Hamaker v. Kenwel-Jackson Mach., Inc.

Decision Date14 May 1986
Docket NumberKENWEL-JACKSON,No. 15152,15152
Citation387 N.W.2d 515,55 USLW 2012
Parties, Prod.Liab.Rep.(CCH)P 11,003 Carolyn M. HAMAKER, Plaintiff and Appellant, v.MACHINE, INC., Defendant and Appellee.
CourtSouth Dakota Supreme Court

Bradley G. Bonynge, Sioux Falls, for plaintiff and appellant.

Timothy Nimick, Woods, Fuller, Shultz & Smith, Sioux Falls, for defendant and appellee; Arlo Sommervold, Woods, Fuller, Shultz & Smith, Sioux Falls, on brief.

SABERS, Justice.

The user of a notching machine brought an action against the corporate successor of the notcher's original manufacturer for injuries sustained while using the machine. The trial court granted summary judgment for the corporate successor, and the user appeals. We affirm.

Statement of Facts

On March 6, 1981, appellant Carolyn M. Hamaker (Hamaker), sustained injuries while operating a notcher machine incident to her employment at Dakota Pallets and Wood Products, Inc., in Alcester, South Dakota. She caught her left hand in the notcher blade and severed the second, third, fourth, and fifth fingers. She sought damages from the appellee, Kenwel-Jackson Machine, Inc. (Kenwel-Jackson), alleging various grounds of product liability including strict liability in tort, negligence, and breach of express and implied warranties.

The machine, a model 3072 notcher, was manufactured by appellee's predecessor, Kenwel Machine Company, Inc. (Kenwel). It was originally sold on May 21, 1969, to Harold Newton of Marshfield, Missouri. Sometime after it started production of the model 3072 notcher, Kenwel made several design changes and began manufacturing its successor which bore the model number 3072A.

On December 31, 1975, Kenwel sold its assets to John S. and Rosemary H. Jackson, husband and wife, for the cash sum of $140,000.00. Thereafter, Kenwel ceased business operations, and its corporate existence was terminated eighteen months later in August of 1977.

Pursuant to the purchase agreement executed between Kenwel and the Jacksons on January 30, 1976, the Jacksons bought the following assets: machinery, equipment, hand tools, furniture, fixtures, leasehold improvements, patent rights, accounts receivable, inventory, and goodwill. They did not purchase the patent for notcher model 3072. Nor did the Jacksons purchase any corporate stock from Kenwel. The purchase agreement contained the following provision:

IV. CONDITIONS. This Offer To Purchase is expressly subject to, and conditional upon, the occurrence of each of the following conditions:

....

6. The agreement by the Seller to discharge or to provide for all liabilities of the Seller as of the date of closing, so that the Purchaser shall have no accounts payable, taxes due, or any other kind or type of current or long term liabilities incurred and unsatisfied as of the date of closing, except, however, commitments for materials ordered from suppliers.

Following the sale, the Jacksons formed the appellee corporation, Kenwel-Jackson, which began its corporate existence on February 2, 1976. No officer or director of Kenwel was ever an officer, director, stockholder, or employee of Kenwel-Jackson. Nor was there any transfer of top management personnel from the old to the new corporation. However, three craftsmen formerly employed by the predecessor corporation were retained by Kenwel-Jackson; one eventually became a vice president in charge of manufacturing.

Kenwel-Jackson was primarily interested in developing all types of board or lumber stackers. It cultivated different customers than its predecessor by marketing lumber stackers for the building component industry. Although Kenwel-Jackson continued to manufacture the model 3072A notching machine as well as its successors, models 3072B and 3072C, respectively, Kenwel-Jackson never participated in the design, manufacture, or sale of the model 3072 notcher which allegedly caused Hamaker's injuries. Kenwel-Jackson remained active in the manufacturing business until September of 1984.

Issue

The issue is whether Kenwel-Jackson, as the successor corporation, can be held liable for Hamaker's injuries under "continuity of enterprise" or "merger" theories, or under the "product line" theory of strict tort liability.

Summary Judgment

Hamaker argues generally that the trial court erred in disposing of this matter through summary judgment. However, no specific factual disputes are asserted by her to support her argument.

In summary judgment, the burden of proof is on the moving party to show clearly that there is no genuine issue of material fact and that he is entitled to judgment as a matter of law. The evidence must be viewed most favorably to the nonmoving party and reasonable doubts should be resolved against the moving party. Summary judgment is an extreme remedy and is not intended as a substitute for a trial. Wilson v. Great Northern Railway Company, 83 S.D. 207, 212, 157 N.W.2d 19, 21 (1968). Accordingly, summary judgment is appropriate to dispose of legal, not factual questions. Since no genuine issue of material fact exists in this case, the legal questions may be appropriately decided by summary judgment.

Our review of a trial court order granting summary judgment leads to an affirmance if any basis exists which supports the ruling. Uken v. Sloat, 296 N.W.2d 540, 542 (S.D.1980), Maryland Cas. Co. v. Delzer, 283 N.W.2d 244 (S.D.1979).

Liability as Successor Corporation

In granting Kenwel-Jackson's motion for summary judgment, the trial court relied heavily on the Nebraska Supreme Court's decision in Jones v. Johnson Mach. & Press Co., Etc., 320 N.W.2d 481 (1982). In this case, the plaintiff sought to recover damages in a products liability action for injuries he sustained while operating a punch press which was manufactured by one of the corporate defendants. A default judgment was entered against the corporate defendant which manufactured the press. The remaining defendants, (other than the plaintiff's employer), were successor corporations which subsequently manufactured, distributed, and sold the same type of press.

The issue of successor corporate liability in Jones was one of first impression in Nebraska, just as it is in South Dakota. The general rule is that a corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation. Id. at 483; Downtowner, Inc. v. Acrometal Products Inc., 347 N.W.2d 118, 121 (N.D.1984); Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir.1977). There are, however, four exceptions to the general rule under which liability may be imposed on a purchasing corporation. They are:

(1) when the purchasing corporation expressly or impliedly agrees to assume the selling corporation's liability;

(2) when the transaction amounts to a consolidation or merger of the purchaser and seller corporations;

(3) when the purchaser corporation is merely a continuation of the seller corporation; or

(4) when the transaction is entered into fraudulently to escape liability for such obligations.

Jones, 320 N.W.2d at 483. (citations omitted). In finding that plaintiff's claim of liability did not fit under any of the exceptions to the general rule, the Jones court affirmed summary judgment in favor of the corporate successors. Id. at 484.

There is no language in the contract between these parties to suggest that Kenwel-Jackson impliedly assumed responsibility for future products liability actions against Kenwel. In fact, the purchase agreement expressly conditioned the sale of assets upon Kenwel's promise to discharge, or to provide for, all of its current or long-term liabilities incurred or unsatisfied as of the date of closing.

Hamaker asserts that the transaction between Kenwel-Jackson and its predecessor amounted to a "merger" of the two corporations, or that Kenwel-Jackson is a "mere continuation" of Kenwel; i.e., exceptions (2) and (3) to the general rule above. However, a merger involves the actual absorption of one corporation into another, with the former losing its existence as a separate corporate entity. When the seller corporation retains its existence while parting with its assets, a "de facto merger" may be found if the consideration given by the purchaser corporation is shares of its own stock. Leannais, 565 F.2d at 439, quoting Bazan v. Kux Machine Co., 358 F.Supp. 1250 (E.D.Wis.1973). No stock in Kenwel-Jackson was transferred as consideration for Kenwel's assets. Cf. Knapp v. North American Rockwell Corp., 506 F.2d 361 (3d Cir.1964) cert. den. 421 U.S. 965, 95 S.Ct. 1955, 44 L.Ed.2d 452 (1975) [Court found a merger despite manufacturer's continued existence for approximately 18 months after the sale, where manufacturer's assets had been exchanged for Rockwell Stock. (Emphasis added.) ].

The key element of a "continuation" is a commonality of the officers, directors, and stockholders in the predecessor and successor corporations. Leannais, 565 F.2d at 440. The top management personnel of Kenwel was not carried over to Kenwel-Jackson. Nor did any shareholder of either corporation become an owner, shareholder, director, officer, or employee of the other.

In Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873 (1976), the Michigan Supreme Court deviated from the traditional requirement for a de facto merger by refusing to recognize a distinction between the purchase of assets with cash and the purchase of assets with the stock of the purchasing corporation. Id. 244 N.W.2d at 879-880. In Turner, the court held that cash consideration was sufficient to establish a prima facie case of continuation of a successor corporation's responsibility for products liability if:

(1) There was basic continuity of the enterprise of the seller corporation, including, apparently, a retention of key personnel, assets, general business operations, and the corporate name.

(2) The seller corporation ceased ordinary business operations,...

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