802 F.2d 75 (3rd Cir. 1986), 85-3392, Polius v. Clark Equipment Co.

Docket Nº:of Michael Polius, Appellants in 85-3392,
Citation:802 F.2d 75
Party Name:Michael POLIUS, Roselyn Polius, and Commissioner of Labor of the Government of the Virgin Islands, as subrogee
Case Date:September 29, 1986
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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802 F.2d 75 (3rd Cir. 1986)

Michael POLIUS, Roselyn Polius, and Commissioner of Labor of

the Government of the Virgin Islands, as subrogee

of Michael Polius, Appellants in 85-3392,

v.

CLARK EQUIPMENT COMPANY, Appellant in 85-3393.

Nos. 85-3392, 85-3393.

United States Court of Appeals, Third Circuit

September 29, 1986

Argued April 28, 1986.

Rehearing and Rehearing En Banc Denied Oct. 23, 1986.

Gordon C. Rhea (argued), Thomas Alkon, Jeffrey L. Resnick, James & Resnick, Christiansted, St. Croix, V.I., for Michael Polius, et al.

Richard H. Hunter (argued), Judith A. Turner, Isherwood, Hunter, & Colianni, Christiansted, St. Croix, V.I., for Clark Equipment Co.

Before HUNTER, WEIS, and MANSMANN, Circuit Judges.

OPINION

WEIS, Circuit Judge.

In this appeal we examine a claim caught up in the swirling cross currents of products liability and corporate successor responsibility. Plaintiff was injured while using an allegedly defective product manufactured by a now defunct corporation that had sold a substantial part of its assets to defendant. Reasoning that in practical effect defendant had carried on the business of the original manufacturer and therefore should assume its liabilities, the district court refused to dismiss the case. We conclude that this continuity of enterprise theory, adopted by a minority of jurisdictions, is an unsound exception to the general rule of corporate successor liability. We also determine that defendant did not owe a duty to warn under the circumstances here. Accordingly, in conformance with the answers to controlling questions of law as framed by the district court under 28 U.S.C. Sec. 1292(b), we will direct an entry of judgment for defendant.

In response to motions submitted to it, the district court entered partial summary judgment in favor of plaintiff Michael Polius, holding that defendant Clark Equipment Company could be found liable as a successor to the Baldwin-Lima-Hamilton

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Corporation. 1 The court also entered partial summary judgment in favor of defendant, concluding that it had no duty to warn under the circumstances.

The plaintiff's injury occurred in November 1983, when his foot caught in the clutch assembly of the winding drum of a crane. The machine had been designed and manufactured in 1969 by Baldwin-Lima-Hamilton (Baldwin) and sold to a distributor, Hoffman Equipment Company, in 1970. The plaintiff's employer, General Engineering Company, was the third user of the crane, two other construction companies having previously owned and operated it.

At the time it initially manufactured and sold the crane to the distributor, Baldwin was a large corporation functioning through seven divisions. All of its stock was owned by Armour and Company, which in turn was wholly owned by Greyhound Corporation.

In 1971, as a matter of corporate development, Greyhound decided to sell Baldwin's assets. In April of that year, defendant Clark Equipment Company purchased the construction equipment division for $45,656,000 cash. 2 The agreement provided that Clark would receive all of the assets of Baldwin "required to operate the business" of the division "in the manner in which [it] is currently being operated." The sale included two manufacturing facilities, inventory, accounts receivable, customer lists, and good will as well as trade names, patents, and trademarks of Baldwin.

Clark assumed liability for the Baldwin division's trade accounts, payroll, vacation pay, and some taxes and selected contractual obligations. The sales agreement did not transfer Baldwin's service contracts. Clark expressly refused to assume any tort liabilities, and Baldwin and Armour agreed to indemnify Clark for all claims arising from the division's operations.

No sale or exchange of stock took place, nor did officers or directors of Baldwin become officers or directors of Clark. The agreement did not mandate dissolution, but Baldwin was required to use its best efforts to keep the division's employees available for Clark.

By 1972, when it changed its name to "BLH, Inc.," Baldwin had sold the six remaining divisions and had become an inactive corporate shell. Formal dissolution occurred in 1976, some seven years before the plaintiff's injury.

After the purchase, Clark manufactured several large cranes, apparently using its own name, and at least for a time, Baldwin's as well. Clark provided replacement parts to its distributors but did not sell directly to crane owners, nor did it service the machines except through distributors. The purchase proved an unhappy one for Clark, and after suffering substantial losses, it ceased manufacturing cranes in 1981.

In February 1984, a year after he was injured by the Baldwin crane, plaintiff filed suit against Clark, alleging strict liability and failure to warn. 3 Clark tendered the defense to Armour, which accepted it and provided representation.

Both parties moved for summary judgment. The district court carefully reviewed the various theories of corporate successor liability and, being "uncomfortable" with the "product line" approach, rejected the cases which espoused it. The district court concluded, however, that the "continuity of enterprise" rule was applicable because Clark had assumed the liabilities and obligations "ordinarily necessary for the uninterrupted continuation of normal business operations." 608 F.Supp.

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1541, 1546 (D.V.I.1985). Moreover, "[b]y reaping the benefits of the predecessor corporation ... the successor should bear some of the burdens of continuity." Id. Added to these considerations was "[t]he public policy underlying strict products liability [which] is to protect the injured party by placing the burden on the party most able to bear the loss by spreading the risk." Id.

Because it believed that "Armour [was] the entity to whom the risk of loss should be shifted under a public policy argument in the context of this case," the district court emphasized the importance of the indemnification agreement with Armour, which had owned Baldwin and caused its dissolution. Id. Based on this line of reasoning, the district court concluded that Clark could be liable for the torts of Baldwin.

The summary judgment motions also included the defendant's contention that it could not be liable under the failure to warn theory. The district court agreed with defendant, noting that Clark neither assumed Baldwin's service contracts nor had any other contract with the plaintiff's employer. Furthermore, the record did not show that Clark had actual notice of a defect. Accordingly, on this issue, the court granted partial summary judgment for defendant.

On the parties' motions, the district court formulated the following controlling questions of law for an interlocutory appeal of its order pursuant to 28 U.S.C.

Sec. 1292(b):

"1. Did the district court properly grant plaintiff's motion for partial summary judgment where it held that plaintiff Michael Polius, injured by an allegedly defective crane manufactured by Baldwin-Lima-Hamilton Corporation ("BLH"), may recover from defendant Clark Equipment Company, the corporation that purchased substantially all of the assets of the construction equipment division of BLH, under the continuity of enterprise exception to the general rule of corporate successor liability?

"2. Did the district court properly grant Clark's motion for partial summary judgment where it held that Clark did not have a duty to warn plaintiff Michael Polius of the allegedly defective condition of the crane that caused the injury?"

On appeal the parties agree that the law of the Virgin Islands should apply to the case at hand, and we accept that choice of law. Where the Virgin Islands has no governing statute, as here, 1 V.I.C. Sec. 4 directs us to examine the common law, first as expressed in the Restatements, and then as generally understood and applied in the United States. Where the Restatement is silent and a split of authority exists, courts should select the sounder rule. Wells v. Rockefeller, 728 F.2d 209 (3d Cir.1984).

Describing the characteristics of the corporate body, Blackstone wrote that "all the individual members that have existed from the foundation to the present time, or that shall ever hereafter exist, are but one person in law, a person that never dies; in like manner as the river Thames is still the same river, though the parts which compose it are changing every instant." 1 W. Blackstone, Commentaries *467-469 A corporation whose stock is actively traded on an exchange has a constantly changing ownership; however, that fluctuation does not affect the corporation's liability for its past actions.

The same concepts of continuing life and accountability underlie the law governing corporate merger through the purchase of stock. Liability continues because the corporate body itself survives. A different rule applies when one corporation purchases the assets of another. Under the well-settled rule of corporate law, where one company sells or transfers all of its assets to another, the second entity does not become liable for the debts and liabilities, including torts, of the transferor. 15 W. Fletcher, Cyclopedia of the Law of Private Corporations, Sec. 7122 (Perm.Ed.1983).

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Four generally recognized exceptions qualify this principle of successor nonliability. The purchaser may be liable where: (1) it assumes liability; (2) the transaction amounts to a consolidation or merger; (3) the transaction is fraudulent and intended to provide an escape from liability; or (4) the purchasing corporation is a mere continuation of the selling company. See Philadelphia Elec. Co. v. Hercules, Inc., 762 F.2d 303, 308-09 (3d Cir.1985)...

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