For The Defense, November 2012 - DRI Today

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Product Liability ation exceptions when trying to establish that successor liability should apply. The focus of the de facto merger analysis is on the similarity of business operations of the predecessor and the successor companies. If a successor retains continuity of certain aspects of the predecessor company’s general business operations and obligations, such as management, personnel, Which state’s law applieswill play a significant role in determining whether a company does or does not have asbestos- related successor liability. business location and shareholders, and the two companies reasonably promptly dissolved the predecessor’s business operations, a court likely will find that the two companies executed a de facto merger. See Philadelphia Electric Co. v. Hercules, Inc., 762 F.2d 303, 310 (3d Cir. 1985); T.H.S. Northstar Assocs. v. W.R. Grace & Co., 840 F. Supp. 676 (D. Minn. 1993). Although courts have developed a four-part test incorporating these factors to assess whether a de facto merger exists, the analysis is less than scientific, and how a court will rule is not easy to predict. Indeed, several Minnesota courts have issued conflicting opinions on whether the acquisition of Zonolite Company by W.R. Grace resulted in successor liability. In T.H.S. Northstar Associates, Northstar claimed that it had been forced to remove and replace Monokote asbestos fireproofing at considerable cost and that W.R. Grace should be held liable for those costs as a successor in interest to Zonolite Company. Under the purchase agreement, W.R. Grace acquired substantially all of Zonolite’s properties and assets, including its business as a going concern, its name, know-how, formulas, and contracts, in exchange solely for a small part of the common stock of 32 ■ For The Defense ■ November 2012 W.R. Grace. Under the agreement Zonolite was to dissolve and liquidate as soon as practicable after closing the deal, and W.R Grace assumed all Zonolite’s debts and liabilities existing on the date of the closing. W.R. Grace argued that the transaction was an asset purchase rather than a merger because Zonolite remained in business for 17 months after the closing and retained assets of over $200,000. Furthermore, even though the agreement required W.R. Grace to retain Zonolite’s president for five years, W.R. Grace did not add any Zonolite representatives to its board, and Zonolite shareholders held a mere 2.27 percent of W.R. Grace’s stock after the acquisition. Despite that in an earlier Minnesota district court decision in East Prairie R-2 School District v. U.S. Gypsum Co., 813 F. Supp. 1396 (E.D. Mo. 1993), the court found that W.R. Grace was not a successor in interest to Zonolite, the Northstar court held that the evidence satisfied each element of a de facto merger, thereby making W.R. Grace liable for the cleanup associated with Zonolite’s asbestoscontaining fireproofing under Minnesota law. The Northstar court viewed the East Prairie court’s application of the de facto merger doctrine as too narrow; the East Prairie court grounded its decision in two facts: “the small percentage of W.R. Grace shares held by former Zonolite stockholders and the lack of mutual officers and directors.” The Northstar court, instead found the continuity of shareholders, rather than the percentage of ownership, more significant to a finding of a de facto merger. The court also found it important that Zonolite did not remain at arms’ length with W.R. Grace after the litigation, but instead W.R. Grace created a “Zonolite Division” and continued the operations of Zonolite through the use of its expertise and personnel. The mere continuation exception to the rule against successor liability in asset purchases is based on the premise that despite the change in name and other characteristics the successor corporation has in essence the same identity as the predecessor corporation. Tift v. Forage King Indus., Inc., 322 N.W.2d 14, 16–17 (Wis. 1982); Sculptchair, Inc. v. Century Arts, Ltd., 94 F.3d 623, 630 (11th Cir. 1996); Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451, 1458 (11th Cir. 1985) (a “mere continuation of business” will be found where the purchasing corporation is merely a “new hat” for the seller with the same or similar management and ownership). Unlike the de facto merger exception, the authors have not identified a widely accepted formula listing the elements that courts must identify to determine whether a successor corporation merely continued the operations of the predecessor. Instead, courts have considered various factors when trying to identify business continuity, including the circumstances surrounding the successor’s purchase of the assets of the predecessor and the degree of continuity between the shareholders, directors, and officers of the successor corporation and the predecessor. Evolving Theories of Successor Liability Courts traditionally have applied the de facto merger or the mere continuation exceptions in product liability cases very narrowly and reluctantly. As a result, other theories of successor liability have evolved that have provided more fertile ground for asbestos plaintiffs in jurisdictions that have adopted them. The continuous enterprise exception was developed as a way to broaden the restrictive mere continuation exception. It emphasizes continuation of the entire business operation rather than the mere continuity of the corporate entity. Courts consider factors such as (1) whether there is a basic continuity of the enterprise of the seller corporation, including the retention of key personnel, assets, general operations, and corporate name; (2) whether the seller corporation ceases business operations, liquidates, and dissolves soon after the sale; (3) whether the purchasing corporation assumes those liabilities and obligations of the seller that are ordinarily necessary for continuing the normal business operations of the seller corporation; and (4) whether the purchasing corporation holds itself out as in effect a continuation of the seller corporation. Courts that have supported the development of this doctrine have reasoned that this approach places the risk associated with a defective product on the manufacturer rather than the consumer, and the successor corporation should be made to bear some of the burden of its predecessor after receiving the benefit of continuing the predecessor’s business.
Another nontraditional exception adopted in some jurisdictions is the product- line exception first enunciated in Ray v. Alad Corp., 560 P.2d 3 (Cal. 1977). This exception applies to a purchasing corporation that continues to produce and to sell the line of products previously manufactured and sold by the predecessor corporation, imposing successor liability on that purchasing corporation. Some courts may find successor liability even if the successor was not involved in the manufacture or the distribution of the defective product but the successor purchased substantially all the manufacturing assets and undertook essentially the same manufacturing operation as the selling corporation. Ramirez v. Amsted Indus., Inc., 431 A.2d 811 (N.J. 1981). The analysis reviews whether (1) the successor corporation has acquired all of the predecessor’s assets, leaving no more than a mere corporate shell; (2) whether the successor has held itself out to the general public as a continuation of the predecessor by producing the same product line under a similar name; and (3) whether the successor has benefitted from the goodwill of the predecessor. Martin v. Abbott Labs, 689 P.2d 368, 387 (Wash. 1984). While the traditional theories of successor liability were developed in the framework of the law of corporations, the product- line exception emerged as a way for courts to find successor liability in the framework of product liability litigation. The court in Ray found the following considerations supported the decision to expand the exceptions to the rule against successor liability: (1) the successor’s acquisition of the business almost entirely destroyed the plaintiff’s remedies against the original manufacturer; (2) the successor had the ability to assume the original manufacturer’s risk- spreading model; and (3) it appeared fair to require the successor to assume responsibility for defective products as a burden of enjoying the original manufacturer’s goodwill, which the successor did enjoy in continuing to operate the business. Ray, 560 P.2d at 8–9; see also Garcia v. The Coe Mfg. Co., 933 P.2d 243, 248– 50 (N.M. 1997) (adopting the product- line exception); Martin v. Abbott Labs., 689 P.2d at 388 (same). Not all jurisdictions have adopted the product- line exception to the rule against successor liability, and some will focus only on the four traditional exceptions. Currently, only a minority of courts takes the product- line approach, and several courts have expressly declined to adopt it, reasoning that expanding successor liability through this approach belongs to the legislatures and not to the courts. See, e.g., Semenetz v. Sherling & Walden, Inc., 851 N.E.2d 1170 (N.Y. 2006); Winsor v. Glasswerks PHX, LLC, 63 P.3d 1040 (Ariz. Ct. App. 2003)); Downtowner, Inc. v. Acrometal Prods., Inc., 347 N.W.2d 118 (N.D. 1984). Armed with the traditional and emerging exceptions to the rule against successor liability in asset transactions, plaintiffs’ attor- Forensic Engineering Forensic Architecture Industrial Hygiene & Safety Fire & Arson Investigation Product Liability Investigation & Analysis Construction, Design & Materials Defects Forensics Cost Estimating EXPERT FORENSICS EXPERT SOLUTIONS Nelson Architectural Engineers, Inc. (NAE) is a globally recognized forensics and consulting firm specializing in Forensic Engineering, Forensic Architecture, Industrial Hygiene and Safety, and Cost Estimating 1.877.850.8765 www.nae-us.com For The Defense ■ November 2012 ■ 33
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