In Re Quigley Company, Inc.
Filing
19
MEMORANDUM OPINION AND ORDER: For the reasons set forth in this Memorandum Opinion and Order, the ruling of the Bankruptcy Court is REVERSED. Appellant is free to pursue its 400 claims in Pennsylvania states courts. (Signed by Judge Richard J. Holwell on 5/17/2011) (tro)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
10 Civ. 1573 (RJH)
IN RE QUIGLEY COMPANY, INC.
MEMORANDUM OPINION
AND ORDER
Richard J. Holwell, District Judge:
Appellant Law Offices of Peter A. Angelos 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
1
and that its fell outside the scope of 11 U.S.C. § 524(g). For the reasons stated below, the
Bankruptcy Court’s opinion is REVERSED.
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 example, 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 asbestos it contained because dangerous when airborne
because workers could inhale the fibers. (Id.) Once the fibers lodged in the lungs, they could
cause fatal disease, including mesothelioma. (Id.) The Insulag packaging did not contain any
warnings about the danger of asbestos. (Id.) To the contrary, Quigley marketing materials that
also contained the Pfizer logo specifically marketed the product as safe, stating “Insulag . . . is
not injurious contains no mineral oil or fine slag particles which are irritants to the body.” (Id.)
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
2
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. (Def.’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
pendency 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 11 U.S.C. § 524(g)(A)(ii). (Id.) This provision is part of
§ 524(g), which enables bankruptcy courts to create asbestos litigation trusts that set aside money
to pay out future asbestos claims. This statute also provides for injunctions of certain claims
against certain non-debtors, including the parent companies of asbestos manufacturers such as
Quigley. Tracking the statute, the Amended Injunction enjoined:
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 Quigley or a
related party;
(III) Pfizer’s provision of insurance to Quigley or a related party; or
3
(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 has named Pfizer as a defendant in Insulag-related claims under the
theory that Pfizer, because it placed its logo on Insulag packaging and advertising, held itself out
to consumers as a manufacturer of Insulag. (Id. at 5.) In doing so, appellant argues, Pfizer was
an “apparent manufacturer” of Insulag and thus was liable pursuant to § 400 of the Second
Restatement of Torts (id.), which the Pennsylvania courts have adopted as state law, Forry v.
Gulf Oil Corp., 237 A.2d 593, 599 (Pa. 1968). Section 400 of the Second Restatement of Torts
provides: “One who puts out as his own product a chattel manufactured by another is subject to
the same liability as though he were its manufacturer.” Restatement (Second) of Torts § 400
(1965). In 2008, appellant moved for partial summary judgment in many of these actions, and
Pfizer in response moved in the Bankruptcy Court to enforce the Amended Injunction. (BR
Opinion 5.)
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 affirmative 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
4
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 same
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 JohnsManville, 517 F.3d 52 (2d Cir. 2008) (hereinafter “Manville III”)1, wherein the court concluded
that bankruptcy courts do not have subject matter jurisdiction to enjoin independents direct
claims against non-debtors Id., 517 F.3d at 66, (“[A] bankruptcy court only has jurisdiction to
enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate.”). Here,
the Bankruptcy Court found that the § 400 claims against Pfizer differed from the claims at issue
1
The Court adopts the numeric used by the Second Circuit in In re Johns-Manville, 600 F.3d 135 (2d Cir. 2010)
which is herein referred to as Manville IV.
5
in Manville III because they were not direct, non-derivative claims but were “vicarious and
derivative” claims that could eventually affect the res of Quigley’s bankruptcy estate. (Id. at
14.)
STANDARD OF REVIEW
“Pursuant to Bankruptcy Rule 8013, a District Court reviews a bankruptcy court’s
conclusions of law de novo and reviews findings of fact for clear error.” In re Cavalry Const.,
Inc., 428 B.R. 25, 29 (S.D.N.Y. 2010); see also In re Bayshore Wire Prods. Corp., 209 F.3d 100,
103 (2d Cir. 2000) (“Like the District Court, we review the Bankruptcy Court’s findings of fact
for clear error, [and] its conclusions of law de novo . . . .” (internal citations omitted)). Pfizer
correctly points out that a bankruptcy court’s interpretation of its own order, including the
preliminary injunction at issue here, is typically given deference on appeal. Deep v. Copyright
Creditors, 122 F. App’x 530, 531 (2d Cir. 2004); Casse v. Key Bank Nat’l Ass’n, 198 F.3d 327,
333 (2d Cir. 1999). Nonetheless, where, as here, the proper effect of an order hinges upon a
question of statutory interpretation, this question is reviewed de novo. See Casse, 198 F.3d at
334; see also Kern v. TXO Production Corp., 738 F.2d 968, 970 (8th Cir. 1984) (“That is, when
we say that a decision is discretionary, or that a district court has discretion to grant or deny a
motion, we do not mean that the district court may do whatever pleases it. The phrase means
instead that the court has a range of choice, and that its decision will not be disturbed as long as
it stays within that range and is not influenced by any mistake of law.”).
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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., 97 B.R. 174, 176 (Bankr. S.D.N.Y.
1989) (“Manville I”). After the link between asbestos and respiratory disease became known,
asbestos-producing companies became overwhelmed with lawsuits from disease-sufferers and
often filed for bankruptcy. Bankruptcy courts were tasked with balancing the interests of those
who were presently suffering from asbestos-related illness and those who might contract such
illness in the future, but who had not yet manifested any symptoms of disease. Id.
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 PrePackaged 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 a 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 files 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
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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 debtor
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) without Compromise: Voting Rights and the Asbestos Bankruptcy Paradox, 2008
COLUM. BUS. L. REV. 841, 852 (2008). In some instances, the channeling injunctions may also
cover certain types of claims against third parties related to the debtor, such as the debtor’s
insurer or corporate affiliates, both of whom are within the ring of fire created by asbestos
litigation. This case concerns such a third-party injunction.
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 interest in an entity as part of such a
transaction.
§ 524(g)(A)(ii) (emphasis added).
8
As noted, the bankruptcy court issued a channeling injunction in this case 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, 517 F.3d at 66 (quoting In re
Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005)).
II.
Pennsylvania State Law
Appellant seeks to prosecute actions brought under §§ 400 and 402A of the Second
Restatement of Torts, which the Pennsylvania courts have adopted as state law.2 Forry v. Gulf
Oil Corp., 237 A.2d 593, 596-97, 599 (Pa. 1968). Section 400 of the Second Restatement of
Torts provides: “One who puts out as his own product a chattel manufactured by another is
subject to the same liability as though he were its manufacturer.” Restatement (Second) of Torts
§ 400 (1965). The Forry court, in adopting § 400, approved the reasoning of the Second
Restatement, specifically that: “(a) the name and the trademark of the sponsor, plus the
reputation of the sponsor, constitute an assurance to the user of the quality of the product, and (b)
reliance (by the user) upon a belief that (the sponsor) has required (the product) to be made
properly for him.” Forry, 237 A.2d at 599 (quoting Restatement (Second) of Torts § 400 cmt. d)
(internal citations and quotations omitted).
2
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.
9
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 plaintiff’s
injury, the seller is strictly liable without proof of negligence.” Walton v. Avco Corp., 610 A.2d
454, 458-59 (Pa. 1992) (quoting Berkebile v. Brantly Helicopter Corp., 337 A.2d 893, 902-03
(Pa. 1975)).
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., 527 A.2d 134, 139-40 (Pa. Super. 1987). In the most common § 400 case, retailers are held
liable for private label products that are manufactured by another party. E.g., Walton, 610 A.2d
at 459. However, Pennsylvania courts have also applied § 400 liability to a parent company such
as Pfizer that neither sold, nor manufactured a product, but marked the product with its own
name. Brandimarti, 527 A.2d at 139-40. (“Under such circumstances Caterpillar could expect
others to purchase the product in reliance on the skill and reputation associated with the
10
Caterpillar name . . . and could be held strictly liable if the product bearing the Caterpillar name
proved defective . . . .”) 3
III.
Application to the Instant Case
For a third-party action to be enjoinable 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 products 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 conduct of
Quigley in the sense that Quigley actually manufactured the defective product. The statute itself
does not define the parameters of indirect liability. The Bankruptcy Court applied a “but for”
standard, pointing out that in the absence of a defective product, Pfizer committed no tort by
placing its name and logo on Insulag packaging. (Id. at 9.) In the absence of any relevant
statutory history, such a reading is a reasonable interpretation of so broad a term as indirect
liability.
The second element, that enjoinable suits “arise by reason of” Pfizer’s ownership of
Quigley, imposes a more demanding standard.4 As noted, the Bankruptcy Court acknowledged
3
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, 517 F.3d at 68.
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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
4
The language of the statute makes clear that claims alleging that Pfizer, as parent, is “indirectly liable for the
conduct of” its debtor-subsidary are only subject to a channeling injunction “to the extent such liability arises by
reason of . . . ownership.” 11 U.S.C. § 524(g)(A)(ii).
12
courts sought to vindicate the expectations of the consumer which do not turn on the intent of a
product’s sponsor or its affiliation with a manufacturer. Forry, 237 A.2d at 599. The labeling at
issue here first listed the Pfizer logo, followed by the Quigley logo, with the words
“Manufacturers of Refractories—Insulations—Paints” beneath. (See e.g. RA 1020.) This label
does not contain any mention of a parent-subsidiary relationship and could even be read as
saying that Pfizer is primarily responsible for producing the product because Pfizer’s name is
listed first on the label. A reasonable consumer could believe that “the name and the trademark
of [Pfizer], plus the reputation of [Pfizer], constitute an assurance to the user of the quality of the
product.” Forry, 237 A.2d at 599. Thus it appears that appellant here has stated § 400 claims
against Pfizer that are legally independent of any factual issue as to the nature of its affiliation
with Quigley or the reason why its name appears on Insulag packaging.
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, 517 F.3d at 55-56 (quoting In re Joint E. & S. Dist.
Asbestos Litig., 129 B.R. 710, 742 (E.D.N.Y. & Bankr. S.D.N.Y. 1991). Faced with a crushing
number of products liability suits, Manville filed for Chapter 11 bankruptcy in 1982. Id. at 56.
In response to the unique issues posed by asbestos litigation, the bankruptcy court oversaw what
at the time was a new entity—an asbestos trust that would pay both present and future claimants.
Travelers Insurance, Manville’s “primary insurer from 1947 through 1976, paid nearly $80
million into the bankruptcy estate” that went to pay the claims against Manville that Travelers
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had insured. Id. at 57. Later, many of those who were exposed to Manville asbestos separately
sued Travelers. Id. at 58. Plaintiffs alleged that Travelers had learned of the risks of asbestos
because it paid claims to asbestos sufferers in its role of Manville’s insurer, and had defaulted on
an independent duty to disclose to insured’s its knowledge of asbestos hazards in violation of
state insurance law. The bankruptcy court held, and the district court agreed, that these claims
were precluded by a channeling injunction issued by the bankruptcy court, id. at 62, which
barred all suits against Manville’s insurers “arising out of” Manville’s liability insurance
policies, and required potential plaintiffs to seek redress from the asbestos trust instead, id. at 57.
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 company
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 63. 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 Manville-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
14
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., 391 F.3d 190, 234 (3d Cir. 2004).
Ultimately, the court concluded that the district court lacked subject matter jurisdiction to enjoin
the claims against Travelers because Travelers was alleged to owe a duty to plaintiffs
independent of its obligations under the insurance policies. Id.
The Supreme Court reviewed this opinion in Travelers Indem. Co. v. Bailey and reversed
on narrow procedural grounds. 129 S.Ct. 2195 (2009). The Bailey Court explicitly stated that in
reversing, it “[did] not resolve whether a bankruptcy court . . . could properly enjoin claims
against nondebtor insurers that are not derivative of the debtor’s wrongdoing.” Id. at 2207. The
Second Circuit confirmed its analysis in Manville III on remand. Manville IV, 600 F.3d at 158.
It confirmed that courts did not have the subject matter jurisdiction in bankruptcy cases to enjoin
non-derivative claims against third parties and that § 524(g) likewise limited the scope of a
channeling injunction to derivative claims. Id. at 153. Applying the Circuit’s holding in the
Manville cases, this Court must determine whether as a matter of law, rather than merely as a
matter of fact, Pfizer’s liability is derivative of Quigley’s. Put another way, does Pfizer’s
liability under state law arise out of its ownership of Quigley, or does liability arise out of its
independent obligations as a sponsor of Insulag?
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.
15
The Bankruptcy Court reached the opposite conclusion by employing a sort of
commutative reasoning: § 400 liability is treated as a kind of vicarious liability under
Pennsylvania law (BR Opinion at 8 (citing Waters v. NMC-Wollard, Inc., 2007 WL 2668008, at
*7 (E.D. Pa. Sept. 5, 2007))), and vicarious liability claims are considered derivative under state
law (id. citing Mamalis v. Atlas Van Lines, Inc., 560 A.2d 1380, 1383 (Pa. 1989)), so § 400
claims are derivative under Manville III and IV and properly enjoinable pursuant to § 524(g) (id.
at 14). One difficulty within this analysis, however, is that the labels “derivative,” and
“vicarious” describe overlapping and amorphous concepts. The Second Circuit counseled in
Manville III that courts should look beyond facile labels and examine the underlying nature of
each claim.
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 because they defaulted on a duty to
sell a safe product and are judged to be in a better position to bear the cost than the consumer.
16
Section 400 liability reads another entity into the distribution chain: the company that did not
manufacturer a product, but held itself out as a sponsor. Any participant in the distribution chain
could be said to be held vicariously liable for the conduct of the original manufacturer. Yet in
another sense, each of these participants had an independent responsibility to the consumer not to
market or sell a defective product, and each can be held liable if it defaults on that responsibility.
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. Appellant 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
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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, 482 Pa. 228, 237 (1978) (internal citations omitted). In other words, “[w]here
the court pierces the corporate veil, the owner is liable because the corporation is not a bona fide
independent entity; therefore, its acts are truly his.” Wicks v. Milzoco Builders, Inc., 503 Pa. 614,
621 (1983). It is natural, then, that a plaintiff who seeks to pierce the corporate veil would have
to show some form of fraudulent behavior, whereas plaintiffs who allege § 400 liability should
be required to make a different or even less burdensome showing. The crux of this analysis is
not whether the predicate acts for one cause of action are better or worse, but rather whether
those claims derive as a legal matter from Pfizer’s ownership of Quigley.
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
hypotheticals, 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
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these forms of liability. But for a § 400 claim, it is legally irrelevant that Pfizer owned Quigley.
Section 400 claims often involve two companies that 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, 610 A.2d 454. When one examines the nature of the legal
claim, as opposed to merely the factual circumstances that gave rise to the claim, it becomes
apparent that the claim itself does not arise from Pfizer’s ownership of Quigley, and so § 524(g)
does not authorize an injunction.
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 argument. (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. 743 F.2d 984, 995 (3d Cir. 1984). It reasoned that the suit was “[a]t best
. . a mere precursor to the potential third party claim for indemnification by Pacor against
Manville” and held that the proceeding itself would have to directly affect the res of the estate
for jurisdiction to be appropriate. Id. Pacor is entirely on point. The § 400 claims that
appellant wishes to prosecute are legally almost identical to the claims against asbestos
distributors in Pacor.
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
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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. 391 FJd 190,232
(3d Cir. 2004). The Third Circuit noted that "it is doubtful whether shared insurance would be
sufficient grounds upon which to find related-to jurisdiction over independent claims against" the
non-debtor subsidiaries, but ultimately found that it had insufficient facts to decide the issue and
ruled on different grounds. ld. at 233. The Third Circuit did not decide the issue definitively,
however, and it is possible that the fact a parent-subsidiary relationship exists would affect the
Third Circuit's analysis. Nonetheless, even if the Court were to hold that these claims would
directly affect the res, this fact would only have bearing on the subject matter jurisdiction
analysis. It would not affect the Court's holding that the appellant's § 400 claims do not arise
out of Pfizer's ownership of Quigley and, therefore, do not fall within the scope of § 524(g).
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.
Dated: New York, New York
May 1.2,2011
~
I I \..r--------.
Richard I. Holwell
United Stated District Judge
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