Opinion ID: 1693685
Heading Depth: 1
Heading Rank: 2

Heading: Continuity of Enterprise

Text: In Turner, supra, this Court held that a corporate successor may be liable for its predecessor's defective products if the totality of the acquisition demonstrates a basic continuity of the enterprise between the predecessor and successor corporations. Thus, under Turner, successor liability becomes an element of the plaintiff's prima facie case of products liability. Turner was a departure from the traditional rule of nonliability for corporate successors who acquire the predecessor through a purchase of assets. [4] The traditional rule of successor liability examines the nature of the transaction between predecessor and successor corporations. If the acquisition is accomplished by merger, with shares of stock serving as consideration, the successor generally assumes all its predecessor's liabilities. However, where the purchase is accomplished by an exchange of cash for assets, the successor is not liable for its predecessor's liabilities unless one of five narrow exceptions applies. The five exceptions are as follows: (1) where there is an express or implied assumption of liability; (2) where the transaction amounts to a consolidation or merger; (3) where the transaction was fraudulent; (4) where some of the elements of a purchase in good faith were lacking, or where the transfer was without consideration and the creditors of the transferor were not provided for; or (5) where the transferee corporation was a mere continuation or reincarnation of the old corporation. (19 Am Jur 2d, Corporations, § 1546, pp. 922-924; Malone v. Red Top Cab Co., 16 Cal.App.2d 268, 273 [60 P.2d 543 (1936) ].) [ Turner, supra at 417, n. 3, 244 N.W.2d 873, quoting Schwartz v. McGraw-Edison Co., 14 Cal.App.3d 767, 92 Cal.Rptr. 776 (1971).][ [5] ] The traditional rule reflects the general policy of the corporate contractual world that liabilities adhere to and follow the corporate entity. It serves to protect creditors and shareholders, to facilitate determination of tax responsibilities, and to promote free alienability of business assets. In the context of tort law, the traditional rule with its narrow exceptions has been criticized as an elevation of form over substance, that may leave victims of a defective product without recourse. These policy concerns shaped this Court's expansion of the traditional rule in Turner. After examining the relevant policy concerns, this Court in Turner concluded that a continuity of enterprise between a successor and its predecessor may force a successor to accept the liability with the benefits of such continuity. Id. at 430, 244 N.W.2d 873. Turner held that a prima facie case of continuity of enterprise exists where the plaintiff establishes the following facts: (1) there is continuation of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations of the predecessor corporation; (2) the predecessor corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; and (3) the purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the selling corporation. Turner identified as an additional principle relevant to determining successor liability, whether the purchasing corporation holds itself out to the world as the effective continuation of the seller corporation. [6] Application of Turner in this case is complicated by the fact that the manufacturer, Cone I, is twice removed from defendant Cone-Blanchard. In other words, Cone-Blanchard did not directly purchase Cone I. Rather, Cone I was purchased by Pneumo Dynamics. Pneumo Dynamics then continued manufacturing the Conomatic line of machines through its wholly owned subsidiary, PDMTG, and formed a new company, Cone II, for purposes of carrying on the Cone name. Cone-Blanchard purchased the assets of PDMTG and the stock of Cone II. It then took over the manufacture of Conomatic machines. We note at the outset, that the tertiary nature of the relationship between Cone I and Cone-Blanchard generally factors against a finding of continuity, but does not preclude it. [7] Although in the appropriate case a tertiary successor might be liable for a manufacturer's defective product, we conclude, on the basis of our interpretation of Turner, that this is not such a case. This case illustrates the limits of Turner's applicability. Turner's holding indicates that the continuity of enterprise doctrine applies only when the transferor is no longer viable and capable of being sued: In our analysis of the matter we must conclude at this point that in a products liability case where the corporation fabricating the injury-producing item changes corporate structure before injury and suit, as a matter of policy neither the victim nor the successor corporation has a different interest vis-a-vis the suit whatever the type of corporate metamorphosismerger, de facto merger, or sale of assets for cash so long as the transferor corporation becomes defunct. [ Id. at 429, 244 N.W.2d 873 (emphasis added).][ [8] ] The thrust of the decision in Turner was to provide a remedy to an injured plaintiff in those cases in which the first corporation legally and/or practically becomes defunct. Turner, supra at 419, 244 N.W.2d 873. Thus, the Turner Court reasoned that distinctions between types of corporate transfers are wholly unmeaningful because the injured plaintiff has no place to turn for relief except to the second corporation. Id. The underlying rationale for the Turner Court's decision to disregard traditional corporate law principles was to provide a source of recovery for injured plaintiffs. Pneumo Dynamics, now Pneumo Abex, continued on as an active corporation after the transaction with Cone-Blanchard. While failure of the predecessor to dissolve may not be fatal in every action for successor liability, especially, for example, where the predecessor continues as a shell or is otherwise underfunded, the fact that a predecessor remains a viable source for recourse is. Certainly, where a plaintiff has in fact successfully pursued a remedy against a predecessor, the policy concerns that underscored the adoption of the continuity of enterprise theory in Turner simply are not present. Here, in light of the availability of Pneumo-Abex to suit as evidence by plaintiff's $500,000 settlement with Pneumo-Abex, Turner is inapplicable.