Kramer v. Weedhopper of Utah, Inc.

• Decision Date: 28 September 1990
• Docket Number: No. 1-90-0009,1-90-0009
• Citation: 204 Ill.App.3d 469,562 N.E.2d 271,149 Ill.Dec. 807
• Parties: , 149 Ill.Dec. 807, Prod.Liab.Rep. (CCH) P 12,676 Vern L. KRAMER, Plaintiff-Appellant, v. WEEDHOPPER OF UTAH, INC., Lawrence Engineering & Supply, Inc. and Hughes Aviation, Defendants (Lawrence Engineering & Supply, Inc., Third-Party Plaintiff-Appellant; California Screw Products Corp., Third-Party Defendant-Appellee; Cal Space Corporation, Third-Party Defendant). * , 1-90-0239.
• Court: United States Appellate Court of Illinois

Page 271

562 N.E.2d 271

204 Ill.App.3d 469, 149 Ill.Dec. 807,

Prod.Liab.Rep. (CCH) P 12,676

Vern L. KRAMER, Plaintiff-Appellant, v. WEEDHOPPER OF UTAH, INC., Lawrence Engineering & Supply Inc. and Hughes Aviation, Defendants (Lawrence Engineering &amp Supply, Inc., Third-Party Plaintiff-Appellant; California Screw Products Corp., Third-Party Defendant-Appellee; Cal Space Corporation, Third-Party Defendant).

No. 1-90-0009 ^*, 1-90-0239.

Appellate Court of Illinois,

First District, Second Division.

Sept. 28, 1990.

Gessler, Flynn, Fleischmann, Hughes & Socol, Ltd., Chicago (Mark Dym and Patricia Felch, of counsel), for third-party plaintiff-appellant.

Arnstein & Lehr, Chicago (Patrick Geary and Richard Hellerman, of counsel), for third-party defendant-appellee.

Justice HARTMAN delivered the opinion of the court:

Third-party plaintiff-appellant, Lawrence Engineering and Supply, Inc. (Lawrence), appeals from a summary judgment entered in favor of third-party defendant-appellee, California Screw Products Corp. (CSPC). Lawrence contends that the circuit court erred in (1) entering summary judgment without first ruling on the choice of law issue regarding whether CSPC was a successor to the liabilities of its predecessor; (2) concluding that CSPC was not a corporate successor under Illinois law; and (3) granting summary judgment when genuine issues of material fact existed as to the corporate transfers made by CSPC.

This controversy arises from the 1980 crash of an ultralight aircraft flown by Vern Kramer (Kramer). The cause of the crash was a defective AN4-33 bolt allegedly supplied to the plane's manufacturer, Weedhopper of Utah, Inc., by Lawrence. Kramer filed suit against Weedhopper and later added Lawrence as a defendant. Additional facts are set forth in our earlier opinion. 141 Ill.App.3d 217, 95 Ill.Dec. 631, 490 N.E.2d 104. On March 13, 1987, Lawrence filed a third-party complaint for contribution against an entity it identified as "California Screw, Inc." (California) and Cal Space Corporation (Cal Space), alleging that the two companies were in the business of designing, manufacturing and selling aircraft quality nuts and bolts. The complaint stated that in August 1985, Cal Space purchased the business assets and liabilities of California and, California or Cal Space, or both, were liable for defects in products they manufactured and sold prior to November 1979. Lawrence asserted that either Cal Space or California had sold the AN4-33 bolt to Lawrence, which in turn sold it to Weedhopper, which subsequently incorporated it into the kit Kramer purchased and ultimately assembled. The AN4-33 bolt allegedly was "unreasonably dangerous" and "defective."

CSPC denied the allegations and, following discovery, moved for summary judgment, pursuant to section 2-1005 of the Code of Civil Procedure (Ill.Rev.Stat.1987, ch. 110, par. 2-1005), maintaining that CSPC did not sell AN4-33 bolts at the time Kramer purchased the kit in 1979 and that CSPC's predecessor, A.D. Machine Tooling (A.D.), was not in the aircraft fastener business at that time.

The affidavit and discovery deposition of Gunther Mendel were submitted into evidence, from which the following evidence was adduced. In 1961, Mendel started the Associated Machine Tool Rebuilders partnership with Andre Fernand. In 1966, they incorporated as A.D., with Mendel as the president and Fernand as the secretary treasurer. The two men were the only shareholders and probably the only directors. Mendel served as president until 1984. The company was in the business of rebuilding and repairing machinery until 1984, when it changed its corporate name to the present CSPC.

Meanwhile, in 1981, Mendel was also an officer, a director, and a shareholder of Cal Space, another California corporation separate from A.D. Prior to 1981, Cal Space was doing business under the name California Screw Products Corporation, ¹ previously identified above as California. California was incorporated in 1965, and Mendel acted as an officer, a director, and a shareholder of that corporation, too. Mendel and Fernand served as charter shareholders, with Fernand the president and Mendel the secretary-treasurer. When Alexander Goden joined the firm in 1966, he became the president, Mendel became the vice president and Fernand became the secretary-treasurer. During its entire corporate life, California only had three shareholders.

Mendel drew separate checks from both A.D. and California. The latter had been located 20 blocks from A.D. The two firms maintained separate identities. In 1965, California made aircraft quality fasteners, including the type of bolt allegedly involved in this lawsuit. In 1981, California changed its name to Cal Space, which continued to operate out of the same physical location as California had. In the later manufacturing stages of California, the company had manufactured only "lower grade" aircraft quality fasteners. ² Cal Space was not engaged in the same business, however. California previously had sold its fastener products to individual distributors. Cal Space now sold higher grade aircraft quality fasteners directly to aircraft manufacturers, such as Boeing and McDonnell Douglas. The products were not made on the same machinery, and different equipment had to be purchased. The name change was intended to reflect the higher grade of the company's product and was done for "image reasons."

In 1984, A.D. purchased Cal Space's old low tech fastener equipment, comprising 30% of Cal Space's total equipment, for $592,756. A short time later, A.D. changed its name to CSPC ³ and abandoned its machinery rebuilding business in order to focus exclusively on the fastener business. The only documentation of the sale from Cal Space to A.D. is a three page bill detailing the transaction. Cal Space subsequently sold its remaining equipment to Deutsch Fasteners Corporation in October 1985, and the company dissolved in November 1986. Three of its former employees joined CSPC after the Deutsch sale; however, all the manufacturing personnel were kept by Deutsch. In the contract between Cal Space and Deutsch, Deutsch did not agree to assume any liabilities incurred by Cal Space.

Mendel stated that Lawrence was a customer of California in 1979 before it became Cal Space and that Lawrence purchased fasteners from California, including the AN4-33 bolt.

Following hearings on the motion, the circuit court granted the motion for summary judgment on December 13, 1989, finding no successor liability as a matter of law. Both Kramer and Lawrence filed timely notices of appeal; however, only Lawrence remains as an appellant, as this court previously granted CSPC's motion to dismiss Kramer's appeal on June 6, 1990.

I.

Lawrence initially contends that the circuit court erred by not deciding whether California or Illinois law, governing successor corporation liability, applied to the case at bar. The court ruled that it did not have to make the determination because CSPC was not a successor corporation under either state's law.

Conflicts rules are applied only when a difference in law will make a difference in the outcome. (Hartford v. Burns International Security Services, Inc. (1988), 172 Ill.App.3d 184, 187, 122 Ill.Dec. 204, 526 N.E.2d 463; International Administrators, Inc. v. Life Insurance Company of North America (7th Cir.1985), 753 F.2d 1373, 1376 n. 4; see also In re Air Crash Disaster near Chicago, Illinois (7th Cir.1981), 644 F.2d 594, 605 n. 2.) Since the circuit court held that CSPC was not a successor under either state's law, the law of each state must be examined in order to determine whether the court erred in not deciding to specifically apply California or Illinois law to the case sub judice.

A.

In Illinois, a corporation which purchases the assets of another corporation generally is not liable for the debts and liabilities of the transferor in the absence of an agreement providing otherwise. (Green v. Firestone Tire & Rubber Co. (1984), 122 Ill.App.3d 204, 206, 77 Ill.Dec. 591, 460 N.E.2d 895 (Green ); Freeman v. White Way Sign & Maintenance Co. (1980), 82 Ill.App.3d 884, 892, 38 Ill.Dec. 264, 403 N.E.2d 495 (Freeman ); Hernandez v. Johnson Press Corp. (1979), 70 Ill.App.3d 664, 26 Ill.Dec. 777, 388 N.E.2d 778 (Hernandez ).) Exceptions to the rule include " '(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.' " Green, 122 Ill.App.3d at 209, 77 Ill.Dec. 591, 460 N.E.2d 895 quoting Hernandez, 70 Ill.App.3d at 667, 26 Ill.Dec. 777, 388 N.E.2d 778.

The first exception is not satisfied here because the only documentation of Cal Space's equipment sale to A.D. is a three page invoice listing which machines were included in the sale. No express liability provisions appear on the bill, and there is no evidence of any express or implied liability assumption by A.D. anywhere in the record.

The sale was not a consolidation or merger under the second exception because Cal Space and A.D. each continued their separate existence following the sale. See Freeman, 82 Ill.App.3d at 893, 38 Ill.Dec. 264, 403 N.E.2d 495. A de facto merger may be sufficient to allow the seller's liabilities to be imposed on the buyer (Hernandez, 70 Ill.App.3d at 667, 26 Ill.Dec. 777, 388 N.E.2d 778), and may occur when the following criteria are present:

"(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...