Case Title: MPI Acquisition, LLC, d/b/a/ Manco Power Sports v. Charlene Northcutt et al.

Citation: 

Docket Number: 1050559

State: alabama

Court: Alabama Supreme Court

Date: 2009-01-16T00:00:00Z

Document:
Rel: 01/16/2009
Notice: This opinion is subject to formal revision before publication in the advance
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Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334) 229-
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the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
OCTOBER TERM, 2008-2009
____________________
1050559
____________________
MPI Acquisition, LLC, d/b/a Manco Power Sports 
v.
Charlene Northcutt et al.
Appeal from Barbour Circuit Court 
(CV-03-238)
PARKER, Justice. 
MPI Acquisition, LLC, d/b/a Manco Power Sports ("MPI"),
petitioned for a permissive appeal from the denial of its
motion for a summary judgment, pursuant to Rule 5(a), Ala. R.
App. P. In certifying its denial of MPI's summary-judgment
1050559
2
motion as appropriate for permissive appeal, the trial court
stated the following controlling questions of law: 
"(1) [W]hether the supremacy clause of the United
States Constitution, Art. VI, cl. 4, and the
doctrine of preemption thereunder obligate this
court to enforce the Order of the United States
Bankruptcy Court for the Northern District of
Indiana which declared the defendant herein, [MPI,]
purchased some of the assets of Manco Products, Inc.
free and clear of the liabilities of Manco Products
for claims arising out of products manufactured by
Manco Products such that MPI may not be found liable
as a matter of law as a successor to Manco Products;
and
"(2) whether the decision of the appellate court in
Glenn v. Steelox Bldg. Systs., Inc., 698 So. 2d 143,
144-45 (Ala. Civ. App.), cert. denied, 698 So. 2d
145 (Ala. 1997), enforcing a similar order of
Bankruptcy Court is binding precedent on this court
to determine as a matter of law that MPI may not be
found liable as a matter of law as a successor to
Manco Products."
This Court granted the petition for a permissive appeal. We
find it unnecessary to answer the second question certified by
the trial court. On the basis of the first, we reverse the
trial court's  denial of MPI's motion for a summary judgment.
As grounds for a summary judgment, MPI relied upon an
order of the United States Bankruptcy Court for the Northern
District of Indiana, which stated that MPI Acquisition, LLC,
had purchased the assets of Manco Products, Inc., free and
1050559
3
clear of liabilities for claims arising out of products
manufactured by Manco Products, Inc., thereby foreclosing
successor 
liability. 
Charlene Northcutt and the other
plaintiffs argued that MPI is a mere continuation of the
transferor corporation and that it thus remains liable under
Alabama successor-corporation liability law for products
manufactured by Manco Products, Inc., before MPI purchased
Manco's assets.
Doctrine of Preemption
The United States Supreme Court has held that Congress
has the power to explicitly preempt state law or to indicate
that a field of regulation is to be occupied by federal law.
That Court has further held that where state law conflicts
with federal law, federal law will prevail. 
"Federal law may pre-empt state law in any of
three ways. First, in enacting the federal law,
Congress may explicitly define the extent to which
it intends to pre-empt state law. E.g., Shaw v.
Delta Air Lines, Inc., 463 U.S. 85, 95-96 (1983).
Second, even in the absence of express pre-emptive
language, Congress may indicate an intent to occupy
an entire field of regulation, in which case the
States must leave all regulatory activity in that
area to the Federal Government. E.g., Fidelity
Federal Savings & Loan Assn. v. De la Cuesta, 458
U.S. 141, 153 (1982); Rice v. Santa Fe Elevator
Corp., 331 U.S. 218, 230 (1947). Finally, if
Congress 
has 
not 
displaced 
state 
regulation
1050559
4
entirely, it may nonetheless pre-empt state law to
the extent that the state law actually conflicts
with federal law. Such a conflict arises when
compliance with both state and federal law is
impossible, Florida Lime & Avocado Growers, Inc. v.
Paul, 373 U.S. 132, 142-143 (1963), or when the
state 
law 
'stands 
as 
an 
obstacle 
to 
the
accomplishment and execution of the full purposes
and objectives of Congress.' Hines v. Davidowitz,
312 U.S. 52, 67 (1941). See also Fidelity Federal
Savings & Loan Assn., supra, 458 U.S., at 153."
Michigan Canners & Freezers Ass'n v. Agricultural Marketing &
Bargaining Bd.,  467 U.S. 461, 469 (1984).
The specific question before this Court is whether an
order of a federal bankruptcy court declaring a purchase of
assets to be free and clear of liability for any claims
involving products manufactured and sold by the seller
preempts the application of Alabama successor-liability law.
This Court has summarized Alabama successor-corporation
liability law:
"As 
a 
general 
rule, the transferee/purchasing
corporation is not liable for the debts and
liabilities of the transferor/seller corporation.
Matrix-Churchill v. Springsteen, 461 So. 2d 782
(Ala. 1984). In Andrews v. John E. Smith's Sons Co.,
369 So. 2d 781, 785 (Ala. 1979), this Court stated:
"'As a general rule, where one company
sells or otherwise transfers all its assets
to another company, the transferee is not
liable for the debts and liabilities of the
transferor unless (1) there is an express
1050559
5
agreement to assume the obligations of the
transferor, (2) the transaction amounts to
a de facto merger or consolidation of the
two companies, (3) the transaction is a
fraudulent attempt to escape liability, or
(4) the transferee corporation is a mere
continuation of the transferor.'
"369 So. 2d at 785. (Citations omitted.) See, Clardy
v. Sanders, 551 So. 2d 1057 (Ala. 1989), cert.
denied, 493 U.S. 885, 110 S.Ct. 230, 107 L.Ed. 2d
178 (1989)."
Brown v. Economy Baler Co.,  599 So. 2d 1, 3 (Ala. 1992). 
According to the United States Supreme Court, the
Bankruptcy Act is not absolutely preclusive of state law:
"Congress did not intend for the Bankruptcy Code to pre-empt
all state laws." Midlantic Nat'l Bank v. New Jersey Dep't of
Envtl. Protection, 474 U.S. 494, 505 (1986). The issue of
preemption of non-bankruptcy state successor-liability law by
federal bankruptcy law remains unsettled in the federal
1050559
See, e.g.,  Schwinn Cycling & Fitness Inc. v. Benonis,
1
217 B.R. 790 (Bankr. N.D. Ill. 1997)(Bankruptcy Code did not
preempt application of state successor law against purchaser);
Conway v. White Trucks, a Div. of White Motor Corp., 885 F.2d
90 (3d Cir. 1989)(applied Pennsylvania law on issue of
successor liability); but see In re White Motor Credit Corp.
(Volvo White Truck Corp. v. Chambersburg Beverage, Inc.), 75
B.R. 944 (Bankr. N.D. Ohio 1987)(federal law preempted state
law imposing successor liability on purchaser of assets).
See Concalves v. Wire Tech. & Mach. Co., 253 N.J. Super.
2
327, 601 A.2d 780 (1991)(company that bought assets of the
manufacturer of the machine at a bankruptcy sale was subject
to liability); Wilkerson v. C.O. Porter Mach. Co., 237 N.J.
Super. 282, 567 A.2d 598 (1989) (successor liability not
precluded by purchase of assets under bankruptcy sale).
Illustrative cases in which successor liability was not
applied are Nelson v. Tiffany Indus., Inc., 778 F.2d 553 (9th
Cir. 1985)(possible collusive agreement precluded summary
judgment); and Forrest v. Beloit Corp., 278 F. Supp. 471 (E.D.
Pa. 2003)(user had remedy against bankrupt).
6
courts.  The issue is also unsettled in state courts.  An
1
2
article in the American Law Reports that discusses both the
positive and the negative aspects of a imposing successor
liability opens with this introduction:
"While a traditional rule provides that a successor
is not liable for the liabilities of a predecessor
whose assets it has acquired, some courts, concerned
that the traditional exceptions to the successor
nonliability rule, being designed chiefly to protect
creditors of the predecessor corporation, were not
sufficient to protect product liability claimants,
have 
added 
the 
product-line 
exception 
which
generally provides that a successor who acquires all
or substantially all of the assets of another
company, 
and 
undertakes 
essentially 
the 
same
manufacturing operation, may be liable for injuries
1050559
7
caused 
by 
products 
that 
were 
issued 
by 
its
predecessor. Other jurisdictions have rejected the
product line exception."
David J. Marchitelli, Annotation, Liability of Successor
Corporation for Injury or Damage Caused by Product Issued by
Predecessor, Based on "Product Line" Successor Liability, 18
A.L.R.6th 629 (2006). 
The exceptions to the general rule that the transferee
or purchasing corporation is not liable for the debts and
liabilities of the transferor or selling corporation, however,
cannot apply where a bankruptcy sale precedes the corporate
succession. This is so because
"[i]n Chapter 11 proceedings, the court is
trying to obtain and preserve as many assets as it
can to protect secured and unsecured creditors. To
do so, it needs to approve sales of assets to third
parties. A key factor to a third party in purchasing
assets is the 'worth' of the asset. Third parties
cannot assess 'worth' if the Bankruptcy Court orders
that they take the assets free and clear of any and
all claims whatsoever, but nonetheless, unsecured
creditors can 'lie in the weeds' and wait until the
bankruptcy court approves a sale before it sues the
purchasers. In sum, the court finds the policy
considerations outlined in [In re] White Motor
[Credit 
Corp. 
(Volvo 
White 
Truck 
Corp. 
v.
Chambersburg Beverage, Inc.), 75 B.R. 944 (Bankr. N.
D. Ohio 1987),] are compelling and adopts them in
holding that Plaintiff's claims are pre-empted."
Myers v. United States,  297 B.R. 774, 784 (S.D. Cal. 2003).
1050559
8
We agree with the following statement:
"The 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. Moreover,
successor liability is precluded by [11 U.S.C.]
Section 1141(c) which specifically frees debtor's
property from creditors' claims. Successor liability
in 
these 
circumstances 
has, 
therefore, 
been
pre-empted by the Bankruptcy Code.
"The effects of successor liability in the
context of a corporate reorganization preclude its
imposition. The successor liability specter would
chill and deleteriously affect sales of corporate
assets, forcing debtors to accept less on sales to
compensate 
for 
this potential liability. This
negative effect on sales would only benefit product
liability claimants, thereby subverting specific
statutory priorities established by the Bankruptcy
Code. See 11 U.S.C. §§ 507 and 1129(a)(9). This
result precludes successor liability imposition."
In re White Motor Credit Corp. (Volvo White Truck Corp. v.
Chambersburg Beverage, Inc.), 75 B.R. 944, 950-51 (Bankr. N.D.
Ohio 1987). Accordingly, we hold that the Supremacy Clause of
the United States Constitution, Art. VI, cl. 2, and the
doctrine of preemption obligate a trial  court to enforce an
order of a United States Bankruptcy Court in cases where
Alabama successor-liability law is raised. 
Based on our answer to the first controlling question of
law presented by the trial court, we find it unnecessary to
1050559
9
resolve the extent to which Glenn v. Steelox Building Systems,
Inc., 698 So. 2d 143 (Ala. Civ. App. 1997), constituted
precedent binding on the trial court.  To the extent that that
opinion of the Court of Civil Appeals may be interpreted to
mean that Alabama law is not subject to the preemption
doctrine, we expressly overrule it.
Conclusion
The Supremacy Clause of the United States Constitution
and the doctrine of preemption do obligate the courts of
Alabama to enforce the valid order of any United States
Bankruptcy Court  where such an order is challenged under the
successor-liability law of the State of Alabama. Further,
Glenn v. Steelox is overruled to the extent that that opinion
may be interpreted to contradict this holding.
Although the parties have further briefed and analyzed
this case, we pretermit further discussion because that
analysis is beyond the scope of this permissive appeal, which
was to answer the controlling questions of law posed by the
trial court. Accordingly, the order of the trial court denying
MPI's motion for a summary judgment, which asserted that the
provision in the order of the bankruptcy court allowing MPI to
1050559
10
purchase assets free and clear of claims for successor
liability negated the plaintiffs' claims against it, is
reversed, and the case is remanded for the entry of a summary
judgment for MPI.
REVERSED AND REMANDED. 
Cobb, C.J., and See, Lyons, Woodall, Stuart, Smith,
Bolin, and Murdock, JJ., concur.