Title: Lefever v. K.P. Hovnanian Enterprises, Inc., et al
Citation: N/A
Docket Number: a-211-97
State: new-jersey
Issuer: new-jersey Supreme Court
Date: July 29, 1999

(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). 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) 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. JUSTIN LEFEVER, Plaintiff-Respondent, v. K.P. HOVNANIAN ENTERPRISES, INC., LULL ENGINEERING CO., INC. and GILES &amp; 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 &amp; Graziano, attorneys). 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. 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. [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. 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. In Ramirez, supra, 86 N.J. at 343, this Court stated that [t]he form of the corporate transaction does not control the [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) /index.htm&gt;. 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. JUSTIN LEFEVER, Plaintiff-Respondent, v. K.P. HOVANANIAN ENTERPRISES, INC., LULL ENGINEERING CO. and GILES &amp; 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 &amp; 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. NO. A-211 JUSTIN LEFEVER, Plaintiff-Respondent, v. K.P. HOVNANIAN ENTERPRISES, INC., et al., Defendants, and LULL INDUSTRIES, INC., Defendant-Appellant. DECIDED