In re Emoral, Inc.

• Decision Date: 24 January 2014
• Docket Number: No. 13–1467.,13–1467.
• Citation: 740 F.3d 875
• Parties: In re EMORAL, INC., Debtor. Diacetyl Plaintiffs, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

740 F.3d 875

In re EMORAL, INC., Debtor. Diacetyl Plaintiffs, Appellants.

No. 13–1467.

United States Court of Appeals, Third Circuit.

Argued Oct. 10, 2013.

Filed: Jan. 24, 2014.

Nancy Isaacson, Esq. (argued), Greenbaum, Rowe, Smith & Davis, Roseland, NJ, Kenneth B. McClain, Esq., Humphrey, Farrington & McClain, Independence, MO, Counsel for Appellants.

Christopher Landau, Esq. (argued), Liam P. Hardy, Esq., Kirkland & Ellis, Washington, DC, Paul Basta, Esq., Kirkland & Ellis, New York, NY, Counsel for Appellee.

Before: FUENTES, COWEN and BARRY, Circuit Judges.

OPINION OF THE COURT

BARRY, Circuit Judge.

This appeal requires us to determine whether personal injury causes of action arising from the alleged wrongful conduct of a debtor corporation, asserted against a third-party non-debtor corporation on a “mere continuation” theory of successor liability under state law, are properly characterized as “generalized claims” constituting property of the bankruptcy estate. We conclude that they are, and will, therefore, affirm the order of the District Court.

I.

In August of 2010, Aaroma Holdings LLC (“Aaroma”), f/k/a Duane Street, LLC, purchased certain assets and assumed certain liabilities of Emoral, Inc. (“Emoral”), f/k/a Polarome International, Inc., a manufacturer of diacetyl, a chemical used in the food flavoring industry. At the time of the transaction, the parties were aware of potential claims against Emoral arising from exposure to diacetyl, although those individuals who came to be known in this litigation as the “Diacetyl Claimants” or the “Diacetyl Plaintiffs” (herein, “Diacetyl Plaintiffs”) apparently had never themselves been employed by Emoral. The Asset Purchase Agreement specifically provided that Aaroma was not assuming Emoral's liabilities related to “the Diacetyl Litigation,” and that it was not purchasing Emoral's corresponding insurance coverage. (App. at 326–27.)

When Emoral filed for bankruptcy protection in June of 2011, disputes arose between the bankruptcy trustee (the “Trustee”) and Aaroma, including, for example, the Trustee's claim that Emoral's sale of assets to Aaroma constituted a fraudulent transfer. On September 21, 2011, the Trustee and Aaroma entered into a Settlement Agreement (the “Agreement”) resolving the claims. As part of the Agreement, Aaroma agreed to pay $500,000 and take certain specific actions, and the Trustee agreed to release Aaroma from any “causes of action ... that are property of the Debtor's Estate” as of the date of the Agreement. ( Id. at 1079–80.)

At a hearing before the Bankruptcy Court regarding approval of the settlement, the Diacetyl Plaintiffs objected to the releases contained in the Agreement to the extent that those releases might bar them from bringing claims against Aaroma, as a successor to Emoral, for personal injuries related to diacetyl. A representative for the Trustee stated its view that the Diacetyl Plaintiffs' successor liability claims against Aaroma “do[ ] not belong to the Estate” and that the Trustee, therefore, “can't release [them].” ¹ ( Id. at 1277.) Counsel for Aaroma argued, however, that whether or not the Diacetyl Plaintiffs' causes of action were property of the estate (and therefore covered by the release) was not an issue before the Bankruptcy Court at that time. ( Id. at 1280–81.) Ultimately, the parties added the following language to the order approving the settlement to address concerns expressed by the Diacetyl Plaintiffs: “Nothing contained in this Order or in the Aaroma Settlement Agreement will operate as a release of, or a bar to prosecution of any claims held by any person which do not constitute Estate's Released Claims as defined in the Aaroma Settlement Agreement.” ( Id. at 1206, 1355.) By order of October 7, 2011, the Bankruptcy Court approved the settlement. The ultimate question, however, of whether the Diacetyl Plaintiffs' causes of action constituted “Estate's Released Claims,” as defined in the Agreement, was not resolved.

The Diacetyl Plaintiffs filed individual complaints against Aaroma in the Superior Court of New Jersey ( see, e.g., id. at 1227–45) alleging personal injury and product liability claims and asserting that Aaroma was a “mere continuation” of Emoral and, therefore, liable. ( Id. at 1233.) In April 2012, Aaroma filed in the Bankruptcy Court a “Motion to Enforce Court Order Approving Settlement with Bankruptcy Trustee and Compelling Dismissal of State Court Actions,” arguing that the Diacetyl Plaintiffs' claims were barred by the Agreement's language as to release. The Diacetyl Plaintiffs opposed the motion, arguing that it was the understanding of the parties that their claims were not released under the Agreement. ( Id. at 1324–26.) They cited, for example, the statement made on behalf of the Trustee during the hearing before the Bankruptcy Court prior to the approval of the settlement that their claims “do[ ] not belong to the Estate” and that the Trustee, therefore, “can't release [them].” ( Id.) In the motion to enforce the order approving the settlement, however, the Trustee did not take a position, stating that it was an issue of law for the Bankruptcy Court to determine. ( Id. at 1341.)

Following oral argument, the Bankruptcy Court, in a lengthy opinion, denied Aaroma's motion, holding that the Diacetyl Plaintiffs' personal injury causes of action were not property of the estate because the Diacetyl Plaintiffs alleged “a particular injury not generalized injury suffered by all shareholders or creditors of Emoral.” ( Id. at 1387.) The Bankruptcy Court stated that “While successor liability has been imposed derivatively, this Court finds that the underlying injury that is alleged to be the basis and premise of the state court actions is personal harm ... to the individual plaintiffs” and that “Emoral has not suffered any personal harm nor have the creditors as a general whole.” ( Id.)

Aaroma appealed to the District Court, and the District Court reversed, emphasizing that the Diacetyl Plaintiffs had no cause of action against Aaroma (which, it was not disputed, neither manufactured nor sold diacetyl) except on a successor liability theory. ( Id. at 7–8.) The District Court held that the cause of action for successor liability was a “generalized” claim belonging to the estate because the facts giving rise to the cause of action were not specific to the Diacetyl Plaintiffs but common to all creditors, and because, if the Diacetyl Plaintiffs were to succeed in establishing that Aaroma constituted a “mere continuation” of Emoral, this would benefit the creditors of Emoral generally. ( Id. at 7–9.) It stated:

[T]he potential liability of Aaroma to the Diacetyl Plaintiffs does not arise out of the alleged misfeasance of Aaroma as to these creditors individually but rather out of its alleged continuation of the general business operation of the actual alleged wrongdoer, Emoral. Put slightly differently, for purposes of determining whether the cause of action belongs to the Estate, the critical distinction between the personal injury claim against Emoral and the successor liability claim against Aaroma is that establishing the former would benefit only the allegedly injured Diacetyl Plaintiffs whereas establishing the latter—that Aaroma is the “mere continuation” of Emoral and thus should be charged with all its liabilities—would benefit creditors of Emoral generally.

( Id. at 8–9.) Accordingly, the District Court reversed and remanded to the Bankruptcy Court for entry of an order consistent with the District Court's opinion. The Diacetyl Plaintiffs now appeal, arguing that they have standing to assert their personal injury causes of action against Aaroma, and that the District Court erred in conflating these claims with their successor liability theory.

II.

We have jurisdiction to review the order of the District Court pursuant to 28 U.S.C. §§ 158(d) and 1291. The District Court had jurisdiction to review the Bankruptcy Court's decision pursuant to 28 U.S.C. § 158(a). We “exercise the same standard of review as the District Court when it reviewed the original appeal from the Bankruptcy Court,” and, thus, review the Bankruptcy Court's factual findings under a clearly erroneous standard and exercise plenary review over legal issues. In re Rodriguez, 629 F.3d 136, 138 (3d Cir.2010) (quoting In re Handel, 570 F.3d 140, 141 (3d Cir.2009)).

III.

The basic legal framework applicable to this case is not in dispute. After a company files for bankruptcy, “creditors lack standing to assert claims that are ‘property of the estate.’ ” Bd. of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir.2002). The “estate,” as defined in the Bankruptcy Code, includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). This includes causes of action, which are considered property of the bankruptcy estate “if the claim existed at the commencement of the filing and the debtor could have asserted the claim on his own behalf under state law.” Foodtown, 296 F.3d at 169 n. 5. In order for a cause of action to be considered “property of the estate,”

the claim must be a “general one, with no particularized injury arising from it.” On the other hand, if the claim is specific to the creditor, it is a “personal” one and is a legal or equitable interest only of the creditor. A claim for an injury is personal to the creditor if other creditors generally have no interest in that claim.

Id. at 170 (citing St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir.1989) and Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1348–49 (7th Cir.1987)).

A cause of action that is “property of the estate” is properly pursued by the bankruptcy trustee because it inures to the benefit of all creditors. This promotes the orderly distribution of assets in bankruptcy, and comports with “the...