Hernandez v. Johnson Press Corp.

• Decision Date: 30 March 1979
• Docket Number: No. 77-1558,77-1558
• Parties: , 26 Ill.Dec. 777 Paulita HERNANDEZ, Plaintiff-Appellant, v. JOHNSON PRESS CORPORATION et al., Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 778

388 N.E.2d 778

70 Ill.App.3d 664, 26 Ill.Dec. 777

Paulita HERNANDEZ, Plaintiff-Appellant, v. JOHNSON PRESS CORPORATION et al., Defendant-Appellee.

No. 77-1558.

Appellate Court of Illinois, First District, Fifth Division.

March 30, 1979.

Reed, Lucas & Doherty, Chicago (Scoby, Biggam & Lunding, P. C., Chicago, of counsel), for plaintiff-appellant.

Maddux, Johnson & Cusack, Ltd., Chicago (Thomas H. Fegan, Jr., Chicago, of counsel), for defendant-appellee.

WILSON, Justice:

Plaintiff brought an action against the corporate successor of the original manufacturer of a punch press seeking damages for injuries sustained while operating the press. The trial court granted summary judgment in favor of defendant. On appeal, plaintiff raises the following issues: (1) whether the We affirm the trial court. The pertinent facts follow.

[26 Ill.Dec. 778] question of successor liability for defective products is one of tort law or corporate law; (2) whether Illinois has greater contacts with the instant case than Indiana; (3) whether a De facto merger has occurred; and (4) whether Illinois should adopt a product line exception to the general rule of non-liability of a purchaser of assets.

On April 11, 1975, plaintiff, Paulita Hernandez, was injured when her hands were caught in a punch press while working at Oxford Products, Inc. of Addison, Illinois. As a result of the injuries sustained, plaintiff filed suit against Johnson Press Corporation, the original manufacturer of the machine, and Amsted Industries Incorporated, the alleged corporate successor, seeking damages for the defective and unreasonably dangerous design and manufacture of the machine.

Defendant, Amsted Industries, moved for summary judgment on the ground that neither Amsted nor any of its subsidiaries or divisions manufactured or designed the punch press in question, but that the press was manufactured by Johnson Press Corporation, a corporation which had been dissolved in 1965. In support of the motion for summary judgment, M. C. Holmes, Secretary and Corporate Counsel of Amsted, filed an affidavit which set forth the following: (1) that an identification card referred to in plaintiff's complaint indicated that the press in question was manufactured by Johnson Press Corp., Elkart, Indiana and shipped on October 1, 1952; (2) that neither South Bend Lathe, a division of Amsted, nor Amsted manufactured the press in question; (3) that Amsted did not at any time assume the liabilities of Johnson Press Corp.; (4) that the assets and liabilities of Johnson Press were purchased by a company known as Bontrager in 1956; (5) that in 1962 Amsted purchased the assets of Bontrager and acquired one outstanding share of stock in Johnson Press; and (6) that Johnson Press was dissolved pursuant to the Indiana General Corporation Act by shareholders vote on July 20, 1965 and pursuant to approval and filing of Articles of Dissolution with the Secretary of State of the State of Indiana on August 21, 1965. Plaintiff did not file any counteraffidavits. The trial court granted defendant's motion for summary judgment and plaintiff appeals.

OPINION

Although the trial court decided the present case under Indiana corporate law, plaintiff initially argues that the court should have applied Illinois tort law and that under tort law a genuine issue of fact exists as to the defendant's liability. We disagree. A review of the record clearly indicates that plaintiff neither raised this argument nor objected to the application of Indiana corporate law at trial. Plaintiff's failure to raise this issue and object to it at trial precludes us from deciding it on appeal. (Kravis v. Smith Marine, Inc. (1975), 60 Ill.2d 141, 324 N.E.2d 417; In re Estate of McGaughey v. McGaughey (1978), 60 Ill.App.3d 150, 17 Ill.Dec. 260, 376 N.E.2d 259; Second Fed. Sav. & Loan v. Home Sav. & Loan (1978), 60 Ill.App.3d 248, 17 Ill.Dec. 350, 376 N.E.2d 349.) Thus, Indiana corporate law principles are applicable to this appeal.

Since the above-mentioned issue has been waived, the next issue of whether Illinois has greater contacts than Indiana need not be discussed.

Plaintiff also contends that a De facto merger has occurred under the facts before us. She argues, in effect, that through Bontrager, the intermediate purchaser, the assets and liabilities of Johnson were absorbed into either Amsted or its subsidiary, South Bend Lathe, thereby creating a basis for imposing liability on Amsted. We find plaintiff's argument unpersuasive.

Under Illinois law, a corporation that purchases the assets of another corporation is not liable for the debts and liabilities of the transferor in the absence of an agreement providing otherwise. (Johnson v. Marshall & Huschart Machinery Co. (1978), 66 Ill.App.3d 766, 23 Ill.Dec. 505, 384 N.E.2d 141. See also, Commercial Nat'l Bank v. Newston (1976), 39 Ill.App.3d 216, 349 N.E.2d 138; Buis v. Peabody Coal Co. (1963), 41 Ill.App.2d 317, 190 N.E.2d 507; Alexander v. State Savings Bank & Trust Co. (1935), 281 Ill.App. 88.) There are, however, several recognized exceptions: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller's obligations. (Leannais v. Cincinnati, Inc. (7th Cir. 1977), 565 F.2d 437; Travis v. Harris Corp. (7th Cir. 1977), 565 F.2d 443.) Exception (2) is recognized in Illinois (Illinois Business Corporation Act, Ill.Rev.Stat.1977, ch. 32, par. 157.69(e)), and has been interpreted to include a De facto merger. (See, Abbott v. Fluid Power Pump Co. (1969), 112 Ill.App.2d 303, 251 N.E.2d 93.) In light of the foregoing principles, as applied to the present case, we find no De facto merger.

The cases cited by plaintiff in which the courts have found that there was a De facto merger have applied the test set forth in McKee v. Harris-Seybold Co. (L.Div.1970), 109 N.J.Super. 555, 264 A.2d 98, aff'd. (App.Div.1972), 118 N.J.Super. 480, 288 A.2d 585. (See e. g., Shannon v. Langston (W.D.Mich.1974), 379 F.Supp. 797; Turner v. Bituminous Cas. Co. (Sup.Ct.Mich.1976), 397 Mich. 406, 244 N.W.2d 873.) The criteria for establishing a De facto merger are as follows:

"(1) There is a continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets and general business operations.

(2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation.

(3) The seller corporation ceases its ordinary business operations, liquidates and dissolves as soon as legally and practically possible.

(4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation. " Shannon v. Langston, 379 F.Supp. at 801 citing McKee v. Harris-Seybold Co.

Even if Illinois were to adopt this test, applying it to the facts presented here, we think that there was no De facto merger between Johnson and Amsted. There are no facts indicating continuity of management, personnel, physical location, assets and general business operations. Nor does the record reflect continuity of shareholders or an exchange of stock. Johnson was not dissolved until 1965, three years subsequent to Amsted's purchase of the assets of Bontrager and one outstanding share of Johnson stock. Moreover, Amsted did not at any time assume the liabilities of Johnson.

Finally, plaintiff urges this court to adopt the product line exception to the general rule of nonliability of a purchaser of assets as exemplified by Ray v. Alad Corp. (1977), 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3. We do not believe that the Ray product line rationale should be adopted by this court. In that case, plaintiff brought an action seeking damages for injuries sustained from the use of a defective ladder manufactured and sold by defendant's predecessor. The California Supreme Court, having found no basis for imposing liability on defendant under the traditional exceptions discussed above, relied upon policy considerations. Their justification rested upon: (1) the nonavailability of plaintiff's remedies against the original manufacturer due to the acquisition of the business by the successor; (2) the successor's ability to assume the original manufacturer's risk-spreading rule; and (3) the fairness involved in requiring the successor to bear the burden for any defects as a consequence of the successor's use of the original manufacturer's good will in continuing the product line. (Ray at 31, 136 Cal.Rptr. at 580, 560 P.2d at 9.) The court concluded that "a party which acquires a manufacturing business and continues the output of its line of products under the circumstances here presented assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired." Ray at 35, 136 Cal.Rptr. at 582, ...