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From Products Liability Law Daily, November 3, 2014

High Court declines to reverse bar imposed by Third Circuit on individual diacetyl claims

By Pamela C. Maloney, J.D.

The U.S. Supreme Court has denied a request by consumers and workers who allegedly suffered lung injuries from exposure to diacetyl to reverse a decision by the U.S. Court of Appeals for the Third Circuit holding that plaintiffs had no remedy from a chemical manufacturer for their injuries. According to the Third Circuit’s ruling, the plaintiffs’ cause of action for successor liability was a generalized claim that belonged to the estate and had been released by the bankruptcy trustee (Diacetyl Plaintiffs v. Aaroma Holdings, LLC, Docket No. 14-71, cert. denied November 3, 2014; cert. filed July 18, 2014).

Background. Emoral, Inc. (f/k/a Polarome International, Inc.) produced diacetyl, an ingredient used in artificial butter flavoring, until 2006. In August 2010, Aaroma Holdings LLC (f/k/a Duane Street, LLC) entered into an asset purchase agreement with Emoral providing that Aaroma was not assuming liabilities related to litigation regarding claims against Emoral arising from diacetyl exposure. Emoral filed for bankruptcy in June 2011. Two hundred and eighty-five individuals, including consumers of diacetyl-containing products and workers at flavoring-producing plants, filed proofs of claim alleging that they had suffered lung injuries as a result of handling diacetyl produced by Emoral. Aaroma and the bankruptcy trustee entered into a settlement agreement under which Aaroma would pay $500,000 and the trustee would release Aaroma from any causes of action that were property of the bankruptcy estate as of the date of the agreement. The diacetyl plaintiffs objected to the releases to the extent they would bar them from bringing claims in state court against Aaroma as a successor to Emoral. The bankruptcy court approved the settlement with language stating that it would not “operate as a release of, or a bar to prosecution of any claims held by any person which do not constitute Estate’s Released Claims as defined in the Aaroma Settlement Agreement.”

Some plaintiffs then filed individual actions against Aaroma in New Jersey state court, alleging that it was liable for personal injury and products liability claims as a “mere continuation” of Emoral. The bankruptcy court denied Aaroma’s motion to dismiss, finding that the plaintiffs’ personal injury causes of actions were not a generalized injury suffered by all Emoral creditors or shareholders, but particularized injuries; therefore, they were not property of the estate. The district court reversed and ruled that the plaintiffs had no cause of action against Aaroma.

Questions presented: The diacetyl plaintiffs had asked the U.S. Supreme Court to answer two questions that they asserted have split circuits as a result of the Third Circuit’s decision:

  1. Whether the Third Circuit erred in concluding, contrary to the decisions of this Court and the law in the Second, Fifth, Sixth, Seventh, Eighth, Ninth, and Eleventh Circuits, that a trustee in bankruptcy can settle the tort claims of those injured by a company that filed for bankruptcy when the debtor company could neither bring the claim at the commencement of the bankruptcy nor was injured in any way by the underlying allegations.

  2. Whether the Third Circuit erred in concluding, contrary to the law in the First, Ninth, and Federal Circuits, that a claim is general and belongs to the estate simply because other claimants could take advantage of a finding of successor liability, rather than finding it is specific and can go forward because it is unique to these plaintiffs.

The U.S. Supreme Court’s action lets stand the decision of the Third Circuit.

Attorneys: Edwin Chemerinsky (University of California, Irvine), Nancy Isaacson (Greenbaum, Rowe, Smith & David), and Kenneth B. McClain (Humphrey, Farrington & McClain, P.C.) for diacetyl plaintiffs.

The case is Docket No. 14-71.

Companies: Emoral, Inc.; Aaroma Holdings, Inc.

MainStory: TopStory ClassActLitigationNews ChemicalNews FoodBeveragesNews SCLIssuesNews SupremeCourtNews

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