Travis v. Harris Corp.

• Citation: 565 F.2d 443
• Decision Date: 27 October 1977
• Docket Number: No. 77-1158,77-1158
• Parties: Charles TRAVIS and Jean Travis, Plaintiffs, v. HARRIS CORP., Harris-Intertype Corporation, Sheridan Division and Bruno Machinery Corporation, Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 443

565 F.2d 443

Charles TRAVIS and Jean Travis, Plaintiffs, v. HARRIS CORP., Harris-Intertype Corporation, Sheridan

Division and Bruno Machinery Corporation, Defendants.

No. 77-1158.

United States Court of Appeals,

Seventh Circuit.

Argued May 25, 1977.

Decided Oct. 27, 1977.

Rehearing and Rehearing En Banc Denied Dec, 21, 1977.

Jeffery L. Lantz, Rodney H. Grove, Evansville, Ind., for plaintiffs.

Fred S. White, John D. Clouse, Evansville, Ind., for defendants.

Before FAIRCHILD, Chief Judge, WOOD, Circuit Judge, and MARKEY, Chief Judge. ¹

MARKEY, Chief Judge.

On May 23, 1973, while employed by Ohio Valley Container Corporation, Evansville, Indiana, (Ohio Valley), Travis was injured when his hand was caught in a die press machine (machine) as he tried to remove excess cardboard from its pincher bar. Under the Indiana Workmen's Compensation Act, 22 Ind.Stat. art. 3 (Burns 1973), designed to assure compensation of injured employees without litigation, Travis was paid $6,226.28.

On May 7, 1975, Travis and his wife (Travis) filed a complaint in Vanderburgh Superior Court, Vanderburgh County, Indiana, against Harris Corporation (Harris) and Bruno Sherman Corporation (Bruno), the alleged corporate successors to the original manufacturer of the machine, seeking damages in strict liability and for negligence in the design, manufacture, and distribution of the machine. On June 12, 1975, the cause was removed to the United States District Court for the Southern District of Indiana.

Both sides moved for summary judgment and, based on affidavits, exhibits and a hearing, the court granted summary judgment for Harris and Bruno. ² We affirm.

Background

The machine had been designed, manufactured and sold in 1957, sixteen years before Travis' injury, ³ by T.W. and C.B. Sheridan Company (Old Sheridan) to Inland Container Corporation (Inland), which, in turn, sold it to Ohio Valley in 1972. In 1964, eight years before Inland's sale of the machine to Ohio Valley, and nine years before Travis' injury, Old Sheridan had sold most of its assets to Harris-Intertype Corporation, which formed a new subsidiary, T.W. and C.B. Sheridan Company (New Sheridan) to receive those assets. The consideration paid to Old Sheridan consisted solely of $6,380,000 in cash. Prior to its voluntary dissolution, Old Sheridan distributed the cash to its shareholders. In 1968, New Sheridan was merged into Harris-Intertype, and in 1974, Harris-Intertype changed its name to Harris Corporation.

In the 1964 agreement for the sale of Old Sheridan assets, Harris agreed that it (or a subsidiary designated to receive the assets) would "on the Closing Date assume and agree to pay all liabilities of (Old) Sheridan, except as hereinafter provided . . ." The next section of the agreement provided: "On the Closing Date, Harris or the Subsidiary shall assume all of the liabilities of (Old) Sheridan existing on the Closing Date . . . except certain specified stockholder and tax liabilities and incidental expenses of the sales transaction itself." (Emphasis added.) Harris also provided an instrument at closing, on May 1, 1964, which stated that New Sheridan hereby assumes and agrees to pay, perform and discharge all debts, obligations, contracts and liabilities of (Old Sheridan) of any kind, character or description, whether accrued, absolute, contingent or otherwise, as reflected on the balance sheets, books of account and other records of (Old Sheridan) on the date hereof, . . . (Emphasis added.)

On September 6, 1972, prior to its change of name, Harris-Intertype sold to Bruno the assets used in the manufacture of the Sheridan Die-Cutting Press and related spare parts, including the good will related thereto. Section 9 of the agreement provided: "Buyer (Bruno) does not assume any liability or responsibility for defense of pending litigation claims or for any personal injury or physical property damage, whether arising before or after the date hereof, caused by or arising out of any Products delivered by Seller (Harris) prior to the date hereof except to the extent altered by Buyer . . . ." (Emphasis added.)

Choice of Law

The parties and the district court agreed that Ohio law should be applied because the 1964 contract so provided. Though the contract may be interpreted under Ohio law, the legal effect of that agreement, and questions of traditional tort law unrelated to the contract, are to be determined in accord with the laws of Indiana, the situs of the injury and domicile of Travis. Having the principal interest in the resolution of the present issues, and under its conflict of laws principles, Indiana would apply its own law. Because the record reflects no difference in the laws of Ohio and Indiana applicable on this appeal, however, the choice of law is irrelevant to our decision. ⁴

Issue

The issue before us is whether, as a matter of law, Harris or Bruno may be held liable for Travis' injury. Its resolution depends on (1) whether the 1964 transfer of assets from Old Sheridan to New Sheridan reflected a corporate "merger" or "continuation," (2) whether that transfer made Harris liable under a "product line" theory, or (3) whether Harris or Bruno had an independent duty to warn Travis' employer about the machine. ⁵

OPINION

(1) "Merger or Continuation"

As a general rule, a corporation that merely purchases for cash the assets of another corporation does not assume the seller corporation's liabilities. As this court recently pointed out in Leannais v. Cincinnati, Inc., et al., No. 77-1066 (7th Cir. October 18, 1977), however, there are four generally recognized exceptions to the rule: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the two corporations; (3) where the purchasing corporation is a "mere continuation" of the seller; and (4) where the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller's debts. Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621 (7th Cir. 1971), Bazan v. Kux Machine Co., 358 F.Supp. 1250 (E.D.Wis.1973). Exceptions (1), (2), and (3) are asserted by Travis.

Regarding express or implied assumption of liability, it was found by the court below, and we agree, that "the claims presently being asserted by the plaintiffs were not reflected on the records of Old Sheridan as of May 1, 1964." The contract provision negating even an implied assumption is clear and unambiguous, and we cannot say that the court below was in error when it found that "New Sheridan, and ultimately Harris, did not agree to assume the products liability claims brought herein."

A major factor in support of a finding of de facto merger is a transfer of stock as consideration. Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873 at 891 (1976) (Justice Coleman dissenting). ⁶ Where the assets are sold for cash, no basic, fundamental change occurs in the relationship of the stockholders to their respective corporations, Lopata v. Bemis Co., Inc., 383 F.Supp. 342 at 345 (E.D.Pa.1974), and absent continuity of shareholder interest, the two corporations are strangers, both before and after the sale. Turner, supra at 891. Thus, the question of whether cash or stock is given in consideration for the assets is really a question of ownership. As Justice Coleman stated:

Responsibility for disposition of the assets of a corporation ultimately rests with its owners, the shareholders. They must respond financially to claims of negligence. If ownership has changed by purchase since the act of negligence occurred, the succeeding owner is not liable, without more. (Turner, supra at 894.)

Here, no stock was transferred, in either direction, between Old Sheridan and Harris-Intertype.

Travis cites Knapp v. North American Rockwell Corp., 506 F.2d 361 (3d Cir. 1974), for the proposition that, though all formal characteristics of a merger are not shown the nature and consequences of the transaction should be considered, a proposition with which we agree. In Knapp, however, stock was transferred as consideration for assets. Absent a transfer of stock, the nature and consequences of a transaction are not those of a merger.

Travis next points to a covenant by Old Sheridan to encourage its employees to remain in the employ of Harris, and a covenant by Harris to give Theodore Clark, Old Sheridan's president, an employment contract for a managerial position with Harris, as grounds for asserting that New Sheridan was a "mere continuation" of Old Sheridan. As was said, however, in National Dairy Products Corp. v. Borden Co., 363 F.Supp. 978 (E.D.Wis.1973), "the test is not the continuation of the business operation but the continuation of the corporate entity." 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. Lopata, supra at 345. It was held in Lopata that the hiring by defendant of the seller corporation's former vice president (who was also a director) was not enough to satisfy the test for "continuation."

In the present case, there was no identity of stock or stockholders, and no identity of directors. Though one of Old Sheridan's officers may have been employed by New Sheridan, there is no evidence that Clark ever served as an officer or director of New Sheridan. Nor was there a sole corporation remaining after the sale. The sale agreement provided that Old Sheridan was to continue normal business operations after purchase of its assets. Old and New Sheridan existed as distinct corporate entities for a week after the sale.

Thus, under the general rule and its exceptions, the facts of the present case fail to support application of either the "de facto merger" or the "mere continuation" exception. If liability is to be imposed on a purchasing corporation under such circumstances, legislatures must do it....