In Re Quigley Co., Inc.
MEMORANDUM OPINION AND ORDER
Aрpellant Law Offices of Peter A. Ange-los appeals from an order of the United States Bankruptcy Court for the Southern District of New York (“the Bankruptcy Court”) determining that certain state law claims it wished to bring were prohibited by the amended channeling injunction put in place in this case. Appellant brought claims against Pfizer, Inc. (“Pfizer”), the parent company of debtor Quigley Company, Inc. (“Quigley”), in state court. Pfizer filed a motion in the Bankruptcy Court arguing that these claims were subject to the amended injunction. On May 15, 2008, the Bankruptcy Court issued a memorandum order and opinion clarifying the amended injunction (“BR Opinion”) that held that Appellant’s suits fell within the injunction and directed Appellant to cease prosecuting them. Appellant appeals that decision, arguing that the Bankruptcy Court did not have subject matter jurisdiction to enjoin its actions and that its fell outside the scope of
BACKGROUND
Quigley was founded in 1916 and produced refractories (materials that retain their strength at high temperatures). (Def.’s Mem. 7.) From the 1930s through the early 1970s, some of those products, including an insulation called Insulag, contained asbestos.
(Id.)
In August 1968, Pfizer acquired Quigley, which became Pfizer’s wholly owned subsidiary. (Pl.’s Mem. 3.) Following the acquisition, marketing materials for several of Quigley’s products, including Insulag, began to include the Pfizer name, logo, and trademark.
(Id.)
For examрle, an advertisement for Insulag contains the Pfizer logo followed by the Quigley logo over the words, “Manufacturers of Refractories— Insulation — Paints.” (RA 878.) The Pfizer name and/or logo also appeared on bags of Insulag. (Pl.’s Mem. 3-4.) Insulag was an insulation that could be used in high heat environments such as blast furnaces used in steel mills.
(Id.
4.) Although it functioned well as an insulation, the asbes
After the health effects of asbestos became known, many individuals began to file law suits against Quigley. By the time Quigley filed for Chapter 11 bankruptcy, it was defending over 160,000 asbestos-related law suits and claims. (BR Opinion 3.) Over 100,000 of these suits also named Pfizer as a defendant although it is difficult to tell which of the claims against Pfizer are based on its own products, certain of which contain asbestos, and which are based on Quigley’s Insulag. (Id.) Quigley’s principal asset is its interest in a joint insurance policy that it shares with Pfizer. (Defi’s Opp’n 7.)
When Quigley filed for bankruptcy in 2004, it petitioned the Bankruptcy Court for an injunction that would stop all asbestos-related lawsuits against itself and Pfizer.
(Id.)
The Bankruptcy Court (Beatty, J.) preliminarily enjoined all asbestos-related claims from proceeding against both companies (including those arising from Pfizer’s own products) during the pen-dency of Quigley’s bankruptcy proceeding.
(Id.)
In 2007, the Bankruptcy Court (Bernstein, J.) narrowed its earlier channeling injunction to permit certain direct actions against non-debtor Pfizer. The amended injunction afforded Pfizer with more limited protection against lawsuits, protection that tracks the language of
any action directed against Pfizer alleging that Pfizer is directly or indirectly liable for the conduct of, claims against, or demands on Quigley to the extent •such alleged liability of Pfizer arises by reason of—
(I) Pfizer’s ownership of a financial interest in Quigley, a past or present affiliate of Quigley, or a predecessor in interest of Quigley;
(II) Pfizer’s involvement in the management of Quigley or a predecessor in interest of Quigley, or service as an officer, director or employee of Quig-ley or a related party;
(III) Pfizer’s provision of insurance to Quigley or a related party; or
(IV) Pfizer’s involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of Quigley or a related party, including but not limited to—
(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or
(bb) acquiring or selling a financial interest in an entity as part of such a transaction.
(Id. at 4 (emphasis added).)
Beginning in 1999, appellant commenced lawsuits in Pennsylvania on behalf of plaintiffs who had been exposed to asbestos-containing products sold by Quigley and Pfizer, including Insulag.
(Id.)
Appellant
The Bankruptcy Court held that appellant’s Pennsylvania suits fell within the Amended Injunction. (Id.) The Bankruptcy Court framed the § 524(g) analysis in terms of three questions, all of which must be answered in the affirmativе for the claims to be enjoined: “(1) does Pfizer’s Section 400 liability arise directly or indirectly from the ‘conduct of, claims against, or demands on’ Quigley; (2) will the Section 400 claims asserted by the Pennsylvania plaintiffs against Pfizer be paid under Quigley’s plan; and (3) does Pfizer’s liability ‘arise by reason of its ownership or management of Quigley?” (BR Opinion 7-8.) It answered the first two questions quickly in the affirmative. (Id. at 9.) It found that found that under a § 400 theory, Pfizer would be held directly or indirectly liable for the actions of Quigley because Quigley, not Pfizer, had manufactured the defective product. It also found that these claims would be paid out under the Quigley plan because § 400 provides that an apparent manufacturer “is subject to the sаme liability as though he were its manufacturer.” (Id.)
It then devoted the majority of its analysis to answering the third question. Noting that “at first glance,” Pfizer’s § 400 liability “arises by reason” of the placement of Pfizer’s name and logo on the packaging of Insulag, the Bankruptcy Court concluded that the statutory text was vague because it could equally be said that Pfizer’s § 400 liability arose by reason of its corporate affiliation with Quigley.
(Id.
at 10.) Finding that on the facts presented the use of the Pfizer name and logo were merely a “statement of corporate affiliation,” the Bankruptcy Court concluded that Pfizer’s § 400 liability arose from ownership of Quigley and fell within the ambit of § 524(g).
(Id.
at 12) Finally, it distinguished the Second Circuit’s holding in
In
re
Johns-Manville,
STANDARD OF REVIEW
“Pursuant to Bankruptcy Rule 8013, a District Court reviews a bankrupt
DISCUSSION
I. The Origins of the § 524(g) Channeling Injunction
For years, courts and legislatures have struggled to craft just results for those who have been exposed to asbestos. Asbestos litigation poses unique challenges to bankruptcy courts because those who have been exposed to asbestos might not manifest symptoms of disease for forty years after exposure.
In re Johns-Manville Corp.,
The Manville bankruptcy court responded with an innovative solution: the asbestos litigation trust. Ronald Barliant et al., From Free-Fall to Free-for-All: The Rise of Pre-Packaged Asbestos Bankruptcies, 12 Am. BaNKR. Inst. L. Rev. 441, 448 (2004). The court created an asbestos litigation trust funded by the debtor’s assets and a portion of the reorganized company’s future profits. This trust was to compensate not only asbestos claimants whose symptoms had already manifested, but also future claimants without signs of illness. Id. This remedy was uniquely attractive for asbestos producers because it, unlike а traditional class action lawsuit, could bind future claimants. Id. at 444. It was also a departure from traditional bankruptcies, which resolve only those claims existing at the time the debtor flies for bankruptcy. Id.
Congress blessed this approach by enacting § 524(g), which was modeled after the Manville bankruptcy trust.
Id.
at 446. Pursuant to § 524(g), debtor companies can fund an asbestos trust through Chapter 11 bankruptcy, and the courts will issue a channeling injunction that requires future claimants to direct their claims to the bankruptcy trust, rather than the debt- or company. The payout to future claimants from these trusts tends to be small in comparison to the value of the claims, but at least future claimants receive something.
See
S. Todd Brown,
Section 524(g)
Section 524(g)(A)(ii) provides that a channeling injunction:
may bar any action directed against a third party who is identifiable from the terms of such injunction (by name or as part of an identifiable group) and is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of—
(I) the third party’s ownership of a financial interest in the debtor, a past or present affiliate of the debtor, or a predecessor in interest of the debtor;
(II) the third party’s involvement in the management of the debtor or a predecessor in interest of the debtor, or service as an officer, director or employee of the debtor or a related party;
(III) the third party’s provision of insurance to the debtor or a related party; or
(IV) the third party’s involvement in a transaction changing the corporate structure, or in a loan or other financial transaction affecting the financial condition, of the debtor or a related party, including but not limited to—
(aa) involvement in providing financing (debt or equity), or advice to an entity involved in such a transaction; or
(bb) acquiring or selling a financial interеst in an entity as part of such a transaction.
§ 524(g)(A)(ii) (emphasis added).
As noted, the bankruptcy court issued a channeling injunction in this ease that tracks the language of § 524(g)(4)(A)(ii).
Courts are to interpret the reach of the § 524(g) channeling injunction for third parties narrowly, in accordance with the Second Circuit’s observation that “a nondebtor release is a device that lends itself to abuse. By it, a nondebtor can shield itself from liability to third parties. In form, it is a release; in effect, it may operate as a bankruptcy discharge arranged without a filing and without the safeguards of the Code.”
Manville III,
II. Pennsylvania State Law
Appellant seeks to prosecute actions brought under §§ 400 and 402A of the- Second Restatement of Torts, which the Pennsylvania courts hаve adopted as state law.
2
Forry v. Gulf Oil Corp.,
This rule works in conjunction with Rule 402A. Id. § 402 cmt. a. Rule 402A provides:
(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if
(a) the seller is engaged in the business of selling such a product, and
(b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold.
Id.
§ 402A. Further, “[a] seller must give such warnings and instructions as are required to inform the user or consumer of the possible risks and inherent limitations of his product. If the product is defective absent such warnings, and the defect is a proximate cause of the plaintiffs injury, the seller is strictly liable without proof of negligence.”
Walton v. Avco Corp.,
By the terms of § 400, a sponsor or apparent manufacturer is subject to the same type of liability as the actual manufacturer. In other words, where the manufacturer would be subject to strict liability pursuant to § 402A, a sponsor will be as well.
Brandimarti v. Caterpillar Tractor Co.,
III. Application to the Instant Case
For a third-party action to be en-joinable under § 524(g), the action must have two characteristics: (1) the action must allege that Pfizer is “directly or indirectly liable” for the conduct of Quigley; and (2) the action must “arise by reason of’ Pfizer’s ownership of Quigley.
The Bankruptcy Court concluded that appellant’s § 400 claims sought to hold Pfizer “directly or indirectly” liable for the conduct of Quigley. Determining whether this element has been satisfied is not without difficulty, especially in the context of strict рroducts liability, where both manufacturers and sponsors are held liable regardless of whether they acted negligently. In one sense, these suits would hold Pfizer directly liable for its own conduct for endorsing a defective product. But the suits would also hold Pfizer indirectly liable for
The second element, that enjoina-ble suits “arise by reason of’ Pfizer’s ownership of Quigley, imposes a more demanding standard. 4 As noted, the Bankruptcy Court acknowledged that “at first glance,” Pfizer’s alleged liability under § 400 arose out of its sponsorship of Insulag (Id. at 10). Nevertheless, the Bankruptcy Court concluded that the term “arise by reason of’ was ambiguous. On the one hand, Pfizer would be held liable not because of its ownership of Quigley, but rather because it marked Insulag with its logo. On the other, use of the logo seemed to the Bankruptcy Court to be merely an expression of corporate affiliation; that is, that Pfizer only placed its logo on Insulag advertising and packaging because it owned Quigley. (Id. at 12.) The Bankruptcy Court noted this perceived ambiguity by resort to an analogy to the types of claims that both parties agreed arose by reason of ownership and could be enjoined through a § 524(g) channeling injunction: claims alleging alter ego, successor-in-interest, and respondeat superior. The Bankruptcy Court noted that as a general matter, a company would have to act fraudulently before it could be held liable under a theory of alter ego liability. It would be incongruous, the Bankruptcy Court noted, if companies would be shielded when they acted fraudulently, but could be held liable for the relatively innocent act of placing a logo on packaging, at least where the use of the parent’s name and logo was merely “a statement of corporate affiliation.” (Id. at 12.) In the court’s view, “[i]f the corporate affiliation is the sine qua non of liability, the liability may be said to ‘arise by reason of the corporate relationship,” a condition it held to be satisfied with respect to appellant’s § 400 claims, thereby subjecting them to a channeling injunction.
Respectfully, the Court believes that the Bankruptcy Court’s analysis misapprehends the nature of § 400 liability. Rather than being the
sine qua non
of liability, Pfizer’s affiliation with Quigley was legally irrelevant to its sponsor liability. In adopting § 400 liability, Pennsylvania courts sought to vindicatе the expectations of the consumer which do not turn on the intent of a product’s sponsor or its affiliation with a manufacturer.
Forry,
Further, the Second Circuit’s analysis in
Manville III
teaches that this sort of legal analysis, rather than on inquiry into the factual circumstances that led to liability, is how courts should determine whether claims are derivative, arising by reason of a third party’s relationship to a debtor, or whether they are independent of that relationship. Manville was at one time “the largest manufacturer of asbestos-containing products and the largest supplier of raw asbestos in the United States.... ”
Manville III,
The Second Circuit held that bankruptcy court did not have jurisdiction to bar claims by asbestosis suffers that proceeded directly against Travelers. Bankruptcy courts have broad equitable powers to release a company in bankruptcy from its debts and to reshape the сompany going forward. But the Second Circuit cautioned that courts should be hesitant to release third parties not in bankruptcy from claims against them because such third parties have not been subjected to the rigors of a bankruptcy proceeding.
Id.
at 66. The court also observed that the plaintiffs sought to recover not for the debtor Manville’s conduct, but rather for Travelers’ own alleged misconduct.
Id.
at 68. Further, the plaintiffs did not seek to recover insurance proceeds under Travelers’ policies, which were the principle assets of the Manville estate.
Id.
Notably, the Second Circuit criticized the lower courts for viewing the inquiry as to whether these claims “arose out of’ the Man-ville-Travelers relationship as essentially a factual one.
Id.
at 63. While in a literal sense the claims arose out of the insurance policies — but for the policies no claims would exist — a legal analysis was required under state law to determine whether Travelers had “an independent legal duty in dealing with the plaintiffs, notwithstanding the factual background in which they duty arose.”
Id.
The court observed that § 524(g) channeling injunctions were similarly “limited to ‘situations where a third party has derivative liability for the claims against the debtor.’ ”
Id.
at 68 (quoting
In re Combustion Eng’g, Inc.,
The Supreme Court reviewed this opinion in
Travelers Indem. Co. v. Bailey
and reversed on narrow procedural grounds. — U.S.-,
One way to answer this question is to propose the following hypothetical: Assuming that Pfizer had no corporate affiliation with Quigley could it be liable under § 400 if Insulag were marketed with Pfizer’s logo on the packaging (say, as its disbritutor)? Since the answer is obviously yes, it would appear that Pfizer’s liability arises out of its sponsorship of a defective product, not its corporate affiliation (or, in the hypothetical, its distribution agreement) with the manufacturer.
The Bankruptcy Court reached the opposite conclusion by employing a sort of commutative reasoning: § 400 liability is treated as a kind of vicаrious liability under Pennsylvania law (BR Opinion at 8 (citing
Waters v. NMC-Wollard, Inc.,
These labels become especially confusing in the context of strict products liability claims. Appellant argues that Pfizer should be directly liable under § 400 which section imposes “the same liability as though he were [a] manufacturer” under § 402A. Pursuant to § 402A, liability attaches to a seller of a defective product “although the seller has exercised all possible care in the preparation and sale of his product.” Restatement (Second) of Torts § 402A(2)(a). Two of the justifications for this rule are
that public policy demands that the burden of accidental injuries caused by products intended for consumption be placed upon those who market them, and be treated as a cost of production against which liability insurance can be obtained; and that the consumer of such products is entitled to the maximum of protection at the hands of someone, and the proper persons to afford it are those who market the products.
Id.
cmt. c. In other words, all parties in the distribution chain are held strictly liable for selling a defective product not because they acted culpably, but rather be
Although the § 402A claims against Quigley are closely related to the § 400 claims against Pfizer, they are not the same. A claimant under each theory seeks redress for injury caused by a defective product. But the mere fact that claimants seek redress for the same ultimate harm does not mean that the one claim is derivative of the other, as that term is used in Johns-Manville III and IV. Pursuant to a § 400 theory, appellant in effect argues that claimants have been injured because they (or the actual purchaser) relied upon Pfizer’s reputation in deciding to use a defective product. Appellаnt thus seeks to bring separate direct actions against Pfizer for the harm claimants suffered because Pfizer breached an independent legal duty not to employ its name and logo in the marketing of a defective product. Because these claims do not legally arise by reason of Pfizer’s ownership of Quigley, they are beyond the proper scope of a § 524 channeling injunction and beyond the jurisdiction of a bankruptcy court.
The Bankruptcy Court concluded that § 400 liability must be a type of claim that arises by reason of ownership because other claims based on ownership, such as piercing the corporate veil, are enjoinable but require that the parent company has acted fraudulently before liability will attach. It would make “no sense” the court reasoned to exclude a § 400 claim which “pales in comparison to the wrongful conduct” required to impose liability under an alter-ego theory. (BR Opinion at 12.) But this argument fails to take into account key differences between § 400 liability and forms of liability similar to piercing the corporate veil. The Pennsylvania Supreme Court has described the justification for piercing the corporate veil as follows:
[The] legal fiction of a separate corporate entity was designed to serve convenience and justice, and will be disregarded whenever justice or public policy demand and when the rights of innocent parties are not prejudiced nor the theory of the corporate entity rendered useless. We have said that whenever one in control of a corporation uses that control, or uses the corporate assets, to further his or her own personal interests, the fiction of the separate corporate identity may properly be disregarded.
Ashley v. Ashley,
A careful comparison of enjoinable claims like piercing the corporate veil and
respondeat superior
to § 400 liability reveals important differences between the types of claims. Were appellant seeking to pierce the corporate veil, it would argue that Quigley’s actions were, in effect, Pfizer’s actions. Were it seeking to hold Pfizer liable under a theory of respondeat superior, it would argue that Quigley’s actions should be attributable to Pfizer because of the legal relationship between the two. Neither theory is a legal claim in itself, but rather a method of determining who should be responsible for an injury. Furthermore, in each of these hypotheti-cals, appellant would not be able to hold Pfizer liable unless it demonstrated a relationship between Pfizer and Quigley. Corporate affiliation is indeed the
sine qua non
of these forms of liability. But for a § 400 claim, it is legally irrelevant that Pfizer owned Quigley. Section 400 claims often involve two companies thаt are not linked by any kind of corporate affiliation. Rather, one company might purchase a product from another company and label that product as its own.
See, e.g. Walton,
Pfizer, perhaps recognizing the weakness of its analysis, contends that an injunction is warranted because Quigley’s
res
is exposed to claims by Pfizer for indemnification. The Bankruptcy Court appears to have credited this аrgument. (BR Opinion 14.) But Pfizer’s ultimate ability to seek indemnification cannot alone confer subject matter jurisdiction. In the seminal case of
Pacor, Inc. v. Higgins,
the Third Circuit held that the bankruptcy court did not have jurisdiction to hear claims against a company that had distributed asbestos manufactured by Johns-Manville merely because the outcome of these claims could ultimately affect the
res
of the Johns-Manville estate.
Pfizer is on marginally firmer footing in arguing that appellant’s claims will directly affect the
res
because Pfizer and Quigley share an insurance policy to defend asbestos claims. In
In re Combustion Eng’g, Inc.,
two subsidiaries of the same parent had shared insurance, one of which was in bankruptcy, and the non-debtor subsidiary argued that the shared insurance acted as an indemnity agreement, conferring jurisdiction on the bankruptcy court.
CONCLUSION
For the foregoing reasons, the ruling of the Bankruptcy Court is REVERSED. Appellant is free to pursue its § 400 claims in Pennsylvania state courts.
SO ORDERED.
Notes
. The Court adopts the numeric used by the Second Circuit in
In re Johns-Manville,
. Although it appears that appellant did not explicitly argue in the Bankruptcy Court proceeding that it intended to rely upon § 402A in pursuing its claims against Pfizer, its intentions are implicit in its reliance on § 400. Section 400 subjects apparent manufacturers to the “same liability’’ as actual manufacturers. Appellant relies upon § 402A to explain what that "same liability” would be.
. Whether appellant would ultimately prevail on its apparent manufacturer claims if freed from the present injunction is far beyond the purview of this Court and irrelevant to its analysis of the proper scope of an injunction under § 524(g).
Manville III,
. The language of the statute makes clear that claims alleging that Pfizer, as parent, is "indirectly liable for the conduct of” its debtor-subsidiary are only subject to a channeling injunction "to the extent such liability arises by reason of ... ownership.”