Rose Ana Forbes Lemelle, Rose Ana Forbes Lemelle v. Universal Mfg. Corp., Universal Mfg. Corp., Werts Novelty Co., Inc., Usf & G

Citation: 18 F.3d 1268Docket: 93-4181

Court: Court of Appeals for the Fifth Circuit; May 27, 1994; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Rose Ana Forbes Lemelle filed a wrongful death lawsuit in federal district court against Universal Manufacturing Corp. and US Fidelity and Guaranty Co. concerning the deaths of her sons, Michael Tyrone Forbes and John Clarence Berchman Forbes. The district court granted summary judgment in favor of the defendants, prompting Lemelle to appeal. The Fifth Circuit Court of Appeals reversed the district court's judgment and remanded the case for further proceedings.

The factual background indicates that Winston Mobile Homes, Inc., incorporated in Alabama in 1965, became Winston Industries, Inc. in 1969. On September 9, 1982, Winston filed for Chapter 11 bankruptcy, which also involved its parent company, Shelter Resources Corp., and another subsidiary, Lancer Homes, Inc. The bankruptcy court consolidated the proceedings administratively. Subsequently, Winston's consumer products division was sold to American Consumer Products, Inc., and its operating assets were sold to Don N. Tidwell, who paid $3,137,000 in cash and assumed warranty liabilities of $2,399,000. After these transactions, Winston retained minimal assets and filed a reorganization plan, which was confirmed in August 1983, discharging Winston.

In 1985, Werts Novelty Co. acquired Winston from Shelter, leading to Winston's merger into Universal Chicken Farms, Inc., and later into Universal Manufacturing Corp. The operational structure of these corporate entities underwent multiple changes, culminating in Werts merging with Universal in 1987.

Rosemary Forbes initiated a lawsuit against Universal in the U.S. District Court for the Eastern District of Louisiana on January 17, 1986, citing diversity jurisdiction. The case was transferred to the Western District of Louisiana on August 13, 1986, where Forbes added United States Fidelity and Guaranty Company (USF. G) as a co-defendant. Forbes claimed that a fire on December 24, 1985, caused by the design and manufacture of a mobile home, resulted in the deaths of her sons, Michael and John. The mobile home had been produced by Winston in 1970.

Universal filed a motion for summary judgment on November 2, 1987, arguing that Forbes' claim was barred because it arose after Winston's discharge from bankruptcy in 1983, which released Winston from all claims. Universal contended that it and Werts were not successors to Winston and thus not liable for the decedents' deaths. They noted that Winston’s assets were sold at a court-ordered sale before its reorganization, leaving only a "corporate shell," which was later merged into Universal.

On December 23, 1987, the court granted Universal's motion, ruling that Winston's reorganization plan had discharged it from obligations and that Universal's merger with Winston meant it bore no liability. On January 25, 1988, USF. G sought summary judgment, which was granted on February 8, 1988, asserting that without liability from Universal, it had no obligation to pay damages to Forbes. Other claims against different defendants remained.

Forbes sought reconsideration of the court's decisions nearly four years later, on January 31, 1992, but the court reaffirmed its earlier rulings, stating that Universal was not a successor corporation liable for Winston's torts, as all manufacturing assets had been liquidated. Forbes filed a notice of appeal, which was dismissed due to the lack of a final certification. On January 14, 1993, Universal and USF. G obtained this certification, leading to the appeal.

The standard of review for summary judgment is de novo, meaning the appellate court evaluates the evidence and inferences favorably towards the non-moving party, using the same criteria as the district court. Summary judgment is appropriate when there are no genuine disputes regarding material facts, allowing the moving party to claim judgment as a matter of law.

Forbes appeals the district court's summary judgment in favor of Universal and USF. G on three grounds: (1) Universal, as Winston's successor through statutory mergers, can be liable for Winston's actions; (2) her causes of action arose after the bankruptcy court confirmed Winston's reorganization plan, so they were not discharged; and (3) USF. G is liable as Universal’s insurer at the time her claim arose.

The key argument from Forbes is that Winston was not fully liquidated during its Chapter 11 proceedings and continued as a restructured entity. She asserts that Universal, as a successor to Winston, can be held liable under state merger laws. In contrast, Universal argues that Winston's reorganization plan led to the liquidation of its consumer products division, defining it as a "corporate shell" post-reorganization and effectively precluding liability under successor theories. Universal further claims that Tidwell, who assumed Winston's liabilities during the asset purchase, is the liable party instead.

Chapter 11 aims to help financially distressed companies rehabilitate, but it can also involve liquidating reorganizations, as recognized in previous case law. A liquidating plan does not automatically mean the corporation is liquidated, as the approval of such a plan does not ipso facto dissolve the corporate entity.

Winston was not liquidated; instead, its reorganization plan allowed the board to decide on actions such as merging, consolidating, or dissolving only after court approval, indicating the intent for the corporation to continue as a viable entity. The disclosure statement emphasized the goal of a public sale of assets to preserve the business's viability. Winston remained a corporate entity under Alabama law until it merged with Universal Chicken Farms in September 1985, following Alabama and Delaware statutory provisions. Consequently, Universal is deemed a successor corporation of Winston and assumes all liabilities, including those related to Forbes' claim. Following the merger, Winston II emerged as a Delaware corporation, responsible for both Universal Chicken Farms' and Winston’s liabilities under state laws. Additionally, in November 1985, Winston II merged into Universal, further transferring liabilities. Universal claims that, per the purchase agreement with Tidwell for Winston's manufactured housing division, Tidwell expressly assumed Winston's liabilities, including those from pre-petition activities, asserting that any potential liability for Forbes' claim rests solely with Tidwell.

Universal's claim regarding Winston's accrued warranty liabilities is met with skepticism, particularly as Exhibit A from Winston's reorganization plan explicitly details these liabilities as of December 24, 1982. The validity of Winston's ultimate liability to Forbes as "accrued" is questionable under generally accepted accounting principles. Crucially, the terms of Tidwell's purchase and the relevant court order are not included in the record, and Universal, as the summary judgment movant, failed to provide necessary documentation to demonstrate the absence of genuine factual disputes. Consequently, the summary judgment on this basis was deemed improper.

Regarding the discharge of liabilities, Forbes contends that the district court mistakenly ruled that Winston's reorganization plan effectively discharged all obligations, including potential tort claims. This assertion is supported by Section 101(5) of the Bankruptcy Code, which broadly defines "claim" in terms of rights to payment, regardless of their status. However, the emergence of claims in bankruptcy is contingent upon non-bankruptcy substantive law. Under Louisiana law, a tort claim accrues when the injured party is entitled to sue, which Forbes argues occurred on December 24, 1985, after Winston's reorganization plan was confirmed. Legislative history indicates that the term "claim" in the Bankruptcy Code was intended to encompass all legal obligations of debtors, even those that are remote or contingent, thereby providing a broader interpretation than under prior bankruptcy law.

The interpretation of the term "claim" under the Code, particularly concerning unaccrued tort liability, varies among courts. Some courts, aligning with Forbes's view, assert that a "claim" does not exist in bankruptcy until a cause of action has accrued according to non-bankruptcy law, as seen in cases like *In re M. Frenville Co.* Other courts oppose this narrower interpretation, arguing it diverges from Congressional intent, concluding that a "claim" arises when the conduct leading to alleged liability occurs, even if the injury is not yet apparent. For instance, in *A.H. Robins Co.*, a plaintiff's claim related to the Dalkon Shield was deemed contingent upon the future manifestation of injury, which occurred post-petition. The Fourth Circuit ruled that her claim was pre-petition, thus subject to the Code's automatic stay. Similarly, the *Waterman* case established that a claim arose upon contact with asbestos, regardless of injury manifestation timing. Some courts, however, have determined that the existence of a claim hinges on whether a specific relationship existed between the claimant and the debtor at the time of the debtor's negligent conduct.

In In re Piper Aircraft Corp., 162 B.R. 619 (Bankr.S.D.Fla.1994), Piper Aircraft Corp. sought to reorganize under Chapter 11, facing a proof of claim filed for $100 million on behalf of potential future claimants, based on statistical projections of crashes and resultant injuries or damages. The court ruled this claim was not valid under section 101(5)(A) of the Code, emphasizing that the future claimants lacked identifiable relationships or events linking them to Piper's pre-petition conduct. The court articulated the inherent difficulties in recognizing claims for unidentified future victims, highlighting the impracticality and constitutional issues in providing adequate notice to such claimants during bankruptcy proceedings. The Piper decision underscored the distinction between theoretical claims to payment and the actual identification of claimants, suggesting that including such undefined future claims could lead to significant due process challenges.

A prepetition relationship, such as contact, exposure, or privity, between a debtor's conduct and a claimant is required for a claim under the Code, as established in prior case law. The court ruled that for a claim to exist, it must also be within the "fair contemplation of the parties" at the time of bankruptcy. In this context, the injury associated with the decedents' death occurred in December 1985, long after Winston's reorganization plan was confirmed, and there was no evidence of prior relationship or knowledge between Winston, the manufacturer, and the decedents or Forbes. This absence of evidence precludes recognizing Forbes' claims as discharged in Winston's bankruptcy proceedings. The court emphasized that even a broad interpretation of "claim" cannot apply where potential claimants were entirely unknown at the time of the bankruptcy filing. The ruling does not address whether a different outcome might arise with evidence of a pre-petition relationship. Ultimately, the district court's conclusion that Universal, a successor corporation, could not be liable for Forbes' claim was deemed erroneous, resulting in an improper summary judgment for Universal.

USF. G, the alleged insurer of Werts and Universal, sought summary judgment against Forbes, arguing that since Werts/Universal had been granted summary judgment, there could be no damages owed to Forbes for which USF. G was responsible. On February 8, 1988, the district court granted USF. G's motion. USF. G had provided a comprehensive general liability insurance policy to Werts from October 1, 1985, to October 1, 1986, renewing an earlier policy. During this period, Winston was a subsidiary of Werts. Following a merger on September 25, 1985, Winston became part of Universal Chicken Farms, also owned by Werts. Subsequently, on November 25, 1985, Winston II, the merger survivor, merged with Universal. Since Universal has been deemed potentially liable to Forbes, the status of USF. G as Werts/Universal's insurer hinges on the policy's terms effective October 1, 1985. Therefore, the district court's decision to grant summary judgment to USF. G was erroneous.

The judgment of the district court is reversed and the case is remanded for further proceedings. The decedents' biological siblings were dismissed from the lawsuit as improper parties. Forbes named additional defendants, but they are not part of this appeal. Universal's argument, based on Erie Lackawanna Ry. Co. v. Henning, that its restructuring constituted a liquidation, and thus it is not liable as a successor for Forbes' claim, is deemed misplaced. The Erie decision involved unique circumstances, including a hybrid restructuring under both Chapter 11 and the Rail Act, which does not apply to the current case. 

Relevant Alabama law states that a surviving or new corporation from a merger assumes all liabilities of the merged corporations unless specified otherwise. Similarly, Delaware law stipulates that all debts and obligations of the constituent corporations attach to the surviving corporation post-merger. Although Universal may still argue this issue on remand, skepticism exists regarding its ability to demonstrate that Tidwell agreed to assume future liabilities indefinitely. It is also noted that Tidwell’s assumption of certain liabilities does not preclude claim holders from seeking satisfaction from other parties involved. The terms of the agreement and court orders will be crucial. Under the Bankruptcy Act, the term "claim" was limited to the concept of provability, meaning the bankruptcy court could not sell assets free of contingent or unliquidated claims, including contingent tort claims.