Court Opinion

ID: 9713508
Source: CourtListenerOpinion
Date Created: 2023-08-26 05:16:37.778719+00
Date Added: 2024-06-11T18:23:19.105377
License: Public Domain

HEFFERNAN, J.
The question posed in this case is whether a business corporation which acquired substantially all of the assets of a predecessor sole proprietorship but which is substantially the same business organization and manufactures an almost identical product as its predecessor may be liable for injuries caused by a defective product manufactured by the predecessor. The circuit court for Barron county, JAMES C. EATON, Circuit Judge, concluded that the successor corporation could not be liable and granted the motion of the defendants for summary judgment dismissing the plaintiffs’ complaint.
The court of appeals affirmed the trial court judgment, concluding that, because the original manufacturer was a sole proprietor, rather than a corporation, no “corporate” successor liability could exist. It also relied upon the general corporate rule that, where a corporation has purchased the assets of another corporation, the successor corporation does not assume the liabilities of the selling corporation.
*74Because it is irrelevant that the predecessor business organization was a sole proprietorship, rather than a corporation, and because the present corporation is a mere continuation of the original business, we reverse the court of appeals and remand the cause for further proceedings.
The underlying accident occurred on October 4, 1975, when the plaintiff, Calvin Tift, seventeen years, of age, was operating a tractor with a chopper box attachment used for cutting and removing silage from a field on his father’s farm. Calvin was drawn into the chopper box and suffered severe and painful personal injuries. The allegedly defective chopper box which caused the injuries was manufactured in 1961-62 by a sole proprietorship doing business as Forage King Industries.
The record shows that, prior to 1957, Vernon L. Ned-land, as sole proprietor, operated a welding works at Prairie Farm, Barron County, Wisconsin. In that year he sold his business to Woodrow W. Wiberg, who continued to operate as a sole proprietor under the 'name Nedland Forage King. The trial court found that the chopper box which allegedly cause the injuries to Calvin was built by Wiberg’s sole proprietorship in 1961 or 1962. At the time the chopper box was built, Wiberg was operating under the name of Forage King Industries. In 1968, Wiberg and Nedland formed a partnership and, as the trial judge found, it shortly thereafter “metamorphosed into a corporation.” As originally incorporated, Wiberg and Nedland were the sole shareholders of the corporation known as Forage King Industries, Inc. The corporation moved its place of operations from Prairie Farm to Ridgeland, Wisconsin. It retained the same employees and manufactured identical products, including chopper boxes, retained the same name, Forage King Industries, Inc., and sold to the same dealers as had the sole *75proprietorship when owned solely by Wiberg. Late in 1968, Nedland sold his stock to Wiberg but remained as a director of the corporation for several years. Wiberg managed the corporation until January 15, 1975, when it was acquired by the Tester Corporation by the purchase of all of Wiberg’s stock. Forage King Industries, Inc., remained at the same location and continued to manufacture substantially the same products, including chopper boxes.
The trial court found that there was nothing in the record to show that any of the successive business organizations had expressly or impliedly agreed to assume liabilities of their predecessors.
On January 30, 1978, Calvin Tift and his father commenced an action against Forage King Industries and its insurance company, Auto-Owners Insurance Company. The complaint alleged that Auto-Owners was the insurer of Forage King at the time Calvin was injured. It alleged that the present Forage King Industries, Inc., was a successor to the manufacturer of the chopper box and was, accordingly, responsible for the accident. The complaint purported to state alternative causes of action in negligence and in strict liability.
No facts were disputed on the motion for summary judgment, and accordingly the trial court decided the case as a matter of law and held that there was no liability. It relied upon the rule set forth in Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977), “. . . that a corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation.”
The trial court recognized that there are, however, four well-recognized exceptions under which liability may be imposed upon a purchasing corporation:
“(1) when the purchasing corporation expressly or impliedly agreed to assume the selling corporation’s lia*76bility; (2) when the transaction amounts to a consolidation or merger of the purchaser and seller corporations; (3) when the purchaser corporation is merely a continuation of the seller corporation; or (4) when the transaction is entered into fraudulently to escape liability for such obligations.” Leannais, supra at 439.
The trial court found none of these exceptions applicable and, accordingly, applied the general rule of corporate law that, where one company sells or otherwise transfers all of its assets to another company, the transferee is not liable for the debts and liabilities of the trans-feror. Fletcher, Cyclopedia Corporations, Vol. 15, sec. 7122, p. 188. The trial court placed heavy emphasis upon the fact that the chopper box in question had been built by a predecessor sole proprietorship and, therefore, the present Forage King Industries, Inc., could not be a successor corporation to the original manufacturer, because the original manufacturer was not a corporation. The Court of Appeals followed the same reasoning in affirming the trial court judgment.
Turning first to the position of both the trial and appellate courts that there cannot be a corporate successor unless the predecessor was a corporation, we conclude that the responsibility of a subsequent business organization, irrespective of the nature of either the predecessor or successor, proprietorship, partnership, or corporation, cannot be facilely dismissed on the basis of the semantics of the rule. There is, of course, some rationality to the position taken by the Circuit Court and the Court of Appeals. As the court of appeals said at 331:
“When a corporation is purchased by a second corporation, the first disappears as a legal entity and, consequently, cannot be sued.”2
*77The court of appeals, however, recognized the paramount policy reasons for imposing liability on a business which succeeds another because:
“[N]o corporation should be permitted to place into the stream of commerce a defective product and avoid liability through corporate transformations or changes in form only.” At 331.
The court of appeals concluded, however, that this obviously correct principle had no application in the instant case because Wiberg, who had operated as a sole proprietorship when he built the chopper box, remained available as a defendant subject to suit, and therefore necessity did not require that any successor business organizations be defendants.
We have no quarrel with the court of appeals’ decision that Wiberg has not absolved himself from liability and remains a proper defendant, but logic does not lead to the conclusion that, because Wiberg is a proper defendant, his successor business organizations cannot be also. The basic logic of the court of appeals’ position leads rather to the conclusion that successor corporations may be sued, as well as the original proprietorship, which manufactured the chopper box. It seems reasonably clear that the court of appeals, based on the principle it enunciated, would have found liability as a matter of policy, had the predecessor manufacturer been a corporation rather than a proprietorship. We hold as a matter of law that the rule and its exceptions are applicable, irrespective of whether a prior organization was a corporation or a different form of business organization.
It should be emphasized that the corporate rule that exempts a successor company from the liabilities of its *78predecessor when it has purchased the assets of the predecessor is subject to the four exceptions recited in Lean-nwis, supra, and considered by the trial court and Court of Appeals.3
Two of these exceptions, the first and the fourth, are unrelated to the problem at hand, for where there is an express or implied assumption of the selling corporation's liabilities — tort, contract, or both — the problem is obviated; and where the transaction is fraudulent, protection is afforded under the law of fraudulent conveyances. The other two “exceptions” are, however, relevant to our discussion of the purposes and policies behind causes of action for tort. These exceptions are not really exceptions at all, for when applicable they swallow up the rule of nonliability.
The second exception is that there is liability when the transaction amounts to a consolidation or merger (de facto or otherwise) of the purchaser and seller corporations. The third “exception” exists when the purchaser corporation is merely a continuation of the seller corporation. When viewed in the context of a tort caused by a defective product, these two “exceptions” merely recite that, where either one is applicable, there is “identity,” because in substance the successor business organization which the plaintiff sues is, despite organizational metamorphosis, the same business organization which manufactured the product which caused his injury.
As Fletcher, supra, points out, the rule and its exceptions were designed initially to protect contract or quasi-contract creditors of a dissolved business organization and, hence, as a general group, all four exceptions are irrelevant to tort except as to the extent that the second and third exceptions are indicia of “identity.” These *79exceptions are declaratory of tests to be applied to encourage “piercing the corporate veil” and to look to the substance and effect of business transformations or reorganizations to determine whether the original organization continues to have life or identity in a subsequent and existing business organization.
They can be viewed also as tests for “privity” with the subsequent organization even if the dealings were only between the original business organization and the ultimate consumer or the party injured.
Exceptions two and three to the corporate rule demonstrate that, when it is the same business organization that one is dealing with, whether it be by consolidation, merger, or continuation, liability may be enforced. These are tests of identity. Suit is possible in these circumstances, because there would be privity with the actual seller or manufacturer, i.e., the exceptions are guidelines to determine under what circumstances the original entity continues to exist, albeit in an altered form.
By applying these rules of corporate law, it is apparent, either by application of exception two or three that the present corporation is the same as the prior organization, i.e., it has substantially the same identity although transformed by merger, consolidation, etc. Hence, an injured party who dealt with the predecessor organization could sue the successor. Where a defendant has retained the same identity, though perhaps not the same name or form of organization, the element of privity is satisfied.
If there is business succession, then in effect the plaintiff is suing the “same” business that produced the original product. Under such a state of facts, a novel or unusual problem is not presented. A court merely need determine that the defendant, despite business transformations, is substantially the same as the original manufacturer. This is the application of existing *80corporate law; and such law governs the decision in this case, because it is clear that there is identity between the original manufacturer and the present Forage King Industries, Inc.
It should be emphasized, however, that the possible fixing of liability on the subsequent manufacturer of the product line does not necessarily exonerate the prior manufacturer of the defective product. The present organization may well have the right of indemnity. What is important, however, is that the plaintiff may seek recourse against either. Where the burden of payment eventually falls between an existing organization that was a prior manufacturer and a present manufacturing organization that is a continuation of the former ought not be a concern of an injured plaintiff.
Our case, however, is a clear case of “identity.” The present Forage King Industries, Inc., is, for the practical purposes relevant to consumer protection, the continuation of the same entity as that operated as a sole proprietorship by Wiberg.
The present Forage King Industries, Inc., acquired all the assets of Forage King Industries, which was incorporated originally by Wiberg and Nedland in 1968, and that business organization derived its assets by taking over all the assets of the partnership of Wiberg and Nedland, which in turn derived its assets from the sole proprietorship of Wiberg, which actually built the defective forage box in 1961 or 1962. Essentially the same manufacturing operation and the manufacture of the same product, the forage box, was continued through all these organizational transformations. The present corporation is in fact substantially identical to the organization that manufactured the allegedly defective chopper box and is therefore liable. Only the form of business organization has changed.
*81The defendant, Forage King Industries, Inc., argues, however, that not only is the fixing of liability inappropriate under the traditional tests and the exceptions to the general corporate rule of no successor liability, but also that the policy concern expressed in some cases that there can be no one to respond to the injured claimant if the successor organization is not answerable is simply not applicable in this case. The defendant states that the plaintiffs’ concern should properly be “whether after merger or consolidation of two corporations the former corporation no longer exists and is not available to suit,” but this concern, defendant asserts, is not present in the instant case, because Wiberg or, alternatively, Nedland, or the partnership of the two is still available for suit, because they, as individuals “are still available.”
The defendant also points out that, where, as here, a sole proprietorship has sold out, there is no reason to assume, as a matter of social policy, that that former sole proprietor is unable to answer in damages and that, even under the traditional exceptions, unless the sale is for less than adequate consideration or is fraudulent, it should be assumed that the original proprietors are able to respond to lawfully imposed liabilities and pay damages. This may well be; and, of course, Wiberg has not been dismissed from the suit. As we have pointed out above, Wiberg might well, under the procedural posture of this case, be responsible in indemnity to the present Forage King Industries, Inc.
In effect, then, Forage King Industries, Inc., is arguing that in the instant case there is indeed another and different “deep pocket” from which the plaintiffs might recover. This may be relevant in the event of an attempt of recovery over by the present corporation against the original sole proprietor, but it does not dispel the potential liability of Forage King Industries, Inc., to the plaintiffs. Whether there can be a recovery over by *82a successor organization need not concern a plaintiff. We are not at this stage of the proceedings concerned with the validity of the present corporation’s claim over against the proprietor of a predecessor organization.
In the instant case, the record does not reveal whether Wiberg is judgment-proof, as the plaintiffs have asserted. If he indeed is, and we were to adopt the position espoused by the defendant, there could be no meaningful recovery against him.
Basically, however, all that the argument of the defendant tends to prove is that both the predecessor and the successor manufacturers are in a better position to spread the cost and assume the liability than is a helpless plaintiff. The undercurrent of the defendant’s argument, of course, is that the predecessor organization, Wi-berg’s sole proprietorship, is in fact “morally” responsible and at fault and should therefore be the only entity answerable in damages. However, as we have pointed out, the present Forage King Industries, Inc., is substantially the identical organization that manufactured the defective box and is answerable to an injured plaintiff by the same reasoning that the original manufacturer would be.
We hold that the present Forage King Industries, Inc., is substantially the same business organization that manufactured the allegedly defective implement. We arrive at that conclusion by the application of traditional tests for successor liability. The present organization, although it has undergone a structural metamorphosis remains in substance the identical organization manufacturing the same product. It is liable for the defective product manufactured by the original business organization.
Under the facts of this case, we conclude that Forage King Industries, Inc., the present operating company, is not, as determined by the trial court, as a matter of law *83free of any possible liability. We therefore reverse the decision of the Court of Appeals, reverse the summary judgment dismissing the complaint, and remand for trial.
By the Court. — Decision reversed, and cause remanded for trial.
Ceci, J., took no part.

 This, of course, is not always true. The more important question is whether the corporation or predecessor is merely a hollow shell or is it an entity with assets answerable to judgments. *77Statutes will affect the answerability of a defunct corporation to subsequent lawsuits.

 See, Frumer & Friedman, Products Liability (Matthew Bender 1981), sec. 5.06, Sale or Merger of Manufacturer; Liability of Successor and Dissolved Corporation.