(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in
the interests of brevity, portions of any opinion may not have been summarized).
Argued January 21, 1999 -- Decided July 29, 1999
O'HERN, J., writing for a majority of the Court.
This appeal involves the question of whether a corporation that acquires its predecessor's product line through
a bankruptcy sale can be liable on a products liability claim that arose prior to the transfer of assets and liabilities.
Justin Lefever was injured in 1989 when a forklift he was operating tipped over and caused him serious
injuries. The Lull Engineering Corporation (Lull I) manufactured and distributed the forklift. Through a series of
transfers, Lull I's assets were acquired in 1986 by the Lull Corporation (Lull II). In 1992, Lull II went into bankruptcy.
In November 1993, the bankruptcy trustee transferred substantially all of Lull II's assets to Lull Industries, Inc. (Lull
III).
Lefever sued Lull I on September 24, 1990, in the Superior Court, Law Division, Middlesex County. During
discovery, Lefever learned that Lull II had acquired the assets of Lull I and that Lull II had, in turn, transferred its assets
to Lull III through a bankruptcy sale. Lefever joined Lull III, but not Lull II, as a party defendant. Lull III moved to
dismiss Lefever's claim on the ground that its purchase of Lull II's assets through a bankruptcy sale was free and clear
of any successor-liability claims. The trial court granted Lull III's motion.
On appeal, the Appellate Division reversed. It found that Lefever had sued the manufacturer (Lull I) and not
the bankrupt Lull II. The bankruptcy did not affect Lefever's claim against Lull III as the successor to the original
manufacturer and distributor.
The Supreme Court granted Lull III's petition for certification.
HELD: Under the circumstances of this case, a successor corporation that acquired its predecessor's assets through a
bankruptcy sale is liable in tort under the "product-line" exception adopted by the Court in Ramirez v. Amsted
Industries,
86 N.J. 332 (1981).
1. New Jersey is one of a minority of states that impose a "product-line" exception to the general rule that successor
corporations are not liable for claims brought against a predecessor. (pp. 5-11)
2. The supremacy of federal bankruptcy law will prevent the application of a state's common law to claims against a
successor corporation that has acquired its assets through a bankruptcy sale, but only if the bankruptcy proceedings have
actually dealt with the claim. Neither §363 of the Bankruptcy Code nor a Chapter 11 reorganization under the Code
will categorically insulate the purchasing enterprise from liability on a products liability claim that was not dealt with
in the bankruptcy proceedings. (pp.11-19)
3. Lefever's claim was not dealt with in the Lull II bankruptcy proceedings. The sale of assets proceeded under §363
and Lefever had no "interest" in Lull II within the meaning of that section. (pp.19-20)
4. The Court's policy on successor corporation liability rests on principles of justice and fairness. Imposition of
product-line liability serves the public interest in spreading the risk for the costs of injuries from defective products.
Furthermore, recourse to successor corporations is appropriate because they enjoy the benefits of an established
manufacturer's trade name and good will. (pp. 20-26)
5. Although the Court's view of successor liability may not enjoy universal or widespread acceptance, it is appropriate
for the courts to deal with the issue. (pp. 26-28)
6. A successor corporation should not be able to have it both ways -- trading on the good will of a predecessor generated
by a long-standing customer base, yet disavowing responsibility to those same customers when an injury occurs. In this
case, further proceedings will establish Lull's comparative responsibility for the injuries sustained by Lefever. (pp. 29
30)
The judgment of the Appellate Division is AFFIRMED.
POLLOCK, J., dissenting, is of the view that when an injury occurs before bankruptcy and the injured party had the
opportunity to file a claim in the bankruptcy proceedings, a court should weigh the bankruptcy when striking the balance
of interests used in applying the "product line" exception. The imposition of liability on an entity that has purchased
a bankrupt's assets "free and clear from any interests in property" skews the balance of interests in the product line
exception.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER and STEIN join in JUSTICE O'HERN's
opinion. JUSTICE POLLOCK has filed a separate dissenting opinion in which JUSTICES GARIBALDI and
COLEMAN join.
SUPREME COURT OF NEW JERSEY
A-
211 September Term 1997
JUSTIN LEFEVER,
Plaintiff-Respondent,
v.
K.P. HOVNANIAN ENTERPRISES, INC.,
LULL ENGINEERING CO., INC. and
GILES & RANSOME, INC.,
individually and t/a RANSOME
LIFT,
Defendants,
and
LULL INDUSTRIES, INC.,
Defendant-Appellant.
Argued January 21, 1999 -- Decided July 29, 1999
On certification to the Superior Court,
Appellate Division, whose opinion is
reported at
311 N.J. Super. 1 (1998).
Steven I. Greene argued the cause for
appellant (Mr. Greene, attorney; Mr. Greene
and Ira S. Broadman, a member of the
Arizona bar, on the briefs).
Dennis S. Brotman argued the cause for
respondent (Brotman & Graziano, attorneys).
The opinion of the Court was delivered by
O'HERN, J.
This appeal concerns the meaning of the product-line
exception in Ramirez v. Amsted Industries Inc.,
86 N.J. 332
(1981), when a successor corporation acquires the predecessor's
product line through a bankruptcy sale.
The general rule of corporate-successor liability is that
when a company sells its assets to another company, the
acquiring company is not liable for the debts and liabilities
of the selling company simply because it has succeeded to the
ownership of the assets of the seller. Traditionally, there
have been only four exceptions: (1) the successor expressly or
impliedly assumes the predecessor's liabilities; (2) there is
an actual or de facto consolidation or merger of the seller and
the purchaser; (3) the purchasing company is a mere
continuation of the seller; or (4) the transaction is entered
into fraudulently to escape liability. 15 William & Fletcher,
Cyclopedia of the Law of Corporations § 70, 122 nn.9-15 (1990).
New Jersey, along with several other jurisdictions, has
adopted a product-line exception to the general rule. Under
that doctrine, by purchasing a substantial part of the
manufacturer's assets and continuing to market goods in the
same product line, a corporation may be exposed to strict
liability in tort for defects in the predecessor's products.
The question in this appeal is whether the product-line
exception is applicable when the successor has purchased the
predecessor's assets at a bankruptcy sale. Our task is made
easier in this case because the bankrupt was not the
manufacturer of the defective product, but rather an
intermediary owner of the product line against whom no claim
had been made by the injured party.
The facts of this case are more fully set forth in the reported opinion of the Appellate Division, 311 N.J. Super. 1 (1998). For convenience, we shall eliminate reference to certain intermediate business entities used by the parties. Conceptually, there were three distributors of the product line. Plaintiff, Justin Lefever, was injured in 1989 when a forklift he was operating tipped over and caused him to suffer crushing injuries. The Lull Engineering Corporation, Inc., whom we shall refer to as "Lull I," had manufactured and distributed the forklift. Through a series of transfers, Lull I's assets were acquired in 1986 by Lull Corporation (“Lull II”). In 1992, Lull II went into bankruptcy. In November 1993, the trustee in the bankruptcy proceedings conveyed to Lull Industries Inc. (“Lull III”), interests in substantially all of Lull II's assets.
On September 24, 1990, plaintiff sued “Lull Engineering Co., Inc.” in the Superior Court, Law Division, Middlesex County.See footnote 11 Plaintiff never sued Lull II. During the course of discovery, plaintiff learned that Lull II had acquired the assets of Lull I, and that Lull II had transferred its assets to Lull III through a bankruptcy sale. Plaintiff joined Lull III as a party defendant. Lull III moved to dismiss plaintiff's claim on the basis that the bankruptcy sale was free and clear of any interests in the property, including any successor-liability claims. The trial court granted Lull III's motion.
On appeal, the Appellate Division reversed. The Appellate Division found that plaintiff had brought his complaint against the manufacturer and current defendant, Lull I, rather than against Lull II, the bankrupt. 311 N.J. Super. at 7. The court noted that “plaintiff does not claim an interest in the property of Lull [II]” and the bankruptcy court order “does not affect plaintiff's products liability claim against Lull [III] as a successor corporation of the Lull Engineering entities.” Id. at 9. The court found that “Lull [III] has not established, and it is unlikely it could establish, that plaintiff would have received full satisfaction for his damages had he filed a claim against Lull [II] in the Bankruptcy Court.” Ibid. We granted Lull III's petition for certification, 156 N.J. 387 (1998).
As the comparable doctrine of privity once sheltered the
manufacturers of products from consumer claims, the doctrine of
corporate-successor liability is an example of a doctrine
previously "resting on formalistic and conceptual foundations"
that has become a doctrine "with functional and pragmatic roots
rather than conceptual roots." Phillip I. Blumberg, The
Continuity of the Enterprise Doctrine: Corporate Successorship
in United States Law, 10 Fla. J. Int'l L. 365, 366-67 (1996).
The new doctrines "focus[] on the economic realities of the
enterprise rather than on the [involved] entity. . . ." Id. at
367. In Ramirez, supra, Justice Clifford traced the evolution
of the law of corporate-successor liability for defective
products. “[T]he traditional corporate approach [to successor
liability] has been sharply criticized as being inconsistent
with the rapidly developing principles of strict liability in
tort and unresponsive to the legitimate interests of the
products liability plaintiff.” Ramirez, supra, 86 N.J. at 341.
The traditional rule "was designed for the corporate
contractual world where it functions well." Polius v. Clark
Equipment Co.,
802 F.2d 75, 78 (3d Cir. 1986). "Strict
interpretation of the traditional corporate law approach leads
to a narrow application of the exceptions to non-liability, and
places unwarranted emphasis on the form rather than the
practical effect of a particular corporate transaction."
Ramirez, supra, 86 N.J. at 341-42.
The first crack in the traditional rule of non-liability
occurred in 1974. See Knapp v. North Am. Rockwell Corp.,
506 F.2d 361 (3d Cir. 1974), cert. denied,
421 U.S. 965,
95 S. Ct. 1955,
44 L. Ed.2d 452 (1975). In Knapp the Third Circuit
eliminated the requirement in de facto mergers that the selling
corporation dissolve after the transfer of the assets. The
court said, “Pennsylvania courts have emphasized the public
policy considerations served [in products liability law] by
imposing liability on the defendant rather than formal or
technical requirements.” Id. at 367. Thus, although the
selling corporation had not dissolved after the transfer of
assets, the court observed that if the successor were not held
liable, the plaintiff would be left without a remedy. The
plaintiff in Knapp had been injured when his hand was caught in
a “Packomatic” machine manufactured by the selling corporation.
Although the Third Circuit recognized that neither the
predecessor nor the successor was in a position to avoid the
accident, it concluded that the successor was the party better
able to spread the burden of the loss. Id. at 370.
In Turner v. Bituminous Casualty Co.,
244 N.W.2d 873
(1976), the Michigan Supreme Court relaxed the traditional rule
that would not have imposed liability. The Michigan court
expanded the “mere continuation” exception to the traditional
rule of non-liability. Id. at 892-94. After observing that
there would have been liability under the de facto merger
exception if the acquisition had been made for stock rather
than cash, the court held that it could find no reason to treat
acquisitions for stock or cash differently. It found that the
analysis in Knapp should also apply to cash transactions, and
concluded that it would be proper to impose liability on the
purchasing corporation after an evaluation of such factors as
the ownership and management of the successor's corporate
entity and its personnel, physical location, assets, trade
name, and general business operation.
"[A]s to the injured person, distinctions between types of
corporate transfers are wholly unmeaningful." Powers v. Baker
Perkins, Inc.,
285 N.W.2d 402, 405 (Mich. Ct. App. 1979). The
functional result is the same whether the transfer results from
(1) a traditional merger accompanied by an exchange of stock of
the corporations, or (2) a de facto merger brought about by the
purchase. The inquiry is framed not by the manner in which the
successor corporation acquires the assets, but rather by what
it does with the assets after it acquires them.
In 1977, the year after the decision in Turner, supra, the
California Supreme Court adopted the "product line exception."
See Ray v. Alad Corp.,
560 P.2d 3 (Cal. 1977). In Ray, the
buyer had purchased the seller's physical plant, manufacturing
equipment, inventories, trade name, good will, and records of
manufacturing designs. The buyer continued the employment of
the factory personnel and hired the seller's general manager as
a consultant. The buyer also continued to manufacture the same
product line under the same name and held itself out to
potential customers as the same enterprise. The California
Supreme Court concluded “that a party [that] acquires a
manufacturing business and continues the output of its line of
products under the circumstances here presented assumes strict
tort liability for defects in units of the same product line
previously manufactured and distributed by the entity from
which the business was acquired." Ray, supra, 560 P.
2d at 11.
Its justification for imposing strict liability
rest[ed] upon (1) the virtual destruction
of the plaintiff's remedies against the
original manufacturer caused by the
successor's acquisition of the business,
(2) the successor's ability to assume the
original manufacturer's risk-spreading
[role] and (3) the fairness of requiring
the successor to assume a responsibility
for defective products that was a burden
necessarily attached to the original
manufacturer's good will being enjoyed by
the successor in the continued operation of
the business.
The drafters of the Restatement (Third) have rejected the product-line exception adopted in New Jersey. See Restatement (Third) of Torts: Products Liability, § 12, comment b. The reporters to the Restatement observed that exceptions to the general rule against holding successors liable are not unique to products liability law and the Restatement (Third), but that the exceptions are designed to preserve fundamental principles of debtor-creditor law. Id. at comment a. It strikes us as somewhat anomalous that after the long journey from MacPherson v. Buick Motor Co., 111 N.E. 1050 (N.Y. 1916), the drafters of the Restatement (Third) would frame the issue in terms of contract law, not products liability law.
Not surprisingly, “a strong minority of states take less restrictive positions on successor liability than the position set forth in the Restatement (Third).” Richard L. Cupp, Jr., Liability of Successor for Harm Caused by Defective Products Sold Commercially by Predecessor, 8 Kan. J.L. & Pub. Pol'y 113, 114 (1998). “Thirteen jurisdictions, representing 43 percent of the United States' population, follow either the product line approach or the continuity of enterprise approach.” Ibid.See footnote 22
Does the supremacy of federal bankruptcy law prevent the application of state common law to claims against a successor business enterprise that has acquired its assets through a bankruptcy sale?
The short answer to this question is "yes," but only if the federal bankruptcy court has "dealt with" the claim. The long answer requires us to examine the function of a bankruptcy sale and to determine what effect a bankruptcy sale may have on other principles of law affecting the liability of a successor business enterprise. For purposes of this analysis, we will draw essentially on a summary of the law of bankruptcy sales set forth by Michael H. Reed in Successor Liability and Bankruptcy Sales, 51 Bus. Law. 653 (1996). This recital is not intended to be a digest of bankruptcy law but only a brief outline of what we understand to be the governing principles that apply in federal courts.
There are essentially two ways [in which] a bankruptcy trustee or debtor-in-possession can sell assets: (i) a sale pursuant to section 363 of the Code; or (ii) a sale pursuant to a confirmed Chapter 11 plan of reorganization.
a. Does a Section 363 sale cut off product liability claims?
Section 363(f) of the Bankruptcy Code (the Code),
11 U.S.C.A.
§363(f) (1978), authorizes the trustee or debtor-in
possession to sell property of the estate "free and clear of
the 'interest' of another entity in such property . . . ."
Reed, supra, 51 Bus. Law. at 655. The primary purpose of that
provision is “to permit the sale of property free and clear of
the liens of secured creditors.” Id. at 656.
Some courts have held that notwithstanding the use of the
term "interest" in section 363(f), the bankruptcy court has
“the power to convey assets free and clear of not only property
interests, such as liens and encumbrances, but also
preconveyance claims, or in personam liabilities of the
transferor.” Id. at 664-65.
“Other courts, however, have held that, because the plain
language of section 363(f) speaks only of 'interests' and makes
no mention of 'claims,' it does not provide authority for a
sale free and clear of preconveyance claims because claims, as
distinguished from 'liens' and 'encumbrances,' are not property
interests.” Id. at 665. Again, the author explains:
[I]t is difficult to quarrel with these
[latter] decisions. The term “interest,”
while undefined, clearly connotes some form
of property interest as it is utilized
throughout the Code. It includes the
property interest of an equity security
holder . . . as well as the property
interest of a lienholder. . . . Creditor
held interests clearly include not only
“liens” but also “charges.”
[Id. at 675 n.62.]
There is nothing in the Code, however, to
suggest that the term "interest" was
intended to embrace rights to payment,
which are the substantive nuclei of
bankruptcy “claims.” See . . . § 101(5)
[of the Code]; see also Fairchild Aircraft
Inc. v. Campbell (In re Fairchild Aircraft
Corp.) [discussed infra at ___ (slip op. at
15], wherein Judge Clark explained:
“Section 363(f) does not authorize sales
free and clear of any interest, but rather
of any interest in such property. . . .
The sorts of interests impacted by a sale
free and clear are in rem interests which
have attached to the property.” Id. at
917-18.
b. Does a Chapter 11 sale cut off products liability claims?
Reed suggests (consistent with the initial paragraph under
subsection “a”) that a sale pursuant to a reorganization would
be more likely to cut off claims based on preconfirmation
conduct.
Selling assets pursuant to a Chapter 11
plan arguably provides more protection from
successor liability than does a sale
pursuant to section 363 of the Code.
Section 1123(a)(5)(D) of the Code
authorizes the sale of "all or any part of
the property of the estate, either subject
to or free of any lien" pursuant to a
confirmed Chapter 11 plan of
reorganization. Section 1141(c) of the
Code provides that any property "dealt
with" by a plan shall be "free and clear of
all claims and interests of creditors,
equity security holders, and general
partners in the debtor." This language has
been interpreted by some courts and
commentators to mean that property sold
pursuant to a plan has been "dealt with” by
the plan and, therefore, such property is
free and clear of any claims arising from
the trustee's or debtor's preconveyance
conduct, including successor liability
claims.
However, whether the latter interpretation of the language
of section 1141 is correct remains unclear. Reed cites two
recent decisions holding that a sale free and clear through a
Chapter 11 plan did not insulate the transferee from successor
liability claims. In In re Savage Industries, Inc.,
43 F.3d 714 (lst Cir. 1994), the court found it unimportant that the
debtors' subsequently-confirmed Chapter ll plan ratified the
sale and purported to relegate all claimants to their pro rata
shares of the net proceeds of the sale. In In re Fairchild
Aircraft Corp.,
184 B.R. 910 (Bankr. W.D. Tex. 1995), vacated
as moot on equitable grounds,
220 B.R. 909 (Bankr. W.D. Tex.
1998), the court held that the purchaser of an aircraft
manufacturing business at a bankruptcy sale was subject to
successor liability regarding a claim for damages allegedly
caused by defects in an aircraft manufactured by the bankrupt.
The bankruptcy court in In re White Motor Credit Corp.,
75 B.R. 944, 950 (Bankr. N.D. Ohio 1987) considered “whether the
state law [imposing successor liability] frustrates the full
objective of the federal [bankruptcy] legislation.” The court
concluded that the state law was preempted because “[t]he
federal purpose of final resolution and discharge of corporate
debt is clearly compromised by imposing successor liability on
purchasers of assets when the underlying liability has been
discharged under a plan of reorganization.” Ibid. However,
other courts have disagreed with the suggestion that imposition
of successor liability in the context of a bankruptcy sale
actually frustrates the purposes of the Code. In Chicago Truck
Drivers, Helpers and Warehouse Workers Union (Independent)
Pension Fund v. Tasemkin, Inc.,
59 F.3d 48 (7th Cir. 1995), a
multi-employer pension fund sought to recover against a
bankrupt furniture company that had allegedly failed to pay
over $300,000 to the fund. The fund attempted to recover in
the Chapter 7 liquidation proceeding, but with no success. The
furniture company had entered into a debt compromise agreement
with its secured lender. The company then turned the interest
over to a successor company, which promptly foreclosed on the
collateral. Two years after the bankruptcy case was closed,
the fund brought an action against the successor company on a
theory of successor liability. The district court dismissed
the case and the Seventh Circuit reversed. The court rejected
the argument that successor liability “frustrates the orderly
scheme of the Bankruptcy Code by allowing some unsecured
creditors to leapfrog over others[,] . . . [because] once a
bankruptcy proceeding is completed and its books closed, the
bankrupt has ceased to exist and the priorities by which its
creditors have been ordered lose their force.” Id. at 51.
“[A] second chance is precisely the point of successor
liability.” Ibid.
That a Chapter 11 sale will resolve the question of
successor liability is thus by no means clear. Courts
analyzing the scope of the power of bankruptcy courts to sell
property free and clear of claims reason that the breadth of
such power is coextensive with the courts' power to discharge
claims under the Code.
Thus, a claimant asserting successor
liability would argue that even if, as a
general proposition, the bankruptcy court
has the power to convey assets free and
clear of “claims," it does not have the
power to cut off obligations or rights,
such as environmental agency injunctions or
future products liability claims, which are
not cognizable as claims for
dischargeability purposes. Such claims
could not be divested, regardless of
whether the sale is made within or outside
of a plan of reorganization.
Although the asset purchase agreement between the trustee and the buyer at the bankruptcy sale expressly recites that the purchaser “will not assume, undertake, accept or be bound by or responsible for . . . any liabilities or obligations of Lull or Erickson or their affiliates that arise or have arisen prior to the Closing Date,” such disclaimers are ineffective in insulating the buyer from successor liability when other principles of law require the imposition of liability. See Ramirez, supra, 86 N.J. at 344 (discussing effect of disclaimer clauses under “mere continuation” theory).
Congress appears to have recognized the foregoing limitation on the scope of a bankruptcy discharge by expressly providing that in the case of debtors liable for personal injury due to asbestos-containing products, bankruptcy courts shall have the authority to insulate a successor from liability "with respect to any claim or demand made against such entity by reason of its becoming such a transferee or successor." Reed, supra, 51 Bus. Law. at 668 (quoting 11 U.S.C.A. §524(g)(3)(A)(ii) (1994)). In Fairchild Aircraft, supra, 184 B.R. at 931-33, which involved personal injury claims arising out of an airplane crash that occurred after a bankruptcy sale, the court refused to cut off those claims because of (1) insufficient or impossible notice to the putative successor liability claimants, (2) insufficient representation of the interests of such claimants, and (3) absence of any provision for such claimants under the plan of reorganization. Cf. In re Piper Aircraft Corp., 162 B.R. 619 (Bankr. S.D. Fla.), aff'd, 168 B.R. 434 (S.D. Fla. 1994), aff'd and modified sub nom., Epstein v. Official Comm. of Unsecured Creditors of Estate of Piper Aircraft Corp., 58 F.3d 1573 (11th Cir. 1995) (potential postconfirmation claims were not “claims” under § 101(5) of Code). Thus, even if a bankruptcy court were to seek to “deal with” preconfirmation conduct, at a minimum there probably should be notice to the class of claimants who would be subject to the claims, and some provision for such claimants should be made under the plan of reorganization. For example, in the silicone breast-implant cases, one of the manufacturers, Dow Corning, entered Chapter 11 and then sought to reach a settlement with its comprehensive general liability insurers. Although the court approving the settlement held that third parties injured as the alleged result of the defendant's silicone breast implants did not have an interest in the insurance policies, the court noted that “competing claims to the insufficient assets [would] be settled through the reorganization process . . .” In re Dow Corning Corp., 198 B.R. 214, 247 (Bankr. E.D. Mich. 1996).
Justin Lefever's claim was simply not dealt with in the bankruptcy proceedings. Plaintiff was not a creditor of the bankrupt. He filed no claim in the bankruptcy proceedings. In addition, the sale here was under Section 363 and Lefever had no “interest” in the sense of a lien or encumbrance on the property. In fact, the bankruptcy trustee specifically authorized plaintiff to proceed with his suit against Lull III because the suit was not against the bankrupt. But see In re All Am. of Ashburn, Inc., 56 B.R. 186 (Bankr. N.D. Ga. 1986) (enjoining claim against successor because bankruptcy sale of assets was free and clear of all claims). The most that can be said is that the debtor, Lull II, listed plaintiff's claim in its schedule of affairs, but there was no attempt to "deal with it."
If federal law permits it, should the principles of Ramirez call for successor liability after bankruptcy sales?
This is by far the harder of the two main issues in the case. Respected commentators find the "policies behind the 'product line' exception inapplicable to the purchase of assets at a bankruptcy sale. Not only does this extension of strict liability violate basic principles of tort law, but it also contradicts the fundamental goals of the Bankruptcy Code . . . ." David R. Kott & Walter A. Effross, Forgive Us Our Predecessors: Bankruptcy Sales and the Product Line Exception, 4 Prod. Liab. L. J. 123, 123 (May 1993). They argue that imposing successor liability amounts to creating a lien on the assets in favor of future products liability claimants and thereby decreases the sale price and effectively minimizes the assets available for the debtors. Future products liability claimants will have "jumped the line" to come out ahead of the debtor's current creditors who may be deprived of compensation for the claims. Although the argument is appealing, it has equal application to that wide variety of other contexts in which liability may be imposed on a successor. See Chicago Truck Drivers, supra, 59 F. 3d at 51. For example, a purchaser of contaminated assets will be responsible for environmental cleanup costs even though the property has been acquired at a bankruptcy sale free and clear of liens. James B. Holden & Debora D. Jones, Representing Purchasers of Assets from Bankruptcy Estates, 20 Colo. Law. 2259, 2261 (1991). Liability also may be imposed on transferees in other contexts. See, e.g., Upholsterers' Int'l Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1323 (7th Cir. 1990) (delinquent pension fund contributions); Klegerman v. F.G. Apparel, Inc., No. 85C7887, 1 986 WL 2531 (N.D. Ill. Feb. 11, 1986) (considering successor's liability for age-discrimination claims despite acquisition of assets at bankruptcy sale).
We acknowledge that California, the jurisdiction that initiated the product-line exception, has declined to apply the exception to the acquisition of a product line through a bankruptcy sale. In Stewart v. Telex Communications, Inc., 1 Cal. Rptr.2d 669, 675 (1992), the California Court of Appeals adopted the reasoning of the Washington Supreme Court in Hall v. Armstrong Cork, Inc., 692 P.2d 787, 792 (1984), that “'[t]he traditional corporate rule of nonliability is . . . counterbalanced by the policies of strict liability [only] when acquisition by the successor, and not some [other] event or act, virtually destroys the ability of the plaintiff to seek redress from the manufacturer of the defective product.'” We believe, however, that the California court has focused on the first justification for the product-line exception, specifically, that strict liability is appropriate when the successor's acquisition of the business has virtually destroyed the plaintiff's remedies, to the exclusion of the more dominant themes.
We must first remember that in Ramirez the defendant did not cause the destruction of the plaintiff's remedies against the original manufacturer. On the same day that the Court decided Ramirez, the Court decided Nieves, supra, 86 N.J. 361. In that case, an intermediate producer of the product line argued that an essential justification for the imposition of liability was missing, namely, the nonavailability of a functioning manufacturer of the product line. The intermediate manufacturer argued that the first prong of the Ray doctrine is concerned solely with finding one viable extant corporate defendant that had succeeded to the manufacturing operation and that it was not such a defendant. The Court disagreed. In its view, “the imposition on [the intermediary] of potential liability for injuries . . . is justified as a fair and equitable burden necessarily attached to the substantial benefit that [the intermediary] enjoyed in the 'deliberate, albeit legitimate, exploitation of [the manufacturer's] established reputation as a going concern producing a specific product line.'” Nieves, supra, 86 N.J. at 369 (quoting Ray, supra, 560 P. 2d at 11). Both the intermediary and the final successor had the ability to assume the original manufacturer's risk-spreading and cost-avoidance roles.
In Mettinger v. Globe Slicing Machine Co., 153 N.J. 371 (1998), Justice Pollock revisited the theme of the relative importance of the first prong of the Ray doctrine. He explained that the Ramirez doctrine rests on deeper premises. “Although a primary justification for the product-line exception is to provide compensation for otherwise remediless victims of a defective product, the imposition of successor liability on corporations also serves the public interest 'of spreading the risk to society at large for the costs of injuries from defective products.'” Id. at 383 (quoting Ramirez, supra, 86 N.J. at 350). Successor manufacturers that have the previous manufacturer's equipment, inventory, records of manufacturing designs, patents, customer lists, and employees have “'virtually the same capacity as [the original manufacturer] to estimate the risks of claims for injuries from defects in previously manufactured [products] for purposes of obtaining insurance coverage or planning self-insurance.'” Id. at 384 (quoting Ray, supra, 560 P. 2d at 10). Moreover, “[r]ecourse against a successor corporation is justified 'as a burden necessarily attached to [the successor's] enjoyment of [the original manufacturer's] trade name, good will and the continuation of an established manufacturing enterprise.'” Ibid. (quoting Ramirez, supra, 86 N.J. at 352). Thus in Wilkerson v. C.O. Porter Machinery Co., 237 N.J. Super. 282, 291-92 (Law Div. 1989),See footnote 33 the court ably reasoned,
Whatever arguments can be made under this justification [of enjoyment of the predecessor-manufacturer's good will] would seem to turn on the nature of the “good will,” and the extent to which it was actually “enjoyed by” the successor. It may be argued that a debtor in bankruptcy has less good will than a viable corporate seller, but that raises a fact question that has to be analyzed on a case-by-case basis. It does not warrant the conclusion that a purchase in bankruptcy per se precludes successor liability.
In Ramirez, supra, 86 N.J. at 343, this Court stated that
“[t]he form of the corporate transaction” does not control the
applicability of successor liability. What is “most important”
is the “continuity in the manufacturing of the . . . product
line throughout the history of these asset acquisitions.” Id.
at 350. We share the instinctive reaction of those who
hesitate to apply the product-line exception to a successor at
a bankruptcy sale. At first glance, to apply the doctrine to
one who could be contemplating the purchase of assets free and
clear of any predecessor liability seems unfair. That concern
turns out to be unfounded. In its dealings with plaintiff,
Lull III appears to have been represented by remarkably
competent counsel. Practice manuals assist attorneys and
clients to deal with issues of successor liability, whether
they arise in the context of environmental liability,
employment discrimination, or, as here, successor products
liability. Cf. Howard L. Shecter & David W. Pollak, Successor
Liability and Asset Acquisitions: Acquiring or Selling the
Privately Held Company, 947 PLI/Corp 69, 112-18 (1996)
(describing practical considerations in preparing for and
negotiating purchase or sale of assets to minimize successor
environmental liabilities); Steven P. Caley & Therese I. Yard,
One may fairly assume that a prudent purchaser of assets makes the cost-benefit analysis that renders the acquisition profitable. The Ramirez doctrine rests on principles of justice and fairness. “[T]he legal limitation on the scope of [products] liability is associated with policy -- with our more or less inadequately expressed ideas of what justice demands, or of what is administratively possible and convenient.” James H. Coleman, Jr., Appellate Advocacy and Decisionmaking in State Appellate Courts in the Twenty-First Century, 28 Seton Hall L. Rev. 1081, 1090 (1998). In New Jersey, “We view the social policy underlying the law of products liability as 'spreading the risk to society at large for the cost of injuries from defective products.'” Id. at 1092 (quoting Ramirez, supra, 86 N.J. at 350).
That our view of successor liability may not enjoy universal or widespread acceptance gives us pause. It is, however, a familiar task for the Court to forge new doctrine. In Magrine v. Krasnica, 94 N.J. Super. 228, 230-31 (Law Div. 1967), aff'd, 53 N.J. 259 (1969), Judge John F. Lynch observed that “[Dean] Prosser fittingly credits New Jersey with having administered the crucial blow upon the 'citadel of privity' in the historic Henningsen v. Bloomfield Motors, Inc. case, 32 N.J. 358 (1960).” We seek here to follow the principles of Henningsen.
The rules regarding successor liability constitute a court-made area of law. “The four exceptions to the general rule set forth by the Restatement (Third) are judicially created exceptions rather than legislatively created exceptions.” Cupp, supra, 8 Kan. J.L. & Pub. Pol'y at 113. For courts to act to correct problems that arise in the area of successor liability is entirely appropriate. In fact, there may be strong reasons not to leave the solution to the Legislature:
If a single state's legislature acts on its own to create an effective statute that forces a dissolving corporation to set aside funds for long-tail product liability claims, a business incorporated in that state that wishes to dissolve can simply reincorporate in a more lenient jurisdiction, dissolve in that more lenient jurisdiction, and thus avoid having to set aside funds for long-tail claimants. The judicial solution of lessening restrictions on successor liability avoids this “race to the bottom” problem because the law of the jurisdiction in which the plaintiff is injured typically controls in determining a successor's liability. Thus, reincorporating in another jurisdiction generally will not allow a corporation to escape responsibility under a judicial approach.
[Id. at 114.]
Ultimately, the question is whether the imposition of a
duty on the successor to respond to the complaints of its
predecessor's customers is fair, when the successor trades on
the loyalty of those customers.See footnote 44 Lull today is part of Omniquip
International, a publicly-traded corporation that is proud of
its heritage and if fully aware of the impact of this
litigation might well disapprove of the posture taken here.
Lull's parent company has a market capitalization of $149
million, and annual net income of over $25 million. Omniquip
proclaims that
Legrand “Shorty” Lull, a feisty
entrepreneur, founded the company that
carries his name in 1956. “Shorty” always
believed that he knew what contractors
required to get their jobs completed
faster, and better. . . . The assets of
Lull changed hands several times between
the 70's and 80's and in November[] 1993,
the assets of Lull Corporation were
purchased by Badger R. Bazen and Lull
Industries was born. Throughout these
changes at Lull, one thing never changed[:]
customer support and loyalty from the Lull
dealer base.
Referring to new product innovations, the message concludes:
"Through all of the changes that occurred at Lull over the past
years, two things have never changed: Lull's leadership role
in the telescopic reach forklift industry, and Lull Quality.”
Lull, (visited Feb. 19, 1999) <http://www.omniquip.com/lull
/index.htm>. For some reason, the Lull enterprises decline to
maintain products-liability insurance, but it appears that in
each re-emergence of the enterprise, Lull has had the same
personnel and the same dealers. In reality, a “continuity of
enterprise” exists.
In these circumstances, we do not consider it unfair to
impose liability on the successor manufacturers of the Lull
forklift. As Justice Pollock explained in Globe Slicing,
supra, “[r]ecourse against a successor corporation is justified
'as a burden necessarily attached to [the successor's]
enjoyment of [the original manufacturer's] trade name, good
will and the continuation of an established manufacturing
enterprise.'” 153 N.J. at 384 (quoting Ramirez, supra, 86 N.J.
at 352). Ready access to counseling such as The Tire Kicker's
Guide to Buying and Selling Assets from Financially Distressed
Companies, 683 PLI/Comm. 365 (Feb. 21-22 1994), enabled Lull
III to structure the acquisition to avoid or accept successor
liability. It should not seek to have it both ways -- trading
on the good will generated by a long-standing customer base,
yet disavowing responsibility to those same customers.
Plaintiff has received substantial recovery from other
responsible parties such as the distributor and the property
owner. Further proceedings would assess Lull's comparative
responsibility for the injury.
The judgment of the Appellate Division is affirmed.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER and STEIN join
in JUSTICE O'HERN's opinion. JUSTICE POLLOCK filed a separate
dissenting opinion in which JUSTICES GARIBALDI and COLEMAN
join.
SUPREME COURT OF NEW JERSEY
A-
211 September Term 1997
JUSTIN LEFEVER,
Plaintiff-Respondent,
v.
K.P. HOVANANIAN ENTERPRISES,
INC., LULL ENGINEERING CO.
and GILES & RANSOME, INC.
individually and t/a RANSOME LIFT,
Defendants,
and
LULL INDUSTRIES, INC.,
Defendant-Appellant.
POLLOCK, J., dissenting
With limited exceptions, successor corporations are not
liable for harm caused by defective products made or
distributed by a predecessor. Restatement (Third) of Torts
sec. 12 (1997). Contrary to the rule in most jurisdictions,
this Court recognizes the "product-line" exception:
[W]here one corporation acquires all or
substantially all the manufacturing assets
of another corporation, even if exclusively
for cash, and undertakes essentially the
same manufacturing operation as the selling
corporation, the purchasing corporation is
strictly liable for injuries caused by
defects in units of the same product line,
even if previously manufactured and
distributed by the selling corporation or
its predecessor.
The product-line exception represents our perception of the
appropriate balance in the ordinary case between compensating
injured parties and the uninhibited transfer of assets.
Mettinger v. Globe Slicing Machine Co.,
153 N.J. 371, 381
(1998).
This appeal questions the weight to be placed in striking
that balance when the selling corporation at the time of sale
is in bankruptcy. The majority holds that the bankruptcy is of
no weight. I believe, however, that when an injury occurs
before bankruptcy and the injured party had the opportunity to
file a claim in the bankruptcy proceeding, a court should weigh
the bankruptcy when striking the balance of interests in the
"product line" exception.
To place the matter in perspective, some facts in addition
to those set forth in the majority opinion may help.
Plaintiff, Justin Lefever, was injured in 1989 in an
employment-related accident arising out of the operation of a
forklift that had been manufactured by the corporation
identified by the majority as "Lull I.” Previously, in 1973,
Lull I had sold its manufacturing assets to "Lull II," which
assumed responsibility for product liability claims such as
plaintiff's. Initially, plaintiff sued "Lull Engineering Co.,
Inc.," for manufacturing and design defects in producing the
forklift. Plaintiff also joined as defendants Giles & Ransome,
the distributor of the forklift, and K.P. Hovananian
Enterprises, the owner of the work site where the accident
occurred. Thereafter, plaintiff settled his claims against
Giles and Ransome and K.P. Hovananian.
On March 3, 1992, nearly twenty years after acquiring Lull
I's assets, Lull II filed a petition for a Chapter 11
bankruptcy. The trustee in bankruptcy promptly notified
plaintiff of the bankruptcy, but plaintiff decided not to file
a claim. In 1993, Badger R. Bazen (Badger) bought Lull II's
assets "free and clear of all interests pursuant to Sections
363(b), 363(f) of the Bankruptcy Code" and with an express
disclaimer of any of Lull II's liability for products
manufactured or sold before the closing date. The bankruptcy
court approved the sale. Also in 1993, Badger sold the assets
to the corporation identified by the majority as Lull III.
The bankruptcy court stayed all actions against the
debtor. In January 1995, however, the trustee sent plaintiff's
counsel a letter stating that the stay did not apply because
the present action is not against the debtor, Lull II. On
November 14, 1996, plaintiff joined Lull III as a defendant.
One justification for the product line exception when the
original manufacturer no longer exists at the time of the
injury is that an injured party may be left without a remedy.
Mettinger, supra, 153 N.J. at 383. When, however, the injured
party has recourse against the original manufacturer, that
consideration should yield to the unfairness of imposing
liability on an innocent successor. The scale could tilt back
toward the imposition of liability, if the successor agreed to
assume liability in the asset-purchase agreement or if it
knowingly participated in a fraudulent asset transfer. Here,
the purchaser of Lull II's assets expressly disclaimed
liability. Plaintiff, moreover, does not allege that Lull III
participated in a fraudulent asset transfer or engaged in a
sham transaction.
Significantly, plaintiff had recourse against Lull II,
which had assumed contractually the liability of the
manufacturer, Lull I. Admittedly, Lull II's bankruptcy could
affect the amount paid on plaintiff's claim, but no more so
than it would affect the claims of other creditors.
As the Third Circuit Court of Appeals stated, "If a remedy
against the original manufacturer was available . . . the
consumer has not been obliged to bear the risk and the
justification for imposing successor liability evaporates."
Conway v. White Trucks,
885 F.2d 90, 95 (1989). To the same
effect, the Seventh Circuit Court of Appeals has written:
Had the [plaintiffs] been parties to the
bankruptcy proceeding, they would have had
no possible basis for a suit against [the
successor]. . . . because the successorship
doctrine on which they rely is inapplicable
if the plaintiff had a chance to obtain a
legal remedy against the predecessor, even
so limited a remedy as that afforded by the
filing of a claim in bankruptcy. [Zerand
Bernal, Inc. v. Cox,
23 F.3d 159, 163 (7th
Cir. 1994) (Posner, J.)].
The majority suggests that plaintiff should be permitted
to proceed with his suit against Lull III because his claim was
not "dealt with" in the bankruptcy proceedings. Continuing,
the majority remarks that "even if a bankruptcy court were to
seek to 'deal' with preconfirmation conduct, at a minimum there
probably should be notice to the class of claimants . . . and
some provision for such claimants should be made under the plan
of reorganization." See ante (slip op. at 18-19). Plaintiff's
claim was not "dealt with," however, only because he failed to
file a claim in the bankruptcy proceedings, not because he had
no notice of the bankruptcy.
The majority opinion limits the power of the bankruptcy
court by denying it the power to permit the sale of the
debtor's assets free of liability for tort claims. Section
363(f) of the Bankruptcy Code provides, however, that the
bankruptcy court shall have the power to sell assets "free and
clear of any interest in . . . property."
11 U.S.C.A. 363(f).
Indeed, the sale of Lull II's assets, as approved by the
bankruptcy court, so provided. A question remains whether such
a sale is free and clear of tort claims that arise after the
sale. Compare In re White Motor Credit,
75 B.R. 944, 950-51
(Bankr. N.D. Ohio 1987) (finding that sale free and clear
precluded successor liability for tort claim arising after
sale) and In re Paris Industries,
132 B.R. 504, 510 (D. Maine
1991) (finding that bankruptcy court could enforce sale free
and clear by enjoining product liability action) with Zerand
Bernal v. Cox,
23 F.3d 159, 164 (7th Cir. 1994) (finding that
bankruptcy court did not have power to enjoin state court
product liability action for successor liability on post-sale
claim) and In re Fairchild Aircraft,
184 B.R. 910, 918 (Bankr.
W.D. Tex. 1995) (holding that sale "free and clear"
extinguishes only in rem interests, not in personam
liabilities). No case, however, has ever held a successor
corporation liable for a tort claim that arose before court
approval of the sale.
When a tort occurs before bankruptcy, courts have treated
a tort claimant like all other claimants. Conway v. White
Trucks,
885 F.2d 90, 95 (1989); In re All American of Ashburn,
Inc.,
56 B.R. 186, 190 (Bankr. N.D. Ga. 1986). In that
context, a sale of assets "free and clear" does not result in
the imposition of liability on the successor corporation. To
impose successor liability would frustrate "the orderly scheme
of the bankruptcy law by allowing some unsecured creditors to
recover without regard to the priority order of the bankruptcy
proceedings." Ninth Avenue Remedial Group v. Allis-Charmers
Corp.,
195 B.R. 716 (N.D. Ind. 1996); see also All American,
supra, 56 B.R. at 190. A bankruptcy court's authority to sell
assets free and clear of existing tort claims is "implicit in
the court's general equitable powers and its duty to distribute
debtor's assets." See White Motor Credit, supra, 75 B.R. at
948. The effect of subjecting the successor to the risk of
liability is to diminish the value of the assets to the extent
of the cost of that risk. That diminution in value will redound
to the detriment of all other creditors who seek to participate
in the distribution of the bankruptcy estate. Permitting a
tort claimant to pursue a successor after a bankruptcy sale
would grant that claimant a priority over other claimants who
were paid in accordance with the Bankruptcy Code and would
produce a negative impact on the trustee's ability to sell
assets of the estate at a fair price. See All American, supra,
56 B.R. at 190. Those considerations should tip the scale back
toward the general rule of not imposing liability on a
successor when a claimant has been injured before the
bankruptcy proceedings and provided with notice and the
opportunity to participate in the proceedings. In sum, the
imposition of liability on the purchaser of assets from a
bankrupt estate "free and clear of any interests in property"
skews the balance of interests in the product line exception.
I respectfully dissent. Justices Garibaldi and Coleman
join in this opinion.
NO. A-211 SEPTEMBER TERM 1997
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
JUSTIN LEFEVER,
Plaintiff-Respondent,
v.
K.P. HOVNANIAN ENTERPRISES, INC., et al.,
Defendants,
and
LULL INDUSTRIES, INC.,
Defendant-Appellant.
DECIDED July 29, 1999
Chief Justice Poritz PRESIDING
OPINION BY Justice O'Hern
CONCURRING OPINION BY
DISSENTING OPINION BY Justice Pollock
Footnote: 1 1 Although plaintiff in fact named as defendant a company that purchased Lull I's assets and later sold them to Lull II, it appears that plaintiff intended to sue Lull I, whose name is virtually identical to the name of its immediate successor. The named defendant has been a dormant corporation with no assets since 1986. Footnote: 2 2 Professor Cupp bases the 43 percent figure on an assessment of “state supreme court decisions, lower court decisions where there is not a state supreme court decision, and federal decisions attempting to predict what approach a state would adopt.” Ibid. Footnote: 3 3 Wilkerson involved a products liability claim that arose after the filing of the bankruptcy petition, rather than, as here, a claim arising before the bankruptcy petition was filed. Footnote: 4 4 Because fairness is the guiding principle, we agree that unless the successor's independent action provides a basis therefor, it would be unfair to impose punitive damages on a successor. In order for punitive damages to be appropriate, the successor must be “sufficiently connected to the culpable conduct.” Brotherton v. Celotex Corp., 202 N.J. Super. 148, 157 (Law Div. 1985) (adopting continuation test to determine successor liability for punitive damages). We also agree that it is wrong to impose successor liability on an asset purchaser that discontinues the product line. See Saez v. S & S Corrugated Paper Mach. Co., 302 N.J. Super. 545, 554 (1997) (disapproving Pacius v. Thermtroll Corp., 259 N.J. Super. 51 (Law Div. 1992), which had held successor company liable for injuries caused by defective product manufactured by predecessor company even when successor did not continue to manufacture product line).