Whittaker, Clark & Daniels, Inc.
Whittaker, Clark, & Daniels, et al.
Debtors.
Whittaker, Clark & Daniels, Inc. et al.,
Plaintiffs,
v.
Brenntag AG, et al.,
Defendants.
Chapter 11
All Counsel of Record
This matter comes before the Court by way of a Motion (the “Motion,” ECF No. 31) filed by Whittaker, Clark & Daniels, Inc. and its affiliates (“Debtors“) in Adv. Pro. No. 23-01245, seeking summary judgment in their favor with respect to Counts I and IV of the Complaint. Specifically, Debtors seek a determination that certain claims brought by third parties against non-debtors in outside litigation (“Successor Liability Claims“), as defined in the Complaint, are property of the Debtors’ estates. The Orange County Water District (“OCWD“) and the Official Committee of Talc Claimants (the “Committee” or “Talc Committee“) oppose Debtors’ motion (ECF Nos. 86 & 90, respectively). The Debtors filed replies to the Talc Committee‘s and OCWD‘s opposition (ECF Nos. 99 & 100, respectively). Additionally, the future claimants’ representative (“FCR“)—appointed by the Court to serve as legal representative to represent and protect the rights of future claimants—filed a statement to apprise the Court of her views on the Motion.2 The Court has fully considered the parties’ submissions, as well as the arguments, evidence and testimony presented during the hearing on December 5, 2023. For the reasons set forth below, the Court grants the Debtor‘s motion for summary judgement on Counts I and IV.
I. Jurisdiction
The Court has jurisdiction over this contested matter under
II. Background and Procedural History
The factual and procedural history of this case is well known to the parties and will not be repeated in detail here. In relevant part, Debtors filed for chapter 11 bankruptcy to address and resolve existing and future claims alleging injuries from exposure to products containing talc, asbestos, or chemical compounds processed or distributed by the Debtors or their predecessors in interest. The claims against the Debtors fall into two general categories: (1) claims alleging injuries resulting from exposure to products containing talc, asbestos, or chemical compounds processed or distributed by the Debtors or their predecessors in interest (the “Asbestos Claims,” and such claimants, the “Asbestos Claimants“); and (2) environmental litigation claims against the Debtors relating to the production or handling of hazardous materials which allegedly contaminated certain properties (the “Environmental
After filing their chapter 11 petition, Debtors commenced the instant adversary proceeding to address the Environmental and Asbestos Claims (collectively, the “Tort Claims“). Debtors contend that the Tort Claims involve actions against certain non-debtor entities—like Brenntag—and seek to establish such entities’ liability for Tort Claims on any grounds, including, without limitation, that such entities are successors to, or alter egos of, the Debtors. Complaint ¶ 1, ECF No. 1. These are the “Successor Liability Claims.” Debtors submit that such Tort Claims, pursued as part of the Successor Liability Claims litigation, give rise to possible indemnification or contribution claims against the Debtors. By way of the adversary proceeding, Debtors seek a determination as to whether the Successor Liability Claims are property of the Debtors’ estates, to be pursued by estate fiduciaries on behalf of all creditors. Debtors also ask the Court to determine whether such claims are subject to the automatic stay. In other words, they seek a permanent pause in the litigations that they assert involve estate assets, or so directly impact the estate that they should be protected by the automatic stay. Debtors filed their Summary Judgment Motion seeking such relief on September 8, 2023—one day after the Adversary Complaint was filed.
Shortly thereafter, the Court entered a Case Management Order (“CMO“, ECF No. 52), which limited the Motion to Counts I and IV3, and mostly stayed discovery in this Adversary Proceeding pending a determination on the Summary Judgment Motion, which was scheduled for argument on December 5, 2024. The CMO also directed the parties to engage in good faith settlement discussions through mediation. On November 15, 2023, the Court entered an order appointing the Honorable Robert E. Gerber (Ret.) as Mediator (ECF No. 72). Shortly before the hearing on the Motion, Debtors filed a separate motion seeking entry of an Order: (I) Temporarily Enjoining Certain Actions Against Non-Debtors; and (II) Approving Procedures for Seeking Extensions of Temporary Restraining Order (the “TRO Motion“). The Court granted the TRO Motion in part and enjoined certain actions on a temporary basis. Following oral argument, the Court indicated that it would reserve its decision on the Motion until at least January 31, 2024, pending the outcome of mediation.
The parties have engaged in mediation, and, on consent of all mediation parties, the Court has entered three (3) separate
III. Standard of Review
A. Summary Judgment
Summary judgment is appropriate where “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
The moving party bears the initial burden of demonstrating the absence of a genuine dispute of material fact. Huang v. BP Amoco Corp., 271 F.3d 560, 564 (3d Cir. 2001) (citing Celotex Corp., 477 U.S. at 323). In determining whether a factual dispute warranting trial exists, the court must view the record evidence and the summary judgment submissions in the light most favorable to the non-movant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). Disputed material facts are those “that might affect the outcome of the suit under the governing law.” Id. at 248. A dispute is genuine when it is “triable,” that is, when reasonable minds could disagree on the result. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted).
“When opposing summary judgment, the nonmovant may not rest upon mere allegations, but rather must ‘identify those facts of record which would contradict the facts identified by the movant.‘” Corliss v. Varner, 247 F. App‘x 353, 354 (3d Cir. 2007) (quoting Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 233 (3d Cir. 2002)); see also In re Moran-Hernandez, 544 B.R. 796, 800 (Bankr. D.N.J. 2016) (quoting Matsushita, 475 U.S. at 586) (“Once the moving party establishes the absence of a genuine dispute of material fact, however, the burden shifts to the non-moving party to ‘do more than simply show that there is some metaphysical doubt as to the material facts.‘“). A party may not defeat a motion for summary judgment unless it sets forth specific facts, in a form that “would be admissible in evidence,” establishing the existence of a genuine dispute of material fact for trial.
B. Property of the Bankruptcy Estate
“After a company files for bankruptcy, ‘creditors lack standing to assert claims that are property of the estate.‘” In re Emoral, Inc., 740 F.3d 875, 879 (3d Cir. 2014) (quoting Bd. of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir. 2002)) (other citations omitted). In determining what constitutes a debtor‘s property, courts look to
With respect to the underlying type of cause of action at issue here—Tort Claims asserted against a third-party non-debtor corporation stemming from the alleged wrongful conduct of a debtor corporation—the seminal case in the Third Circuit is In re Emoral, Inc., 740 F.3d 875 (3d Cir. 2014).4 In that case, the trustee had settled claims described as “belonging to the estate” with the debtors’ successor, Aaroma Holdings LLC (“Aaroma“). When plaintiffs filed individual complaints against Aaroma in the state court, Aaroma sought a ruling from the bankruptcy court that those claims, in fact, belonged to the estate and had already been resolved. The court in Emoral, thus, had to decide whether claims by creditors against a non-debtor third-party based on a “mere continuation” theory5 of successor liability under state law were property of the estate.
The Third Circuit observed that the facts giving rise to the cause of action were not specific to the plaintiffs, but common to all creditors. The circuit court additionally noted that successful claims against Aaroma would benefit all creditors. Ultimately,
The Emoral decision has been interpreted as establishing a two-prong test. To be estate property: “(1) the claim must be one that both existed at the commencement of the filing and that the trustee could have asserted on his own behalf under applicable state law; and (2) the claim must be a general one, with no particularized injury arising from it.” In re Maxus Energy Corp., 571 B.R. 650, 658 (Bankr. D. Del. 2017) (citing In re Emoral, 740 F.3d at 879); see also Foodtown, 296 F.3d at 169 n. 5; id. at 170. “The first element is about timing.” In re Wilton Armetale, 968 F.3d 273, 282 (3d. 2020). There is no dispute here that the Successor Liability Claims existed as of the Debtors’ petition filings. “The second element hinges on whether the claim is ‘general’ to the estate or ‘personal’ to a specific creditor” because “[i]ndividual creditors have the statutory authority to bring only personal claims.” Wilton Armetale, 968 F.3d at 282 (citing Emoral, 740 F.3d at 879). A claim is personal to a creditor and not property of the estate “[o]nly when a particular creditor suffers a direct, particularized injury that can be ‘directly traced’ to the defendant‘s conduct.” Id.
In Emoral, the Third Circuit deliberately distinguished between plaintiffs’ personal injury claims against the debtor, which were individual to them, and their successor liability claims against the purchaser of the debtor‘s assets, whom plaintiffs were seeking to hold indirectly liable for the debtor‘s tortious conduct on a theory that the successor was a “mere continuation” of the debtor. In re Emoral, 740 F.3d at 879. The court examined the standard for establishing successor liability based on a mere continuation theory under applicable state law6 and determined that the factual allegations needed to establish successor liability were general to creditors. Id. at 880. The court stated:
To establish liability based on a “mere continuation” theory . . . a plaintiff must establish that there is continuity in management, shareholders, personnel, physical location, assets, and general business operation between selling and purchasing corporations following the asset acquisition.
The [] 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 [debtor]. Likewise, they fail to demonstrate how recovery on their successor liability cause of action would not benefit all creditors of [debtor] given that [successor], as a mere continuation of [debtor], would succeed to all of [debtor‘s] liabilities. Thus, the [] Plaintiffs’ cause of action against [successor] is “general” rather than “individualized.”
In re Emoral, 740 F.3d at 879-80 (quotations and citations omitted).
As discussed, the claims at issue in Emoral were based on a “mere continuation” theory of successor liability, whereas many of the Successor Liability Claims at issue in the instant case are bottomed on additional theories—including a “product
IV. Discussion
While the parties agree that Emoral provides guidance, they disagree as to its scope and application. Debtors assert that, under Emoral, the Successor Liability Claims are property of the bankruptcy estate and, summary judgment is appropriate as to Counts I and IV of the Complaint. Debtors contend that all the potential Successor Liability Claims are general to the bankruptcy estate because such theories of liability are rooted in the corporate and contractual relationship between the Debtor and certain non-debtor third parties (identified as “Protected Parties” in the Complaint), and thus do not depend upon any facts that are unique to any particular Tort Claimant or creditor. “Successor Liability Claims – whether premised on a theory of mere continuation, de facto merger, product line, alter ego, or any other theory of indirect liability – cannot be ‘personal’ to Tort Claimants because they do not seek to redress injury that such claimants can trace directly to Brenntag . . . .” Debtor‘s Supp. Br. ¶ 1, ECF No 233.
The Committee, on the other hand, argues that Debtors “mischaracterize” the ruling in Emoral, and suggest that its holding “is limited to ‘mere continuation’ claims under New Jersey law.” Committee‘s Opp‘n ¶ 38, ECF No. 90 (quoting Emoral, 740 F.3d at 876). While the Committee grants that claims like those pursued in Emoral are property of the estate pursuant to
Additionally, after inquiry by this Court, Debtors have supplemented their position by submitting that
The Court firmly believes that the Debtors offer the correct application of Emoral to the present dispute. Here, as in Emoral, the Successor Liability Claims are general to the Debtors’ estates by their very nature, as they seek to hold non-debtor entities indirectly liable for the Debtors’ tort liabilities, rather than remedy a harm that a Tort Claimant or creditor can directly trace to a non-debtor third party. See MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 40 Misc. 3d 643, 677, 965 N.Y.S.2d 284, 311 (Sup. Ct. 2013) (“[T]he successor liability doctrine generally [does] not focus on the conduct of the third-party bringing the successor liability claim. The focus instead is on the relationship between asset buyer and seller and the buyer‘s post-acquisition conduct with respect to the assets.“). There can be little dispute that the bulk of such claims fall within the parameters of estate property under
In answering the inquiry in the affirmative, the Court takes a step back and observes that the issue at the heart of this dispute is whether the Successor Liability Claims constitute estate property as defined under the Bankruptcy Code. The parties—like the Third Circuit in Emoral—focus on whether the Successor Liability Claims are estate property under
Notably, property of the estate is different from property of the debtor. See, e.g., In re Cybergenics Corp., 226 F.3d 237, 246 (3d Cir. 2000) (“‘[Debtor‘s] assets’ and ‘property of the estate’ have different meanings[.]“). The bankruptcy court in Doemling—a case that has been cited with approval by the Third Circuit—explained that “section 541(a)(7) . . . is limited to property acquired post-petition by the estate as opposed to property acquired by the debtors.” In re Doemling, 127 B.R. 954, 956 (W.D. Pa. 1991). Significantly, the rights and powers acquired by the estate by virtue of a Bankruptcy Code provision,
A. 11 U.S.C. § 544(a)(1)
Section 544 of the Code addresses a trustee‘s rights and powers, and ability to employ the rights and remedies of certain hypothetical creditors. In relevant part,
A trustee shall have . . . the rights and powers of . . . a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists[.]
Where a trustee has not been appointed, a debtor in possession may exercise these powers. See In re Wright, 649 B.R. 625, 628 (Bankr. D.N.J. 2023) (explaining that Congress has explicitly provided for chapter 11 debtors-in-possession to have all the powers of a trustee, including avoiding powers); see also In re Cybergenics Corp., 226 F.3d at 244 (“the [chapter 11] debtor in possession is similarly endowed to bring certain [fraudulent transfer] claims on behalf of, and for the benefit of, all creditors.“). Thus, as the result of its chapter 11 filing, Debtors possess the rights
and powers of a hypothetical judgment lien creditor under
The parties disagree as to the scope of a trustee‘s powers under
1. The rights and powers under § 544(a)(1) extend beyond avoidance actions
As stated, the parties disagree as to the scope of the powers afforded a trustee under
The use of the word “or” between the phrases “shall have . . . the rights and powers of” and “may avoid any transfer” indicates that these abilities should be read in the disjunctive. In other words, under
The Committee also asserts that “binding Third Circuit law . . . precludes the application of section 544(a) to non-avoidance actions.” Committee‘s Supp. Reply ¶ 3, ECF No. 242. Again, the Court respectfully disagrees. As an initial matter, nothing in the Third Circuit‘s Emoral decision precludes application of
In further support of its position, the Talc Committee also cites to In re CitX Corp., Inc., 448 F.3d 672, 677 (3d Cir. 2006). In that case, the Third Circuit reviewed a decision granting summary judgment to a defendant on claims brought by a Chapter 7 bankruptcy trustee alleging malpractice and “deepening insolvency.” The circuit court affirmed the district court‘s decision because it agreed that the trustee had not established a genuine issue of fact to support his allegations. Id. at 681. This Court acknowledges that the Third Circuit briefly references
Next, the Talc Committee cites to Off. Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001), in which the Third Circuit stated that “[t]he trustee‘s ‘avoiding’ powers [under
The FCR cites to the absence of case law holding that a trustee can bring claims under
The Committee also cites In re Bridge and explains that, in Bridge, the Third Circuit describes
Finally, the Committee contends that the Third Circuit‘s decision in Nardulli & Sons limits
The Committee and the FCR additionally argue that the “overwhelming weight of well-reasoned authority holds that a debtor cannot utilize section 544(a) to prosecute non-avoidance claims.” Committee‘s Supp. Reply ¶ 6-12, ECF No. 242; see also FCR Supp. Reply ¶¶ 7-8, ECF No. 1222 in Case No. 23-13575. Admittedly, a line of cases exists narrowly interpreting a trustee‘s authority to pursue creditor claims under
As an initial matter, Ozark, a decision by the Eighth Circuit Court of Appeals, is not binding on this Court. Ozark is also factually distinguishable in that the claims at issue in that case were found to be “personal to the corporate creditors rather than the corporation.” Ozark 816 F.2d at 1225. Thus, the claims at issue in Ozark would likewise fail the Emoral test in the Third Circuit. Notably, the Ozark decision relies heavily on the Supreme Court‘s ruling in Caplin. However, because Caplin pre-dates the modern Bankruptcy Code, it is not determinative as to the scope of
Ultimately, the cases relied on by the Committee and the FCR either do not directly address the issue before this Court, are bankruptcy-level decisions, or are out-of-circuit opinions and, thus, are not dispositive. This Court must be guided by the plain language of the statute, which simply does not place the limitations on a trustee‘s rights and powers, as advanced by the Committee and FCR. Instead, this Court remains guided by Emoral and joins the line of cases—albeit the minority—holding that a trustee can utilize the rights and powers under
To understand the full import of
§ 544 , one must first understand the power of a bankruptcy trustee to stand in the shoes of an [sic] hypothetical creditor of the debtor to effect a recovery from a third party. Simply stated, from the reservoir of equitable powers granted to the trustee to maximize the bankruptcy estate, Congress has fashioned a legal fiction. Not only is a trustee empowered to stand in the shoes of a debtor to set aside transfers to third parties, but the fiction permits the trustee also to assume the guise of a creditor with a judgment against the debtor. Under that guise, the trustee may invoke whatever remedies provided by state law to judgment lien creditors to satisfy judgments against the debtor.
Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1523 (10th Cir. 1990); see also, e.g., In re Duffin, 457 B.R. 820, 828 (B.A.P. 10th Cir. 2011) (“We agree that the powers given to a trustee under §544(a) are not limited to avoidance of transfers but specifically include broader ‘rights and powers.’ “); In re MS55, Inc., 2007 WL 2669150, at *11 (D. Colo. Sept. 6, 2007), aff‘d on reh‘g, 2008 WL 2358699 (D. Colo. June 6, 2008) (stating that “the language of section 544(a) supports a finding that trustees are endowed with more than solely avoidance powers“); In re Guillot, 250 B.R. 570, 593 (Bankr. M.D. La. 2000) (explaining that “the lien creditor status of the trustee (as of the commencement of the case) . . . is a power set off from the
The Court remains unpersuaded by the Committee‘s contention that allowing a trustee to bring a non-avoidance action under
The Committee next posits that claims brought under
The Committee also argues that “asbestos creditors cannot be bound by any settlement or resolution of the Successor Liability Claims obtained by the Debtors on their behalf without their consent.” Committee‘s Supp. Br. ¶ 22, ECF No. 232. This argument is contrary to the holding in Emoral in which the Circuit explained that, to the extent claims are general, the trustee is the proper party to bring the claim and the “creditors are bound by the outcome of the trustee‘s action.” In re Emoral, Inc., 740 F.3d at 879 (quoting St. Paul Fire & Marine Ins. Co., 884 F.2d at 701).
The Committee next contends that the rights and powers referenced in
Finally, the Committee asserts that the Debtors’ interpretation of
Section 544(a) stands in contrast with section 544(b). While section 544(a) provides a bankruptcy trustee with general powers to assert certain rights and powers of certain classes of hypothetical creditors, section 544(b) provides a bankruptcy trustee with the power to bring actions to avoid transfers, which could be brought by an actual creditor. Whereas the limiting principal of section 544(a) is that the rights and powers must be those the creditors at large could bring, rather than the particularized claims belonging to particular creditors, the limiting principal of section 544(b) is that the actions brought must be avoidance actions that a particular creditor could bring.
In re Kwok, 2024 WL 1261803, at *3 (emphasis added). Thus, this Court‘s interpretation of
This Court acknowledges, as has the Third Circuit, that it “may seem strange” to hold that a cause of action for successor liability against Brenntag or other third parties is property of Debtors’ bankruptcy estates. Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1240 n.20 (3d Cir. 1994); see also In re Emoral, 740 F.3d at 881. However, there are policy reasons underlying this “strange” scenario. In In re Emoral, the Circuit found that personal injury claims brought by plaintiffs against the debtor‘s successor, Aaroma, were property of the debtor‘s estate. The Third Circuit noted that “[a]s 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 Aaroma.” In re Emoral, Inc., 740 F.3d at 881. The Circuit reconciled this glitch in the matrix by referring to the principles underlying the successor liability doctrine, stating that “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.” Id. (citing Phar-Mor, Inc., 22 F.3d at 1240 n. 20). In a similar vein, pursuit of Successor Liability Claims in good faith by the Debtors in this case will result in more efficient and equitable resolutions, thus, maximizing value to creditors.
Indeed, when a company files for bankruptcy, the automatic stay operates to prevent creditors from pursing their own remedies against property of the bankruptcy estate.
This Court finds additional support in the multitude of cases in which courts have ruled that a trustee had standing to bring the general claims of the creditors at large, specifically in the context of veil-piercing, alter ego, and successor liability actions. See, e.g., In re Wilton Armetale, Inc., 968 F.3d 273, 283 (3d Cir. 2020) (“The class action plaintiffs that invoke [a claim against a successor corporation for the tort liability of the predecessor] allege a general injury, their standing depends on their status as creditors of [the debtor], and their success would have the effect of increasing the assets available for distribution to all creditors. For the same reasons stated with respect to the piercing claims, claims based upon successor liability should be asserted by the trustee on behalf of all creditors.“); In re Tronox Inc., 855 F.3d 84, 99 (2d Cir. 2017) (stating that Congress‘s intent by enacting the automatic stay provision was “to protect all creditors by making the trustee the proper person to assert claims against the debtor” and explaining that “[t]his reasoning extends to common claims against the debtor‘s alter ego or others who have misused the debtor‘s property in some fashion“) (quoting St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir. 1989)); In re Kwok, 2024 WL 1261803 (holding that
Having determined that
2. Claims Arising Under California Law
Here, the Successor Liability Claims seek to establish a non-debtor‘s liability bottomed on Debtors’ liability, through allegations of successor liability, alter ego, or some similar theory. Pursuant to Emoral the question then becomes whether the Successor Liability Claims are general—as Debtors argue—or whether they are particularized or direct—as alleged by the Talc Committee. “[A] general claim ‘inures to the benefit of all creditors’ by enlarging the estate, and so ‘the trustee is the proper person to assert the claim.‘” In re Wilton Armetale, Inc., 968 F.3d 273, 282 (3d Cir. 2020) (quoting In re Emoral, 740 F.3d at 879) (other citations omitted). “The distinction between general and personal claims ‘promotes the orderly distribution of assets in bankruptcy’ by funneling all asset-recovery litigation through a single plaintiff: the trustee.” In re Wilton Armetale, Inc., 968 F.3d at 282 (quoting In re Emoral, 740 F.3d at 879). Where a claim is particularized or “personal,” however, the individual creditor has authority to bring it. When distinguishing between general and personal claims, courts must “examine the nature of the cause of action itself” and the theory of liability asserted. In re Emoral, Inc., 740 F.3d at 879.
The Committee contends that the Successor Liability Claims arising under California law are direct and personal claims under the Emoral test. Committee‘s Supp. Reply ¶¶ 14-16. As such, the Committee concludes that these claims remain the exclusive property of creditors and cannot be advanced or settled by Debtors. Debtors maintain that these claims are not personal because creditors cannot trace their injuries to Brenntag or any other non-debtor third party. See Debtors Supp. Reply 2, ECF No. 241. The Court agrees with Debtors’ characterization.
In reaching this conclusion, this Court is guided by the district court‘s analysis in Purdue. In re Purdue Pharma, L.P. 635 B.R. 26 (S.D.N.Y. 2021). In that case, Judge McMahon explained that “direct” or “particularized” claims are those claims that “are not derivative of Purdue‘s liability, but are based on the Sacklers’ own, individual liability, predicated on their own alleged misconduct and the breach of duties owed to claimants other than Purdue.” Id. at 90. In other words, “‘[d]irect’ claims are based upon a ‘particularized’ injury to a third party that can be directly traced to a non-debtor‘s conduct.” Id. In applying that definition to the case presently before this Court, it is evident that the Successor Liability Claims brought under California law are general. These claims are not based on any “particularized” injury that can be traced to Brenntag or any other non-debtor party. Rather, the claims are based entirely on Debtors’ actions and conduct. Brenntag and other third parties are implicated solely through their business dealings with Debtors; therefore, the California Claims are derivative. See Purdue, 365 B.R. at 90 (“‘Derivative’ claims are those [that] seek to recover from the estate indirectly on the basis of the debtor‘s conduct, as opposed to the non-debtor‘s own conduct.“) (cleaned up).
Because the California Claims are general, the second prong of the Emoral test is satisfied. As to the first prong—which asks whether the trustee could have asserted the claim under applicable state law—it is of no moment that the Debtors do not possess a state law right to pursue
3. Product Line Claims
The product line exception to liability generally “imposes strict liability for injuries caused by defects of a product line on a corporation that acquires all or substantially all of the manufacturing assets of another corporation and undertakes essentially the same manufacturing operation.” Committee‘s Opp‘n ¶ 41, ECF No. 90 (citing Ramirez v. Amsted Indus., Inc., 86 N.J. 332, 431 A.2d 811 (1981)). The Successor Liability Claims at issue in this case include product line claims against Brenntag based on its acquisition of Debtors’ assets. The Committee contends that claims premised on this theory are “undisputedly direct claims under Emoral” because “they (i) are predicated upon individualized harm suffered by each claimant; (ii) cannot be asserted by a corporation against its own successor; and (iii) are specific to Asbestos Claimants and cannot be brought by all of the Debtors’ creditors.” Committee‘s Supp. Br. ¶ 7, ECF No. 232.
Debtors concede that these product line claims “are not held by every (or even practically every) hypothetical creditor who extends credit to the debtor. Rather, they are held only by those creditors who are injured by products manufactured by the debtor.” Debtors’ Supp. Br. ¶ 15, ECF No. 233. Accordingly, these claims appear particularized or direct and, as such, arguably would belong to the creditors. However, all Successor Liability Claims—including the product line exception claims—seek, at their core, to hold a non-debtor entity liable for Debtors’ tort liabilities. The harms alleged cannot be traced directly to Brenntag or any other non-debtor third party—no matter the theory of liability utilized. And although the product line
Under New Jersey‘s version of product line theory, the purchaser of a company‘s manufacturing assets is strictly liable for defects where the purchaser “undertakes essentially the same manufacturing operation as the selling corporation[.]” Ramirez v. Amsted Indus., Inc., 86 N.J. 332, 358, 431 A.2d 811, 825 (1981). The facts necessary to make such findings are general to the estate and not personal to a specific creditor. The same holds true under California‘s version of product line theory, which requires an inquiry into the purchaser‘s acquisition, the purchaser‘s ability to assume risk, and the fairness in imposing liability upon the purchaser. Hernandez v. Enter. Rent-A-Car Co. of San Francisco, 37 Cal. App. 5th 187, 249 Cal. Rptr. 3d 467 (2019).
Again, the facts necessary to determine successor liability are general to all creditors. The Court finds no legal or factual justification to carve-out product line claims from the dictates of Emoral in treating all successor liability claims as estate property.
Notably, courts have looked beyond the language of the complaints and the theories pleaded to prevent individual creditors from pursuing claims belonging to bankruptcy estates. See In re Revlon, Inc., 2023 WL 2229352 at *12-17 (Bankr. S.D.N.Y. Feb. 24, 2023) (collecting cases where plaintiffs used strategic pleading choices in an effort to transform a derivative claim to a non-derivative one); see also In re Tronox Inc., 855 F.3d 84, 99 (2d Cir. 2017) (explaining that “so-called ‘derivative claims‘—i.e., claims ‘based on rights “derivative” of, or “derived” from, the debtor‘s‘—typically constitute ‘property of the estate’ “) (quoting In re Bernard L. Madoff Inv. Sec. LLC, 740 F.3d 81, 88 (2d Cir. 2014)). “[A] creditor‘s claim against a third party is not particular simply because the trustee cannot bring the exact claim as the creditor.” In re Port Morris Tile & Marble LP, 645 B.R. 500, 515 (Bankr. S.D.N.Y. 2022). When examining claims, “[t]he proper analysis . . . involves a comparison between the harms that are subject of the creditors’ claim and the harms that are actionable via the trustee‘s claims.” Id.
Here, the product line claims are bottomed on the fact that a successor continued to manufacture Debtors’ product line. The harms alleged in the product line claims are, thus, the same harms alleged in the Successor Liability Claims premised on other theories of liability: all allege that Debtors’ product caused injuries. Significantly, the facts underlying these claims are available to all creditors. See, e.g., In re Tronox Inc., 855 F.3d at 103-04 (agreeing with Emoral that the fact that plaintiffs “had an underlying harm specific to them did not put the claims automatically outside the estate” and finding the claims to be general).
The Court is aware that the facts of the instant case are distinguishable from those before other courts that have deemed general claims that were pleaded as particularized. For example, unlike the claims at issue in Revlon—which were filed post-petition and analyzed under
The Court grants that Emoral did not specifically address claims asserted under a product line theory and, instead, grappled with liability based on a “mere continuation” theory. Nonetheless, nothing about the Emoral decision indicates that the analysis undertaken would not apply similarly to a claim grounded on a different theory—especially when that claim is based on the same facts and alleges the same harms; namely, facts regarding the contractual and transactional relationship between the Debtors and Brenntag and harms stemming from injuries due to Debtors’ product. The viability of a Successor Liability Claim will not depend on facts that are unique to any individual Tort Claimant. Rather, it is dependent on the relationship between the initial entity and its successor. See, e.g., Pub. Serv. Elec. & Gas Co. v. Cooper Indus., LLC, 678 F. Supp. 3d 611 (D.N.J. 2023) (discussing elements of successor liability under New Jersey law); Rubio v. CIA Wheel Grp., 63 Cal. App. 5th 82, 102, 277 Cal. Rptr. 3d 450, 469 (2021) (discussing elements of successor liability under California law). Although the Third Circuit in Emoral analyzed the claims at issue under a theory of successor liability bottomed on “mere continuation,” its holding remains instructive, and the Court can conceive of no reason why the general versus personal analysis under one theory of successor liability should differ when a successor liability claim is premised on a different theory. In this Court‘s view, the same rationale should apply. The Court finds further support for this conclusion in the Third Circuit‘s reasoning in Emoral, which—as discussed earlier—suggests that the analysis used can, and should, be imputed to other theories of liability so long as their underlying purposes are similar. See In re Emoral, Inc., 740 F.3d at 881 (citing Phar-Mor, Inc., 22 F.3d 1228, and extending rationale used in cases involving veil-piercing causes of action to cases involving successor liability actions).
In sum, all Successor Liability Claims seek—in some fashion—to impute Debtors’ liability to a non-debtor entity. The harms alleged and the factual allegations necessary to establish a Successor Liability Claim—whether it is based on “mere continuation” theory, “product line exception,” or any other legal basis—are not unique to any one creditor. Given the factual overlaps and identical harms alleged, the Court concludes that the Successor Liability Claims are not direct claims under the Emoral test, no matter the theory under which they are pursued. As a result, they are property of the estate under
Having determined that the Successor Liability Claims are property of the bankruptcy estates, many of the remaining objections to Debtors’ Motion are rendered moot. This Court need not address the Talc Committee‘s arguments that factual disputes exist as to the type of claims at issue (i.e. “mere continuation” claims or product line exception claims), or that disputes exist as to which state‘s laws should govern each claim. Likewise, a choice of law analysis is not required. However, certain other objections raised by the Committee, FCR, and OCWD warrant further discussion. The Court takes this opportunity to address them.
1. No Factual Issues Remain
First, the Committee asserts that genuine issues of fact exist regarding whether each claim listed in Appendix A to the Complaint is a derivative claim. Committee‘s Opp ‘n ¶¶ 56-60, ECF No. 90. While conceding that “[t]he definition of ‘Successor Liability Claims’ in the Motion is consistent with” the requirement that the precluded claims must be “derivative claim[s] based on an injury caused by the Debtors,” the Committee posits that the Debtors “fail to actually establish through admissible facts or clear descriptions that . . . none of the Appendix A Claims are direct claims against Brenntag.” Id. at ¶¶ 56, 57. This argument puts the cart before the horse. It is not necessary at this juncture for Debtors or the Court to conduct an exhaustive review of each individual claim. The Court‘s adjudication of Counts I and IV of the Complaint does not require a ruling that any particular lawsuit on Appendix A asserts Successor Liability Claims against Brenntag or other third parties. For the same reasons, a claim-by-claim choice of law analysis for all the claims is unnecessary, especially considering the Committee‘s failure to demonstrate an actual conflict of law warranting a choice of law analysis. Rather, for purposes of this Motion it is sufficient for Debtors to establish a category of claims that belong to Debtors as a matter of law; namely, the Successor Liability Claims as those claims are defined in the Complaint. Debtors have satisfied that burden.13 If, in applying this Court‘s ruling to litigation going forward, a dispute arises regarding the characterization of a given claim, this Court retains jurisdiction to determine whether such claim constitutes a Successor Liability Claim.
The Committee also contends that additional discovery is needed to understand the scope of the relief sought by Debtors and to investigate the enforceability of any indemnification claims against Debtors. Committee‘s Opp ‘n ¶¶ 101-07, ECF No. 90. In rejecting this argument, this Court reiterates that a fact-intensive inquiry into the details of every claim is not necessary to resolve the primarily legal issue before of the Court; namely, whether the Successor Liability Claims as those claims are defined in the Complaint constitute property of the estate. Additional discovery into related issues, such as indemnification obligations, would not alter this Court‘s analysis under Emoral.
2. Declaratory Relief is Appropriate
The Talc Committee asserts that Debtors “may be seeking to stay [the Successor Liability Claims] in order to obtain undue leverage over their creditors for the benefit of a non-party to these Chapter 11 Cases.” Committee‘s Opp‘n ¶ 74, ECF No.
Although the Committee and FCR argue against declaratory relief sought in the Motion, both parties concede “there is the considerable amount of discretion built into the Declaratory Judgment Act itself.” Step-Saver Data Sys., Inc. v. Wyse Tech., 912 F.2d 643, 646 (3d Cir. 1990) (citing
As to the second factor—the conclusiveness of the judicial judgment—courts “must determine whether judicial action at the present time would amount to more than an advisory opinion based upon a hypothetical set of facts.” Presbytery of N.J. of Orthodox Presbyterian Church v. Florio, 40 F.3d 1454, 1468 (3d Cir. 1994). “Questions that are predominantly legal ‘are generally amenable to a conclusive determination in a pre[-]enforcement context.‘” California Cas. & Fire Ins. Co. v. Montez, 2024 WL 180822, at *5 (quoting Presbytery of New Jersey of Orthodox Presbyterian Church v. Florio, 40 F.3d at 1468). Once again, here, the question of whether the Successor Liability Claims constitute estate property is predominantly legal in nature and amounts to more than an advisory opinion. Thus, this factor also suggests ripeness.
Finally, the Court addresses the utility of the declaratory relief. Declaratory relief in Debtors’ favor will undeniably serve a useful purpose; namely, the promotion of fairness and equity among creditors and the maximization of value to the estate. Given the specificity of this ruling and the concrete definition of Successor Liability Claims in the Complaint, this Court is confident that parties will be able to use the declaratory relief to discern which claims constitute Successor Liability Claims. The Court simply does not accept the contention advanced by the FCR that a ruling in Debtors’ favor will provide no
As to the impact of declaratory relief on future claims, the FCR argues that because future claimants are not parties to the adversary proceeding—they cannot be bound by any declaratory judgment entered in this adversary proceeding. FCR Supp. Br. ¶ 11, ECF No. 1195 in Case No. 23-13575. The impact of the instant ruling on claimants who have not yet sought relief, however, is a question for another day. At this juncture, the Court‘s ruling is limited to the primarily legal determination that the Successor Liability Claims—as those claims are defined in the Complaint—constitute estate property. To the extent a future claimant files a claim and wishes to challenge the collateral or preclusive effect of the instant ruling, the Court will address the issue at that time. However, such issues are not ripe for decision today.
3. Due Process Concerns
The Committee argues that Debtors’ preference to settle the successor liability issues in a single proceeding rather than thousands of individual lawsuits cannot trump plaintiffs’ due process rights. Committee‘s Opp‘n ¶ 77, ECF No. 90. This argument assumes that Debtors’ pursuit of the Successor Liability Claims is merely a strategic choice and not tied to the fact that the Successor Liability Claims are estate property that—in accordance with the Bankruptcy Code—are appropriately pursued by the trustee or debtor-in-possession.
4. Allegations of Improper Purpose and Policy Considerations Do Not Warrant Denial of Summary Judgment
The Committee makes much of the fact that NICO may bear ultimate responsibility for any successor liability exposure that Debtors are unable to satisfy. However, the fact that Debtors may be entitled to indemnification does not eliminate the fact that—prior to receiving indemnification—Debtors must first be exposed to liability. The Debtors’ liability is what triggers the impact on the estate and underscores the policy reasons behind the Debtors’ rights to step into the shoes of a hypothetical judicial lien creditor. Indeed, the Committee concedes that “[t]he Debtors are certainly entitled to avail themselves of the protections under chapter 11 to bring finality to their own liabilities and facilitate an equitable distribution of their remaining assets to creditors.” Committee‘s Opp‘n ¶ 91, ECF No. 90. That is what Debtors are seeking to accomplish here.
Notably, the Committee expresses concern that “Debtors are seeking sole authority to settle Successor Liability Claims in order to obtain Court approval to settle those claims” without proper analysis and “in a manner that is beneficial to NICO to the detrimental to [sic] Tort Claimants, rather than in [a] manner that is truly fair and equitable.” Committee‘s Opp ‘n ¶ 94, ECF No. 90. This concern ignores the role that courts play in the approval of settlements and implies that this Court will rubber-stamp Debtors’ proposed settlement, even if it does not meet the standard for approval set forth in binding case law. The Court takes this opportunity to assure the parties that, prior to approving settlements, the Court carefully considers all the In re Martin factors, including “the paramount interest of the creditors.” In re Martin, 91 F.3d 389, 393 (3d Cir. 1996). It will undertake this same process should Debtors in the instant case propose a settlement of the Successor Liability Claims.
Indeed, the FCR focuses solely on the solvent financial condition of the non-debtor entities in support of this argument. This narrow focus disregards the risks, uncertainties, costs, and delays that accompany these litigations. Let‘s not ignore the obvious: these Debtors have not operated in two decades and hundreds of claimants have already been waiting years and years to have their claims heard. They are deserving of a fair and equitable recovery in the near term, without the risk and delays inherent in the tort system. Moreover, given the collective action considerations discussed in Purdue, the Court is unpersuaded that the Tort Claimants’ individual pursuit of these claims against non-debtor third parties truly would maximize value; and remains far less confident that such a path maximizes value for all claimants. Rather, this Court holds firm that allowing Debtors to pursue the Successor Liability Claims will prevent the proverbial race to the courthouse, will ensure more equitable creditor recoveries, and will enable creditors to avoid “the significant risk, cost and delay (potentially years) that would result from pursuing the [non-debtors] and related parties through litigation.” Harrington v. Purdue Pharma L. P., 144 S. Ct. at 2101.
C. Derivative Standing is not before the Court
OCWD requests that—to the extent the Court deems the Successor Liability Claims property of the bankruptcy estate—the Court grant derivative standing to pursue those claims the creditors. See OCWD‘s Opp‘n ¶ 4, ECF No. 86. The issue of derivative standing is not presently before the Court. To the extent creditors seek an order granting them authority to pursue the Successor Liability Claims derivatively, an appropriate motion should be filed.
IV. Conclusion
For the foregoing reasons, the Court concludes that the Successor Liability Claims—as that term is defined in the Complaint—are property of the estate under
Dated: August 13, 2024
Michael B. Kaplan, Chief Judge
U.S. Bankruptcy Court
District of New Jersey