Bonee v. L & M CONST. CHEMICALS

• Decision Date: 23 July 1981
• Docket Number: No. 78-1039.,78-1039.
• Parties: Charles BONEE, Administrator for the Estate of Roy Nolan Bonee, Plaintiff, v. L & M CONSTRUCTION CHEMICALS et al., Defendants.
• Court: U.S. District Court — Middle District of Tennessee

518 F. Supp. 375

Charles BONEE, Administrator for the Estate of Roy Nolan Bonee, Plaintiff, v. L & M CONSTRUCTION CHEMICALS et al., Defendants.

No. 78-1039.

United States District Court, M. D. Tennessee, Columbia Division.

July 23, 1981.

COPYRIGHT MATERIAL OMITTED

Wayne Hairrell, Lawrenceburg, Tenn., Richard Swartz, Boston, Mass., for plaintiff.

William H. Lassiter, Jr. and Robert L. Trentham, Nashville, Tenn., for BCS and William Falls.

W. Harold Bigham, Nashville, Tenn., for Dayton Sure-Grip & Shore and Danis Industries.

MEMORANDUM

WISEMAN, District Judge.

In this diversity action, plaintiff, administrator for the estate of Roy Nolan Bonee, a Tennessee resident, seeks damage relief from, among others, BCS Chemicals, Inc., BCS, a now defunct Illinois corporation, Dayton Sure-Grip & Shore Company Dayton, an Ohio corporation, Danis Industries, Inc., Danis, an Ohio corporation, and William Falls. This Court has jurisdiction under 28 U.S.C. § 1332. Danis, Dayton, and Falls have moved for summary judgment. For the reasons stated below, the motions of Dayton and Falls are denied, and Danis' motion is granted.

Facts

Although plaintiff suggests that disputed issues of fact exist that render summary judgment inappropriate, in the Court's view the facts relevant for determination of this motion are uncontested. Woody v. Combustion Engineering, Inc., 463 F.Supp. 817, 819 (E.D.Tenn.1978).

On March 31, 1978, plaintiff's decedent, a maintenance employee of Scott County Memorial Hospital, was standing beside a coworker as the coworker tried to open an oil drum with a blow torch. The drum allegedly contained hydropel, a flammable construction sealer. The drum exploded. Plaintiff's decedent was burned severely and died from the injuries received in the explosion. According to the hospital supervisor, the drums bore no label indicating flammability. The issue at trial will inevitably boil down to whether the drums were properly labeled.

Until 1975 BCS was in the business of manufacturing, among other products, construction sealers. In the normal course of business BCS would label the drums with labels provided by the purchaser (Falls Dep. at 14). Hydropel was one of the sealers BCS made specifically for L & M Construction Chemicals, Inc., L & M. The hydropel formula resulted from a collaboration between BCS and L & M (Falls Dep. at 73). Although no one disputes that hydropel is a distinct brand of sealer, all architectural wall sealers do basically the same job and look and smell the same (Falls Dep. at 85).

In 1975 Dayton purchased all of the assets of BCS except some of its blending formulas and trade secrets. BCS existed as a mere shell for another year; its franchise expired in 1976 (Falls Dep. at 7). Prior to the purchase of the assets of BCS, Dayton did not produce construction chemicals. Dayton had been manufacturing and selling concrete construction supplies since 1924. Since acquiring the assets of BCS and hiring William Falls, Dayton manufactures a construction sealer similar to hydropel. The manufacture of Dayton's J26 waterproofing acrylic has a "slight difference in some of the raw materials used and a little bit of difference in the blending process" (Falls Dep. at 96).

Dayton's purchase of the BCS assets was part of a larger transaction in which the assets of three corporations were purchased and certain liabilities of two corporations were assumed. Dayton bought substantially all of the assets of BCS, C & M Florida, and C & M Illinois.¹ William Falls owned 100 percent of the stock of C & M Illinois and BCS and 27 percent of the stock of C & M Florida. As part of the purchase agreement, Falls became a full-time employee of Dayton. Following the acquisition of these assets, Dayton opened a chemical division, which was managed by William Falls (Schimpf Dep. at 5). The chemical division operated the plants of the acquired companies (Schimpf Dep. at 18-19),² and sold its products to many of the former companies' customers (Schimpf Dep. at 22-25).

BCS conveyed its assets to Dayton pursuant to the following provision of the contract:

At the closing, BCS shall assign, transfer and convey to Buyer Dayton all of the assets and properties of BCS, both tangible and intangible, including without limitation, all of its equipment ..., all of its cash, inventory, accounts and notes receivable, trademarks, tradenames, licenses, contracts, leases, rights, and business, and its name and goodwill, EXCEPTING, however, its blending formulas and other trade secrets and the items in section 13 hereof basically BCS' corporate books.

(Purchase Agreement at 2).³

Some of the formulas of BCS were transferred to Dayton as part of a license agreement.

BCS, largely through Falls as president of BCS, has developed and possesses valuable technical, engineering and sales information and know-how with respect to the formulas, all of which information and know-how are hereafter referred to as "Know-How."

....

BCS hereby grants to DSG Dayton the exclusive right and license to produce, manufacture and sell, and to sublicense others to produce, manufacture and sell, any and all products based on the Formulas and the Know-How .... During the term of this Agreement, BCS shall furnish all the Know-How to DSG, including all new developments related thereto of which it or Falls acquires knowledge.

....

Falls represents and warrants that the Formulas and Know-How comprise all of the chemical blending formulas and information related to or used in the concrete construction industry of which he has technical knowledge.

(License Agreement 1-2, 4) (emphasis added). Dayton assumed BCS' trade liabilities, but did not assume liability for future tort liability. As a result of these transactions Dayton received all the blending formulas it wanted (Schimpf Dep. at 56). According to the contract, the closing occurred on March 14, 1975, in Dayton, Ohio.

Dayton's Summary Judgment Motion

Dayton's motion for summary judgment is based on the traditional rule of nonliability of successor corporations. The traditional rule is that when one company transfers some or all of its assets to another company the successor is not liable for the debts of the predecessor except when:

"(1) The purchaser expressly or impliedly agrees to assume such debts; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently in order to escape liability for such debts.... A fifth exception, sometimes incorporated ..., is the absence of adequate consideration for the sale or transfer."

1 L. Frumer & M. Friedman, Products Liability § 5.062, at 70.58(2)-(3) (1981) hereinafter cited as Frumer & Friedman (quoting McKee v. Harris Seybold Co., 109 N.J. Super. 555, 264 A.2d 98 (1970)).

Plaintiff does not urge that Dayton expressly or impliedly agreed to assume BCS' tort liabilities. Neither does he contend that the transaction was entered into fraudulently or lacked adequate consideration. Under the traditional rule, plaintiff concedes, an exchange of stock must occur for a court to find consolidation or merger. The thrust of plaintiff's argument in opposition to defendant's motion for summary judgment is that the Court should find that Dayton was a mere continuation of BCS, see Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873 (1976), or that Dayton should be held liable because it continued to manufacture the same product line as BCS, see Ray v. Alad Corp., 19 Cal.3d 22, 560 P.2d 3, 136 Cal.Rptr. 574 (1977).

Dayton asserts that this Court is governed by the Sixth Circuit's decision in Poole v. Amstead sic Industries, Inc., 575 F.2d 1338 No. 76-2652 (6th Cir. May 22, 1978), aff'g No. 1-76-75 (E.D.Tenn. Oct. 5, 1976). The district court in Poole viewed the case as calling for an interpretation of the sales contract under the first of the traditional rules quoted above. The court apparently relied on Indiana substantive law. Id. at 2. In a per curiam affirmance the Sixth Circuit emphasized the paucity of allegations in the complaint and the absence of a response by plaintiff to defendant's summary judgment motion. The court noted that the "complaint did not allege that the selling corporation had been dissolved or had gone out of business, or that it was without assets." In the instant case plaintiff alleges and defendant admits that the selling corporation is dissolved, is no longer in business, and has virtually no assets. On this basis alone Poole is distinguishable from the instant case.

Choice of Law

In a diversity case a federal district court is bound to apply the conflict of laws rules of the forum state. Klaxon v. Stentor Electric Manufacturing Co., 313 U.S. 487, 85 L.Ed. 1477, 61 S.Ct. 1020 (1941). The transferor company was an Illinois corporation; the transferee company was an Ohio corporation; and the injury occurred in Tennessee. Because Tennessee follows basically a lex loci approach, the issue of characterization becomes very important. If this case is characterized as a tort case, the substantive law of Tennessee, the state in which the tort occurred, would govern. Winters v. Maxey, 481 S.W.2d 755 (Tenn.1972). Even if the case is characterized as one of strict liability, the lex loci rule would still apply. Babcock v. Maple Leaf, Inc., 424 F.Supp. 428 (E.D.Tenn.1976). If this case is characterized as a contract question under Tennessee law, the rights of parties to a contract are governed by the law that the parties intended, and absent manifestation of contrary intent, the parties are presumed to have contracted under the laws of the state in which the contract was entered into. Boatland, Inc. v. Brunswick Corp., 558 F.2d 818 (6th Cir. 1977); Ohio Casualty Ins. Co. v. Travelers Indemnity Co., 493 S.W.2d 465 (Tenn.1973).

Because the basic question in this case is what is the legal...