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PCA's Innocent Victims Go Beyond Consumers

Julie Gallagher, Supermarket News

March 16, 2009

Creditors owed money by the Peanut Corp. of America were scheduled to convene last Thursday for the start of the peanut processor's Chapter 7 bankruptcy proceedings. As part of what experts estimate could be a yearlong process, PCA's assets will be identified, converted to cash and distributed.

Among those with their hands out are several Whole Foods Markets, which sold bulk nuts that came from PCA, and Orchard Valley Harvest, which processed the private-label peanuts used in self-serve peanut grinders at Safeway's “Nut Huts.”

These companies shouldn't be holding their breath, though, since, in the eyes of the court, secured creditors — such as those with liens against the company — take priority over the likes of Whole Foods and Orchard Valley Harvest, who've been relegated to the unsecured, non-priority claims file. Experts estimate that there'll be little, if any, money left for companies like these.

But no worries for PCA. More than 3,400 tainted products, 638 victims and nine deaths later, the company that knowingly shipped tainted product, according to the FDA, is still putting its needs first. It's set aside $100,000 for legal representation for the criminal case launched against it by the FBI, said published reports.

But the real salt in the wounds of those who innocently distributed tainted product may be yet to come. That's because PCA's personal injury insurer has raised a very logical question about whether it should have to pay claims resulting from PCA's negligence. If the courts say no, manufacturers, distributors and even supermarkets that so diligently removed a seemingly endless list of items from their shelves could be on the hook for damages sought on behalf of the victims (click on "Chain Reaction" for the story).

That's because some states have what's called “chain of distribution liability,” personal injury attorney Bill Marler told me. It means that all members of the supply chain are held strictly liable to the victim. It's Marler's practice to go after the company that is the most at fault, but if need be, he'll work his way up the supply chain to help supplement damages sought.

As it stands, he's representing about 100 victims, 90 of which became ill after eating Kellogg's products. The remainder were either nursing home residents who became sick after eating King Nut peanut butter, or they've not yet pinpointed which of the peanut products they ate made them sick. Marler is suing Kellogg's and King Nut in addition to PCA, since PCA's personal injury policy of $12 million to $24 million will not cover all he's seeking.

If PCA's insurer is taken out of the equation, he'll have to move even further up the supply chain, beyond Kellogg's and King Nut.

“That could include grocery stores in certain states,” since they distributed product, Marler said.

The “holding out” theory of law could also come into play. It means that when a third party, such as a retailer, puts its name on a store-brand product, it's holding itself out to the consumer as its manufacturer.

“The label doesn't likely say ‘Was made for us by a really crappy company in Blakely, Ga.,’” Marler explained. “The consumer thinks they're buying the retailer's brand.”

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