Manh Hung Nguyen v. Johnson Mach. & Press Corp.

• Decision Date: 18 March 1982
• Docket Number: No. 81-292,81-292
• Parties: , 60 Ill.Dec. 866 MANH HUNG NGUYEN, Plaintiff-Appellant, v. JOHNSON MACHINE & PRESS CORPORATION, et al., Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 1104

433 N.E.2d 1104

104 Ill.App.3d 1141, 60 Ill.Dec. 866

MANH HUNG NGUYEN, Plaintiff-Appellant, v. JOHNSON MACHINE & PRESS CORPORATION, et al., Defendants-Appellees.

No. 81-292.

Appellate Court of Illinois, First District, Fourth Division.

March 18, 1982.

Philip H. Corboy & Associates, Chicago (Philip H. Corboy, Robert A. Clifford, Chicago, of counsel), for plaintiff-appellant.

Raymond R. Cusack, Johnson, Cusack & Bell, Ltd., Chicago (Thomas H. Fegan, Chicago, of counsel), for defendant-appellee Amsted Industries, Inc.

LINN, Justice:

In 1978, the hands of plaintiff, Manh Hung Nguyen, were severed by a punch press manufactured by Bontrager Corporation. Bontrager had manufactured the punch press in 1960 and had sold it to plaintiff's employer in 1962.

Following his injury, plaintiff brought this action in the circuit court of Cook County against numerous defendants seeking damages based on strict liability in tort. Two of the defendants, Amsted Industries, Inc., and South Bend Lathe, Inc., filed motions for summary judgment which were granted by the trial court. The court found no just reason to delay enforcement or appeal of its order. Plaintiff appealed.

The primary issue is whether Amsted or South Bend Lathe can be liable to plaintiff as successor corporation to the business of Bontrager.

We affirm.

BACKGROUND

The punch press involved in this case was sold under a trade name as a "Johnson" press. Presses of this kind were originally manufactured and sold by Johnson Machine and Press Corporation in Elkhart, Indiana. In 1956, Bontrager purchased the assets of In 1960, Bontrager manufactured and leased the punch press to a party not involved in this case. On February 5, 1962, this press was sold and delivered to plaintiff's employer. On August 29, 1962, Amsted and Bontrager entered into a purchase agreement under which Amsted was to purchase all the assets of Bontrager for approximately.$1.2 million. Under the agreement, Bontrager promised to dissolve its corporate entity as soon as reasonably possible after the completion of the sale. Amsted was to assume the liabilities and obligations of Bontrager necessary for the uninterrupted continuation of the business. However, Amsted specifically refused to assume any liability resulting from injuries incurred from the use of presses manufactured and sold by Bontrager.

[60 Ill.Dec. 868] Johnson for cash. As part of the purchase, Bontrager also received one share of stock in Johnson so that Bontrager could continue to manufacture and sell presses under the Johnson name.

Following completion of the sale, Amsted continued the manufacture and sale of the Johnson presses using Bontrager's plant in Elkhart. This business was carried on by one of Amsted's divisions, South Bend Lathe. South Bend Lathe also had a plant in South Bend, Indiana, and after several years all of the operations carried out in Elkhart were transferred to the South Bend plant and the Elkhart plant was sold.

Though the parties disputed some of the facts, for the purpose of the summary judgment motion it was assumed that South Bend Lathe manufactured the Johnson presses by using the same employees, assets, physical location, and middle-level management personnel that Bontrager had used. However, none of the shareholders, directors, or officers of Bontrager became shareholders, directors, or officers of Amsted or South Bend Lathe.

Following the sale, Amsted informed Bontrager's and Amsted's customers that Amsted would thereafter be manufacturing and selling the Johnson presses. In 1964, Bontrager was voluntarily dissolved. Until 1975, Amsted, through its South Bend Lathe division, continued the manufacture and sale of the Johnson presses. In 1975, Amsted sold all of the assets involving the Johnson presses to LWE, Inc. Thereafter LWE, Inc. changed its name to South Bend Lathe, Inc. (the other defendant that was granted summary judgment by the trial court). In 1978, plaintiff was injured.

OPINION

I

It is admitted that if Amsted could not be liable in this case then neither could South Bend Lathe, Inc. Accordingly, we will discuss this case with a view towards Amsted's possible liability because of Amsted's purchase of Bontrager's assets.

Generally, a corporation that purchases the assets of another corporation is not liable for the debts and liabilities of the seller. (Hernandez v. Johnson Press Corp. (1979), 70 Ill.App.3d 664, 26 Ill.Dec. 777, 388 N.E.2d 778.) The recognized exceptions to this rule are when (1) an express or implied agreement of assumption exists; (2) the transaction amounts to a merger of the seller into the buyer or a consolidation of the two; (3) the buyer is a mere continuation of the seller such as when the buyer comes into existence pursuant to the reorganization of the seller; or (4) the transaction is fraudulent in that it was entered into to allow the seller to escape its liabilities. State ex rel. Donahue v. Perkins & Will Architects, Inc. (1980), 90 Ill.App.3d 349, 45 Ill.Dec. 696, 413 N.E.2d 29.

Under the second exception above, our courts have recognized that a de facto merger is sufficient to allow liabilities of the seller to be imposed on the buyer. (State ex rel. Donahue v. Perkins & Will Architects, Inc. (1980), 90 Ill.App.3d 349, 45 Ill.Dec. 696, 413 N.E.2d 29.) A de facto merger may occur when the following are present: (1) there is a continuity of the business enterprise between seller and buyer, including continuity of management, employees, location, and assets; (2) there is a continuity of shareholders, in that shareholders of the seller become shareholders of the buyer; (3) the seller ceases operations and dissolves as soon as possible after the transaction; and (4) the buyer assumes those liabilities and obligations necessary for the uninterrupted continuation of the seller's business. State ex rel. Donahue v. Perkins & Will Architects, Inc. (1980), 90 Ill.App.3d 349, 45 Ill.Dec. 696, 413 N.E.2d 29; Freeman v. White Way Sign and Maintenance Co. (1980), 82 Ill.App.3d 884, 38 Ill.Dec. 264, 403 N.E.2d 495.

Of the above requirements, the continuity of shareholders is absent from this case because the assets were purchased for cash and not exchanged for stock or other securities. Under corporate principles, this absence would be enough to defeat a finding of de facto merger and would prevent Amsted from being liable for any liabilities Bontrager may have had to its creditors or shareholders. (State ex rel. Donahue v. Perkins & Will Architects, Inc. (1980), 90 Ill.App.3d 349, 45 Ill.Dec. 696, 413 N.E.2d 29.) Plaintiff, however, stresses that this is a strict liability case, and asks us to apply the law of strict liability and the policies underlying that law and reach the conclusion that continuity of shareholders should be ignored in determining whether Amsted should be liable. In essence, plaintiff asks us to create a special extension of the de facto merger doctrine that would apply to strict liability cases.

The step plaintiff asks us to take was taken by the Michigan supreme court in the case of Turner v. Bituminous Casualty Co. (1976), 397 Mich. 406, 244 N.W.2d 873. The reasoning in Turner is somewhat difficult to understand. The court declared, on the basis of facts similar to those here, that product liability law was the only law that governed the case. The court found that as far as plaintiff was concerned the problem was the same whether a corporate transfer was one involving an exchange of assets for cash or an exchange of stock. In either case, the plaintiff had nowhere to turn for a remedy except to the successor corporation. If the successor could not be liable, plaintiff would have no remedy.

Finding that one of the primary purposes of strict liability law was to impose liability on the party better able to gauge the risks and meet the costs of such liability, the court found the successor corporation could do so just as well as its predecessor. The successor could acquire insurance to protect against potential liability resulting from the predecessor's products and could pass the costs on to its customers by increases in the price of the products it manufactured. The successor could also estimate the potential costs of liability and see to it that such costs are considered during the negotiations for sale of the predecessor's assets.

The Michigan court also noted that the successor corporation, in an indirect way, benefitted from the predecessor's sales of the product because the successor would enjoy the goodwill built up by the predecessor and would be able more easily to sell the products it manufactured in the future than it could if it were just beginning the manufacture and sale of the product. Since one purpose of strict liability law is to impose liability on those who reap a benefit from the sale of the product that has caused injury, the court found that this transfer of goodwill was sufficient to establish that the successor corporation reaped a benefit from the sales of the product by its predecessor.

After the above discussion justifying the imposition of liability on the successor corporation based on strict liability principles, the Michigan court, in an unexplained about-face, went on to decide the case by applying corporate law to the situation. The court merely extended the de facto merger doctrine by eliminating the requirement that there be a continuity of shareholders. Thus, if plaintiff could show (a) a continuity of the enterprise, including a continuity of management, employees, location, and assets; (b) a dissolution of the predecessor corporation as soon as possible after the transfer; and (c) an assumption by the successor of those obligations and liabilities necessary for the uninterrupted continuation of the predecessor's business, then a plaintiff could bring a strict liability action against the successor for injuries caused by the predecessor's product. Apparently if any of...