National Gypsum Co. v. Continental Brands Corp., Civ. A. No. 93-12027-NG

• Decision Date: 14 July 1995
• Docket Number: 93-12147-NG.,Civ. A. No. 93-12027-NG
• Citation: 895 F. Supp. 328
• Parties: NATIONAL GYPSUM COMPANY, Plaintiff, v. CONTINENTAL BRANDS CORP. and TACC International Corp., Defendants. L & W SUPPLY CORP., Plaintiff, v. CONTINENTAL BRANDS CORP., TACC International Corp., Morgan Materials, Inc. and Schenectady Chemicals, Inc., Defendants.
• Court: U.S. District Court — District of Massachusetts

895 F. Supp. 328

NATIONAL GYPSUM COMPANY, Plaintiff, v. CONTINENTAL BRANDS CORP. and TACC International Corp., Defendants.

L & W SUPPLY CORP., Plaintiff, v. CONTINENTAL BRANDS CORP., TACC International Corp., Morgan Materials, Inc. and Schenectady Chemicals, Inc., Defendants.

Civ. A. Nos. 93-12027-NG, 93-12147-NG.

United States District Court, D. Massachusetts.

July 14, 1995.

Robert C. Cadle, Fordham & Starrett, Boston, MA, Laurence M. Johnson, Boston, MA, for Nat. Gypsum Co.

Alan L. Packer, Green, Friedman & Packer, Boston, MA, Robert D. Friedman, Perkins, Smith & Cohen, Boston, MA, for L & W Supply Corp.

D. Patterson Gloor, David C. Van Dyke, Cassidy, Schade & Gloor, Chicago, IL, Carol A. Kelly, Martin, Magnuson, McCarthy & Kenney, Boston, MA, for Continental Brands Corp.

Don M. Kennedy, Yvette L. Kruger, Yvette K. Mullaney, Goodwin, Proctor & Hoar, Boston, MA, Herbert A. Horgan, Jr., Chestnut Hill, MA, for TACC Intern. Corp.

Elizabeth M. Fahey, Morrison, Mahoney & Miller, Boston, MA, for Morgan Materials, Inc.

MEMORANDUM AND ORDER

GERTNER, District Judge:

I. FACTUAL BACKGROUND

These consolidated actions raise difficult issues of corporate successor liability in the products liability context. They require this Court to determine the extent to which the sins of a defunct manufacturer of faulty products may be visited upon a firm which, although formally unrelated to the manufacturer, seeks to continue the business in which the manufacturer was engaged.

Plaintiffs National Gypsum Co. ("NGC") and L & W Supply Corp. ("L & W") are suppliers of building materials to the construction industry. Defendant Continental Brands ("Continental") was, until 1993, a small manufacturer of industrial adhesives located in Woburn, Massachusetts. Among its products was an adhesive used by the plaintiffs in the manufacture of wallboard.

In early 1993, a number of Continental's customers discovered that a batch of this adhesive, which had been incorporated into their products, was defective. This defect caused wallboard manufactured using the adhesive to turn yellow. The defect was later traced to a contaminated chemical involved in Continental's manufacturing process. The chemical had been manufactured by defendant Schenectady Chemicals, Inc. ("Schenectady") and had been sold to Continental by Morgan Materials, Inc. ("Morgan"), a chemical broker.

At approximately the same time that Continental's customers were discovering the yellowing adhesive problem, Continental was attempting to find its way out from under a mountain of debt which it had incurred. This debt was of three types. First, Continental was heavily indebted to BayBank, its secured lender. Continental owed BayBank approximately $1.6 million on a note which was secured by its receivables, inventory and intangible assets. In addition, Continental was obligated to pay the approximately $2.3 million mortgage which BayBank held on its factory site. (The site was, in turn, owned by the 181 New Boston Road Realty Trust ("the Realty Trust"), a real estate trust controlled by the families of three of Continental's four shareholders). Both the note and the mortgage were backed up by personal guarantees from the families of Continental's shareholders.¹

In addition to its bank debt, Continental also faced large potential liabilities arising from the yellowing problem. Many of its customers had incorporated the defective adhesive into their wallboard products and were asserting claims for the resulting damage. Continental estimated that its liabilities could be as high as $1 million.

Finally, Continental faced another potentially large liability because of the existence of hazardous waste stored at its Woburn site. The cost of state mandated environmental remediation was also estimated to be in the $1 million range.

In an apparent attempt to salvage its operations, Continental sought the assistance of an outside investor to prop up its financial situation. It found one in defendant TACC International, Inc. ("TACC"), a family owned manufacturer of adhesive products, located in Rockland, Massachusetts. TACC had a product line which complimented Continental's and, unlike Continental, was in excellent financial shape.

On June 18, 1993, as a result of a number of agreements worked out between BayBank, Continental's president, Michael Rogers, and TACC's president, Michael D'Amelio, Continental ceased to exist as a functioning entity. In its place was a complex arrangement involving, among other things, two shell corporations, a consulting agreement, and stock options.

One of the shell corporations was MI-CO International, Inc. ("MI-CO"), which was owned entirely by Mr. D'Amelio. MI-CO had been in existence prior to the agreement, and had been used by Mr. D'Amelio in other, similar, acquisitions. The other shell was called Claymax Corporation ("Claymax"). Claymax was incorporated at the time of the agreement, and had as its shareholders Michael Rogers, Judith Stein, and Lawrence Cuddy, three of the four Continental shareholders. MI-CO maintained effective control over Claymax through a stock option arrangement, which gave it the right to purchase all of Claymax's stock for a total price of $3.00 on 24 hours notice.

Using these shells, the parties structured a transaction that allowed TACC to effectively purchase Continental's manufacturing operations and real estate, while at the same time attempting to shield TACC from any of its liabilities.

First, Claymax replaced Continental as the nominal tenant at the Woburn factory site. Under the terms of its five year lease with the Realty Trust, Claymax was required to pay monthly rent of $29,166.66. Of this amount, $20,833.33 was paid directly to BayBank to reduce the principal on the Realty Trust mortgage. The remaining $8,333.33 was placed in a special escrow account to fund hazardous waste cleanup on the site. The lease also gave Claymax the right to purchase the property (subject to the BayBank mortgage) for the nominal price of $1,000.

Although Claymax was the tenant under this arrangement, the actual source of rent payments was TACC/MI-CO. Under a so-called "consulting agreement" with Claymax, MI-CO agreed to pay a monthly "consulting fee" of $29,166.66, precisely the amount of Claymax's rent. Because the consulting agreement was assigned to BayBank, MI-CO in fact was obligated to make all of its "consulting payments" directly to the bank.

The net result of this arrangement was that TACC (through MI-CO) was permitted to take a "free look" at the Waltham property: It could pay down the mortgage and fund environmental remediation through the consulting arrangement with Claymax. If the environmental remediation turned out to be economically feasible, it could exercise its right (through its control of Claymax) to purchase the property for a nominal sum. If the property turned out not to be desirable, it could terminate its obligations at any time, and, since MI-CO was essentially assetless, the Bank would have no effective recourse against it.

The second result achieved under the June 18, 1993 agreement was to combine Continental's former manufacturing operations with those of TACC.² This took place in two stages. In the first stage, BayBank foreclosed on Continental's inventory and intangibles, and immediately sold them to MI-CO for $531,000.³ Continental discharged all of its employees, who were immediately hired by Claymax. Then Claymax, under contract with MI-CO, and using the former Continental workforce, processed the inventory which MI-CO had purchased from BayBank. This work, which lasted until October, 1993, took place at the Woburn facility. MI-CO paid Claymax $837,879 during this period.

Stage two began after October, 1993. Manufacturing operations at the Woburn site were discontinued, and almost 80% of the Claymax/Continental employees were discharged. TACC then began manufacturing Continental's old product line at its Rockland headquarters. This product line now accounts for 40% of TACC's sales. The remaining Claymax/Continental employees, which included Continental's top management and part of its sales force, transferred to Rockland as well. All but three of these were hired directly by TACC, including Lawrence Cuddy, a top Continental executive who became director of TACC's national sales force. Three employees, Michael Rogers, Continental's president, Edward Stein, its chief chemist, and Stephen Choi, Stein's assistant, were retained by TACC as "consultants" through an arrangement with Claymax.

Between November, 1983 and March, 1984, MI-CO continued to make payments to Claymax, totalling approximately $162,000. However, it appears that MI-CO made no payments to BayBank after September, 1993. The reason for this is unclear, although there appears to have been a dispute concerning allocation of responsibility for cleaning up certain unusable hazardous inventories at the Woburn site in order to make it suitable for sublease to a new tenant.

Shortly after the consummation of this complex of transactions, NGC commenced the first of these actions against Continental and TACC, alleging that Continental was directly liable for the damage caused by the defective adhesive, and that TACC was liable as Continental's successor. L & W filed a similar action shortly thereafter, but also named Morgan and Schenectady as defendants.

II. PROCEDURAL HISTORY

NGC filed Civil Action No. 93-12027 on September 14, 1993. On September 30, 1993, L & W filed Civil Action No. 93-12147.

On December 29, 1993, Schenectady filed a motion to dismiss the complaint for lack of personal jurisdiction in No. 93-12147. On August 3, 1994, Judge Stearns of this Court issued an order allowing Schenectady's motion.

On June 16, 1994, TACC filed a motion for summary judgment against NGC in No. 93-12027.

On October 12, 1994, the cases were consolidated, and No. 93-12147 was reassigned to this Court.

On November 21, 1994, TACC moved...