In In re Emoral, Inc.,[1] the Third Circuit held that personal-injury causes of action arising from the alleged wrongful conduct of the debtor corporation, asserted against a third-party non-debtor corporation on a theory of successor liability under state law, were generalized claims constituting property of the bankruptcy estate. The Third Circuit’s decision draws attention to the distinction between specialized and generalized claims and who has control over such claims: the individual creditors or the bankruptcy trustee.
Journey to the Third Circuit
Emoral, Inc. manufactured and sold chemicals for the flavor and fragrance industry. One of the chemicals manufactured and sold by Emoral was diacetyl, a key ingredient that gave artificial butter flavoring its buttery taste and smell. Diacetyl was later determined to be toxic and caused lung injuries to consumers and those involved in the manufacturing of the chemical. In 2010, Aaroma Holdings LLC purchased certain assets and assumed certain liabilities of Emoral.[2] At the time, the parties were aware of potential claims against Emoral arising from exposure to diacetyl;[3] however, the asset-purchase agreement (APA) specifically provided that Aaroma was not assuming Emoral's liabilities related to “the Diacetyl Litigation,” and that it was not purchasing Emoral's corresponding insurance coverage.[4]
Less than one year after the execution of the APA, Emoral filed a voluntary petition under chapter 7. Following an attempt by the chapter 7 trustee to avoid the sale as a fraudulent transfer, the trustee and Aaroma negotiated a settlement under which Aaroma was to pay $500,000 in exchange for a release from any causes of action belonging to the bankruptcy estate. When the settlement was presented to the bankruptcy court for approval, several diacetyl plaintiffs objected to the terms, claiming that it was for insufficient consideration and could not bar them from proceeding against Aaroma in state court. The bankruptcy court approved the settlement, but not without stipulating that “[n]othing contained in this Order or in the Aaroma Settlement Agreement will operate as a release of, or a bar to prosecution of, any claims held by any person which do not constitute Estate's Released Claims as defined in the Aaroma Settlement Agreement.”[5]
A group of the diacetyl plaintiffs proceeded to initiate litigation in New Jersey state court against Aaroma, as Emoral’s successor, for their personal-injury claims.[6] Aaroma responded by filing a motion in bankruptcy court to enforce the settlement and enjoin the diacetyl plaintiffs from pursuing their state law claims, arguing that the settlement barred such claims.[7] The bankruptcy court denied Aaroma's motion, holding that the diacetyl plaintiffs' personal-injury claims alleged personal harm, and therefore were “particularized” claims that were not property of the estate.[8] On appeal, the district court reversed, holding the diacetyl plaintiffs’ claims to be generalized claims.[9] Specifically, the district court held that nothing about the state law claims was specific to each claimant, because if the diacetyl plaintiffs were to succeed in establishing successor liability against Aaroma, all creditors of Emoral would benefit generally.[10] Accordingly, it was exclusively within the trustee’s powers to negotiate such claims.[11]
The Third Circuit’s Opinion
The Third Circuit began its opinion with a recital of the relevant law concerning the distinction between generalized and particularized claims. While it is clear that “creditors lack standing to assert claims that are property of the estate,”[12] a claim belonging to the estate must be “general ... with no particularized injury arising from it.”[13] If a claim or cause of action should be categorized as generalized, then it is exclusively within the trustee’s power to assert such claim(s), consequently binding creditors to that decision.[14] On the other hand, if a claim is particularized or “personal,” the trustee has no standing to bring such claims — or settle them; rather, this right vests solely in the individual claimant.[15] The Seventh Circuit explained that “to determine whether an action accrues individually to a claimant or generally to a corporation, a court must look to the injury for which relief is sought and consider whether it is peculiar and personal … or general and common.”[16]
In determining whether the personal-injury claims brought by the diacetyl plaintiffs were particular or general, the Third Circuit first examined “the nature of the cause of action itself.” While the diacetyl plaintiffs emphasized the individualized nature of their claims against Emoral, the court could not ignore that such claims are based on a theory of successor liability, which, if proven, would benefit all creditors of Emoral, not just the diacetyl plaintiffs. Consequently, the court held that “the Diacetyl Plaintiffs’ cause of action against Aaroma is ‘general’ rather than ‘individualized.’”[17]
Reflections on In re Emoral
The Third Circuit’s decision adopts an approach that places greater weight on the procedural tool enabling a claim — successor liability, in this case — rather than on the nature of the underlying tort claims pursued against the successor company under state law. In making this determination, the court relied on two observations. First, all of the diacetyl plaintiffs’ claims are based on successor liability and are thus not “unique to them as compared to other creditors.” Second, recovery based on successor liability would benefit all creditors. Absent in the court’s reasoning is any consideration of the individualized nature of the diacetyl plaintiffs’ injuries — namely, the severe lung damage suffered from exposure to diacetyl.
Other circuits have struggled with divorcing the theory of recovery from the factual nature of the underlying injuries. For instance, in Ahcom Ltd. v. Smeding, the Ninth Circuit held that alter ego claims against a third party are individualized claims belonging to creditors.[18] The First Circuit followed a similar approach in In re Savage Indus. Inc., in which successor liability claims were held to be the property of tort creditors.[19] Most recently, the Second Circuit also held that the underlying injuries alleged by plaintiffs against nondebtor defendants were “particularized and outside the Trustee’s purview.”[20] The dissent markedly points out that the majority’s holding is inconsistent with the Third Circuit’s own precedent from Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown Inc., in which the Third Circuit examined the effect of the underlying wrongdoing on the plaintiffs before alter ego arguments were specifically addressed.[21] Despite the split in the circuits, the Supreme Court denied writ of certiorari,[22] leaving the line between particularized and generalized claims circuit-dependent.
[1] In re Emoral Inc., 740 F.3d 875, 877 (3d Cir.), cert. denied sub nom., Diacetyl Plaintiffs v. Aaroma Holdings LLC, 135 S.Ct. 436 (2014).
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id. at 878.
[8] Id.
[9] Id. at 879.
[10] Id.
[11] Id.
[12] Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown Inc., 296 F.3d 164, 169 (3d Cir. 2002).
[13] Id.
[14] Id.
[15] Koch Ref. v. Farmers Union Cent. Exch. Inc., 831 F.2d 1339, 1349 (7th Cir. 1987).
[16] Id.
[17] In re Emoral, 740 F.3d at 880.
[18] Ahcom Ltd. v. Smeding, 623 F.3d 1248 (9th Cir. 2010).
[19] In re Savage Indus. Inc., 43 F.3d 714 (1st Cir. 1994).
[20] Picard v. Fairfield Greenwich Ltd., Case Nos. 13-1289, 13-1392, 13-1785, 2014 WL 3882481, at *8 (2d Cir. Aug. 8, 2014).
[21] Bd. of Tr. of Teamsters Local 863 Pension Fund v. Foodtown Inc., 296 F.3d 164, 169 (3d Cir. 2002).
[22] Diacetyl Plaintiffs v. Aaroma Holdings LLC, 135 S.Ct. 436 (2014).