inc. v. Bessent, Hammack &

Ruckman, Inc., 405 So.2d 440 (Fla. App. 1st Dist. 1981)); see Fla. Stat. Ann. § 718.111(3).
Second, when the Association did file the proof of claim and participate in the bankruptcy before
confirmation, it was not independent from the Debtor. Florida law attributes the actions of a
developer-controlled condominium association to the developer, not the unit owners. "Prior to the
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developer relinquishing control of the association pursuant to subsection (4), actions taken by
members of the board of administration designated by the developer are considered actions taken
by the developer, and the developer is responsible to the association and its members for all such
actions."

Fla. Stat. Ann. § 718.301.

Thus, the court concludes that the Debtor-controlled

Association's filing of a proof of claim and participation in the bankruptcy case do not establish
that the unit-owners' Association was afforded due process.
Finally, WCI suggests that the Bankruptcy Court's application of Wright produces an
inequitable result in this case since the Association could recover the full value of its claims;
whereas, other similarly situated creditors could only receive the fractional recovery as provided
by the Debtor's Plan. (D.I. 10 at 23). The court finds no merit in this argument. This position
merely raises a general critique to the Bankruptcy Code's mandate that only claims arising prior
to confirmation are dischargeable. See II U.S.C. § 114l(d). And while Grossman's and Wright
has complicated the issue of when "claims" arise in bankruptcy, this precedent applies equally to
all creditors. The fact that the Association may recover the full value of its claims, and other
creditors have had claims discharged, simply reflects the Legislature's policy in establishing a
fixed cutoff date for determining the dischargeability of claims in bankruptcy.
The court concludes that the Bankruptcy Court did not err by finding that the Frenville test,
as opposed to the Grossman's test, applied to the Association's claims. The Bankruptcy Court
also correctly determined that under the Frenville test, the Debtor's Confirmation Order did not
discharge these claims. 6

6
Given this conclusion, the Court need not address the Bankruptcy Court's alternative conclusion, that the
Association's claims survived the Debtor's bankruptcy because they are based on assertions of entirely postconfirmation conduct. (D.I. 1-5 at 13-14; D.I. I 0 at 27). Additionally, although WCI tangentially raised a res judicata
defense in its opening brief (see D.I. I 0 at 28-29), the Court can easily dismiss this argument. Given the holding that
due process prevents the discharge of the Association's claims, the Confirmation Order could not have had any res
judicata effect on these claims. See In re Szostek, 886 F.2d 1405, 1408 (3d Cir. 1989) ("a confirmation order is res
judicata as to all issues decided or which could have been decided at the hearing on confirmation.") (emphasis added).

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VI.

CONCLUSION
For the foregoing reasons, the court will AFFIRM the Bankruptcy Court's May 17, 2013

Order and Opinion. The court will issue an appropriate order.

Dated: July .1_k-2015

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