For The Defense, November 2012 - DRI Today

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 asbestos- containing 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
asbestos- containing 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
asbestos- related 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
asbestos- related 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-
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