For The Defense, November 2012 - DRI Today

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Product Liability Asbestos Litigation By Tanya M. Lawson Successor Liability and Current Trends To guarantee longterm viability, successor companies must continue the delicate dance required to protect against tort liability that they did not create. Those familiar with the mammoth that is asbestos litigation are aware of the many challenges that defendant companies face, not the least of which include runaway verdicts and substantial litigation costs. Many companies have taken draconian steps to limit costs and have sought ways to exit this litigation, whether graciously or not, to avoid the least gracious exit of all, bankruptcy— an exit that this litigation has forced many before to take. At the same time, resourceful plaintiffs’ attorneys have explored alternative ways to expand liability to companies that never manufactured or distributed asbestos products. These defendants may have had minimal connections to the now- defunct companies that manufactured and sold asbestos, but plaintiffs’ attorneys have used traditional and other evolving exceptions to the rules of successor liability to take aim at these defendants, sometimes successfully. In August of this year, a plaintiff in Texas sued Kraft Foods North America Inc. for damages associated with her husband’s exposure to asbestos while working for a Kraft Foods predecessor. The net of asbestos litigation has broadened rather than contracted, defying expectations, and it has continued to broaden, forcing companies that were not previously caught in the web of asbestos to join the fray. Against this backdrop policymakers have expended some effort to find ways to protect companies that acquired other companies with direct or tangential links to the asbestos industry, and some states have enacted legislation intended to limit this liability. Crown Cork & Seal Co.’s experience highlights the dilemma faced by successor companies that led to this legislative response. The Crown Cork & Seal Dilemma Crown Cork & Seal, which never manufactured or sold asbestos products, was one of many defendants sued by Barbara Robinson and her husband John Robinson after he was diagnosed with mesothelioma. See Robinson v. Crown Cork & Seal Co., 335 S.W.3d 126 (Tex. 2010). Crown was sued as a successor to Mundet Cork Corporation, which manufactured asbestos insulation to which ■ Tanya M. Lawson is a partner in the Fort Lauderdale, Florida, office of Sedgwick LLP. She defends clients sued due to injuries sustained from allegedly defective products and has extensive experience defending asbestos claims in Florida as well as in the asbestos multidistrict litigation in the Eastern District of Pennsylvania. The author wishes to thank Sedgwick attorneys Lenore Smith, Vacharaesorn Vivacharawongse, and Keshia Rodriguez for their contributions to this article, and summer associates, Freddy Munoz and Jewell Riddick for their research assistance. 30 ■ For The Defense ■ November 2012
John Robinson was allegedly exposed while he served in the United States Navy. In 1963, Crown’s predecessor acquired a majority of the stock in Mundet. Within a few months Mundet sold all its assets related to insulation, and two years later, in February 1996, Mundet and Crown merged. Crown acknowledged that as a successor it succeeded to Mundet’s liabilities under traditional successor liability principles. Although Crown acquired Mundet for only around $7 million, by the early 2000s, Crown had paid over $400 million in asbestos settlements, and Mundet’s insurance coverage totaled about $3.7 million. To say the least, Crown executives suffered buyer’s remorse. This was not, however, either the first or the last time that a successor company has been saddled with the weight of costly asbestos litigation. Many companies have structured their acquisitions carefully to minimize liability for product defects that may be associated with a predecessor’s product. Successor Liability Theories Used in Asbestos Litigation Under traditional principles of corporate law, the nature of a transaction determines whether a corporate successor assumes the liabilities of its predecessor. If the parties transfer the corporate enterprise through a merger or a consolidation, the successor assumes the predecessor’s liabilities, including product liability claims. If the successor purchases the assets of the predecessor, however, the successor does not assume the predecessor’s liabilities unless (1) the successor expressly or impliedly assumes those liabilities; (2) the transaction is a de facto merger; (3) the successor is considered a “mere continuation” of the predecessor; or (4) the successor executed the transaction fraudulently to escape liability. Call Ctr. Techs., Inc. v. Grand Adventures Tour, 635 F.3d 48, 52 (2d Cir. 2011); Patin v. Thoroughbred Power Boats, 294 F.3d 640, 649 (5th Cir. 2002). Knowing the risks associated with merging with companies involved in the asbestos industry, many companies have structured their acquisitions carefully to minimize liability for product defects that may be associated with a predecessor’s product. Structuring a deal as an asset purchase rather than as a merger or a stock purchase is one method that companies have used to try to avoid the tort liabilities of predecessor companies. Even though companies may structure their transactions as asset purchases, however, they may still find themselves holding the bag if plaintiffs can prove that one of the exceptions to excusing successor liability applies. In Schmoll v. ACandS, Inc., 703 F. Supp. 868 (D. Or. 1988), the court found that although the asset restructuring of Raybestos- Manhattan, Inc., a manufacturer of asbestoscontaining products, met the technical formalities of corporate form, the restructuring was designed with the improper purpose of escaping asbestosrelated liabilities. In that case, Raymond Schmoll brought a products liability action for alleged exposure to asbestos from products manufactured by the defendants, including Raymark Industries, Inc., which manufactured and distributed asbestoscontaining energy absorption and transmission products. In the 1970s, Raymark Industries, previously known as Raybestos- Manhattan, Inc., was named in an everincreasing number of asbestos cases and, as a result, suffered a precipitous decline in net worth. Through a complicated series of transactions taking place over a six-year period, Raymark Corporation, a holding company that operated through its subsidiary, Raymark Industries, reorganized its corporate structure, ultimately transforming Raybestos Manhattan into Raymark Industries and Raytech. In doing this, ownership of the two historically lucrative businesses of Raymark Industries was transferred to Raytech, and other restructuring efforts freed Raytech of the drain of the asbestos litigation. Schmoll took the position that Raytech should be held liable for Raymark Industries’ production, sale, and distribution of asbestoscontaining products because Raytech and Raymark Industries were one and the same corporate entity. The court stated that the defendants and their counsel “engineered an elaborate, apparently unique transfer of corporate assets” but that both the “context of the corporate restructuring and the participants’ statements show[ed] that the elaborate transfer of assets was designed to escape liability.” Id. at 873. The court looked closely at the financial issues facing Raymark Industries at the time of the restructuring, the backlog of asbestos cases pending against Raymark Industries, the total value of the pending claims and damages awarded, and the high percentage of its insurance coverage already used. The court also looked at statements made to shareholders about the purpose of the restructuring, which included the desire to protect shareholder investment and limit exposure for asbestos claims to businesses currently threatened. After completing the analysis the court held that there was no reason to respect the integrity of the transactions because it was clear that they were designed with the improper purpose of escaping asbestosrelated liabilities. Traditional Exceptions Successor liability has served as both a sword and as a shield in asbestos litigation, depending on the circumstances. In a traditional context, plaintiffs have sued successor defendants when the original manufacturer of the a product at issue no longer existed; when it was unclear which one was the responsible entity, the predecessor or successor; or when the successor simply was the lower hanging fruit due to accessibility or solvency. In those situations, the plaintiffs have had to prove that one of the four previously enunciated exceptions to the rule excusing successor liability applies. The rules in play vary from state to state, and which state’s law applies will play a significant role in determining whether a company does or does not have asbestosrelated successor liability. Many states have at minimum adopted the four traditional exceptions to excusing successor liability. However, plaintiffs’ attorneys in asbestos cases typically focus on the de facto merger and mere continu- For The Defense ■ November 2012 ■ 31
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