Third Circuit Holds That Personal Injury Plaintiffs’ “Mere Continuation” Successor Liability Claims Against Purchaser of Bankrupt Debtor’s Assets Belong to Bankruptcy Estate, Not Plaintiffs

In In re Emoral, Inc., the Third Circuit, in a decision of first impression, held that personal injury claims of individuals allegedly harmed by a bankrupt debtor’s products cannot be asserted against the purchaser of the debtor’s assets since they are “generalized claims” which belong to the debtor’s estate and not to the harmed individuals.

In August 2010, Aaroma Holdings LLC acquired certain assets and liabilities of Emoral, a manufacturer of the chemical Diacetyl. The asset purchase agreement specifically provided that Aaroma would not assume Emoral’s liabilities related to claims against Emoral arising from exposure to Diacetyl. After Emoral filed for bankruptcy protection in June 2011, a dispute arose between the bankruptcy trustee and Aaroma, resulting in a settlement agreement in which the Trustee agreed to release Aaroma from any “causes of action . . . that are property of the Debtor’s Estate.”

After the Bankruptcy Court approved the settlement agreement, Aaroma sought an order from the Bankruptcy Court, enforcing the settlement agreement’s release provision by compelling the dismissal of a number of state-court actions asserted by individuals allegedly harmed by Diacetyl against Aaroma. The plaintiffs in the state-court actions alleged that Aaroma was a “mere continuation” of Emoral and was therefore liable to the plaintiffs as Emoral’s successor in interest.

The Bankruptcy Court denied Aaroma’s motion, holding that the plaintiffs’ causes of action were not property of Emoral’s estate because they alleged “a particular injury not generalized injury suffered by all shareholders or creditors of Emoral.” Therefore, the Bankruptcy Court found that the plaintiffs’ claims against Aaroma had not been released by Emoral’s Trustee. The District Court reversed, finding that the claim for successor liability — which was essential to the plaintiffs’ ability to obtain judgments against Aaroma — was a “generalized” claim belonging to the estate because a finding that Aaroma was a “mere continuation” of Emoral would benefit Emoral’s creditors generally.

The Third Circuit affirmed the District Court, finding that the plaintiffs’ causes of action against Aaroma constituted property of Emoral’s estate and were therefore released by Emoral’s Trustee in the settlement agreement. The panel noted that, because Aaroma was a third party which is not alleged to have caused any injury to the plaintiffs, the plaintiffs were required to show that Aaroma was a “mere continuation” of Emoral which therefore succeeded to all of Emoral’s liabilities. But a finding that Aaroma succeeded to all of Emoral’s liabilities would benefit all of Emoral’s creditors — not just the plaintiffs claiming harm from Diacetyl — and would serve to increase the pool of assets available to all creditors. Therefore, the successor-liability aspect of the plaintiffs’ claim was a generalized one, and the claims were property of Emoral’s estate.

The panel also noted that, just as a bankruptcy trustee can pursue claims seeking to pierce a corporate debtor’s veil to expand the assets available to the bankrupt’s creditors, a bankruptcy trustee can pursue successor-liability claims against a pre-bankruptcy purchaser of the debtor’s assets: “the purpose of successor liability is to promote equity and avoid unfairness, and it is not incompatible with that purpose for a trustee, on behalf of a debtor corporation, to pursue that claim.” Further, “the remedy against a successor corporation for the tort liability of the predecessor is . . . an equitable means of expanding the assets available to satisfy creditor claims” which may be pursued by the bankruptcy trustee “because it benefits all customers, [] promotes the orderly distribution of assets in bankruptcy, and comports with the fundamental bankruptcy policy of equitable distribution to all creditors that should not be undermined by an individual creditor’s claim.”

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