Knapp v. North Am. Rockwell Corp.

• Citation: 506 F.2d 361
• Decision Date: 27 December 1974
• Docket Number: No. 74-1110,74-1110
• Parties: Stanley KNAPP, Jr., Appellant, v. NORTH AMERICAN ROCKWELL CORPORATION v. MRS. SMITH'S PIE COMPANY, Third-Party-Defendant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 361

506 F.2d 361

Stanley KNAPP, Jr., Appellant, v. NORTH AMERICAN ROCKWELL CORPORATION v. MRS. SMITH'S PIE COMPANY, Third-Party-Defendant.

No. 74-1110.

United States Court of Appeals, Third Circuit.

Argued Sept. 10, 1974.

Decided Dec. 27, 1974.

Howard J. Creskoff, Freedman, Borowsky & Lorry, Philadelphia, Pa., for appellant.

William F. Sullivan, Jr., Robert M. Britton, Barton L. Post, Post & Schell, P.A., Philadelphia, Pa., for appellee.

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil No. 71-668).

Before ALDISERT, ADAMS and ROSENN, Circuit Judges.

OPINION OF THE COURT

ADAMS, Circuit Judge.

The principal question here is whether it was error to grant summary judgment on the ground that one injured by a defective machine may not recover from the corporation that purchased substantially all the assets of the manufacturer of the machine because the transaction was a sale of assets rather than a merger or consolidation.

I.

Stanley Knapp, Jr., an employee of Mrs. Smith's Pie Co., was injured on October 6, 1969, when, in the course of his employment, his hand was caught in a machine known as a 'Packomatic.' The machine had been designed and manufactured by Textile Machine Works (TMW) and had been sold to Mrs. Smith's Pie Co. in 1966 or 1967.

On April 5, 1968, TMW entered into an agreement with North American Rockwell whereby TMW exchanged substantially all its assets for stock in Rockwell. TMW retained only its corporate seal, its articles of incorporation, its minute books and other corporate records, and $500,000. in cash intended to cover TMW's expenses in connection with the transfer. ¹ TMW also had the right, prior to closing the transaction with Rockwell, to dispose of land held by TMW or its subsidiary. Among the assets acquired by Rockwell was the right to use the name 'Textile Machine Works.' ² TMW was to change its name on the closing date, then to distribute the Rockwell stock to its shareholders and to dissolve TMW 'as soon as practicable after the last of such distributions.'

The accord reached by Rockwell and TMW also stipulated that Rockwell would assume specified obligations and liabilities of TMW, but among the liabilities not assumed were: '(a) liabilities against which TMW is insured or otherwise indemnified to the extent of such insurance or indemnification unless the insurer or indemnitor agrees in writing to insure and indemnify (Rockwell) to the same extent as it was so insuring and indemnifying TMW.'

Closing took place pursuant to the agreement on August 29, 1968. Plaintiff sustained his injuries on October 6, 1969. TMW was dissolved on February 20, 1970, almost 18 months after the bulk of its assets had been exchanged for Rockwell stock.

Plaintiff filed this suit against Rockwell in the district court on March 22, 1971. He alleged that his injuries resulted from the negligence of TMW in designing and manufacturing the machine and that Rockwell, as TMW's successor, is liable for such injuries. Rockwell joined plaintiff's employer, Mrs. Smith's Pie Co., as a third-party defendant. ³

Rockwell moved for summary judgment in the district court on June 19, 1973. On September 6, 1973, the district court granted the motion, ruling that Rockwell had neither merged nor consolidated with TMW, that Rockwell was not a continuation of TMW, and that Rockwell had not assumed TMW's liability to knapp. Therefore, the court concluded, Rockwell was not responsible for the obligations of TMW. On October 11, 1973, Knapp filed a motion for rehearing and reconsideration by the district court, which was denied on November 26, 1973. Knapp appealed to this Court on December 11, 1973. ⁴

II.

Both parties agree that this case is controlled by the following principle of law:

The general rule is that 'a mere sale of corporate property by one company to another does not make the purchaser liable for the liabilities of the seller not assumed by it.' . . . There are, however, certain exceptions to this rule. Liability for obligations of a selling corporation may be imposed on the purchasing corporation when (1) the purchaser expressly or impliedly agrees to assume such obligations; (2) the transaction amounts to a consolidation or merger of the selling corporation with or into the purchasing corporation; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability for such obligations.

Shane v. Hobam, Inc., 332 F.supp. 526, 527-528 (E.D.Pa.1971) (decided under New York law).

In light of this language, knapp contends that the transaction in question 'amounts to a consolidation or merger of (TMW) with or into the purchasing corporation (Rockwell)' or, alternatively, that Rockwell is a 'continuation' of TMW. Although the TMW corporation technically continued to exist until its dissolution approximately 18 months after the consummation of the transaction with Rockwell, TMW was, Knapp argues, a mere shall during that period. It had none of its former assets, no active operations, and was required by the contract with Rockwell to dissolve itself 'as soon as practicable.' Knapp urges in effect that the transaction between TMW and Rockwell should be considered a de facto merger. ⁵

Rockwell asserts, in defense of the district court's grant of summary judgment, that a merger, a consolidation and a continuation all require that the corporation being merged, consolidated or continued cease to exist. TMW, Rockwell claims, did not go out of existence at the time of the exchange with Rockwell, but continued its corporate life for 18 months thereafter. Further, Rockwell argues, TMW until its dissolution possessed assets of substantial value, in the form of Rockwell stock. ⁶ $13III.

In a diversity case, the federal court must apply the rule of law which would govern if suit were brought in a court of the forum state. ⁷ We must, therefore, determine how this case would be decided by a Pennsylvania court.

All jurisdictions which have considered the question appear to have accepted not only the general rule that a corporation which purchases the assets of a second corporation is not thereby liable for the obligations of the selling corporation, unless there exists one of the exceptions set out in Shane, supra p. 364. ⁸

Under Shane, the first of the four exceptions rendering the purchasing corporation liable for duties of the seller is a transaction amounting to a merger or consolidation. In a merger a corporation absorbs one or more other corporations, which thereby lose their corporate identity. 'A merger of two corporations contemplates that one will be absorbed by the other and go out of existence, but the absorbing corporation will remain.' ⁹ In a consolidation, on the other hand, 'all the combining corporations are deemed to be dissolved and to lose their identity in a new corporate entity which takes over all the properties, powers and privileges, as well as the liabilities, of the constituent companies.' ¹⁰ Another of the Shane exceptions to the general rule of nonliability arises when there is a continuation. In a continuation, a new corporation is formed to acquire the assets of an extant corporation, which then ceases to exist. 'There is in effect but one corporation which merely changes its form and ordinarily ceases to exist upon the creation of the new corporation which is its successor.' ¹¹

No prior cases decided under Pennsylvania law have addressed the problem presently before this Court. However, when courts from other jurisdictions have considered similar questions, they have ascertained the existence vel non of a merger, a consolidation or a continuation on the basis of whether, immediately after the transaction, the selling corporation continued to exist as a corporate entity and whether, after the transaction, the selling corporation possessed substantial assets with which to satisfy the demands of its creditors.

Thus, in Bazan v. Kux Machine Co., ¹² the plaintiff was injured in 1966 by a machine purchased by his employer from Kux Machine Co. in 1961. In 1963, after the sale of the machine to plaintiff's employer but prior to the accident, Kux sold to the Wickes Corporation the bulk of Kux's assets, retaining only its accounts receivable, its prepaid insurance and its real estate. Wickes acquired Kux' tangible personal property, licenses, trademarks, patents, good will, and the exclusive right to use the name 'Kux Machine.' Kux, after changing its name, remained in existence for ten months before dissolving as required by the contract with Wickes. The court held that the transaction was not a merger, consolidation or continuation. It reasoned that Kux continued to exist for a substantial period after the exchange, that the transaction was a cash sale rather than an exchange of stock, and that none of the owners or management of the seller acquired any interest in the buyer.

Similarly, in McKee v. Harris-Seybold Co. ¹³ the court held that there had been no merger or consolidation between the alleged tortfeasor and the purchaser of its assets. The plaintiff was injured in 1968 by a paper-cutting machine manufactured in 1916 by the Seybold Machine Co. In 1926, Seybold agreed to sell its assets to Harris Automatic Press Co. In exchange, Harris agreed to give Seybold cash plus common stock in Harris, and to assume certain of Seybold's liabilities. Harris acquired all the assets of Seybold including its good will and the exclusive use of the name 'Seybold Machine Co.' Seybold agreed to change its name and not to engage in any manufacturing activities. Seybold continued to exist under a different name for one year after the exchange. Prior to the consummation of the transaction Harris assigned its interest in the contract to a new corporation formed for the purpose. The new corporation was later renamed the Harris-Seybold Co. The court held that...