Downtowner, Inc. v. Acrometal Products, Inc., WEATHER-RIT

• Citation: 347 N.W.2d 118
• Decision Date: 21 March 1984
• Docket Number: INC,10494,WEATHER-RIT,Nos. 10495,s. 10495
• Parties: The DOWNTOWNER, INC., Coca-Cola Bottling Company of Bismarck; Northwest Billiard Supply, Inc.; d'Joyce Photography Inc., and Gold Seal Company, Plaintiffs and Appellants, v. ACROMETAL PRODUCTS, INC., Defendant. and ADAMS, INCORPORATED, Defendant, Third-Party Plaintiff and Appellant, v., a corporation; and Acrometal Products, Inc., Third-Party Defendants and Appellees. WEEDA'S BATH AND KITCHEN SHOP, Prairie West Casuals; Downtowner Investment Company; Special People, Inc.; and First Trust Company of North Dakota, Plaintiffs, v. ADAMS, INCORPORATED, Defendant, Third-Party Plaintiff and Appellant, v., a corporation; Acrometal Products, Inc., a corporation and Continental Casualty Company, Third-Party Defendants and Appellees. Civ.
• Court: United States State Supreme Court of North Dakota

Page 118

347 N.W.2d 118

The DOWNTOWNER, INC., Coca-Cola Bottling Company of

Bismarck; Northwest Billiard Supply, Inc.;

d'Joyce Photography Inc., and Gold Seal

Company, Plaintiffs and Appellants, v. ACROMETAL PRODUCTS, INC., Defendant. and ADAMS, INCORPORATED, Defendant, Third-Party Plaintiff and Appellant, v. WEATHER-RITE, INC., a corporation; and Acrometal Products, Inc., Third-Party Defendants and Appellees.

WEEDA'S BATH AND KITCHEN SHOP, Prairie West Casuals;

Downtowner Investment Company; Special People,

Inc.; and First Trust Company of North

Dakota, Plaintiffs, v. ADAMS, INCORPORATED, Defendant, Third-Party Plaintiff and Appellant, v. WEATHER-RITE, INC., a corporation; Acrometal Products,

Inc., a corporation and Continental Casualty

Company, Third-Party Defendants and

Appellees.

Civ. Nos. 10495, 10494.

Supreme Court of North Dakota.

March 21, 1984.

Joel W. Gilbertson, of Pearce, Anderson & Durick, Bismarck, for plaintiff and appellant, Downtowner, Inc.

Steven A. Storslee, of Fleck, Mather, Strutz & Mayer, Bismarck, for defendant, third-party plaintiff and appellant Adams, Incorporated.

A. William Lucas, of Lundberg, Conmy, Nodland, Lucas & Schulz, Bismarck, for defendant, Acrometal Products, Inc.

GIERKE, Justice.

These appeals are brought by the plaintiff, Downtowner, Inc., and by the defendant and third-party plaintiff, Adams, Inc., from a partial summary judgment entered in the District Court of Burleigh County in favor of defendant and third-party defendant, Acrometal Products, Inc. We affirm in part, reverse in part, and remand.

The plaintiffs, Downtowner, Inc., and Weeda's Bath and Kitchen Shop, commenced these actions by service of summons and complaint alleging products liability causes of action. Both complaints allege that sometime prior to January 1973 a corporation named Weather-Rite, Inc., manufactured a make-up air unit named the Thermo-O-Thrift, Model 212. This unit is a gas-fired heater. In January of 1973, the heater was sold by Weather-Rite through Adams, Inc., to Gerlach Sheet Metal of Bismarck for installation in The Downtowner, a Bismarck restaurant. The plaintiffs allege that in January 1978 the heater caused a fire which damaged the building in which the plaintiffs' businesses were located, with resultant damage to the plaintiffs' property. The only liability alleged against Adams is that it was in the chain of sale of the product.

Upon receipt of the summons and complaint, Adams brought claims against Weather-Rite and Acrometal, alleging its rights to indemnification, pursuant to Sec. 28-01.1-07 of the North Dakota Century Code. ¹ On December 8, 1981, Acrometal filed a motion for summary judgment which was granted. A Rule 54(b), N.D.R.Civ.P., order was entered and from the judgment Downtowner and Adams have appealed. ²

Weather-Rite was a corporation formed sometime prior to 1968. It was in the business of manufacturing heating units of the type described in the complaints. Weather-Rite was responsible for the entire manufacturing process, from initial construction and testing of the unit to its actual shipment to distributors. Adams was a distributor of Weather-Rite products in North Dakota.

In 1974 Weather-Rite was in serious financial difficulty and foreclosure proceedings were being initiated by its financing bank. The company went into receivership in state court in Minnesota.

After the receivership had begun, Acrometal purchased the bulk of Weather-Rite's assets for cash. No stock was acquired. Only the assets were purchased, excluding buildings and real property.

Acrometal purchased these assets from two sources. Weather-Rite's financing bank executed an assignment to Acrometal of the bank's security interest in Weather-Rite's accounts receivable. The bank also executed a bill of sale to Acrometal of its security interest in Weather-Rite's inventory and contract rights. Acrometal also purchased certain of Weather-Rite's personal property from the bank. In addition, the court-appointed receiver executed a bill of sale to Acrometal of Weather-Rite's remaining assets. On October 18, 1974, the District Court of Hennepin County, Minnesota, approved the sale. Neither the documents of transfer nor the order of approval recite any assumption by Acrometal of Weather-Rite's liabilities. Weather-Rite became a mere corporate shell.

In addition to the purchase of Weather-Rite's assets, a number of Weather-Rite's employees were also hired by Acrometal. Among these employees was Richard Cowan, the chief engineer, sales manager, and vice president of Weather-Rite. Also hired was John Nagan, the president of Weather-Rite. During the transition period, the manufacturing process never ceased for any substantial length of time. Products were manufactured almost continuously, either by Weather-Rite or Acrometal. Weather-Rite's operations, however, were gradually shut down at its St. Paul plant and the manufacturing process was begun at Acrometal's Minneapolis facility.

During the manufacturing process under Acrometal, the designs of the Weather-Rite products did not substantially change. The same sales network was used, and customer lists and other files were obtained by Acrometal. The heating units were at all times marketed under the Weather-Rite name, with substantially the same marketing technique. No mention was made of Acrometal, except in small print on the last page of its promotional brochure.

Acrometal also honored the warranties of products manufactured and sold by Weather-Rite and filled the orders which were in existence at the time of the purchase of assets. Acrometal is now the source for replacement parts for the units. All of this was accomplished through the "Weather-Rite" division of Acrometal.

The sole issue on appeal is whether or not the district court erred in granting summary judgment to Acrometal Products, Inc. Summary judgment is a procedural device designed to dispose of a legal conflict on the merits without a trial if there is no dispute as to material facts or where only a question of law is involved. Rule 56, North Dakota Rules of Civil Procedure. Roll v. Keller, 336 N.W.2d 648, 650 (N.D.1983). Where different inferences may be drawn from agreed-upon facts, they must be drawn in favor of the party opposing summary judgment. Sheets v. Letnes, Marshall & Fiedler, Ltd., 311 N.W.2d 175, 180 (N.D.1981). There is no dispute regarding the facts of this case. There is also no dispute regarding the law of successor corporate liability as it existed in North Dakota at the time of the fire. The principal question raised by this appeal is whether or not North Dakota should join a minority of jurisdictions which have either expanded upon the "mere continuation" exception to the rule of successor corporate liability or have granted a separate exception to the general rule. Appellants also urge that the summary judgment be reversed on the basis that Acrometal knew of problems with the Weather-Rite heaters and failed to warn Weather-Rite's customers of those problems.

I

The long-established general rule is that a corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation. There are, however, four well-recognized exceptions to the general rule under which liability may be imposed on a purchasing corporation:

1. Where there is an express or implied agreement to assume the transferor's liabilities;

2. Where the transaction amounts to a consolidation or merger of the two corporations;

3. Where the transferee corporation is merely a continuation of the transferor corporation; or

4. The transaction is an attempt to defraud the creditors of the corporation.

Leannais v. Cincinnati, Inc., 565 F.2d 437 (7th Cir.1977); Cyr v. B. Offen & Co., Inc., 501 F.2d 1145 (1st Cir.1974). A further exception has been recognized where some of the elements of a purchaser in good faith are absent. Cyr v. B. Offen & Co., Inc., supra 501 F.2d at 1152.

Under neither this general rule nor its exceptions would Acrometal be liable for any damage resulting from a defect in the equipment manufactured by Weather-Rite.

The traditional rule of corporate nonliability was developed in response to the need to protect a bona fide purchaser from the unassumed debt liability of its predecessor. L. Frumer & M. Friedman, 1 Products Liability Sec. 5.06 (1980). A number of courts, however, have evidenced a concern that this rule, when applied to products liability cases, serves to frustrate the policies on which the strict products liability theory is premised. These courts have therefore deviated from the strict application of the general rule in the products liability context. Two of the cases relied on by the appellants are illustrative of the approaches taken by these courts.

In Turner v. Bituminous Cas. Co., 397 Mich. 406, 244 N.W.2d 873 (1976), the Michigan Supreme Court expanded the merger and continuation exceptions and held that a successor corporation may be liable if the totality of the transaction demonstrates the basic continuity of the enterprise. The traditional requirement for a de facto merger was the purchase of assets with the stock of the purchasing corporation. In Turner, supra, the Michigan court refused to recognize a distinction between the purchase of assets with cash and the purchase of assets with the stock of the purchasing corporation. In reference to this distinction, the Turner court stated that:

"The stated difference between a stock payment and a cash payment is that in the first situation there is a commonality of ownership....

* * *

"The reasoning behind this must be that shareholders of the first company, become, as a result of the stock transfer, shareholders of the second corporation. Technically, this argument is strong. The presence of stock as consideration should be one factor to use to determine whether there exists a sufficient nexus between the successor and predecessor corporations...