Foster v. Cone-Blanchard Mach. Co.

• Decision Date: 20 July 1999
• Docket Number: Docket No. 108465, Calendar No. 8.
• Citation: 460 Mich. 696,597 N.W.2d 506
• Parties: Evia Irene FOSTER, Plaintiff-Appellee, v. CONE-BLANCHARD MACHINE COMPANY, Defendant-Appellant, and Seven Ranges, Inc., Defendant.
• Court: Michigan Supreme Court

597 N.W.2d 506

460 Mich. 696

Evia Irene FOSTER, Plaintiff-Appellee, v. CONE-BLANCHARD MACHINE COMPANY, Defendant-Appellant, and Seven Ranges, Inc., Defendant.

Docket No. 108465, Calendar No. 8.

Supreme Court of Michigan.

Argued November 9, 1998.

Decided July 20, 1999.

Baker, Durst, Nelson, Benz & Baldwin (by Gary R. Baldwin), Clinton, for plaintiff-appellee.

Sullivan, Ward, Bone, Tyler & Asher, P.C. (by Thomas M. Slavin and Ronald S. Lederman), Southfield, for defendant-appellant.

Lupo & Koczkur, P.C. (by Paul S. Koczkur and Dane A. Lupo, Jr.), Detroit, amicus curiae for Pneumo Abex Corporation.

Ford & Kobayashi, P.C. (by James B. Ford), Kalamazoo, amicus curiae for Michigan Trial Lawyers Association.

Opinion

WEAVER, C.J.

In this products liability case, we examine the scope of successor liability in general, and of a successor corporation's duty to warn its customers of defects in a product manufactured by its predecessor. The trial court granted defendant Cone-Blanchard Machine Company's motion for summary disposition. The Court of Appeals reversed, holding that summary disposition was improper. It concluded that the plaintiff established a prima facie case of continuity of enterprise sufficient to allow a products liability claim against Cone-Blanchard. It also concluded that the plaintiff had established facts sufficient to allow the claim of breach of duty to warn to go forward.

We reverse and hold that, because Cone-Blanchard's predecessor was available for recourse as witnessed by plaintiff's negotiated settlement with the predecessor for $500,000, the continuity of enterprise theory of successor liability is inapplicable. Further, plaintiff did not produce evidence sufficient to show a relationship between Cone-Blanchard and plaintiff's employer or that Cone-Blanchard was actually aware of the alleged design defect in the type of machine owned by plaintiff's employer. Thus, summary disposition was appropriate with regard to the claim of breach of duty to warn.

I Factual and Procedural Background

While operating a Conomatic feed screw machine on her job at defendant Seven Ranges, Inc., plaintiff's hair became ensnarled in the rapidly spinning and unguarded rod being processed by the machine. Her hair and scalp were torn from her head. Plaintiff sued Cone-Blanchard and Seven Ranges. She alleged that Cone-Blanchard was liable as the legal successor of Cone Automatic Machine Company (Cone I), the company that designed and manufactured the machine in 1943.

Plaintiff specifically alleged a design or manufacturing defect on the ground that the machine contained no emergency shutoff button or other safety devices. She also alleged breach of warranty of fitness for intended purposes and breach of implied warranty of merchantability. Finally, she alleged that Cone-Blanchard breached its duty to warn of the known or reasonably suspected danger posed by operation of the machine.

Defendant Cone-Blanchard filed a motion for summary disposition pursuant to MCR 2.116(C)(10). Defendant argued that it could not be liable because it was not the manufacturer of the machine. Further, Cone-Blanchard argued that there was no continuity of enterprise between Cone I, the manufacturer, and itself that would support imposition of successor liability. In 1963, Pneumo Dynamics purchased Cone I by acquiring all its stock. Shortly thereafter, Cone I ceased operations and dissolved. Pneumo Dynamics formed Cone Automatic Machine Co., Inc. (Cone II). Cone II had no employees, assets, or place of business and existed solely to hold the Cone name. Pneumo Dynamics continued to manufacture the Conomatic line of machines through a wholly owned subsidiary, Pneumo Dynamics Machine Tool Group (PDMTG). PDMTG included assets of the dissolved Cone I in addition to assets from two other machine companies.

In 1972, Cone-Blanchard purchased the assets of PDMTG and the stock of Cone II from Pneumo Dynamics and, thereafter, continued the manufacture and design of the Conomatic line of screw machines. Pneumo Dynamics ceased designing and manufacturing the Conomatic line of screw machines, although it remained an active corporation. Pneumo Dynamics changed its name to Pneumo Abex Corporation.

The trial court granted defendant Cone-Blanchard's motion for summary disposition, determining that it was not a successor corporation for purposes of successor liability under Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873 (1976). The trial court also dismissed plaintiff's claim that Cone-Blanchard failed to warn of alleged defects in the machine. The Court of Appeals reversed, holding that plaintiff had established a question of fact concerning whether there was sufficient continuity of enterprise for successor liability and whether Cone-Blanchard had breached a duty to warn of the machine's alleged defects.¹ We granted leave to appeal.² We review a motion for summary disposition de novo.³

II Continuity of Enterprise

In Turner, supra, this Court held that a corporate successor may be liable for its predecessor's defective products if the totality of the acquisition demonstrates a basic continuity of the enterprise between the predecessor and successor corporations. Thus, under Turner, successor liability becomes an element of the plaintiff's prima facie case of products liability. Turner was a departure from the traditional rule of nonliability for corporate successors who acquire the predecessor through a purchase of assets.⁴

The traditional rule of successor liability examines the nature of the transaction between predecessor and successor corporations. If the acquisition is accomplished by merger, with shares of stock serving as consideration, the successor generally assumes all its predecessor's liabilities. However, where the purchase is accomplished by an exchange of cash for assets, the successor is not liable for its predecessor's liabilities unless one of five narrow exceptions applies. The five exceptions are as follows:

"(1) where there is an express or implied assumption of liability; (2) where the transaction amounts to a consolidation or merger; (3) where the transaction was fraudulent; (4) where some of the elements of a purchase in good faith were lacking, or where the transfer was without consideration and the creditors of the transferor were not provided for; or (5) where the transferee corporation was a mere continuation or reincarnation of the old corporation. (19 Am Jur 2d, Corporations, § 1546, pp. 922-924; Malone v. Red Top Cab Co., 16 Cal.App.2d 268, 273 [60 P.2d 543 (1936) ].)" [Turner, supra at 417, n. 3, 244 N.W.2d 873, quoting Schwartz v. McGraw-Edison Co., 14 Cal.App.3d 767, 92 Cal.Rptr. 776 (1971).][⁵]

The traditional rule reflects the general policy of the corporate contractual world that liabilities adhere to and follow the corporate entity. It serves to protect creditors and shareholders, to facilitate determination of tax responsibilities, and to promote free alienability of business assets. In the context of tort law, the traditional rule with its narrow exceptions has been criticized as an elevation of form over substance, that may leave victims of a defective product without recourse.

These policy concerns shaped this Court's expansion of the traditional rule in Turner. After examining the relevant policy concerns, this Court in Turner concluded that a continuity of enterprise between a successor and its predecessor may force a successor to "accept the liability with the benefits" of such continuity. Id. at 430, 244 N.W.2d 873. Turner held that a prima facie case of continuity of enterprise exists where the plaintiff establishes the following facts: (1) there is continuation of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations of the predecessor corporation; (2) the predecessor corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; and (3) the purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the selling corporation. Turner identified as an additional principle relevant to determining successor liability, whether the purchasing corporation holds itself out to the world as the effective continuation of the seller corporation.⁶

Application of Turner in this case is complicated by the fact that the manufacturer, Cone I, is twice removed from defendant Cone-Blanchard. In other words, Cone-Blanchard did not directly purchase Cone I. Rather, Cone I was purchased by Pneumo Dynamics. Pneumo Dynamics then continued manufacturing the Conomatic line of machines through its wholly owned subsidiary, PDMTG, and formed a new company, Cone II, for purposes of carrying on the Cone name. Cone-Blanchard purchased the assets of PDMTG and the stock of Cone II. It then took over the manufacture of Conomatic machines. We note at the outset, that the tertiary nature of the relationship between Cone I and Cone-Blanchard generally factors against a finding of continuity, but does not preclude it.⁷ Although in the appropriate case a tertiary successor might be liable for a manufacturer's defective product, we conclude, on the basis of our interpretation of Turner, that this is not such a case.

This case illustrates the limits of Turner's applicability. Turner's holding indicates that the "continuity of enterprise" doctrine applies only when the transferor is no longer viable and capable of being sued:

In our analysis of the matter we must conclude at this point that in a products liability case where the corporation fabricating the injury-producing item changes corporate structure before injury and suit, as a matter of policy neither the victim nor the successor corporation has a different interest vis-a-vis the suit whatever the

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