Lead Opinion
OPINION OF THE COURT
This appeal requires us to determine whether personal injury causes of action arising from the alleged wrongful conduct of a debtor corporation, 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. We conclude that they are, and will, therefore, affirm the order of the District Court.
In August of 2010, Aaroma Holdings LLC (“Aaroma”), f/k/a Duane Street, LLC, purchased certain assets and assumed certain liabilities of Emoral, Inc. (“Emoral”), f/k/a Polarome International, Inc., a manufacturer of diacetyl, a chemical used in the food flavoring industry. At the time of the transaction, the parties were aware of potential claims against Emoral arising from exposure to diacetyl, although those individuals who came to be known in this litigation as the “Diacetyl Claimants” or the “Diacetyl Plaintiffs” (herein, “Diace-tyl Plaintiffs”) apparently had never themselves been employed by Emoral. The Asset Purchase Agreement 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. (App. at 326-27.)
When Emoral filed for bankruptcy protection in June of 2011, disputes arose between the bankruptcy trustee (the “Trustee”) and Aaroma, including, for example, the Trustee’s claim that Emoral’s sale of assets to Aaroma constituted a fraudulent transfer. On September 21, 2011, the Trustee and Aaroma entered into a Settlement Agreement (the “Agreement”) resolving the claims. As part of the Agreement, Aaroma agreed to pay $500,000 and take certain specific actions, and the Trustee agreed to release Aaroma from any “causes of action ... that are property of the Debtor’s Estate” as of the date of the Agreement. (Id. at 1079-80.)
At a hearing before the Bankruptcy Court regarding approval of the settlement, the Diacetyl Plaintiffs objected to the releases contained in the Agreement to the extent that those releases might bar them from bringing claims against Aaro-ma, as a successor to Emoral, for personal injuries related to diacetyl. A representative for the Trustee stated its view that the Diacetyl Plaintiffs’ successor liability claims against Aaroma “do[ ] not belong to the Estate” and that the Trustee, therefore, “can’t release [them].”
The Diacetyl Plaintiffs filed individual complaints against Aaroma in the Superior Court of New Jersey (see, e.g., id. at 1227-45) alleging personal injury and product liability claims and asserting that Aaroma was a “mere continuation” of Emoral and, therefore, liable. (Id. at 1233.) In April 2012, Aaroma filed in the Bankruptcy Court a “Motion to Enforce Court Order Approving Settlement with Bankruptcy
Following oral argument, the Bankruptcy Court, in a lengthy opinion, denied Aa-roma’s motion, holding that the Diacetyl Plaintiffs’ personal injury causes of action were not property of the estate because the Diacetyl Plaintiffs alleged “a particular injury not generalized injury suffered by all shareholders or creditors of Emoral.” (Id. at 1387.) The Bankruptcy Court stated that “While successor liability has been imposed derivatively, this Court finds that the underlying injury that is alleged to be the basis and premise of the state court actions is personal harm ... to the individual plaintiffs” and that “Emoral has not suffered any personal harm nor have the creditors as a general whole.” (Id.)
Aaroma appealed to the District Court, and the District Court reversed, emphasizing that the Diacetyl Plaintiffs had no cause of action against Aaroma (which, it was not disputed, neither manufactured nor sold diacetyl) except on a successor liability theory. (Id. at 7-8.) The District Court held that the cause of action for successor liability was a “generalized” claim belonging to the estate because the facts giving rise to the cause of action were not specific to the Diacetyl Plaintiffs but common to all creditors, and because, if the Diacetyl Plaintiffs were to succeed in establishing that Aaroma constituted a “mere continuation” of Emoral, this would benefit the creditors of Emoral generally. (Id. at 7-9.) It stated:
[T]he potential liability of Aaroma to the Diacetyl Plaintiffs does not arise out of the alleged misfeasance of Aaroma as to these creditors individually but rather out of its alleged continuation of the general business operation of the actual alleged wrongdoer, Emoral. Put slightly differently, for purposes of determining whether the cause of action belongs to the Estate, the critical distinction between the personal injury claim against Emoral and the successor liability claim against Aaroma is that establishing the former would benefit only the allegedly injured Diacetyl Plaintiffs whereas establishing the latter — that Aaroma is the “mere continuation” of Emoral and thus should be charged with all its liabilities — would benefit creditors of Emoral generally.
(Id. at 8-9.) Accordingly, the District Court reversed and remanded to the Bankruptcy Court for entry of an order consistent with the District Court’s opinion. The Diacetyl Plaintiffs now appeal, arguing that they have standing to assert their personal injury causes of action against Aaroma, and that the District Court erred in conflating these claims with their successor liability theory.
II.
We have jurisdiction to review the order of the District Court pursuant to 28 U.S.C. §§ 158(d) and 1291. The District Court had jurisdiction to review the Bankruptcy Court’s decision pursuant to 28 U.S.C. § 158(a). We “exercise the same
III.
The basic legal framework applicable to this case is not in dispute. After a company files for bankruptcy, “creditors lack standing to assert claims that are ‘property of the estate.’ ” Bd. of Trustees of Teamsters Local 868 Pension Fund v. Foodtown, Inc.,
the claim must be a “general one, with no particularized injury arising from it.” On the other hand, if the claim is specific to the creditor, it is a “personal” one and is a legal or equitable interest only of the creditor. A claim for an injury is personal to the creditor if other creditors generally have no interest in that claim.
Id. at 170 (citing St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc.,
A cause of action that is “property of the estate” is properly pursued by the bankruptcy trustee because it inures to the benefit of all creditors. This 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.” Koch Refining,
To determine whether the Diacetyl Plaintiffs’ cause of action against Aaroma constitutes property of Emoral’s bankruptcy estate, we must examine the nature of the cause of action itself. While the Diace-tyl Plaintiffs focus on the individualized nature of their personal injury claims against Emoral, we cannot ignore the fact, and fact it be, that their only theory of liability as against Aaroma, a third party that is not alleged to have caused any direct injury to the Diacetyl Plaintiffs, is that, as a matter of state law, Aaroma constitutes a “mere continuation” of Emo-ral such that it has also succeeded to all of Emoral’s liabilities.
The parties do not dispute that under both New Jersey and New York state law,
The Diacetyl Plaintiffs fail to demonstrate how any of the factual allegations that would establish their cause of action based on successor liability are unique to them as compared to other creditors of Emoral. Likewise, they fail to demonstrate how recovery on their successor liability cause of action would not benefit all creditors of Emoral given that Aaroma, as a mere continuation of Emoral, would succeed to all of Emoral’s liabilities. Thus, the Diacetyl Plaintiffs’ cause of action against Aaroma is “general” rather than “individualized.” See Foodtown,
Although we have not before squarely addressed this issue, other courts applying New York and New Jersey law have held that state law causes of action for successor liability, just as for alter ego and veil-piercing causes of action, are properly characterized as property of the bankruptcy estate. In In re Keene Corp.,
[T]he remedy against a successor corporation for the tort liability of the predecessor is, like the piercing remedy, an equitable means of expanding the assets available to satisfy creditor claims. The class action plaintiffs that invoke it allege a general injury, their standing depends on their status as creditors of Keene, and their success would have the effect of increasing the assets available for distribution to all creditors.
Id. at 853. Accordingly, the court held that the successor liability causes of action should be asserted by the trustee on behalf of all creditors.
Likewise, in In re Buildings by Jamie, Inc.,
As we observed in Phar-Mor, so, too, here it “may seem strange” to hold that a cause of action for successor liability against Aaroma is property of Emoral’s bankruptcy estate. As a practical matter, it is difficult to imagine a factual scenario in which a solvent Emoral, outside of the bankruptcy context, would or could bring a claim for successor liability against Aaro-ma. See Buildings by Jamie,
Just as the purpose behind piercing the corporate veil, however, 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. See Phar-Mor, Inc.,
The Diacetyl Plaintiffs concede that there is no relevant caselaw directly supporting their position that individual personal injury claims asserted on a successor liability theory should not be considered property of the bankruptcy estate. They attempt to distinguish Keene Corp. and
The Diacetyl Plaintiffs also argue that Foodtoum supports their position because we held in that case that a pension fund’s claim against third party affiliates of a debtor employer did not constitute property of the debtor’s bankruptcy estate. See
IV.
Because the Diacetyl Plaintiffs’ cause of action for successor liability against Aaro-ma belongs to the bankruptcy estate, it falls within the “Estate’s Released Claims” within the meaning of the Agreement between the Trustee and Aaroma. The District Court, therefore, properly reversed the Bankruptcy Court’s denial of Aaroma’s motion to enforce the order approving the settlement, and we will affirm the order of the District Court. We recognize that, in so doing, we leave the Diacetyl Plaintiffs, who allege that they have suffered serious personal injuries resulting from exposure to a harmful chemical, albeit not at the hands of Aaroma, with no apparent recourse against Aaroma. We note, however, that our holding has no bearing on any remedy the Diacetyl Plaintiffs may be seeking directly against Emoral in the bankruptcy proceeding or against any of the numerous other defendants the Diace-tyl Plaintiffs have named in the actions pending in the Superior Court of New Jersey.
Notes
. The Trustee's representative stated: "I would like to sell someone the Brooklyn Bridge, but I don’t own it so I can’t sell it. I cannot, the Trustee cannot release claims that he doesn’t own. It was never contemplated that he would be releasing claims he doesn’t own.” (Id. at 1278.)
. There is no dispute that either New Jersey or New York law applies and that the two states’ relevant applicable legal standards are
. In Buildings by Jamie, there was no question that recovery on the alter ego claim "would necessarily inure to the benefit of all creditors,” because the plaintiff creditors constituted the entire body of creditors.
Dissenting Opinion
dissenting.
I agree with the Bankruptcy Court that the Diacetyl Plaintiffs’ claims against Aa-roma constitute “individualized claims” belonging to the Diacetyl Plaintiffs themselves. Because the majority instead concludes that such claims are “generalized claims” belonging to the bankruptcy estate, I must respectfully dissent.
Because the Diacetyl Plaintiffs’ against Aaroma “could [not] be brought by any creditor of the debtor,” they constitute individualized claims belonging to the Dia-cetyl Plaintiffs themselves — and not to the debtor or the bankruptcy estate. Initially, it is uncontested that the underlying personal injury claims against Emoral are individualized in nature. In fact, personal injury and product liability causes of action under state law represent quintessential examples of an individualized claim, i.e., “a ‘personal’ [claim that is] a legal or equitable interest only of the creditor.” Id. The majority insists that “we cannot ignore the fact ... that [the Diacetyl Plaintiffs’] only theory of liability as against Aaroma, a third party that is not alleged to have caused any direct injury to the Diacetyl Plaintiffs, is that, as a matter of state law, Aaroma constitutes a ‘mere continuation’ of Emoral such that it has also succeeded to all of Emoral’s liabilities.” (Id. at 8-9 (emphasis omitted).) Nevertheless, the Court also cannot ignore the claims or allegations underlying this theory or remedy of successor liability. As the Bankruptcy Court explained in its thorough and well-reasoned ruling, “the underlying injury that is alleged to be the basis and premise of the state court actions is personal harm by exposure to Diacetyl by the individual plaintiffs or harm to the individual plaintiffs.” (A1387.) The successor liability theory alleged by the Diacetyl Plaintiffs is inextricably tied to — and cannot be considered separate or apart from — their underlying personal injury and product liability allegations. Because the Diacetyl Plaintiffs’ underlying allegations are clearly individualized in nature, their claims against Aaroma — which seek to hold this third party liable for their alleged injuries as the “mere continuation” of Emoral — must also be considered as individualized claims. In short, “any creditor of the debtor” could not allege that the third party should be held responsible on this specific theory of successor liability for injuries allegedly suffered as a result of exposure to a product made and sold by the debtor itself. For instance, a trade creditor of the debtor could not make such a claim.
I believe that the prior case law, beginning with our own ruling in Foodtown, weighs in favor of this approach to the Diacetyl Plaintiffs’ claims.
“In Foodtown, a plaintiff pension fund sought to recover $9.3 million in ERISA withdrawal liability owed by the debtor [Twin] to the pension fund by bringing an alter ego veil-piercing claim and claims for breach of fiduciary duty against third parties.” (Majority Opinion at 13.) This Court determined that “Twin’s withdrawal liability is not property of the estate” because “the claim did not arise until after
In this case, the injury is not insolvency stemming from Appellees’ actions. Here, the injury is the Appellees’ evasion of withdrawal liability. Withdrawal liability is not owed to Twin; rather, it is owed to the pension fund. Because the liability is owed only to the fund, the claim is personal to the Appellant. Moreover, absent a general creditors’ interest, a trustee can only collect money that may be owing to the bankrupt entity. Here, there is no general creditors’ interest in the statutorily imposed withdrawal liability owed to the fund. Rather, the action to recover the withdrawal liability has the character of an action for damages flowing from an alleged illegality against the fund. The alleged illegality may have caused other injuries in addition to those caused to the fund, but the direct injury to the fund — the evasion of its statutory entitlement — defines the nature of plaintiffs claim as a personal one....
Id. (citing Steinberg v. Buczynski,
We thereby adopted in Foodtown an expansive approach to the question of whether a creditor’s cause of action against a third party constitutes an individualized claim and, at the very least, exhibited a preference for allowing a third party claim to be decided on the merits. As a practical matter, I do not see how the same court that was willing to permit the pension fund’s third party claims to go forward could reach the opposite result with respect to the Diacetyl Plaintiffs’ own third party claims against Aaroma. Just as we relied on the individualized nature of the underlying withdrawal liability allegations to permit a creditor to pursue its claims against several third parties, we likewise should allow the Diacetyl Plaintiffs’ claims against Aaroma to go forward given the individualized nature of their own underlying personal injury and product liability allegations.
The Court in Foodtown turned for support to the Seventh Circuit’s opinion in Steinberg, which addressed what we called “a similar case.” Id. at 171. The Stein-
The point is simply that the trustee is confined to enforcing entitlements of the corporation. He has no right to enforce entitlements of a creditor. He represents the unsecured creditors of the corporation; and in that sense when he is suing on behalf of the corporation he is really suing on behalf of the creditors of the corporation. But there is a difference between a creditor’s interest in the claims of the corporation against a third party, which are enforced by the trustee, and the creditor’s own direct — not derivative — claim against the third party, which only the creditor himself can enforce ....
Id. at 893. A trustee has standing to pursue an action to pierce the corporate veil on behalf of the bankrupt corporation only if the corporation was injured by the shareholders’ disregard of corporate formalities. Id. at 892; see also, e.g., Foodtown,
The Second Circuit recently considered the question of standing in In re Bernard L. Madoff Investment Securities LLC,
Because the claims against Aaroma belong to the Diacetyl Plaintiffs, the Bankruptcy Court properly determined that “the Diacetyl plaintiffs’ right to assert those claims [was] not affected by the settlement agreement [or] the settlement approval order” (A1388). See, e.g., id. at 175 (“Because Appellant’s cause of action is based on withdrawal liability under ERISA and is not considered property of the estate, Twin’s release does not affect Appellant’s claims.”). For the foregoing reasons, I would vacate the District Court’s order, which reversed the order of the Bankruptcy Court denying Aaroma’s motion to enforce the settlement approval order and to compel dismissal of the Dia-cetyl Plaintiffs’ state court actions against Aaroma, and would remand for further proceedings.
. The majority turns for support to two bankruptcy court decisions that "have held that state law causes of action for successor liability, just as alter ego and veil-piercing causes of action, are properly characterized as property of the bankruptcy estate.” (Majority Opinion at 880.) However, I believe that both opinions — which clearly are not binding on this Court — are distinguishable on a number of different grounds. Unlike our ruling in Food-town, neither Buildings by Jamie nor Keene really looked to the underlying injury or injuries alleged by the creditors. In turn, Buildings by Jamie did not involve either personal injury or product liability claims. The Food-town Court distinguished this New Jersey bankruptcy case because, among other things, “the trustee [in Buildings by Jamie] had standing to pursue an alter ego action on behalf of the corporate debtor to recover on a defaulted loan.” Foodtown,
. I agree with the majority that its holding has no bearing on any remedy the Diacetyl Plaintiffs may have against Emoral the bankruptcy proceeding or against any of the other defendants named in the state court proceedings. Specifically, it appears the Diacetyl Plaintiffs’ insurance proceed claims are currently pending before the New Jersey Superi- or Court, and our ruling today has no effect whatsoever on such claims.