Savage Industries, Inc., In re

• Decision Date: 04 April 1994
• Docket Number: No. 93-2244,93-2244
• Citation: 43 F.3d 714
• Parties: , 32 Collier Bankr.Cas.2d 923, 26 Bankr.Ct.Dec. 480, Bankr. L. Rep. P 76,303 In re SAVAGE INDUSTRIES, INC., Debtor. WESTERN AUTO SUPPLY COMPANY, Defendant, Appellee, v. SAVAGE ARMS, INC., Plaintiff, Appellant. First Circuit. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 714

43 F.3d 714

63 USLW 2402, 32 Collier Bankr.Cas.2d 923,

26 Bankr.Ct.Dec. 480,

Bankr. L. Rep. P 76,303

In re SAVAGE INDUSTRIES, INC., Debtor WESTERN AUTO SUPPLY COMPANY, Defendant, Appellee, v. SAVAGE ARMS, INC., Plaintiff, Appellant.

No. 93-2244.

United States Court of Appeals,First Circuit.

Heard April 4, 1994.

Decided Dec. 14, 1994.

Paul H. Rothschild, with whom Michael B. Katz, Susan Luttrell Burns and Bacon & Wilson, P.C., Springfield, MA, were on brief, for appellant.

Mark G. DeGiacomo, with whom James P. Rooney, Edward J. Rozmiarek and Roche, Carens & DeGiacomo, Boston, MA, were on brief, for appellee.

Before TORRUELLA, CYR and BOUDIN, Circuit Judges.

CYR, Circuit Judge.

The question presented on appeal is whether the bankruptcy court properly enjoined a state-law based "successor product-line liability" action in an Alaska court against an entity which had acquired a corporate chapter 11 debtor's assets by purchase and subject to an explicit disclaimer of liability on all unfiled claims relating to products manufactured by the chapter 11 debtor. On intermediate appeal, the district court vacated the injunction. As we conclude that injunctive relief was improvidently granted, we affirm the district court order.

I BACKGROUND

A. The "Successor Liability" Claim

In February 1988, Savage Industries, Inc. ("Debtor Industries"), a Massachusetts firearms manufacturer, commenced voluntary chapter 11 proceedings in the United States Bankruptcy Court for the District of Massachusetts and obtained authorization to operate its business as a debtor in possession. One month later, appellant Savage Arms, Inc. ("Arms") was incorporated. In May 1989, Debtor Industries submitted a proposal to sell substantially all its corporate assets to Arms. ¹ The bankruptcy court approved the proposed sale in July 1989. Although the court order prescribed safeguards for interests held by objecting creditors, it neither required court approval of the asset-transfer terms subsequently negotiated between Debtor Industries and Arms, nor made provision for the interests of holders of contingent product liability claims against Debtor Industries. ²

On November 1, 1989, Debtor Industries and Arms closed their asset transfer agreement, wherein Arms assumed liability for certain pending product liability claims against Debtor Industries, but explicitly disclaimed all liability for any other product liability claims relating to firearms manufactured by Debtor Industries prior to the closing date. ³ Debtor Industries ceased to operate immediately after the asset transfer was consummated. Thereupon, without interruption, Arms took up the manufacture of the identical lines of firearms previously produced by Debtor Industries.

Meanwhile, in May 1989, shortly before Debtor Industries submitted its proposal to transfer its assets to Arms, Kevin Taylor had been injured by a "Stevens" .22 caliber firearm manufactured by Debtor Industries. One year after the chapter 11 asset transfer was consummated, Taylor brought a products liability action against Debtor Industries in an Alaska state court. Later, Western Auto Supply Company ("Western Auto"), the retail distributor which sold Taylor the allegedly defective firearm, was added as a party defendant. Although Taylor did not name Arms as a defendant, in due course Western Auto filed a third-party complaint alleging that Arms had incurred "successor product-line liability" under Alaska law by continuing to manufacture the identical firearms theretofore manufactured by Debtor Industries. Western Auto demanded either indemnification or an apportionment of damages from Arms as successor to Debtor Industries. ⁴

In June 1991, the bankruptcy court confirmed the chapter 11 liquidation plan, which made no provision for contingent product liability claims disclaimed by Arms under its November 1989 asset transfer agreement with Debtor Industries. The asset-transfer proceeds began to be disbursed under the confirmed chapter 11 plan in February 1992.

Thereafter, Arms commenced this adversary proceeding against Western Auto in the United States Bankruptcy Court for the District of Massachusetts, requesting declaratory and injunctive relief against further prosecution of Western Auto's third-party complaint in Alaska state court. Arms asserted that it acquired Debtor Industries' assets "free and clear" of all product liability claims against Debtor Industries, except those disclosed to Arms by Debtor Industries prior to the chapter 11 asset transfer. See supra notes 2 & 3.

B. The Injunction

Notwithstanding the contention that it lacked jurisdiction once the asset transfer had been consummated, the bankruptcy court enjoined further prosecution of Western Auto's third-party action against Arms in Alaska state court. The bankruptcy court concluded that it retained the requisite jurisdiction to enjoin any hostile "claim" which contravened the terms of the asset transfer agreement approved by the bankruptcy court in the pending chapter 11 proceeding. Savage Arms, Inc. v. Taylor (In re Savage Arms, Inc.), No. 88-40046-JFQ, slip op. at 4-5 (Bankr.D.Mass. Oct. 5, 1992). But cf. Mooney Aircraft v. Foster (In re Mooney Aircraft), 730 F.2d 367 (5th Cir.1984) (bankruptcy court lacks jurisdiction to enjoin successor liability claims arising one year after close of bankruptcy proceedings).

The bankruptcy court reasoned that--even assuming Alaska were to adopt a common law "successor product-line liability" doctrine, see, e.g., Dawejko v. Jorgensen Steel Co., 290 Pa.Super. 15, 434 A.2d 106 (1981); supra note 4--the Western Auto claim against Arms would be preempted by the Bankruptcy Code insofar as it constituted a tort "claim" against Debtor Industries which arose before either the chapter 11 asset transfer or the order confirming the chapter 11 plan. Savage Arms, Inc., slip op. at 2-3 (citing Volvo White Truck Corp. v. Chambersburg Beverage, Inc. (In re White Motor Truck Corp.), 75 B.R. 944, 950 (Bankr.N.D.Ohio 1987); American Living Systs. v. Bonapfel (In re All American of Ashburn, Inc.), 56 B.R. 186, 190 (Bankr.N.D.Ga.1986)). Since the confirmed chapter 11 plan restricted claimants to their pro rata share of the net proceeds realized from the all-assets transfer, the bankruptcy court considered injunctive relief essential to prevent Western Auto from circumventing the Bankruptcy Code priority scheme by obtaining full recovery from Arms, the chapter 11 debtor's successor. Because Taylor and Western Auto held "claims" against Debtor Industries that could be dealt with under the confirmed chapter 11 plan, and since asset transfers under Bankruptcy Code Sec. 363(f) are effected "free and clear of any interest" in the transferred assets, ⁵ the bankruptcy court ruled Western Auto took an intermediate appeal to the district court, which concluded that the bankruptcy court lacked jurisdiction to enjoin prosecution of the Alaska state court action. This appeal followed. ⁶

that the explicit disclaimer in the asset transfer agreement must be given full effect, at least in the absence of collusion. Savage Arms, Inc., slip op. at 3. Finally, the court expressed concern that such successor liability actions might "chill" all-asset sales under chapter 11 by prompting potential purchasers to hedge their bids against unquantifiable future product liability costs. Id. at 5. See also Paris Mfg. Corp v. Ace Hardware Corp. (In re Paris Indus. Corp.), 132 B.R. 504, 508 n. 7 (D.Me.1991).

II DISCUSSION

The bankruptcy court reasoned that the requisite jurisdiction to enjoin further prosecution of the state court "successor liability" action summoned from its power to enforce its own order approving the all-assets transfer, ⁷ in furtherance of two fundamental Bankruptcy Code themes: the Code priority scheme and maximization of creditor recoveries. For the reasons hereinafter discussed, we believe the rationale undergirding the bankruptcy court decision is flawed. ⁸

A. The Code Priority Scheme

The bankruptcy court expressed concern that unless such successor liability actions are enjoined, claimants will be encouraged to forego their chapter 11 remedies in favor of the more lucrative state-court recoveries conceivably available against the chapter 11 debtor's successor.

We believe this concern to be unwarranted. For one thing, it is more illusory than real, given the nature of the successor product-line liability doctrine itself. See supra note 4. As a general rule, a successor to the chapter 11 debtor would be absolved of strict tort liability if the claimant failed to pursue any available chapter 11 remedy. See, e.g., Conway v. White Trucks, 885 F.2d 90, 95 (3d Cir.1989) (applying Pennsylvania law). Yet more conclusively, the "circumvention" concern relied upon by the bankruptcy court is inapposite to the present context since there is no record indication that any attempt was made to afford notice to Taylor or Western Auto as holders of contingent postpetition product liability claims, see Bankruptcy Code Sec. 502(c), 11 U.S.C. Sec. 502(c). We enlarge upon the latter point.

Notice is the cornerstone underpinning Bankruptcy Code procedure. Under the Bankruptcy Reform Act of 1978--in a deliberate departure from its forerunners--virtually all administrative responsibilities were removed from the bankruptcy judge. See, e.g., In re Sullivan Ford Sales, 2 B.R. 350, 353-54 & n. 10 (Bankr.D.Me.1980) (citing Report of the Comm. on the Judiciary, House of Representatives, To Accompany H.R. 8200, H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 4, 89-91, 99, 107 (1977) U.S.Code Cong. & Admin.News 1978, p. 5787, 5790, 5875-5877, 5885, 5893.). Under the Code, therefore, the debtor in possession or trustee must ensure "parties in interest" adequate notice and opportunity to be heard before their interests may be adversely affected. See, e.g., Bankruptcy Code Sec. 363(b) ("The Trustee, after notice and a hearing, may use, sell, or lease,...