Opinion ID: 1104454
Heading Depth: 1
Heading Rank: 1

Heading: The Potential Liability of Matrix-Churchill

Text: The trial court, sitting without a jury by agreement of the parties, heard the case on August 31, 1983. The testimony of Robert McFarland, President of new Cyril Bath was taken, and the depositions of Messrs. Homza, Kiggen, and Ellis were admitted into evidence. On October 4, 1983, the trial court entered a final order finding that a de facto merger had occurred between old Cyril Bath and Matrix-Churchill before the sale of the Cyril Bath assets to new Cyril Bath. The trial court cited our cases of Andrews v. John E. Smith's Sons Co., 369 So.2d 781 (Ala.1979), and Rivers v. Stihl, Inc., 434 So.2d 766 (Ala.1983), and noted that those cases had spoken approvingly of Turner v. Bituminous Casualty Company, 397 Mich. 406, 244 N.W.2d 873 (1976). Following this order, Matrix-Churchill moved for a new trial on the following ground, among others: 2. For that the testimony presented in this cause namely that of Robert McFarland, the president of the New Cyril Bath Company indicated that the new company, that is the New Cyril Bath Company, did not advertise press brakes or promote their sales in any way or identify themselves with the press brake or product brake line. Further, that in the deposition taken by Cyril Bath Company in this cause, Mr. McFarland testified at Page 14 of that deposition that they did not advertise in any trade publication. That subsequent to the trial and the testimony taken in this cause, the defendant, Matrix-Churchill has ascertained that the said New Cyril Bath Company does, in fact, advertise and in fact has a listing in the Thomas Register of 1983, a copy of listing in the register is attached hereto wherein the New Cyril Bath Company advertises that they do, in fact, manufacture press brakes.... 3. For that the attorneys for the defendant, Matrix-Churchill did not have this information in hand at the trial of this cause which was tried before this Honorable Court on the 31st day of August 1983. 4. For that the findings of the court are based upon the testimony of Mr. McFarland and in the findings of the court, the court states that the New Cyril Bath Company did not hold itself out as a manufacturer of press brakes when, in fact, the advertisement from the Thomas Register showed that this is incorrect. 5. For that the finding of the court would have been changed had the defendant, Matrix-Churchill been allowed to have the information regarding the advertisements in the Thomas Register. 6. For that the knowledge of this advertisement was totally within the hands of the defendant, Cyril Bath Company, and that the testimony offered by Cyril Bath Company did not lead one to conclude that such advertisements were made. After a hearing on this motion, the trial court amended its order of October 4, 1983, abandoning the earlier finding of a  de facto merger and substituting the instrumentality doctrine for piercing the corporate veil set out in Forest Hill Corporation v. Latter & Blum, 249 Ala. 23, 29 So.2d 298 (1947), as applied in Krivo Industrial Supply Co. v. National Distillers and Chemical Corporation, 483 F.2d 1098 (5th Cir.1973), and Kwick Set Components v. Davidson Industrial, Inc., 411 So.2d 134 (Ala.1982), again holding Matrix-Churchill liable. Springsteen, the plaintiff, and Matrix-Churchill, the cross-claimant, appealed from that order. The liability vel non of a successor corporation has been explored previously by this Court, the applicable principles having been set forth in a recent decision, Rivers v. Stihl, Inc., 434 So.2d 766, 771 (Ala.1983): Liability of a successor corporation under corporation law is largely dependent on the form of the acquisition. When corporations merge, the successor remains liable for its predecessors' liabilities. Birmingham Trust National Bank v. State, 292 Ala. 335, 294 So.2d 153 (1974). This result is also obtained where, regardless of the denomination of the transaction by the parties, the acquisition constitutes a de facto merger. See Shannon v. Samuel Langston Co., 379 F.Supp. 797 (W.D.Mich.1974). When, on the other hand, a corporation purchases the assets of another company the transferee is generally not liable unless (1) there is an express 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. 15 Fletcher, Cyclopedia Corporations § 7122 (Perm. ed. 1973); 19 Am.Jur.2d Corporations § 1546 (1965). In the emerging field of products liability a separate body of law regarding the liability of successor corporations has begun to develop. See, e.g. Ramirez v. Amsted Industries, 86 N.J. 332, 431 A.2d 811 (1981); Ray v. Alad Corp., 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3 (1977); `Products LiabilityLiability of Transferee for Defective Products Manufactured by Transferor,' 30 Vand.L.Rev. 238 (1977). While recognizing that all of the policies underlying the rationales of other courts may not be applicable to the Alabama Extended Manufacturer's Liability Doctrine, this court adopted a `basic continuity of enterprise' test regarding the issue of transferee liability derived from Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873 (1976), which contains an extensive analysis of the issues involved. See Andrews v. John E. Smith's Sons Co., 369 So.2d 781 (Ala.1979). We ruled that a transferee may be held liable for its predecessor's liabilities `where the totality of the transaction demonstrates a basic continuity of the enterprise.' Andrews at 785. In the present case, the trial court first found that there had been a de facto merger between old Cyril Bath and Matrix-Churchill, observing that the management, and operations, of these two corporations were so interwoven that they were one in [sic] the same, and Cyril Bath was merely an instrumentality of Matrix-Churchill. In making this finding, the trial court doubtless was applying the basic continuity of enterprise test adopted by the Court in Andrews v. John E. Smith's Sons Co., 369 So.2d 781, 785 (Ala.1979), derived from Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873 (1976), which contains an extensive study of this aspect of products liability, including this quotation from Cyr v. B. Offen & Co., 501 F.2d 1145 (1st Cir.1974), at 1154: `   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 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. `... [I]t is true that the successor, by definition, was not the legal entity which launched the product on the stream of commerce or made an implied representation as to its safety. But in the most real sense it is profiting from an exploiting all of the accumulated good will [sic] which the products have earned, both in its outward representations of continuity and in its internal adherence to the same line of equipment.' ... Turner, supra, added at 244 N.W.2d 882: Where the successor corporation represents itself either affirmatively or, by omitting to do otherwise, as in effect a continuation of the original manufacturing enterprise, a strong indication of continuity is established. Justice would be offended if a corporation which holds itself out as a particular company for the purpose of sales, would not be estopped from denying that it is that company for the purpose of determining products liability.... That court ultimately adopted as guidelines for determining continuity of interest, and therefore responsibility, the first, third, and fourth criteria quoted in Shannon v. Samuel Langston Co., supra : (1) There is a continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations. .... (3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible. (4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation. Under these guidelines, was the trial court's finding of a de facto merger between old Cyril Bath and Matrix-Churchill supported by the facts? Matrix-Churchill purchased 99.7% of Cyril Bath's common stock in 1969. James Kiggen, who was president and chief executive officer of the old Cyril Bath, also assumed those same positions with Matrix-Churchill following the purchase by Matrix-Churchill, and in fact operated both companies from the same office. Both companies had a common secretary-treasurer and comptroller, a common purchasing agent, and a common board of directors. Cyril Bath's operations continued in the same plant location as before, under Matrix-Churchill's substantial, though not complete, ownership. Thus, there was a continuation of old Cyril Bath's enterprise under the first criterion. Neither the second nor the third criterion was established, however. Quite the contrary, the record discloses that the old Cyril Bath's operations continued separately from those of Matrix-Churchill's operations after its purchase by the latter. It is not contended that old Cyril Bath ceased its operations and liquidated. In fact, it continued, albeit under joint management by Matrix-Churchill, until the sale to Fairfield. In the continuation of old Cyril Bath's operations after its stock had been purchased by Matrix-Churchill, nothing is shown to justify the conclusion that Matrix-Churchill, the purchaser, assumed Cyril Bath's liabilities and obligations ordinarily necessary for the uninterrupted continuation of [old Cyril Bath's] normal operations. Thus, the third component of a de facto merger was also missing. Accordingly, there was no continuity of enterprise by Matrix-Churchill in its purchase of Cyril Bath in 1969, under Andrews, supra, and Rivers, supra . What is shown by the record is that Matrix-Churchill purchased 99.7% of old Cyril Bath's stock in 1969 and continued to operate it as a separate company. By purchasing substantially all of that stock, Matrix-Churchill did not effect a consolidation or merger which could be construed as an implied assumption of old Cyril Bath's obligations. `[T]he test [of a mere continuation] is not the continuation of the business operation but the continuation of the corporate identity.' The indicia of `continuation' are a common identity of stock, directors, and stockholders and the existence of only one corporation at the completion of the transfer .... (Emphasis added.) Travis v. Harris Corp., 565 F.2d 443, 447 (7th Cir.1977). The record clearly establishes that Matrix-Churchill and old Cyril Bath carried on distinct businesses. The former's business was importing and selling, and servicing, British-made machine tools used in cutting metals. Old Cyril Bath manufactured and serviced metal forming and stretch forming equipment, press brakes, and contracted for metal forming services. These two businesses maintained separate facilities, although they were located in the same building. Their sales and engineering departments were distinct, and each served different customers in different industries. Old Cyril Bath employed approximately 45 persons; Matrix-Churchill about 12. While their managements overlapped, that fact in itself does not establish resulting control by the successor. Krivo Industrial Supply Co. v. National Distillers and Chemical Corporations, supra . Finally, the record does not disclose any express agreement between Matrix-Churchill and old Cyril Bath whereby the former was to assume the obligations of old Cyril Bath, nor any facts justifying the conclusion that Matrix-Churchill's purchase of old Cyril Bath's stock was a fraudulent attempt to escape liability. Quite the contrary, the press brake in question was manufactured by old Cyril Bath before the 1969 purchase of Cyril Bath stock by Matrix-Churchill, and plaintiff Springsteen was injured five years after new Cyril Bath acquired old Cyril Bath's operation. Neither those circumstances nor any others contained in the record allow any conclusion of fraud on the part of either Matrix-Churchill or old Cyril Bath. Under these circumstances, the general rule applies to the questioned liability of Matrix-Churchill: the corporation purchasing the assets of another company generally is not liable. Rivers v. Stihl, Inc., supra, at 771. None of the exceptions to that rule can be applied to render Matrix-Churchill liable as old Cyril Bath's successor under the facts adduced. We conclude, moreover, that the trial court's application of the piercing the corporate veil doctrine in order to impose potential liability upon Matrix-Churchill, likewise was erroneous. The facts of this case negate the conclusion that Matrix dominated and controlled old Cyril Bath to the extent that old Cyril Bath became the mere instrumentality of Matrix-Churchill so as to enable Matrix-Churchill to become a vehicle for evading responsibility. Krivo, supra ; Forest Hill Corp. v. Latter & Blum, supra . The control required under the instrumentality rule amounts to total domination of the subservient corporation [old Cyril Bath], to the extent that the subservient corporation manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation. Kwick Set Components, Inc. v. Davidson Industries, Inc., 411 So.2d 134 (Ala.1982), quoting Krivo, supra, at 1107. Nor is there any evidence that Matrix-Churchill itself, by its stock purchase or otherwise, caused Springsteen any harm or injury through misuse of any control. Krivo, supra .