Successor Liability • Bankruptcy Trustee • Personal Injury

In re Emoral, PICS Case No.14-0173 (3d Cir. Jan. 24, 2014) Barry, J. (23 pages).

The Third Circuit held that personal injury causes of action arising from the alleged wrongdoing of a debtor corporation which are 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.

Emoral was a manufacturer of diacetyl, a chemical used in the food flavoring industry. In August 2010, Aaroma Holdings purchased certain assets and assumed certain liabilities of Emoral. At the time of the transaction, the parties were aware of potential claims against Emoral arising from exposure to diacetyl. The asset purchase agreement specifically provided that Aaroma was not assuming Emoral’s liabilities related to the diacetyl litigation.

A dispute arose between Aaroma and the bankruptcy trustee after Emoral filed for bankruptcy in 2011. The trustee and Aaroma entered into a settlement agreement whereby the trustee agreed to release Aaroma from any causes of action that were property of the debtor’s estate as of the date of the agreement. The diacetyl plaintiffs objected to the release at the bankruptcy court hearing, and a provision was added to the settlement agreement, but no determination was made of whether the diacetyl plaintiffs’ causes of action were released.

Plaintiffs filed individual complaints against Aaroma alleging personal injury and product liability claims, asserting Aaroma was liable because it was a “mere continuation” of Emoral. Aaroma filed a motion in the bankruptcy proceeding to enforce the settlement agreement. The bankruptcy court denied that motion, but the district court reversed, holding that plaintiffs’ claim for successor liability was a generalized claim belonging to the bankruptcy estate.

The court affirmed the decision of the district court, holding that plaintiffs’ cause of action against Aaroma was the property of Emoral’s bankruptcy estate because plaintiffs failed to demonstrate how their cause of action based on successor liability was unique to them as compared to other creditors of Emoral. The court determined plaintiffs’ cause of action against Aaroma was general rather than individualized. Because plaintiffs’ cause of action for successor liability belongs to the bankruptcy estate, the court held it fell with the release provision of the settlement agreement between Aaroma and the bankruptcy trustee.