Case Name: Flaugher et al., Appellants, v. Cone Automatic Machine Co. et al., Appellees
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1987-04-22
Citations: 30 Ohio St. 3d 60
Docket Number: No. 86-929
Parties: Flaugher et al., Appellants, v. Cone Automatic Machine Co. et al., Appellees.
Judges: Moyer, C.J., Locher, Holmes, Wright and H. Brown, JJ., concur.
Reporter: Ohio State Reports, Third Service
Volume: 30
Pages: 60–72

Head Matter:
Flaugher et al., Appellants, v. Cone Automatic Machine Co. et al., Appellees.
[Cite as Flaugher v. Cone Automatic Machine Co. (1987), 30 Ohio St. 3d 60.]
(No. 86-929
Decided April 22, 1987.)
Lindhorst & Dreidame Co., L.P.A., and Jay R. Langenbahn, for appellants.
McCaslin, Imbus & McCaslin and R. Gary Winters, for appellees.
Pneumo Corporation was then known as Pneumo Dynamics Corporation.

Opinion:
Douglas, J.
The instant appeal presents this court with three separate questions. The first is whether either of the appellee corporations falls within a recognized exception to the traditional rule of successor non-liability. Secondly, we are urged to adopt the "product line" theory of liability as espoused in Ray v. Alad Corp., supra. The final question is whether appellees had a duty to warn appellant of the alleged defect in the machine which injured her. Our analysis follows.
I
The general rule in products liability is that a successor corporation's amenability to suit will depend on the nature of the transaction which gave rise to the change in ownership. 1 Frumer & Friedman, Products Liability (1983) 70.58(3), Section 5.06[2]. Where the transfer is accomplished by means of a statutory merger or consolidation, the liability of the former corporation will be assumed by the new entity. Id. Where there is merely a sale of a corporation's assets, the buyer corporation is not liable for the seller corporation's tortious conduct unless one of the following four exceptions applies:
(1) the buyer expressly or impliedly agrees to assume such liability;
(2) the transaction amounts to a defacto consolidation or merger;
(3) the buyer corporation is merely a continuation of the seller corporation; or
(4) the transaction is entered into fraudulently for the purpose of escaping liability. Id. at 70.58(4); Burr v. South Bend Lathe, Inc. (1984), 18 Ohio App. 3d 19, 18 OBR 43, 480 N.E. 2d 105; Annotation, Products Liability: Liability of Successor Corporation for Injury or Damage Caused by Product Issued by Predecessor (1975), 66 A.L.R. 3d 824.
The transfer under scrutiny here, i.e., the purchase of PDMTG (which included the assets of Cone I, the actual manufacturer of the machine in question) and Cone II by appellee Cone-Blanchard, was a "sale of assets" transaction. Thus, Cone-Blanchard is not liable unless one of the above four exceptions applies.
Appellants concede that the second and fourth exceptions above are inapplicable. They contend, however, that the first and third exceptions exist under these facts.
Appellants' argument regarding the first exception is that the purchase agreement between Pneumo Corporation, Cone I's sole successor, and Cone-Blanchard is ambiguous as to whether Cone-Blanchard intended to assume tort liability for products manufactured by Cone I, and that such ambiguity should be construed in appellants' favor. However, our examination of the pertinent portions of the purchase agreement reveals that no ambiguity exists. Cone-Blanchard did not contract to assume liability for the alleged tortious conduct of Cone I.
Section 6.2 of the agreement provides that Cone-Blanchard shall assume any liability incurred by Pneumo Corporation arising from any breach of warranty made by Pneumo, or from any negligence or willful misconduct of Pneumo, to the extent covered by Cone-Blanchard's insurance. This section clearly and unambiguously limits Cone-Blanchard's assumption of liability to any liability stemming from Pneumo's own acts or omissions. The alleged defect in the machine in question is chargeable only to Cone I, its actual manufacturer.
Section 5.2 provides that Pneumo shall indemnify Cone-Blanchard for all claims against PDMTG asserted after the effective date of the agreement "arising out of any transaction entered into, or any state of facts existing" prior thereto, where liability for such claims has not already been assumed by Cone-Blanchard elsewhere in the contract. This section unambiguously relieves Cone-Blanchard of any liabilities predating the purchase agreement which are not expressly assumed by Cone-Blanchard.
Section 5.1 specifically limits the liabilities assumed by Cone-Blanchard to those expressly enumerated in that section, none of which applies to the instant cause.
It is evident from the foregoing that Cone-Blanchard did not expressly or impliedly assume any liability for injury caused by defective machines manufactured by Pneumo's predecessor, Cone I. Thus, the "assumption of liability" exception has no bearing here.
Nor does the "mere continuation" exception find application under these facts. In no way can the buyer, Cone-Blanchard, be characterized as a mere continuation of the seller, Pneumo Corporation, or of the seller's predecessor, Cone I.
"The gravamen of the traditional 'mere continuation' exception is the continuation of the corporate entity rather than continuation of the business operation." (Emphasis sic.) 1 Frumer & Friedman, supra, at 70.58(12), Section 5.06[2][c]. The exception has been narrowly construed to protect corporations from unassumed liabilities. Id. at 70.58(13), Section 5.06[3]. Those courts which have expanded this exception have done so on the basis of significant shared features between the buyer and the seller, such as the same employees, a common name, or the same management. See, e.g., Cyr v. B. Offen & Co. (C.A. 1, 1974), 501 F. 2d 1145, 1153-1154 (same employees continued after transfer of ownership to produce same product, in same plant, with same supervision); Turner v. Bituminous Cas. Co. (1976), 397 Mich. 406, 244 N.W. 2d 873 (retention of key personnel and trade name). The reasoning behind this expanded view of continuity is that where the successor corporation shares significant features with its predecessor, no basis exists for treating a purchase of assets differently from a defacto merger. Id. at 423, 244 N.W. 2d at 880. The cases have required that the predecessor be dissolved or liquidated soon after the transfer of assets. Id. at 419-420, 244 N.W. 2d at 878-879; Bonne v. L & M Constr. Chemicals (M.D. Tenn. 1981), 518 F. Supp. 375, 381.
It is obvious that even the expanded view of continuity has no application under these facts. Cone-Blanchard has no directors or officers in common with either Cone I or its sole successor, Pneumo Corporation. Cone-Blanchard does not consist solely of the assets of the long-defunct Cone I. It does not manufacture only Conomatic machines. Cone I, Pneumo's predecessor and the manufacturer of the machine in question, was dissolved in 1963, nine years before Cone-Blanchard bought PDMTG, which included Cone I's assets. Most importantly, Pneumo Corporation continued to exist as a viable business concern after the 1972 transfer. Clearly, there was a clean break between Cone-Blanchard and Pneumo Corporation such that the former cannot be considered a mere continuation of the latter or of the latter's predecessor, Cone I. In our extensive review of the applicable authorities, we could find no case imposing liability on a corporation as far removed from the actual manufacturer as Cone-Blanchard is from Cone I. We are not inclined to extend liability to Cone-Blanchard under any of the four exceptions to successor non-liability.
As for appellee Cone II, it is patently clear that neither the "assumption of liability" nor the "mere continuation" exception forms any basis for liability. The record discloses no document of any description which could possibly be characterized as an assumption by Cone II of the liabilities of Cone I arising from defectively manufactured machinery. Nor can the "mere continuation" exception apply, since Cone II is simply a holding corporation, entirely inactive, formed for the sole purpose of holding the Cone name and associated rights. It cannot be regarded as a mere continuation of Cone I, which was a manufacturing concern with employees, a place of business and a product line.
Accordingly, we hold that a corporation which purchases the assets of a manufacturer is not liable for injury resulting from a defective machine produced by that manufacturer unless there is an express or implied assumption of such liability, or the transaction constituting the sale of assets amounts to a defacto merger or consolidation, or the purchaser corporation is a mere continuation of the seller corporation, or the transaction is a fraudulent attempt to escape liability.
II
In Ray v. Alad Corp., supra, the California Supreme Court created a fifth exception to the general rule of successor non-liability in a sale-of- assets setting. This exception has come to be referred to as the "product line" theory, and appellants urge this court to adopt it for application in this case.
In Ray, a worker was injured in 1969 while using a defective ladder probably manufactured in 1952 by the since-dissolved "Alad I" Corporation which had sold all its assets in 1968 to "Alad II" Corporation. None of the four exceptions to successor non-liability was found to apply. However, the court fashioned a fifth exception, which holds that a party that acquires a manufacturing business and continues the manufacture of its line of products assumes strict tort liability for injuries resulting from defects in units of the same product line previously manufactured and distributed. Id. at 34, 136 Cal. Rptr. at 582, 560 P. 2d at 11. In so holding, the court emphasized the policy in products liability law of insuring that the costs of injury be borne not by the innocent injured consumer, but by the manufacturer who can insure the risk and distribute the expense among the public as a cost of doing business. Id. at 30-31, 136 Cal. Rptr. at 579, 560 P. 2d at 8. It reasoned that the successor corporation in such a case enjoys the benefits of the good will associated with the product, so it is not inappropriate to require it to bear the burdens as well. Id. at 31, 136 Cal. Rptr. at 580, 560 P. 2d at 10-11.
Ray has not drawn an enthusiastic reception. A few courts have endorsed its reasoning. Ramirez v. Amsted Indus., Inc. (1981), 86 N.J. 332, 431 A. 2d 811; Dawejko v. Jorgensen Steel Co. (1981), 290 Pa. Super. 15, 434 A. 2d 106; Bonee, supra. Others disapprove its expansive approach. See, e.g., Woody v. Combustion Engineering, Inc. (E.D. Tenn. 1978), 463 F. Supp. 817; Hernandez v. Johnson Press Corp. (1979), 70 Ill. App. 3d 664, 388 N.E. 2d 778; Bernard v. Kee Mfg. Co., Inc. (Fla. 1982), 409 So. 2d 1047. Many of the federal cases decline to adopt Ray in applying the law of a particular state where such state has not spoken on the issue, since it represents such a far-reaching exception. See, e.g., Leannais v. Cincinnati, Inc. (C.A. 7, 1977), 565 F. 2d 437; Rhynes v. Branick Mfg. Corp. (C.A. 5, 1980), 629 F. 2d 409. Some courts have felt that this radical departure from traditional principles calls for legislative rather than judicial adoption. Leannais, supra, at 441; Hernandez, supra, at 669-670, 388 N.E. 2d at 782; Burr, supra, at 23, 18 OBR at 48, 480 N.E. 2d at 109.
We are inclined to agree that the expansion of corporate successor liability espoused in Ray, if it is to be considered by Ohio at all, would require legislative action. The adoption of the product line theory would cast a potentially devastating burden on business transfers and would convert sales of corporate assets into traps for the unwary. See Woody, supra, at 821. The consideration of whether the benefits of the product line theory outweigh its drawbacks is a matter best consigned to the legislature, with its "comprehensive machinery for public input and debate." Leannais, supra, at 441.
We hold, therefore, that the "product line" exception to corporate successor non-liability is a far-reaching and radical departure from traditional principles, such that its adoption is a matter for the legislature rather than the courts.
Ill
The final issue for our review is whether appellee Cone-Blanchard had a duty to warn of the defect alleged to exist in the machine which injured appellant. For the following reasons, we hold that it had no such duty.
A successor corporation may acquire a duty to warn where defects in a predecessor's products are brought to its attention. Leannais, supra, at 441-443; 1 Frumer & Friedman, supra, at 70.58(22)(a), Section 5.06[5]. This duty may arise regardless of the nature of the transaction transferring ownership since it is based not on the corporation's successor status but on its own knowledge of the defect. Id.; Pelc v. Bendix Machine Tool Corp. (1981), 111 Mich. App. 343, 358, 314 N.W. 2d 614, 621. The successor corporation must be shown to have had prior knowledge, actual or constructive, of the defect in question.
Appellants contend that Cone-Blanchard had the requisite prior notice of the defect which caused the injury by virtue of its receipt of a summons on March 16,1979 notifying it of a Texas lawsuit alleging that the plaintiff therein had sustained an injury similar to that suffered by appellant due to a defect in a Conomatic machine. A review of the record reveals that the filing of this lawsuit was insufficient to constitute notice of the alleged defect in the machine which injured appellant.
The complaint in the Texas lawsuit was filed just five weeks before the occurrence of the incident which is the subject of this action and involved a different machine. At that time, appellee can fairly be said to have notice only of a single allegation that a defect in a different machine caused a similar injury. This court is not prepared to impose on appellee a duty to warn of a defect which had not yet been proven to exist, and which, even if proven, would not necessarily pertain to the machine which injured appellant.
Accordingly, we hold that a successor corporation has no duty to warn of defects in products manufactured by its predecessor unless the successor is shown to have had pre-existing knowledge, actual or constructive, of the particular defect alleged to exist. Even where such knowledge is lacking, however, the successor may still be liable for injuries resulting from its predecessor's defective products if any of the four exceptions to successor non-liability applies.
Based on the foregoing, we find that appellees are not liable to appellants under any theory. Therefore, the judgment of the court of appeals is hereby affirmed.
Judgment affirmed.
Moyer, C.J., Locher, Holmes, Wright and H. Brown, JJ., concur.
Sweeney, J., dissents.
Section 6.2 provides:
"Indemnification of Buyer for Extraordinary Damages. Beginning on the Closing Date Buyer shall assume any liability of Seller for any damages to any person or property arising or alleged to arise (a) out of any breach of warranty, expressed or implied, made by Seller in connection with the sale of machines or parts therefor or (b) out of the negligence or willful misconduct of Seller in the manufacture of such machines or parts therefor, but only to the extent covered by Buyer's insurance. Buyer's insurance at the Closing Date shall provide the following coverage:
"$500,000/$2,000,000 Bodily Injury
"$500,000 Property Damage
"$5,000,000 Umbrella — excess over primary coverage
"Seller shall indemnify and hold Buyer harmless after the Closing Date and shall assume the defense of any claim asserted against and with respect to all such damages and all costs or expenses related thereto to the extent not covered by Buyer's insurance." (Underscoring sic.)
This section provides:
"Indemnification. Seller shall indemnify and hold Buyer harmless and shall assume the defense of any claim being asserted after the Effective Date against and in respect of all liabilities and obligations, costs and expenses in excess of $20,000 of the Machine Tool Group related to the Business of any nature, whether accrued, absolute, contingent, or otherwise existing on the Effective Date or arising out of any transaction entered into, or any state of facts existing, prior to the Effective Date, to the extent (i) not included in Clauses (a), (b), (c), (d) and (e) of Section 5.1, and assumed by Buyer pursuant to the provisions of Section 5.1, (ii) not reflected on the balance sheet for Cone for the fiscal year ending November 30, 1972 referred to in Clause (b) of Section 4.1 or not incurred by Cone in the ordinary course of business in operating the Business for the account of Buyer in compliance with the terms of this Agreement from the Effective Date to the Closing Date, except all such balance sheet liabilities and other such liabilities paid or discharged on or before the Closing Date, or (iii) not referred to in the Document List. Notwithstanding any of the foregoing provisions of this Section 5. or any other provision of this Agreement, Buyer shall not assume and does not assume any liability or obligation of Seller or Cone wdth respect to any retirement benefits or pension benefits which Seller or Cone has agreed to pay any employee outside of, or in addition to, any of the pensions, retirement plans or arrangements of Seller or Cone referred to in the Document List." (Underscoring sic.)
Section 5.1 states:
"Assumption of Liabilities. On the Closing Date, Buyer shall assume and agree to pay, perform and discharge as and when due the following:
"(a) All liabilities of PDMTG reflected on the balance sheet for PDMTG for the fiscal year ending November 30,1972, referred to in Clause (a) of Section 4.1, and all liabilities incurred by PDMTG in the ordinary course of business in operating the Business for the account of Buyer in compliance with the terms of this Agreement from the Effective Date to the Closing Date except all such balance sheet liabilities and other such liabilities paid or discharged on or before the Closing Date.
"(b) All obligations and liabilities of PDMTG as of the Effective Date under all open sales contracts and purchase contracts referred to in the Document List attached hereto as Exhibit 'B'.
"(c) All obligations and liabilities of PDMTG as of the Effective Date under all other contracts, plans, agreements and commitments referred to in the Document List, except any obligation of PDMTG under Seller's Salaried Employee's Pension Plan for certain salaried employees of PDMTG (as to which special provision is made in Section 16.)
"(d) Buyer shall also assume Seller's liability under certain guarantees of borrowings in British Pounds made by Cone from the London branches of Chase Manhattan Bank N.A., Manufacturers Hanover Trust Company and the First National Bank of Boston not exceeding 600,000 British Pounds. Buyer agrees to use its best efforts to secure a release of Seller from its present guarantee of said borrowings.
"(e) All written product guarantees and warranties to the extent specified in Section 6.1.
"The assumption of liabilities and obligations contemplated by this Section 5.1 shall be effected by the execution and delivery by Buyer to Seller on the Closing Date of an assumption of liabilities in the form of the Assumption Of Liabilities attached hereto as Exhibit 'C'. Notwithstanding the foregoing provisions of this Section 5.1, Buyer shall not assume any obligations or liabilities not described in Clauses (a), (b), (c), (d) or (e) of this Section 5.1 or which Buyer and Seller have expressly agreed shall not be assumed by Buyer as shown in the Document List even though referred to in the Document List." (Underscoring sic.)