Leannais v. Cincinnati, Inc.

• Decision Date: 18 October 1977
• Docket Number: No. 77-1066,77-1066
• Citation: 565 F.2d 437
• Parties: Raymond LEANNAIS and Catherine Leannais, Plaintiffs, v. CINCINNATI, INCORPORATED and Cincinnati-Forte Company and Liberty Mutual Insurance Company, Defendants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 437

565 F.2d 437

Raymond LEANNAIS and Catherine Leannais, Plaintiffs, v. CINCINNATI, INCORPORATED and Cincinnati-Forte Company and Liberty Mutual Insurance Company, Defendants.

No. 77-1066.

United States Court of Appeals Seventh Circuit.

Argued May 25, 1977.

Decided Oct. 18, 1977.

John A. Hamell, Jr., Wauwatosa, Wis., for plaintiffs.

James R. Gass, Russell M. Ware, Milwaukee, Wis., for defendants.

Before FAIRCHILD, Chief Judge, and WOOD, Circuit Judge, and MARKEY, Chief Judge. ¹

MARKEY, Chief Judge.

On April 20, 1973, appellant Raymond Leannais was injured while operating a coil slitter machine incident to his employment at Fullerton Metals Company in Milwaukee, Wisconsin.

In this diversity suit, Leannais and his wife (Leannais) sought damages from Cincinnati, Inc., and Cincinnati-Forte Co., (Cincinnati), the alleged corporate successors to the original manufacturer of the machine. The complaint alleges strict liability, negligence in the design and manufacture of the machine, and failure to warn potential users after serious injuries had occurred. In view of affidavits filed by both parties, the court granted summary judgment for Cincinnati. ² We reverse and remand.

FACTS

The machine on which Leannais was injured had been manufactured by Forte Equipment Company (Forte) and sold to Fullerton in late 1964. In December, 1967, Forte sold its assets to Cincinnati, Inc., an Ohio corporation, for cash and certain employment agreements. Cincinnati, Inc., established a subsidiary named Cincinnati-Forte to accept the Forte assets. The subsidiary was dissolved in 1973 and the assets of Cincinnati-Forte were purchased by Cincinnati, Inc.

In the Forte-Cincinnati, Inc. agreement, Cincinnati expressly limited its liability for personal injury caused by Forte for a period of five years from the December 6, 1967 closing date of the contract, and agreed to use its best efforts to secure a specific amount of insurance against such claims during that time. ³ No other liability for

personal injury claims was assumed. Cincinnati was first notified of Leannais' injury in July, 1975, more than seven years after the acquisition of Forte's assets.

THE ISSUE

The issue before us is whether Cincinnati can be held liable for appellant's injury (1) under "corporate merger" or "continuation" theories, (2) under a "product line" theory of strict tort liability, or (3) because it negligently failed to warn of the potentially dangerous condition of the machines. The parties agree that Wisconsin law applies. That state being the situs of the injury and the residence of Leannais, it has the principal interest of any state in the rules of law to be applied.

OPINION

"MERGER" OR "CONTINUATION"

The general rule in the majority of American jurisdictions, including Wisconsin, is that a corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation. Bazan v. Kux Machine Co., 358 F.Supp. 1250 (E.D.Wis.1973). Here, Cincinnati had no part in the design, manufacture, sale or distribution of the allegedly defective machine, and the general rule accords with the fundamental principle of justice and fairness, under which the law imposes responsibility for one's own act and not for the totally independent acts of others. There are, however, four well-recognized exceptions to the general rule under which liability may be imposed on a purchasing corporation: (1) when the purchasing corporation expressly or impliedly agreed to assume the selling corporation's liability; (2) when the transaction amounts to a consolidation or merger of the purchaser and seller corporations; (3) when the purchaser corporation is merely a continuation of the seller corporation; or (4) when the transaction is entered into fraudulently to escape liability for such obligations. Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621 (7th Cir. 1971), Bazan v. Kux Machine Co., supra.

Leannais contends that the transaction here falls under exceptions (2) or (3), i. e., that there was a "merger" of the two corporations or that Cincinnati is a "mere continuation" of Forte. A merger, however, involves the actual absorption of one corporation into another, with the former losing its existence as a separate corporate entity. That did not happen here. When the seller corporation retains its existence while parting with its assets, a "de facto merger" may be found if the consideration given by the purchaser corporation be shares of its own stock. Bazan v. Kux Machine Co.,supra, McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 264 A.2d 98 (1970). ⁴ Here, no stock in Cincinnati or in Cincinnati-Forte was transferred as consideration for Forte's assets. ⁵ A "consolidation" occurs when two combining corporations are dissolved and lose their identity in a new corporate entity. Forest Laboratories, Inc. v. Pillsbury Co., supra. Cincinnati maintained its distinct corporate identity from a time prior to and throughout the transactions herein to the present day. The key element of a "continuation" is a common identity of the officers, directors and stockholders in the selling and purchasing corporations. Unlike the situation in which a new corporation merely takes over the assets of the selling corporation under the old management, ⁶ the management of Forte was not carried over to Cincinnati. Nor did any shareholder of either corporation become an owner, director, or officer of the other.

We conclude, therefore, that the purchase of Forte's assets was not such as to bring it within either the "merger" or the "mere continuation" exception to the general rule. Cincinnati did not impliedly assume Forte's liability and its express assumption in paragraph 11(q) of the Purchase Agreement was limited to the five years stated. No allegation of fraudulent conduct having been made, the transaction must be viewed as a bona fide, arm's length bargain, valid under Wisconsin law. It is thus clear that Cincinnati is not liable for the injury to Leannais under any of the traditional exceptions to the general rule respecting purchaser corporations.

"PRODUCT LINE"

Leannais also asserts a form of "tort" theory founded on "strict liability," and extension of the law of purchaser corporation liability exemplified by the recent case of Ray v. Alad Corp., supra note 6. Ray sued a corporation which had purchased the assets of a ladder manufacturer, claiming injury from a defective ladder made by that manufacturer. Finding no basis for liability under the traditional exceptions discussed above, the California Supreme Court relied upon policy considerations. Drawing analogies from the treatment of certain labor law problems of successor corporations by the United States Supreme Court, Howard Johnson Co. v. Hotel Employees, 417 U.S. 249, 94 S.Ct. 2236, 41 L.Ed.2d 46 (1974), Golden State Bottling Co. v. NLRB, 414 U.S. 168, 94 S.Ct. 414, 38 L.Ed.2d 388 (1973), the court created a special "strict tort liability" exception to protect "otherwise defenseless victims of manufacturing defects" and to spread "throughout society . . . the cost of compensating them." (original emphasis) ⁷

In essence, the court adopted a rule tied to the "product line":

We therefore conclude 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. 136 Cal.Rptr. at 582, 560 P.2d at 11.

The record here contains not the slightest indication that Wisconsin courts have created, or would create, such a far-reaching exception to the non-liability of asset purchasers, so long the basis of economic decisions by its citizens. It is on occasion absolutely necessary, if justice be done, for courts to "legislate" within the "interstices" of a statute, or by analogy to other laws and judicial precedents. In recent years, for a variety of reasons, many have thought it necessary to turn to the courts in search of solutions to social problems. Courts are ill-equipped, however, to balance equities among future plaintiffs and defendants. Such forays can result in wide-ranging ramifications on society, the contemplation of which is precluded by the exigencies of deciding a particular case presented on a limited record developed by present parties. Absent compelling necessity, therefore, a Federal Court should not impose the policy pronouncements of the Supreme Court of one state upon the citizens of another. Nor are we at liberty to impose our own view as to what the law of Wisconsin should be. As the Wisconsin Supreme Court has recognized, such broad public policy issues are best handled by legislatures with their comprehensive machinery for public input and debate. Holifield v. Setco Industries, Inc., 42 Wis.2d 750, 758, 168 N.W.2d 177 (1969).

Indeed, the 1977 Wisconsin legislature by Joint Resolution, has directed its legislative council to conduct a complete study of the problems here presented, i. e., those related to product liability, and to recommend necessary legislation. State of Wisconsin, 1977 Assembly Joint Resolution 16, January 19, 1977.

Under all the circumstances, therefore, we hold that there is no "product line" theory transferring to a purchaser corporation the liabilities of the seller under Wisconsin law. ⁸

As a matter of law, therefore, Cincinnati did not assume, by virtue of the Purchase Agreement, the obligation to insure against Forte's product liabilities beyond those of which notice was received within five years. Leannais' claim did not arise during that period. Cincinnati cannot be held liable under Wisconsin law in strict liability for injury resulting from defects in the coil slitter designed, manufactured, and delivered by Forte.

FAILURE TO WARN

Leannais alleges that Cincinnati received notice of...