Opinion
32904/01.
Decided March 30, 2006.
Defendant, MYERS POWER PRODUCTS, INC. (hereinafter "MYERS") filed a Motion to Dismiss pursuant to C.P.L.R. § 3211 (a)(7) seeking the entry of an Order dismissing the first, second, and third causes of the Fourth Third-Party complaint filed by TRUSTEES OF COLUMBIA IN THE CITY OF NEW YORK and PLAZA CONSTRUCTION CORP. (hereinafter "Third-Party Plaintiffs" or "Columbia") against MYERS for failure to state a cause of action.
SUMMARY
The underlying actions (the "State Court Actions") arise from a February 12th, 2000 incident in which plaintiff Geoffrey Gross claims he sustained a pulmonary injury caused by a malfunction of an AC inverter/emergency lighting system (the "Lighting System") manufactured by Computer Power, Inc. ("CPI"). The Plaintiffs filed a Complaint against several defendants including Columbia and Plaza on or about September 4th, 2001. CPI filed a bankruptcy petition on or about July 9th, 2001.
United State Traffic Corporation ("USTC") a Delaware corporation purchased substantially all of the assets from CPI on or about August 10th, 2001 pursuant to an Asset Purchase Agreement ("APA") and an order of the Bankruptcy Court (the "Sale Order"). The Sale Order specifically states, pursuant to Section 363 of the Bankruptcy Code, that the assets were sold by the Debtor to USTC free and clear of any liens, claims and encumbrances of any kind.
USTC is the parent corporation of MYERS. MYERS Power Products, Inc. is an affiliate of USTC formed as a purchase vehicle consummate the sale of the assets from CPI to USTC.
Columbia and Plaza commenced a Fourth-Third Party action in state court against MYERS seeking indemnification from MYERS based on a product liability theory with respect to the manufacturing of the lighting system.
BACKGROUND
The facts are not in dispute. On or about July 9th, 2001 (the "Petition Date"), CPI filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the District of New Jersey. At that time, CPI's primary business was the manufacturing approximately 7-8 product lines of uninterruptible power supplies of lighting inverter systems for sale throughout the world with approximately 10-15 models.
On or about July 16th, 2001, CPI entered into an Asset Purchase Agreement ("APA") with United States Traffic Corporation ("USTC") to purchase its assets for $1,127,000 less certain adjustments. The APA contained language stating that USTC was not assuming any of the CPI's liabilities. Specifically, in Section 2.4, No Assumption By Buyer, of the APA states:
Except for any liability under any Lease or executory contract assumed by Debtor and assigned to Buyer pursuant to Section 2.3 above, nothing contained in this Agreement or in any action or undertaking by the Buyer pursuant to this Agreement shall be deemed or be construed to constitute an assumption by Buyer of any liabilities or obligations incurred by any the Debtor in connection with the conduct its business, or under any instrument, agreement, or document pertaining to the Assets acquired by the Buyer pursuant to this Agreement, or otherwise, nor shall any provision of this Agreement otherwise obligate Buyer to take Any action or to incur expenses or discharge any obligation, duty or liability of the Debtor with respect to the Assets, or any of them.
On August 10th, 2001, the Bankruptcy Court approved the sale of the Assets pursuant to a Sale Order which was consistent to the APA in that it provided that:
At the closing contemplated by the Asset Purchase Agreement (the "Closing"), all right, title and interest of the Debtor in the Estate in, to and under the assets shall be immediately vested in [USTC], free and clear of any and all liens, claims, interests, set-offs, rights of recoupment, actions, cause of action, demands, debts, obligations, rights, mortgages, pledges, security interests, restrictions, levies, liabilities, obligations, encumbrances, charges, claims and interest of any kind, nature and description whatsoever of secured or unsecured creditors of the Debtor, including, but no limited to any environmental claims, and that except as provided in the Asset Purchase Agreement or other agreements executed with respect with to sale transaction, USTC will not be liable for any obligation of or claims against the Debtor and Debtor's Estate.
As stated above, USTC is the parent corporation of MYERS.
PROCEDURAL HISTORY
Plaintiff, Geoffrey Gross, a resident of New Jersey, Bergen County, was injured by an AC inverter/emergency lighting system (the "Lighting System") in Manhattan previously manufactured by Computer Power, Inc. Plaintiffs filed a complaint against the Trustees of Columbia University in the City of New York, Plaza Construction Corp., Mid City Electric Corp., and Five Star Electric Corp.
On March 1st, 2005, Columbia and Plaza filed a Fourth Third-Party State Court Complaint against MYERS, alleging that if Plaintiffs are found injured, then it was a result of "among other things, the design, planning, testing, inspection, distribution, sale assembly and/or manufacture of the Lighting System . . ." and for breach of an express or implied warranty. Fourth Third-Party State Court Complaint ¶ 21.
MYERS filed a motion in Bankruptcy Court for a stay of the State Court actions and the Federal Court actions involving the same incident. Bankruptcy Court declined to stay the actions. However the court clarified its interpretation of the "free and clear" language in its Sale Order, but declined to determine the issue of successor liability under state law. Transcript of June 6th, 2005 hearing, p. 17, 1.21-24.
The Bankruptcy Court concluded that it was bound by the decision of the Court in In re Trans World Airlines, Inc., 322 F.3d 283 (3rd Cri. 2003) because it was being asked to interpret federal statute Section 363 (f). Specifically, the court stated:
What is at issue is the interpretation of a federal stature, specifically 363 (f) of the Bankruptcy Code. On issues of interpretation of the bankruptcy code, this court is bound by the decisions of the Third Circuit. A contrary decision by the New Jersey Supreme Court is not controlling. The question then becomes whether In Re: Trans World Airlines, Inc., 322 F.3d 283, supports Myers interpretation of the Sale Order. The Court finds that it does. Although the TWA case did not involve products liability claims, the Third Circuit's analysis was not limited to the specific claims at issue in that case. It was based in the language of 363 itself. The TWA court noted that the trend seemed to be towards a more expansive reading of interest in property which encompasses other obligations that may grow from ownership of the property. That's from TWA, 289 quoting Collier on Bankruptcy at paragraph 363.061.
Thus, the Bankruptcy Court stated its interpretation of the language of the August 10th, 2001 Sale Order, "is that free and clear included the assets being sold free and clear of any successor claims based on product liability." Transcript p. 20-21. The court also stated while it may be unclear whether those particular assets were among those sold to USTC, and ultimately MYERS, that is immaterial because it remains clear that the product liability claims arise from assets of the Debtor. The Court further stated that under TWA, if the obligations at issue are connected to or arise from the property that was sold then they can be extinguished by a sale free and clear under 363 (f).
During a subsequent hearing for a stay of the State and Federal Court actions, the Bankruptcy Court reiterated its interpretation of the Sale Order and stated it no longer had subject matter jurisdiction over the proceeding.
ANALYSIS
MYERS, argues that the Fourth Third-Party Complaint must be dismissed because it cannot be liable causes of actions stemming from the Plaintiff's injuries, since it bought CPI's assets free and clear pursuant to Section 363 (f) of the Bankruptcy Code. Section 363 (f) provides in pertinent part:
"The trustee may sell property . . . free and clear of any interest in such property of an entity other than the estate, only if —
(1) applicable non-bankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such."
In their Memorandum of Law in Support of the Motion to Dismiss, Fourth Third-Party, MYERS' counsel argues that in In re: Trans World Airlines, Inc., 322 F.3d 283 (2003) the Third Circuit Court of Appeals, established that "the phrase interest in property,' as used in bankruptcy statute providing for sale of assets of estate free and clear of any interest in property as long as one of five conditions satisfied, is not limited in scope only to in rem interests, such as liens, but should be interpreted more expansively to "encompass other obligations that may flow from ownership of the property."
Defendants, Trustees of Columbia University in the City of New York ("Columbia") and Plaza Construction Corp. ("Plaza"), argue in opposition that MYERS' motion is based on an overly broad interpretation of the term "interest" in the property. Defendants further contend that only a strained reading of TWA can support MYER's assertion that "interest" in property includes future products liability claims which were not specifically dealt within the bankruptcy proceeding.
In TWA, a dispute arose regarding the debtor's liability to furnish free travel to individual employees on account of vouchers that had been issued to those employees in settlement of a gender-discrimination class action lawsuit prior to the closing of the bankruptcy proceedings. Over the objection of the Equal Employment Opportunity Commission ("EEOC"), the court concluded that Section 363 (f) permits the bankruptcy court to authorize a sale free of any interest' that an entity has in the property of the estate. In its decision, the court cited Collier on Bankruptcy ¶ 363.06[1] and reasoned that because Section 363 (f) (3) provides for particular treatment when such interest is a lien, then "there must be situations in which the interest is something other than a lien; otherwise, Section 363 (f) (3) would not need to deal explicitly with the case in which the interest is a lien." TWA, 322 F.3d 283, 290 (3rd Cir. Ct. Of Appeals 2003).
Counsel for Columbia and Plaza note that TWA deals with claims that had been asserted at the time of bankruptcy. More importantly, the claimants received notice of the bankruptcy proceedings, had an opportunity to be heard on their claims and presented their arguments before the court. Additionally, unlike the case at bar, TWA did not involve issues of product liability or successor liability laws.
This case involves issues of successor liability because the claim against MYERS was based on its purchase of the manufacturer of the lighting system. Although the injury alleged to be caused by the product occurred prior to the bankruptcy proceedings, the third-party product liability claims against the manufacturer were unforseen and non-existent at the time of the bankruptcy proceedings.
Defendants, Columbia and Plaza cite, Ezra H. Cohen in Successor Liability in § 363 Sales. In that article Cohen states that "the paradigm for successor liability for product liability claims is when the injury occurs after the sale and after the assets of the selling corporation have been distributed." See, Ezra H. Cohen, Successor Liability in § 363 Sales, Am. Bankr. Ins. J.18, 46 (November 2003). This structure is illustrated by the case "where a purchaser continued manufacturing and selling the same product that injured the plaintiff under the same name and where the seller has paid all known debts and distributed the remaining money to the shareholders before the plaintiff is injured by the product manufactured by the seller." Id. In that situation, the product liability claim is not a bankruptcy "claim" within the meaning of Bankruptcy Code § 101 (5), but rather a "future claim," even if the injury is caused by a product that was manufactured prepetition.
The product liability claim stemming from Plaintiffs' injury was not a bankruptcy "claim" within the meaning of Bankruptcy Code § 101 (5), but rather a "future claim," because the claim came into existence on the day the product liability claim was actually filed. Prior to the filing date the claim was a potential claim or a future claim.
Furthermore, in the instant case, neither Plaintiffs nor the Third-Party Plaintiffs received notice of the bankruptcy proceedings. Their claims were not known by the debtor/manufacturer at the time of the bankruptcy sale, and they did not have an opportunity to be heard on their claims.
In Lemelle v. Universal Mfg. Corp., 18 F.3d 1268 (5th Cir. 1994) Plaintiff was injured in a 1985 fire caused by a defective mobile home, the manufacturer of which had been discharged in a 1983 bankruptcy proceeding. The defendant had acquired the debtor pursuant to a series of sales and mergers after a bankruptcy proceeding which included a discharge from all "obligations and demands." The court held that "the absence of evidence [that would have permitted the debtor to identify, during the course of the bankruptcy proceedings, potential victims and thereby permit notice to those victims] precludes a finding that the claims now asserted by victim-plaintiff were discharged in the bankruptcy proceedings." Lemelle, supra at 1277.
In Lemelle, the court further stated that the definition of a claim' cannot be construed to include claims of victims "whom the record indicates were completely unknown and unidentified" at the time the debtor/manufacturer filed the bankruptcy petition "and whose rights depended entirely of the fortuity of future occurrences." Id.; see also, Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159 (7th Cir. 1994) (finding that Bankruptcy Court cannot enjoin plaintiffs from seeking to impose successor liability on purchasers where the injury occurred after the sale, confirmation of the plan or administration of the estate); Fairchild Aircraft Inc. v. Campbell, 184 B.R. 910 (Bankr. W.D. Tex. 1995) (holding that executors of persons killed in an airplane crash held future claims, not bankruptcy claims and therefore were not precluded from seeking successor liability on the purchaser of the aircraft's debtor/manufacturer.) Depriving claimants of a property interest, i.e. future claims, without notice, is a violation of the Due Process Clause of the Fifth Amendment. See, Hexcel Corporation v. Stephan Co., 239 B.R. 564, 570-571 (N.D. Cal. 1999).
That the Plaintiff's injuries which give rise to the product liability claim occurred prior to the bankruptcy proceedings is not dispositive. Lefever v. K.P. Hovnanian Enterprises, Inc., 160 N.J. 307 (1999). The court in Lefever held that "product line" successor liability applied to a purchaser of assets at a bankruptcy sale, even though the injury that gave rise to liability occurred before the bankruptcy.
In the instant case, there is no indication that the Plaintiff was known or identified at the time the debtor/manufacturer filed the bankruptcy petition. As such, a foreclosing of the product liability claim without notice would also deprive the parties of their constitutional right to Due Process. Myer's position that bankruptcy courts should have the power to divest future claims in order to effectuate the intent of the debtor and purchaser, fails to take into account the rights and expectations of future claimants who have not been afforded the opportunity to participate in the bankruptcy proceedings or the invariable likelihood that bankruptcy system may be abused by purchasers and debtors. See eg., Zerand-Bernal Group, Inc. v. Cox, supra at 163 (Justice Posner discusses the dangers of allowing bankruptcy proceedings to discharge future claims).
Further, during the June 9th, 2005 hearing on MYERS' Motion to Stay, the Bankruptcy court specifically declined to determine the issue of successor liability because it is an issue of state law.
Here, the Plaintiffs are New Jersey residents, the debtor (CPI) is a New Jersey corporation, the product was manufactured in New Jersey, the Purchase and Sale agreement was drafted with New Jersey Law clauses and the bankruptcy proceedings took place in New Jersey District Bankruptcy courts. As such, New Jersey state law should be applied to resolve the product liability issues as the New Jersey has the greatest interest in the resolution of the instant motions. See, Finance One Public Co., Ltd., v. Lehamn Bros. Special Financing, Inc., 414 F.3d 325 (2nd Cir. 2000). In Branhill v. Johnson, 503 U.S. 393, 398 (1992) the court stated that "[i]n absence of any federal law, property' and interests in property' are creatures of state law." See also, In re: Evelth Mines, LLC., 312 B.R. 634 (Bankr. D. Minn. 2004) (stating that interest in property as stated in Section 363(f) is governed by state law).
The issues of interest' and successor product liability under New Jersey Law were examined in Lefever v. K.P. Hovnanian Enterprises, Inc., 160 N.J. 307 (1999). Specifically, the Court discussed whether a company whom purchases the assets of a debtor/manufacturer pursuant to a bankruptcy proceeding could be held liable for claims arising from defective products manufactured by the debtor company even where the sale agreement contains Section 363 (f) free and clear clause releasing the purchaser the debtee's interest and liabilities in the property. Id. Thus, the issues in Lefever parallel the issues of the case at bar in that it discusses future claims of product liability.
In Lefever, the court made several important points. Lefever held that a product liability claim cannot be precluded where it has not been dealt with in Bankruptcy Courts. See, Lefever at 320-321. The bankruptcy proceeding in the instant case did not deal with the product liability claims arising from Plaintiffs' injuries. The Lefever court also held that the term interest' contained in Section 363 (f) did not include claims arising from the debtor's company manufacture of allegedly defective products. See, Lefever supra at 320 (1999). Additionally, the court noted that New Jersey has a well established Product-Line Exception for successor liability, and that no preemptive federal law exists to the contrary. Id.
As discussed in Lefever, New Jersey recognizes the Product-Line Exception to the general rule of no liability for corporate successors. The Product-Line Exception which provides for successor liability where the purchasing company purchases a substantial part of the debtor manufacturer's assets and continues to market the goods in the same product line. Lefever, supra at 310 (1999); Mettinger v. Globe Slicing Machine Co. Inc., 153 N.J. 371 (1998) (stating that New Jersey's adopted the product line exception to successor liability). Thus, the court must examine whether the product-line exception is applicable in this instance.
In Mettinger, supra at 380 (1998) the court stated that:
"[w]here one corporation acquires all or substantially all the manufacturing assets of another corporation, even if exclusively for cash, and undertakes essentially the same manufacturing operation as the selling corporation, the purchasing corporation is strictly liable for injuries caused by the defects in units of the same product line, even if previously manufactured and distributed by the selling corporation or it predecessor." citing Ramirez v. Amsted Indus., 86 N.J. 332, 358, 431 A.2d 811 (1981). The court recognized three reasons for imposing potential liability on a successor corporation that acquires the assets and continues the manufacturing operation of its predecessor:
(1) the virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business,
(2) the successor's ability to assume the original manufacturer's risk-spreading role, and
(3) the fairness of requiring the successor to assume a responsibility for defective products that was a burden necessarily attached to the original manufacturer's good will being enjoyed by the successor in the continued operation of the business. Id. at 381.
MYERS' purchase satisfies all the prongs of the Product-Line Exception. The APA states that the assets and related rights which are acquired by MYERS under the agreement consist of:
1. All general tangibles . . . agreements for the sale . . . of goods . . . all Copyrights, all Patents, all Trade names, Trademarks, and all similar marks and symbol having or depicting similar names, goodwill, product lines, customer lists, design drawings and specification purchase orders, . . . service contracts.
2. All machinery, machine tools, equipment, motor vehicles, . . . rolling stock . . . dies, parts, jigs, molds, models, computers, data processing equipment . . .
3.All inventories of raw materials, work in process, finished goods, and other materials and supplies . . .
4.All unpaid accounts receivable including, without limitation, accounts generated by sales of goods which have been billed to customers of the Debtor.
These provisions of the APA demonstrate that MYERS absorbed CPI and CPI is now defunct, thus destroying any potential remedy against CPI. MYERS continued CPI's operations with approximately 1/3 of CPI's personnel and corporate officers. Specifically, former officer of CPI, Bruce Steigerwald, is MYERS current general manager. MYERS also retained all the customers with only one exception, lists the Bethlehem, PA office as MYERS/CPI in the website directory and keeps CPI computer files.
These facts satisfy the first prong in that the virtual destruction of the plaintiff's remedies against the original manufacturer, CPI, was caused by the successor, MYERS' acquisition of the business.
Furthermore, MYERS continued to manufacture essentially the same line of products as CPI and assumed the original manufacturer's risk-spreading role in numerous ways. First, MYERS advertises in its website that it acquired CPI and transferred its product lines. MYERS has possession of all of CPI's service department files and contracts and it services inverters and other products which were sold by CPI prior to the asset purchase. Though MYERS does not carry the precise model inverter that is the subject of this lawsuit because such model is outdated, it does sell an updated version of the inverter. Additionally, MYERS manufactures inverter systems using CPI design schematics, technology tools, equipment and inventory. Finally, the Asset Purchase Agreement required CPI to continue to carry insurance on the assets and the operation of its business and name MYERS as an additional insured on such insurance policies. Thus, MYERS satisfies the second of the Product-Line Exception in that MYERS has the ability to assume the original manufacturer's risk-spreading role.
The third prong of the Product-line Exception is also satisfied because the fairness of requiring the MYERS to assume a responsibility for defective products is a burden necessarily attached to the CPI's good will currently being enjoyed by MYERS in the continued operation of the business.
The concern that post-bankruptcy successor liability for product claims will have a chilling effect on the purchase of the assets of companies in bankruptcy is unfounded and fails to account for practical considerations. Here, MYERS could and did anticipate the possibility future product liability claims in that they expressly required CPI to carry insurance on the operation of its business and that CPI name MYERS as an additional named party.
Based on these undisputed facts, MYERS has met the requirements necessary for invoking the Product-Line Exception under New Jersey law. Because the Product-Line exception is applicable to the instant action, MYERS can be held liable as a corporate successor to CPI for the injuries incurred by the Plaintiffs.
WHEREFORE the Fourth-Third Party Defendant's motion for an Order dismissing the first, second, and third causes of the Fourth Third-Party complaint is denied.
This shall constitute the decision and order of this Court.