Johnston v. Amsted Industries, Inc.

• Decision Date: 09 April 1992
• Docket Number: No. 91CA0230,91CA0230
• Citation: 830 P.2d 1141
• Parties: Prod.Liab.Rep. (CCH) P 13,224 Christopher M. JOHNSTON and Janice Johnston, Plaintiffs-Appellants, v. AMSTED INDUSTRIES, INC., a Delaware corporation, and South Bend Lathe, Inc., an Indiana corporation, Defendants-Appellees. . V
• Court: Colorado Court of Appeals

Page 1141

830 P.2d 1141

Prod.Liab.Rep. (CCH) P 13,224

Christopher M. JOHNSTON and Janice Johnston, Plaintiffs-Appellants, v. AMSTED INDUSTRIES, INC., a Delaware corporation, and South Bend Lathe, Inc., an Indiana corporation Defendants-Appellees.

No. 91CA0230.

Colorado Court of Appeals Div. V.

April 9, 1992.

Kathleen McWhirter Emmett, James F. Frost, Denver, for plaintiffs-appellants.

Fowler, Schimberg & Cowman, P.C., Daniel M. Fowler, Terrence P. Murray, Denver, for defendants-appellees.

Opinion by Judge DAVIDSON.

In this products liability case, plaintiffs, Christopher and Janice Johnston, appeal from the summary judgment entered in favor of defendants, Amsted Industries, Inc., and South Bend Lathe, Inc. Presenting issues of first impression in Colorado, plaintiffs argue that strict products liability should attach to a corporate successor for the defective product of a predecessor under the "product line doctrine" or "continuity of enterprise" exception to traditional corporate law. We reject these arguments and therefore affirm.

The case was submitted to the trial court on stipulated facts. On September 9, 1980, Christopher Johnston's hand was amputated while operating a power press which had been designed, manufactured, and sold by Johnson Machine and Press Corporation in 1948. In 1956, another corporation purchased the assets of Johnson for cash and received one share of stock in Johnson so that it could continue to manufacture and sell presses under the Johnson name. That corporation continued to manufacture and sell "Johnson" power presses from 1956-1962, when it was succeeded by Amsted.

In its purchase agreement in 1962, Amsted bought all of the previous business' assets and liabilities necessary for the uninterrupted continuation of the business, but specifically refused to assume any liability resulting from injuries incurred from the use of presses manufactured and sold by that business. Amsted transferred its assets to South Bend Lathe, which was Amsted's wholly-owned subsidiary. None of the shareholders, directors, or officers of the selling corporation became shareholders, directors, or officers of Amsted or South Bend Lathe.

South Bend Lathe continued to manufacture the "Johnson" power presses until 1975, when Amsted sold all of the assets involving the Johnson presses to LWE Incorporated. LWE Incorporated, then changed its name to South Bend Lathe, Inc.

In April 1981, Christopher Johnston brought this action against South Bend Lathe, Inc., and later against Amsted, asserting claims for strict liability, negligence, and breach of warranty. Janice Johnston asserted a claim for loss of consortium. Acknowledging that he had been injured on a machine which had been manufactured 32 years prior to his injury by a company which had ceased to exist in 1956, Johnston alleged essentially that, because of Amsted's purchase of the business' assets in 1962, defendants should be held liable for his injuries as successor corporations either under traditional corporate law or under theories of strict liability.

On cross-motions for summary judgment, the trial court rejected plaintiffs' arguments. The issues on appeal concern only the trial court's denial of plaintiffs' strict liability claims.

I.

Under traditional corporate law, the liability of a successor entity depends on the nature of the transaction which gives rise to the change of ownership. Generally, a corporation that purchases the assets of another corporation is not liable for the debts and liabilities of the seller unless (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.

Ruiz v. ExCello Corp., 653 P.2d 415 (Colo.App.1982).

In its summary judgment order, the trial court rejected plaintiffs' claim that liability against defendants as successor corporations fell within the first and third of these traditional exceptions. Specifically, the trial court, noting a disclaimer in the purchase agreement specifically to the contrary, found that Amsted neither expressly nor impliedly agreed to assume the business' debts or liabilities concerning the Johnson presses. Further, based upon the stipulated fact that there was no mixing of officers, directors, or shareholders in any of the five corporate successors or transfers, the trial court found that neither Amsted nor South Bend Lathe, Inc., was a "mere continuation" of the selling corporation. Plaintiff does not contest this part of the trial court's ruling.

II.

In Ray v. Alad Corp., 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3 (1977), the California Supreme Court created the "product line" exception to the traditional rule on nonliability of successor corporations. On the theory that the policies underlying strict tort liability for defective products allowed the imposition of liability on an entity otherwise having no connection with the act causing the injury, the Alad court held that "a party which acquires a manufacturing business and continues the output of its line of products [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." Plaintiffs, acknowledging that traditional corporate law does not provide them any remedy, argue that we should recognize this so-called "product line" exception. We decline to do so.

A.

Preliminarily, insofar as defendants appear to argue that the Colorado Products Liability Act, as presently enacted, precludes judicial recognition of the product line exceptions, we disagree.

Our supreme court adopted the doctrine of strict products liability as set forth in Restatement of Torts (Second) § 402A (1966). In pertinent part, this doctrine is that one who manufactures any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability under certain conditions. "[Manufacturer's] liability in strict tort does not rest upon the normal negligence rules of foreseeability, but upon the newer concept of enterprise liability for casting a defective product into the stream of commerce." Hiigel v. General Motors Corp., 190 Colo. 57, 544 P.2d 983 (1975).

In 1977, the doctrine of strict liability was codified in the Colorado Products Liability Act, § 13-21-401, et seq., C.R.S. (1987 Repl.Vol. 6A). Its stated purpose is to impose liability on those who create the risk of harm by their involvement in the process which places the defective product in the stream of commerce.

Accordingly, strict products liability, with exceptions not applicable here, is limited to claims against the manufacturer of an allegedly defective product. Section 13-21-402(1), C.R.S. (1987 Repl.Vol. 6A). A "manufacturer" is a "person or entity who designs, assembles, fabricates, produces, constructs, or otherwise prepares a product [prior] to the sale of the product to a user or consumer." Section 13-21-401(1), C.R.S. (1987 Repl.Vol. 6A).

Therefore, by statutory definition, a corporate successor is not a manufacturer of an allegedly defective product, and under this rationale, this court declined to extend liability under the Products Liability Act to successor corporations. "[There] is nothing in the legislative history of the CPLA which indicates a legislative intent to abrogate the corporate rule of successor liability as applied to a manufacturer." Ruiz v. ExCello Corp, supra.

Citing Ruiz v. ExCello Corp., supra, defendants thus contend that insofar as the "product line" exception was developed prior to the enactment of the Colorado Products Liability Act, the General Assembly, by its failure specifically to incorporate the concepts of this product line theory in that act, "considered this theory but chose not to enact it." Plaintiffs argue, however, that Ruiz v. ExCello, supra, is not dispositive of the issues here because the question of the adoption of a "product line" exception was not raised in that case.

Although it is highly relevant authority, we agree with plaintiffs that Ruiz is not dispositive. Contrary to defendants' argument, at least in relation to the issue of the product line theory, the Colorado Products Liability Act "does not address the liability of successor manufacturers or sellers." Florom v. Elliott Manufacturing Co., 867 F.2d 570 (10th Cir.1989).

B.

Thus, because the General Assembly has not yet either adopted or rejected the product line theory, we address plaintiffs' contention that considerations of public policy require its judicial recognition.

Numerous courts have considered whether to adopt the product line exception since its promulgation in Ray v. Alad Corp., supra. The vast majority have declined to do so. See Conn v. Fales Division of Mathewson Corporation, 835 F.2d 145 (6th Cir.1987) (enumerating states which have statutorily adopted product liability but have rejected the product line theory); Guzman v. MRM/Elgin, 409 Mass. 563, 567 N.E.2d 929 (1991) (citing, as examples, 14 cases which reject adoption of the product line exception); Niccum v. Hydra Tool Corp., 438 N.W.2d 96 (Minn.1989) (collecting 18 cases).

As synthesized, the reasoning in these decisions is that strict liability should not be imposed because: the successor corporation did not create the risk nor did it directly profit from the predecessor's sale of the defective product; it did not solicit the use of the defective product nor make any representations as to its safety; and it is not able to enhance the safety of a product that is already on the market. See Bernard v. Kee Manufacturing Co., 409 So.2d 1047 (Fla.1982); Domine v. Fulton Iron Works, 76 Ill.App.3d 253, 32 Ill.Dec. 72, 395 N.E.2d 19 (1979); Jones v. Johnson...