In re Jason Pharmaceuticals, Inc.

• Decision Date: 06 July 1998
• Docket Number: No. 93-5-0920-SD.,93-5-0920-SD.
• Citation: 224 BR 315
• Parties: In re JASON PHARMACEUTICALS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Maryland

224 B.R. 315 (1998)

In re JASON PHARMACEUTICALS, INC., Debtor.

No. 93-5-0920-SD.

United States Bankruptcy Court, D. Maryland, at Baltimore.

July 6, 1998.

Deborah H. Devan, Sonya F. Lorge, Neuberger, Quinn, Gielen, Rubin & Gibber, P.A., Baltimore, MD, for Debtor and St. Paul Fire & Marine in Bankruptcy Court.

Lance D. Schreiner, Bismark, ND, for Debtor in state court.

John D. Burns, Greenan, Walker, Trainor & Billman, Greenbelt, MD, for John and Sherry Skees in Bankruptcy Court.

Timothy Purdon, Bismark, ND, for John and Sherry Skees in state court.

Robert L. Hanley, Towson, MD, for the Creditors Committee in Bankruptcy Court.

Karen H. Moore, Assistant U.S. Trustee, Office of U.S. Trustee, Baltimore, MD, for U.S. Trustee.

MEMORANDUM & ORDER

WILLIAM A. HILL, Bankruptcy Judge.

Before the Court is the Motion to Modify Discharge Injunction filed by John and Sherry Skees ("Skees") in the confirmed and consummated Chapter 11 case of Jason Pharmaceuticals, Inc. ("Jason"). By their motion, the Skees seek leave of the Court to continue their products liability suit against Jason in the District Court of Ward County, North Dakota. Jason and its insurer, St. Paul Fire and Marine Insurance Co. ("St. Paul"), jointly resist the Skees' motion, arguing Jason's discharge in bankruptcy as a defense to the state court action.¹ A hearing was held in this matter before the undersigned, sitting by special designation, on June 8, 1998.

I. FACTS

During the 1980s and early 1990s, Jason produced the weight-loss product "Medifast," which it distributed and sold exclusively through medical doctors in conjunction with its "Medifast Modified Fasting Program" ("Medifast Program"). Sherry Skees became a participant in the Medifast Program, and began purchasing and ingesting Medifast, in September 1989. In February 1990, after suffering a gallbladder attack, Mrs. Skees underwent surgery to have her gallbladder removed.

Jason filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code ("Code") on February 11, 1993. Jason's Second Amended Plan of Reorganization ("Plan") was confirmed by Court Order on March 29, 1994. Jason's Plan was fully consummated, and its case closed, on June 4, 1996. Thereafter, Jason was sold to new owners who were unrelated to its bankruptcy proceedings.

In August 1995, the Skees filed suit against Jason in the District Court of Ward County, North Dakota, alleging, inter alia, that Mrs. Skees' ingestion of Medifast caused her to be ill and necessitated the removal of her gallbladder. St. Paul hired North Dakota counsel to defend Jason. In September 1995, Jason's counsel answered the Skees' complaint, and subsequently answered their January 1997 Amended Complaint.

In April 1997, Jason's counsel notified the Skees of its bankruptcy proceedings, and subsequently moved the state district court to enjoin the continuation of the Skees' action, as well as for summary judgment, based upon the March 29, 1994 Confirmation Order of this Court. On June 16, 1997, the state district court enjoined the Skees' proceedings against Jason pending approval to continue therewith from "an appropriate federal court." On July 28, 1997, it denied reconsideration of its June 16 Order.

On December 1, 1997, the Skees filed a Motion to Modify Discharge Injunction. By their motion, the Skees seek leave of the Court to proceed in their state court action against Jason, through which they seek a determination of its liability in order to recover from its insurer St. Paul. The Skees seek no recovery from Jason, maintaining their suit against it only nominally in order to reach St. Paul. They argue that the Plan and Confirmation Order, as well as the case law, allow them to pursue their action.

Jason and St. Paul resisted the motion by their joint Memorandum of Law in Opposition to Motions to Reopen Case and Modify Discharge Injunction, filed on January 8, 1998. They argue that the Skees' claim, although filed post-petition, was discharged, along with all pre-petition claims, as a result of its bankruptcy proceedings, and further contend that the Skees' action violates the permanent injunction relating to discharged debts in bankruptcy. As an additional consideration, they argue that St. Paul is prejudiced by the Skees' action, as Jason's discharge in bankruptcy precludes it from asserting a claim against Jason for a deductible under its insurance policy. They concede, however, that "neither the Plan nor the Confirmation Order discharge St. Paul from a claim of the Skees."

Two issues have thus been presented in this matter for the Court's determination, namely, whether the Skees' claim against Jason was indeed discharged in Jason's bankruptcy proceedings, and whether the Skees may proceed nominally against Jason in order to recover from its insurer St. Paul. The Court's analysis of these issues follows.

II. DISCUSSION OF LAW

1. Whether the Skees' Claim was Discharged in Jason's Bankruptcy Proceedings

Ordinarily, the confirmation of a plan or reorganization discharges the Chapter 11 debtor from all liability on its preconfirmation debt,² save that excepted from discharge under Section 523, and additionally serves to both "vest all property of the estate in the debtor," and leave "the property dealt with by the plan . . . free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor." 11 U.S.C. § 1141(b)-(d); see United States v. Carolina Parachute Corp., 907 F.2d 1469, 1474 (4th Cir.1990); see also United States v. Continental Airlines (In re Continental Airlines), 134 F.3d 536, 540 (3d Cir.1998) ("Section 1141 provides for the discharge of pre-petition debts after completion of a bankruptcy proceeding."); United States v. Victor, 121 F.3d 1383, 1387 (10th Cir.1997) ("Section 1141 of the Bankruptcy Code discharges any debt that arose before the date of confirmation of the reorganization plan. . . ."). Therefore, in order to determine whether a debtor has been discharged from liability on a debt, it is important to ascertain when the debt arose. That inquiry, as with many others in bankruptcy, begins with the definition of the term in question.

The term "debt" is defined under the Code as being, simply, "liability on a claim." 11 U.S.C. § 101(12). Correspondingly, the term "claim" is defined under the Code to signify, in relevant part, a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured,"³ 11 U.S.C. § 101(5), and thereby evinces Congress' intent, by its use of this language, "to adopt the broadest available definition of the term,"⁴Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991). See Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990); see also Stewart Foods, Inc. v. Broecker (In re Stewart Foods, Inc.), 64 F.3d 141, 144 (4th Cir.1995) ("Congress intended to adopt the broadest possible definition of the term `claim,' so that a bankruptcy case would deal with all of the debtor's legal obligations."). In turn, a "right to payment" is defined by the Supreme Court as, "nothing more nor less than an enforceable obligation." Davenport, 495 U.S. at 559, 110 S.Ct. at 2131; see Cohen v. de la Cruz, ___ U.S. ___, ___, 118 S.Ct. 1212, 1216, 140 L.Ed.2d 341 (1998) (quoting same). In this connection, "any right to payment which arises prebankruptcy constitutes pre-petition debt and is discharged, absent an applicable exception." River Place E. Hous. Corp. v. Rosenfeld (In re Rosenfeld), 23 F.3d 833, 836 (4th Cir.) (citing 11 U.S.C. § 524(a)(2)), cert. denied, 513 U.S. 874, 115 S.Ct. 200, 130 L.Ed.2d 131 (1994). Therefore, the Court's next inquiry turns upon when the Skees' right to payment arose.

"To determine when a claim arises for bankruptcy purposes, reference is to be made to federal bankruptcy law rather than to state law." Butler v. NationsBank, N.A., 58 F.3d 1022, 1029 (4th Cir.1995); see Grady v. A.H. Robins Co., 839 F.2d 198, 201-03 (4th Cir.), cert. dismissed, 487 U.S. 1260, 109 S.Ct. 201, 101 L.Ed.2d 972 (1988)⁵; see also Teates v. Kuranda (In re Kuranda), 122 B.R. 264, 268 (Bankr.E.D.Va.1990) ("It is irrelevant whether the plaintiff has satisfied all the technical elements for a cause of action . . . for indemnity at state law. All that is necessary is that a `right to payment' may arise."). Under federal bankruptcy law within the Fourth Circuit, "`a right to payment' arises at the `time when acts giving rise to the alleged liability were performed.'" In re A.H. Robins, Co., 63 B.R. 986, 993 (Bankr.E.D.Va.1986) (quoting In re JohnsManville Corp., 57 B.R. 680, 690 (Bankr. S.D.N.Y.1986)), aff'd sub nom. Grady v. A.H. Robins Co., 839 F.2d 198 (4th Cir.), cert. dismissed, 487 U.S. 1260, 109 S.Ct. 201, 101 L.Ed.2d 972 (1988); see Grady, 839 F.2d at 203; Thompson v. Board of Trustees (In re Thompson), 182 B.R. 140, 153 (Bankr. E.D.Va.1995); accord Lovett v. Honeywell, Inc. (In re Transp. Sys. Int'l, Inc.), 110 B.R. 888, 894 (D.Minn.1990), aff'd, 930 F.2d 625 (8th Cir.1991); Wisconsin Barge Lines, Inc. v. United States (In re Wisconsin Barge Lines, Inc.), 91 B.R. 65, 68 (Bankr.E.D.Mo. 1988).

Under instant facts, the Skees' causes of action against Jason constitute "claims" within the meaning of 11 U.S.C. § 101(5); that their "right to payment" against Jason may be unliquidated, contingent, unmatured, or disputed does not alter this fact. See 2 Lawrence P. King et al., Collier on Bankruptcy ¶ 101.056, at 101-36.3 (15th ed. rev.1998) ("As distinguished from prior bankruptcy law, tort claims constitute claims, and thus are payable out of the estate, and constitute dischargeable debts. . . . Under the Code the fact that the tort claim may be unliquidated or disputed does not mean that it is not a claim."); id., ¶...