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Personal Injury Claims Arising from Wrongful Acts of a Debtor, Asserted Against a Third Party Purchaser Under a State Law Successor Liability Theory, Held by Third Circuit to be Property of the Estate

Aaroma Holdings, LLC v. Diacetyl Plaintiffs (In re Emoral, Inc.), No. 13-1467, 2014 WL 259870 (3d Cir. Jan. 24, 2014)

On January 24, 2014, in a precedential Opinion, the Third Circuit determined that personal injury causes of action, arising from wrongful conduct of a debtor, asserted against a non-debtor third party pursuant to a “mere continuation” theory of successor liability under state law, are “generalized claims” belonging to a bankruptcy estate rather than personal claims belonging to individual creditors.

Prior to the bankruptcy filing of Emoral, Inc. (“Emoral”), Aaroma Holdings LLC (“Aaroma”) purchased certain assets and assumed certain liabilities of Emoral.  At the time of the sale, the parties were aware of potential claims against Emoral arising from exposure to diacetyl, a chemical used in the food flavoring industry and manufactured by Emoral.  The asset purchase agreement between Emoral and Aaroma specifically excluded from the Emoral liabilities assumed by Aaroma those related to so-called “Diacetyl Litigation.”  Following the sale transaction, a series of personal injury suits were commenced against Aaroma by the appellants (the “Diacetyl Plaintiffs”) in state court.  The Diacetyl Plaintiffs alleged that Aaroma was a “mere continuation” of Emoral, and thus, successor to Emoral’s liabilities.  Aaroma responded that the Diacetyl Plaintiffs’ state court claims were released by Emoral’s bankruptcy trustee through a previous court-approved settlement, which released Aaroma from causes of action that were property of Emoral’s estate as of the settlement date.

In determining that the Diacetyl Plaintiffs’ claims against Aaroma constituted property of Emoral’s estate (and thus released), the Third Circuit focused on the nature of the causes of action asserted by the Diacetyl Plaintiffs against Aaroma.  Importantly, it found that no personal injury claims were asserted against Aaroma – those were asserted against Emoral. According to the Court, the theory of Aaroma’s liability to the Diacetyl Plaintiffs arose from the nature of its business and operations following the Emoral sale transaction.  Those facts served as the basis for a “mere continuation” theory of successor liability under state law and could be asserted by any creditor of Emoral.  Moreover, the Court found that any determination that Aaroma was a mere continuation of Emoral would benefit all Emoral creditors as Aaroma would succeed to all of Emoral’s liabilities – not only the personal injury claims asserted by the Diacetyl Plaintiffs.  For the foregoing reasons, the Court held that the Diacetyl Plaintiffs’ claims constituted property of the estate, which unfortunately for the Diacetyl Plaintiffs meant that their claims against Aaroma were released through the bankruptcy settlement.  The Court sympathized with the Diacetyl Plaintiffs, but noted that they can still seek any remedy directly against Emoral.