Bankruptcy follows salmonella outbreak

The company linked to a national salmonella outbreak, Peanut Corp. of America, filed for Chapter 7 bankruptcy Friday in federal court in Lynchburg, Va., court documents show.

The filing comes at the end of a week in which problems have continued to mount for Lynchburg-based Peanut Corp., whose Blakely peanut processing plant was shut down last month after federal health officials traced the salmonella to the plant.

In its filing, the company said its assets were between $1 million and $10 million, and its liabilities were between $1 million and $10 million.

Andrew Goldstein, the Roanoke, Va., attorney who filed the bankruptcy petition said “it was kind of almost an inevitability because all their business opportunities shut down” in the weeks since the Blakely plant was linked to the salmonella outbreak.

“The snowball just got bigger and bigger, and we had no choice,” Goldstein said.

The salmonella outbreak so far has sickened more than 630 people and may have caused the deaths of nine people. It has led to one of the largest product recalls in the nation’s history, with more than 2,000 products recalled thus far, according to the FDA.

The company could not be reached for comment and did not post any statement regarding the development on its Web site.

Legal experts said the bankruptcy may alter the landscape of lawsuits and liability involving the company, already the subject of damage claims in federal and state courts, but it will not protect them against salmonella litigation.

Frederick Tung, a professor of corporate, securities law and bankruptcy at Emory Law School in Atlanta, said the bankruptcy filing would give Peanut Corp. protection from all creditors —- including “tort creditors … who are harmed by having eaten tainted peanut butter.”

Under bankruptcy liquidation, creditors, including those who had filed damage claims against the company, “would not be paid in full for their damages,” said Tung. “Instead they would be paid some fraction of their claims.”

Future lawsuits filed against the company could also be dealt with in the bankruptcy, said Tung.

Where bankruptcy may lessen the burden on Peanut Corp. in having to pay claims of damages to salmonella victims, it may increase the burden on Peanut Corp. customers —- the companies that used its peanut butter and paste to make their products.

“The bankruptcy of PCA will slow the process down slightly,” said Seattle food-borne illness attorney Bill Marler, who has filed six claims against Peanut Corp.

“But the victims will be able to be compensated from either PCA’s insurance policy or Kellogg or King Nut,” which made crackers and peanut butter the plaintiffs claim sickened them with salmonella poisoning, Marler said.

Earlier this week, Peanut Corp. was the focus of a congressional subcommittee hearing on the outbreak. Company President Stewart Parnell and Blakely Plant Manager Sam Lightsey declined to testify, invoking their Fifth Amendment right not to incriminate themselves.

According to documents and testimony presented at the hearing, PCA kept shipping products to unsuspecting customers even after it learned the products were tainted with salmonella, according to e-mails and other documents released by the House Subcommittee on Oversight and Investigations.

On Monday, agents from the FBI spent most of the day at the Blakely plant.

That same day, PCA voluntarily shut down a second peanut plant, in Plainview, Texas, after a private lab told the company it discovered possible salmonella in a sample of products Sunday night.