Jacobs v. Lakewood Aircraft Service, Inc.

• Decision Date: 03 April 1981
• Docket Number: 80-0158.,Civ. A. No. 79-1044
• Citation: 512 F. Supp. 176
• Parties: Winifred M. JACOBS, Executrix of the Estate of Gerald Jon Jacobs, Deceased, v. LAKEWOOD AIRCRAFT SERVICE, INC., Beryl D'Shannon Aviation Specialties, Inc. and Flight Extenders, Inc. Winifred M. JACOBS, Executrix of the Estate of Gerald Jon Jacobs, Deceased, v. FLIGHT EXTENDERS, INC. v. LAKEWOOD AIRCRAFT SERVICE, INC.
• Court: U.S. District Court — Eastern District of Pennsylvania

512 F. Supp. 176

Winifred M. JACOBS, Executrix of the Estate of Gerald Jon Jacobs, Deceased, v. LAKEWOOD AIRCRAFT SERVICE, INC., Beryl D'Shannon Aviation Specialties, Inc. and Flight Extenders, Inc.

Winifred M. JACOBS, Executrix of the Estate of Gerald Jon Jacobs, Deceased, v. FLIGHT EXTENDERS, INC. v. LAKEWOOD AIRCRAFT SERVICE, INC.

Civ. A. Nos. 79-1044, 80-0158.

United States District Court, E. D. Pennsylvania.

April 3, 1981.

COPYRIGHT MATERIAL OMITTED

David S. Shrager, Philadelphia, Pa., for plaintiff.

Dean F. Murtagh, Philadelphia, Pa., for defendant Flight Extenders.

OPINION

LORD, Chief Judge.

I. Preliminary Statement

In this products liability case, defendant Flight Extenders, Inc., a California corporation ("the California Corporation"), seeks summary judgment. Its motion implicates two developing theories: the liability of a successor corporation for torts committed by its predecessor corporation, see Woody v. Combustion Engineering, Inc., 463 F.Supp. 817, 820 (E.D.Tenn.1978); and the liability of a successor corporation for breach of its duty to warn of recently discovered defects in its predecessor's products, see Wilson v. Fare Well Corp., 140 N.J.Super. 476, 492-93, 356 A.2d 458, 467-68 (L.Div.1976). For the reasons that follow, I shall grant this motion.

II. Facts

Plaintiff's decedent was killed on March 24, 1978 when his Bonanza airplane crashed in Pennsylvania. Plaintiff alleges that this crash was caused by, inter alia, a defective wing tip tank fuel system which had been designed, manufactured, and sold by Flight Extenders, Inc., a Connecticut corporation ("the Connecticut corporation").

Plaintiff did not sue the Connecticut corporation because it ceased operations in 1966. Rather, plaintiff sued the California corporation which had purchased some of the Connecticut corporation's assets. Although these two corporations were separate companies which existed at different times, plaintiff contends that the transferee corporation is liable for the injuries caused by defective products manufactured by its transferor. Resolution of this issue depends upon the nature of the contacts between the two corporations. I must therefore detail their respective corporate histories.

The Connecticut corporation was incorporated in 1960 in Stamford, Connecticut. Ronald Bamber was its president and primary stockholder; the other stockholders were his wife and two sisters-in-law. Bamber maintained the only corporate office in Stamford. This corporation manufactured and sold tip tank systems for use on various models of the Beechcraft Bonanza airplane. It also manufactured and sold a hot lunch kit called "Flight Maid" for installation in Bonanza airplanes. There were two or three employees throughout the company's lifetime.

The Connecticut corporation ceased all operations in April of 1966. All of its physical assets remained in Stamford. There were no outstanding liabilities or debts, and there were no accounts receivable. Nor were there any outstanding unfilled orders from purchasers.

In July, 1968, Bamber sold some of the dormant corporation's assets to one Robert Matheson. These assets included, inter alia, tools, molds, design drawings, parts, raw materials, placards, manuals, and other documents relating to the fifteen gallon tip tank system. Bamber also sold the use of the name "Flight Extenders," along with the good will attached thereto. Matheson did not receive any customer lists nor did he buy any assets relating to the hot lunch kit. Bamber agreed not to initiate any business involving the manufacture of tip tank systems for Bonanza airplanes. However, Bamber was not obligated to change the name of his corporation or to dissolve it. Bamber had no further involvement with his corporation after the sale; ultimately he discarded all his stock. The Connecticut corporation never resumed operations after this sale to Matheson.

Matheson paid $18,000 for these assets. This was a reasonable consideration. Matheson received no stock in the Connecticut corporation; nor did Bamber receive stock in any Matheson corporation.

When Matheson came to pick up these assets, Bamber briefly gave instructions on constructing the tip tank system. This was the last contact that Bamber had with Matheson: Bamber was not offered any position in Matheson's corporation; Bamber did not provide any consulting services; and none of Bamber's employees became Matheson's employees. Indeed, Bamber has not seen or heard from Matheson since the day the assets were shipped.

Matheson then formed Flight Extenders, Inc., a California corporation (the defendant here), in August or September of 1968. On September 16, 1968, he sold the assets that he had bought from Bamber to this newly formed corporation in exchange for 200 shares of its common stock. None of the officers, directors, or shareholders of the Connecticut corporation became officers, directors, or shareholders of the California corporation.

The California corporation could not start manufacturing and selling operations immediately, however. In order to set up a manufacturing facility, Matheson had to get necessary tools, machines, and equipment, including, inter alia, a compressor, a booth for spraying, a heater, and other spraying devices. He also had to redraft the blueprints which he received from the Connecticut corporation since they were illegible and wrinkled. Moreover, he developed a new operating procedures manual and he revised Bamber's tip tank installation instructions. In addition, he had to buy the necessary raw materials because, although the Connecticut corporation had some remaining, they were too old and heavy and therefore Matheson had not shipped them from Connecticut to California. Matheson also had to buy fuel selector valves since Bamber did not have any on hand when Matheson came to pick up the assets. Consequently this was a "slow time" because of the need to set up the necessary manufacturing facilities and processes.

The California corporation also needed to get product manufacturing authority from the Federal Aviation Authority so that it could manufacture and sell the tip tank system. The company ultimately received this authority and began manufacturing and selling the systems. These tip tank systems were slightly different from the ones that the Connecticut corporation had manufactured and sold.

The California corporation sold only five to ten of these systems before it ceased operations and warehoused all its physical assets in January, 1970. The California corporation remained dormant until May, 1972 when its corporate shell was reactivated as the mail hauling company that it is today. It sold all its assets used in connection with the manufacture and sale of the tip tank system in May, 1973.

The tip tank system which was part of the airplane involved in this case was not designed, manufactured, sold, assembled, installed, or serviced by the California corporation. Moreover, the California corporation did not know of the owners of this particular tip tank system.

III. Discussion

A. Corporate successor liability

1. Introduction

Ordinarily when one company sells or transfers all its assets to another company, the latter is not liable for the debts and liabilities of the transferor simply by virtue of its succession to the transferor's property. In order to find that this general rule is not applicable and that the transferee does acquire such liability, one of the following must be shown: (1) the purchaser expressly or impliedly agrees to assume such obligation; (2) the transaction amounts to a consolidation or merger; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is fraudulently entered into to escape liability.

Husak v. Berkel, Inc., 234 Pa.Super. 452, 456-57, 341 A.2d 174, 176 (1975). See Knapp v. North American Rockwell Corp., 506 F.2d 361 (3d Cir. 1974), cert. denied, 421 U.S. 965, 95 S.Ct. 1955, 44 L.Ed.2d 452 (1975); Cabrera v. Hayes-Albion Corp., C.A. No. 80-3108 (E.D.Pa. Feb. 10, 1981); Woody v. Combustion Engineering, Inc., supra (Pennsylvania law); Bippus v. Norton Co., 437 F.Supp. 104 (E.D.Pa.1977); Shane v. Hobam, Inc., 332 F.Supp. 526 (E.D.Pa.1971); Granthum v. Textile Machine Works, 230 Pa.Super. 199, 326 A.2d 449 (1974). Plaintiff concedes that the first and fourth exceptions are inapplicable. But he contends that the transaction here falls under the second or third exceptions.

2. Merger

Traditionally the merger exception applies when the seller corporation is absorbed into the purchaser corporation, thereby losing its existence as a separate corporate entity. See, e. g., Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977); Knapp v. North American Rockwell Corp., 506 F.2d at 365; Woody, supra; Shannon v. Samuel Langston Co., 379 F.Supp. 797, 801 (W.D.Mich.1974). That did not happen when Matheson bought some of the assets of the Connecticut corporation because the latter company continued to exist, there was not continuity of ownership in the successor corporation that was later formed, and the Connecticut corporation received fair consideration for its assets in a bona fide sale. See, e. g., Woody, supra; Bazan v. Kux Machine Co., 358 F.Supp. 1250 (E.D.Wis.1973); McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 264 A.2d 98 (L.Div.1970), aff'd per curiam, 118 N.J.Super. 480, 288 A.2d 585 (App.Div.1972).

However, plaintiff argues that if I look to the substance of this transaction I will find the elements of a de facto merger because the Connecticut corporation's sale of its assets resembled a merger although the transaction lacked the formal characteristics of one. Plaintiff is apparently correct in noting that Pennsylvania courts "follow the philosophy ... that questions of an injured party's right to seek recovery are to be resolved by an analysis of public policy considerations rather than by a mere procrustean application of...