Court Opinion

ID: 9693206
Source: CourtListenerOpinion
Date Created: 2023-08-25 16:30:03.346006+00
Date Added: 2024-06-11T18:19:42.547770
License: Public Domain

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 “produet-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.
[Ramirez v. Amsted Industries, Inc., 86 N.J. 332, 358, 431 A.2d 811 (1981).]
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, 709 A.2d 779 (1998).
*328This 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 plaintiffs. Initially, plaintiff sued “Lull Engineering Co., Inc.,” for manufacturing and design defects in producing the forklift. Plaintiff also joined as defendants Giles & 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.
The bankruptcy court stayed all actions against the debtor. In January 1995, however, the trustee sent plaintiffs counsel a letter stating that the stay did not apply because the present action is *329not against the debtor, Lull II. On November 14, 1996, plaintiff joined Lull III as a defendant.
One justification for the product line exception when the original manufacturer no longer exists at the time of the injury is that an injured party may be left without a remedy. Mettinger, supra, 153 N.J. at 383, 709 A.2d 779. When, however, the injured party has recourse against the original manufacturer, that consideration should yield to the unfairness of imposing liability on an innocent successor. The scale could tilt back toward the imposition of liability, if the successor agreed to assume liability in the asset-purchase agreement or if it knowingly participated in a fraudulent asset transfer. Here, the purchaser of Lull II’s assets expressly disclaimed liability. Plaintiff, moreover, does not allege that Lull III participated in a fraudulent asset transfer or engaged in a sham transaction.
Significantly, plaintiff had recourse against Lull II, which had assumed contractually the liability of the manufacturer, Lull I. Admittedly, Lull IPs bankruptcy could affect the amount paid on plaintiffs claim, but no more so than it would affect the claims of other creditors.
As the Third Circuit Court of Appeals stated, “If a remedy against the original manufacturer was available ... the consumer has not been obliged to bear the risk and the justification for imposing successor liability evaporates.” Conway v. White Trucks, 885 F.2d 90, 95 (1989). To the same effect, the Seventh Circuit Court of Appeals has written:
Had the [plaintiffs] been parties to the bankruptcy proceeding, they would have had no possible basis for a suit against [the successor]____because the successor-ship doctrine on which they rely is inapplicable if the plaintiff had a chance to obtain a legal remedy against the predecessor, even so limited a remedy as that afforded by the filing of a claim in bankruptcy. [Zerand-Bernal, Inc. v. Cox, 23 F.3d 159, 163 (7th Cir.1994) (Posner, J.) ].
The majority suggests that plaintiff should be permitted to proceed with his suit against Lull III because his claim was not “dealt with” in the bankruptcy proceedings. Continuing, the majority remarks that “even if a bankruptcy court were to seek to *330‘deal’ with preconfirmation conduct, at a minimum there probably should be notice to the class of claimants ... and some provision for such claimants should be made under the plan of reorganization.” See ante at 320-21, 734 A.2d at 298. Plaintiffs claim was not “dealt with,” however, only because he failed to file a claim in the bankruptcy proceedings, not because he had no notice of the bankruptcy.
The majority opinion limits the power of the bankruptcy court by denying it the power to permit the sale of the debtor’s assets free of liability for tort claims. Section 363(f) of the Bankruptcy Code provides, however, that the bankruptcy court shall have the power to sell assets “free and clear of any interest in ... property.” 11 U.S.C.A. 363(f). Indeed, the sale of Lull II’s assets, as approved by the bankruptcy court, so provided. A question remains whether such a sale is free and clear of tort claims that arise after the sale. Compare In re White Motor Credit, 75 B.R. 944, 950-51 (Bankr.N.D.Ohio 1987) (finding that sale free and clear precluded successor liability for tort claim arising after sale) and In re Paris Industries, 132 B.R. 504, 510 (D.Maine 1991) (finding that bankruptcy court could enforce sale free and clear by enjoining product liability action) with Zerand-Bernal v. Cox, 23 F.3d 159, 164 (7th Cir.1994) (finding that bankruptcy court did not have power to enjoin state court product liability action for successor liability on post-sale claim) and In re Fairchild Aircraft, 184 B.R. 910, 918 (Bankr.W.D.Tex.1995) (holding that sale “free and clear” extinguishes only in rem interests, not in personam liabilities). No case, however, has ever held a successor corporation liable for a tort claim that arose before court approval of the sale.
When a tort occurs before bankruptcy, courts have treated a tort claimant like all other claimants. Conway v. White Trucks, 885 F.2d 90, 95 (1989); In re All American of Ashburn, Inc., 56 B.R. 186, 190 (Bankr.N.D.Ga.1986). In that context, a sale of assets “free and clear” does not result in the imposition of liability on the successor corporation. To impose successor liability would *331frustrate “the orderly scheme of the bankruptcy law by allowing some unsecured creditors to recover without regard to the priority order of the bankruptcy proceedings.” Ninth Avenue Remedial Group v. Allis-Chalmers Corp., 195 B.R. 716 (N.D.Ind.1996); see also All American, supra, 56 B.R. at 190. A bankruptcy court’s authority to sell assets free and clear of existing tort claims is “implicit in the court’s general equitable powers and its duty to distribute debtor’s assets.” See White Motor Credit, supra, 75 B.R. at 948. The effect of subjecting the successor to the risk of liability is to diminish the value of the assets to the extent of the cost of that risk. That diminution in value will redound to the detriment of all other creditors who seek to participate in the distribution of the bankruptcy estate. Permitting a tort claimant to pursue a successor after a bankruptcy sale would grant that claimant a priority over other claimants who were paid in accordance with the Bankruptcy Code and would produce a negative impact on the trustee’s ability to sell assets of the estate at a fair price. See All American, supra, 56 B.R. at 190. Those considerations should tip the scale back toward the general rule of not imposing liability on a successor when a claimant has been injured before the bankruptcy proceedings and provided with notice and the opportunity to participate in the proceedings. In sum, the imposition of liability on the purchaser of assets from a bankrupt estate “free and clear of any interests in property” skews the balance of interests in the product line exception.
I respectfully dissent. Justices GARIBALDI and COLEMAN join in this opinion.
For affirmance — Chief Justice PORITZ and Justices HANDLER, O’HERN and STEIN — 4.
For reversal — Justices POLLOCK, GARIBALDI and COLEMAN — 3.