Opinion ID: 1432329
Heading Depth: 1
Heading Rank: 11

Heading: successor liability stanlabs pharmaceutical company

Text: The Martins contend that the trial court erred in granting summary judgment in favor of Stanlabs Pharmaceutical Company for acts of Stanley Drug Products, Inc. Traditionally, a corporation purchasing the assets of another corporation does not, by reason of the purchase of assets, become liable for the debts and liabilities of the selling corporation. The courts have recognized, however, that the traditional rule allows a transferring corporation, under certain circumstances, to effectively avoid its obligations to the detriment of creditors and minority shareholders. Thus, Washington has recognized four narrow exceptions to the traditional rule: (1) the purchaser expressly or impliedly agrees to assume liability; (2) the purchase is a de facto merger or consolidation; (3) the purchaser is a mere continuation of the seller; or (4) the transfer of assets is for the fraudulent purpose of escaping liability. Meisel v. M & N Modern Hydraulic Press Co., 97 Wn.2d 403, 405, 645 P.2d 689 (1982); Cashar v. Redford, 28 Wn. App. 394, 396, 624 P.2d 194 (1981); Casenote, Successor Liability in Washington: When a Successor Should Be Liable for a Predecessor's Products Liability  Meisel v. M & N Modern Hydraulic Press Company, 6 U. Puget Sound L. Rev. 323 (1983) (hereinafter Casenote, Successor Liability in Washington ). In any of these four circumstances, the court will find that the acquiring entity is a successor to the liabilities and obligations of the selling corporation. Recently, however, courts have come to recognize that the traditional rule of nonliability, with its four exceptions, was developed solely on corporate law principles to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions. These traditional rules of successor liability fail to address the particular circumstances of a products liability claimant. Turner v. Bituminous Cas. Co., 397 Mich. 406, 244 N.W.2d 873 (1976); Ramirez v. Amsted Indus., Inc., 86 N.J. 332, 431 A.2d 811 (1981); Dawejko v. Jorgensen Steel Co., 290 Pa. Super. 15, 434 A.2d 106 (1981); Ray v. Alad Corp., 19 Cal.3d 22, 560 P.2d 3, 136 Cal. Rptr. 574 (1977). Although the common law exceptions protect commercial creditors, they frequently leave the products liability plaintiff without a remedy. Since an acquiring corporation will generally purchase the transferor's assets for consideration adequate to avoid those known liabilities that the traditional rule seeks to protect (i.e., traditional debts and obligations), the traditional rule looks to the transferor as the source of recovery. If, however, the transferor has dissolved, and if more than two years have elapsed from the time of dissolution, the injured plaintiff is left without a remedy. Thus, while the traditional rules of corporate law satisfy the needs of traditional creditors whose claims arise before or soon after the predecessor's dissolution, those rules provide no adequate remedy for the typical products liability plaintiff whose claims frequently arise years after the product's purchase. The failure of the traditional rules of successor liability to meet the needs of the products liability plaintiff results from the rule's limited purpose. The rule's purpose is to protect persons having obligations against a business entity. Although a products liability plaintiff falls into that class of person, the traditional rule was fashioned to meet the needs of only those claimants whose claims were clearly identifiable at the time of the transfer. Fashioned long before the advent of the modern products liability doctrine, the traditional rule did not anticipate the social policies underlying the new doctrine. Consequently, the application of the traditional rule frustrates the policies of modern products liability. (Footnotes omitted.) Casenote, Successor Liability in Washington, at 332-33. See also Note, Postdissolution Product Claims and the Emerging Rule of Successor Liability, 64 Va. L. Rev. 861 (1978). In an effort to make the traditional corporate approach more responsive to products liability law, several courts have broadened the mere continuation exception in order to expand corporate successor liability in certain situations. See Turner, at 422-31; Cyr v. B. Offen & Co., 501 F.2d 1145, 1152-54 (1st Cir.1974). The mere continuation exception was first expanded by a federal court applying New Hampshire law in Cyr v. B. Offen & Co., 501 F.2d at 1152-54. In Cyr, two printing press employees were seriously injured in 1969 by the drying ovens of a machine manufactured in 1959 by B. Offen & Company, a sole proprietorship. In 1963, a group of employees of the original manufacturer had formed the defendant corporation, B. Offen & Company, Inc., and had purchased for cash the drying system of the presses from the executor of the estate of the sole proprietor. The contract of sale between the successor corporation and the predecessor's estate provided for the purchase of the predecessor's goodwill, contract and service obligations, and the continued operation of the predecessor's business without substantial change. The contract expressly disclaimed successor corporation liability for costs incurred by the torts of the predecessor. The court held that there was sufficient justification for a jury to treat the successor corporation as the mere continuation of its predecessor for the purposes of imposing tort liability for injuries caused by defective products. It found that the successor corporation continued to produce the same product, through the same employees, in the same physical plant, and under the same supervision as its predecessor, and that by use of essentially the same name held itself out to the world as the same enterprise. The Cyr court justified its holding on the public policy considerations underlying strict products liability. It recognized that the successor corporation, not being the original manufacturer, is not the specific legal entity that placed the defective product in the stream of commerce or made implied representations as to its safety. Nonetheless, there were several other policy justifications for imposing strict products liability on the successor. The first was, in essence, the risk-spreading approach: The very existence of strict liability for manufacturers implies a basic judgment that the hazards of predicting and insuring for risk from defective products are better borne by the manufacturer than by the consumer. The manufacturer's successor, carrying over the experience and expertise of the manufacturer, is likewise in a better position than the consumer to gauge the risks and the costs of meeting them. The successor knows the product, is as able to calculate the risk of defects as the predecessor, is in position to insure therefor and reflect such cost in sale negotiations, and is the only entity capable of improving the quality of the product. Cyr, at 1154. The court also reasoned that the successor corporation, having reaped the benefits of continuing its predecessor's product line, exploiting its accumulated goodwill and enjoying the patronage of its established customers, should be made to bear some of the burdens of continuity, namely, liability for injuries caused by its defective products. Perhaps the most significant decision expanding the mere continuation exception to the traditional rule of corporate successor nonliability is Turner v. Bituminous Cas. Co., 397 Mich. 406, 244 N.W.2d 873 (1976). The Turner court held that in applying the mere continuation exception to situations involving the sale of corporate assets for cash, continuity of shareholders between selling and purchasing corporations is not a relevant criterion for the purposes of determining successor liability for injury caused by defective products. Rather, it adopted a less stringent version of the mere continuation exception in the sale-of-assets-for-cash context, emphasizing continuity of the enterprise of the predecessor corporation. This continuity included: retention of key personnel, assets, general business, and trade name. Other indicia of continuation included the fact that the seller corporation ceased ordinary business operations, the purchasing corporation assumed those liabilities and obligations of the seller necessary for the continuation of the business, and the purchasing corporation held itself out as the effective continuation of the seller corporation. The courts of Wisconsin and Alabama have chosen to follow the Turner mere continuation approach to product liability. See Tift v. Forage King Indus., Inc., 108 Wis.2d 72, 322 N.W.2d 14 (1982); Andrews v. John E. Smith's Sons Co., 369 So.2d 781 (Ala. 1979). Rather than expand a rule designed for other purposes, the California Supreme Court developed an exception for successor liability specifically designed to deal with products liability claims. Ray v. Alad Corp., 19 Cal.3d 22, 560 P.2d 3, 136 Cal. Rptr. 574 (1977). In Ray, the manufacturer of a defective ladder had sold its assets for cash and dissolved prior to the products liability claim. A new and separately owned corporation acquired the plant, equipment, inventory, trade name, personnel, customer lists, and goodwill of the manufacturer, and continued the same line of business under the same corporate name. There was no intervening manufacturing hiatus during or after the sales transaction. The court recognized that if it applied the traditional successor liability rules, the victim would be without a remedy because the predecessor had received adequate consideration for its assets, distributed the consideration to its shareholders, and dissolved before the plaintiff's claim arose. The court determined that none of the four stated exceptions to the general rule of nonliability under the traditional corporate law approach was a sufficient basis for imposing liability on the purchasing corporation. Nevertheless, the court determined that a departure from that traditional approach was called for by the policies underlying strict tort liability for injuries caused by defective products. Rather than adopt the expanded mere continuation exception to the corporate law approach as developed in Cyr and Turner, the Ray court abandoned the traditional analysis. It developed instead the following formulation, which has since come to be known as the product line approach to successor corporation liability for injuries caused by defective products: We ... conclude that a party which 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, at 34. The Ray court formulated this successor liability test based on the underlying strict products liability policies of compensation of injured victims and the allocation of product defect causing injury costs throughout society. [C]onsiderations favoring continued protection for injured users of defective products.... include (1) the nonavailability to plaintiff of any adequate remedy against [the transferor] as a result of [their] liquidation prior to plaintiff's injury, (2) the availability to [the transferee] of the knowledge necessary for gauging the risks of injury from previously manufactured [units] together with the opportunity to provide for meeting the cost arising from those risks by spreading it among current purchasers of the product line and (3) the fact that the good will transferred to and enjoyed by [the transferee] could not have been enjoyed by [the transferor] without the burden of liability for defects in [units] sold under its aegis. Ray, at 25. The court's duty under the Ray rule is (1) to determine whether the transferee has acquired substantially all the transferor's assets, leaving no more than a mere corporate shell; (2) to determine whether the transferee is holding itself out to the general public as a continuation of the transferor by producing the same product line under a similar name; and (3) to determine whether the transferee is benefiting from the goodwill of the transferor. In Meisel v. M & N Modern Hydraulic Press Co., 97 Wn.2d 403, 405, 645 P.2d 689 (1982), this court had occasion to apply the Ray rule to a summary judgment proceeding. Although we held that we need not adopt the Ray rule under the factual circumstances of that case, we did note that the Ray criteria were salutary and not inconsistent with Washington products liability policy. Meisel, at 408 n. 1. Applying the Ray criteria to the summary judgment proceedings, we stated: With respect to Ray 's first justification, we may assume for summary judgment purposes that Meisel has no other remedy than that against Modern. With respect to Ray 's second justification, Modern's ability to assume M & N's risk-spreading role is certainly a factual question since it is in the same business and can anticipate like risks. And as to the third justification, fairness, the similarity of M & N's and Modern's name and product (Modern manufactures a custom line while M & N manufactured a standard line), and Modern's purported assumption of M & N's goodwill (the Los Angeles machinery broker thought the company had only undergone a name change) present factual questions. Meisel, at 407. This court concluded, however, that while all the factual issues were incompatible with summary judgment, successor liability was inapplicable because there had been no transfer of assets. [3] We now find it appropriate to adopt the Ray product-line criteria for successor liability in products liability actions. In doing so, we are in accord with the courts of New Jersey and Pennsylvania. See Ramirez v. Amsted Indus., Inc., 86 N.J. 332, 431 A.2d 811 (1981); Dawejko v. Jorgensen Steel Co., 290 Pa. Super. 15, 434 A.2d 106 (1981). The court in Dawejko noted the reasons for adopting the product-line exception as opposed to expansion of the traditional corporate acquisition exceptions: It is perhaps only a matter of style how one proceeds. One may retain the traditional exceptions but expand their boundaries, so that merger or continuation are held to include cases they once would not have included. Or one may adopt a new exception, such as the product-line exception. We believe it better to adopt a new exception. To the extent the law has changed  and so far, as the foregoing discussions indicates, it has changed in relatively few jurisdictions  the change may be explained as an attempt to implement the social policies underlying strict products liability. Ramirez v. Amsted Industries, Inc. [86 N.J. 332] at 358, 431 A.2d at 825. By adopting a new exception, this impetus is acknowledged and made plain, the other exceptions then remaining, to deal with cases not so much affected by the policy considerations that have led to the rule of strict liability for defective products. Dawejko, at 25-26. While both the product-line exception and the expanded mere continuation exception are founded on the same principles, we find it appropriate to retain the traditional corporate exceptions for their intended purposes and adopt the product-line exception specifically formulated for products liability claims. This narrowly drawn rule strikes a fair balance among the competing considerations of products liability and corporate acquisitions. Imposition of liability is properly based on the successor's receipt of a benefit from the predecessor's product line. The benefit of being able to take over a going concern manufacturing a specific product line is necessarily burdened with potential products liability linked to the product line. This standard allows the parties to a transfer to consider potential products liability and in fairness to the competing considerations still leaves some claimants uncompensated and some forms of transfer immune. In the case at bar, the same factors discussed by this court in Meisel preclude the grant of summary judgment to Stanlabs Pharmaceutical Company. All reasonable inferences must be resolved against the movant and considered in the light most favorable to the nonmoving party. Specifically, this court must assume, for summary judgment purposes, that the Martins have no other remedy than that against Stanlabs Pharmaceutical Company. The affidavits, depositions, and admissions show that Stanlabs Pharmaceutical Company purchased substantially all of the assets of Stanley Drug Products, Inc., including all going concern value, customers lists, and the name Stanley Drug Products, Inc. Further, issues of fact remain concerning Stanlabs Pharmaceutical Company's continuation of Stanley Drug Products, Inc.'s tabletizing and distribution of DES, the similarity of Stanlabs Pharmaceutical Company's and Stanley Drug Products, Inc.'s names and product lines, the use by Stanlabs Pharmaceutical Company of containers bearing Stanley Drug Products, Inc.'s name after Stanlabs Pharmaceutical Company succeeded to its assets, and Stanlabs Pharmaceutical Company's assumption of Stanley Drug Products, Inc.'s goodwill. Here, only Stanlabs Pharmaceutical Company moved for summary judgment. Given the trial court's apparent application of an incorrect legal standard  one that does not take into account our adoption of the Ray criteria  and given the facts recited above which arguably support a finding of successor liability, we hold that the trial court erred in granting Stanlabs Pharmaceutical Company's motion for summary judgment. We affirm the trial court's grants of summary judgment as to the remaining defendants finding no material issues of fact concerning their exculpation from liability. [3]