U.S. District Judge Kevin McNulty. Photo: Carmen Natale/ALM

A U.S. district court judge in Newark—upholding a deal to sell East Orange General Hospital out of Chapter 11 bankruptcy free and clear, without any successor liability—has ruled that a former employee’s suit against the buyer was rightly dismissed.

At issue was a former hospital employee’s age discrimination suit against the hospital’s new owner, lodged only after the hospital was in bankruptcy. The worker claimed the bankruptcy judge’s order directing her to dismiss her state court claim was outside his jurisdiction, but U.S. District Judge Kevin McNulty of the District of New Jersey affirmed the bankruptcy judge’s ruling enforcing the sale.

According to the June 28 decision, the hospital entered into an agreement to be sold to an entity called Prospect EOGH in May 2014. Eighteen months later, in November 2015, Roseann Denunzio was fired from her laboratory technician job at the hospital. And in November 2015, East Orange General Hospital filed for relief under Chapter 11 of the Bankruptcy Code.

Two weeks after the hospital’s Chapter 11 petition was filed, but before she filed a suit, Denunzio and her attorney were served with a notice of commencement of the bankruptcy and a meeting of the creditors. Denunzio’s potential suit was listed on the schedule of liabilities as a contingent, disputed litigation claim with the amount unknown, according to the court.

In January 2016, the bankruptcy court set a Feb. 26, 2016, deadline for claims to be filed, and Denunzio and her attorney were served with the deadline notice. Denunzio did not file a claim by the specified deadline, McNulty said.

The hospital sale closed on March 1, 2016, and three months later, on June 9, Denunzio filed an age discrmination action against the new owner, Prospect EOGH, in Essex County Superior Court. Her suit claimed Prospect was subject to successor liability, and that the buyers were “sufficiently connected to the culpable conduct that terminated [Denunzio] in violation of her rights under the Law Against Discrimination.” She claimed that the individual who terminated her employment at the hospital, whom she identified as “Mr. Krouse,” remains working at the hospital under the new ownership.

U.S. Bankruptcy Judge Vincent Papalia granted Prospect’s motion to enforce the sale order and to order Denunzio to dismiss her state court case against Prospect. Papalia also denied Denunzio’s motion for reconsideration.

On Denunzio’s appeal, McNulty, too, rejected the claim that the bankruptcy court lacked jurisdiction over the state case. The proceeding before the bankruptcy court was not the state court case itself, but the motion to enforce the sale order, McNulty said. And the bankruptcy court was within its jurisdiction to enforce the sale order, McNulty said.

Denunzio also claimed that New Jersey law permits tort damages against purchaser-successors like Prospect. She cited the New Jersey Supreme Court’s 1999 decision in Lefever v. K.P. Hovnanian Enterprises, which concerned the “product line exception” to the rule that an acquiring company is generally not liable for the debts of the seller. In Lefever, the court found by a 4-3 margin that the product line exception could be used to impose strict liability for injuries caused by a defective forklift where the successor bought the predecessor’s assets at a bankruptcy sale.

But McNulty said Papalia correctly ruled that Lefever was rejected by the 2003 decision of the U.S. Court of Appeals for the Third Circuit In re Trans World Airlines, which held a bankruptcy court order approving the sale of Trans World to American Airlines extinguished American’s liability for employment discrimination claims against Trans World and for a travel voucher program.

McNulty said that the bankruptcy court was correct to take note of Denunzio’s failure to seek recovery from the bankruptcy estate.

“Successor liability under these circumstances, then, would not merely be unauthorized; it would be inequitable and contrary to the purposes of the bankruptcy laws,” McNulty said.

Denunzio’s lawyer, Morristown solo Christopher Hager, declined to comment on the case.

Prospect’s counsel, Bradford Sandler of Pachulski Stang Ziehl & Jones, in Wilmington, Delaware, remarked on “the amount of thought and effort Judge McNulty put into this appeal and that he recognized our argument that the sale order was the controlling order and barred the claims of Ms. Denunzio.”