Nissen Corp. v. Miller

• Decision Date: 01 September 1990
• Docket Number: No. 110,110
• Citation: 594 A.2d 564,323 Md. 613
• Parties: , 60 USLW 2169, Prod.Liab.Rep. (CCH) P 13,023 NISSEN CORPORATION et al. v. Warren G. MILLER, Individually and t/a Atlantic Fitness Products et al
• Court: Maryland Court of Appeals

Page 613

323 Md. 613

594 A.2d 564, 60 USLW 2169, Prod.Liab.Rep.

(CCH) P 13,023

NISSEN CORPORATION et al. v. Warren G. MILLER, Individually and t/a Atlantic Fitness

Products et al.

No. 110 Sept. Term, 1990.

Court of Appeals of Maryland.

Aug. 27, 1991.

Daniel J. Moore (Thomas M. Trezise, Stephen E. Marshall, Semmes, Bowen & Semmes, all on brief), Towson, for petitioners.

A. Ronald Rubin (Nancy B. Gertner, both on brief), John B. Sinclair (Carol A. O'Day, Kara M. Miller, Miles & Stockbridge, all on brief), Baltimore, for respondents.

Argued before MURPHY, C.J., ELDRIDGE, RODOWSKY, McAULIFFE and CHASANOW, JJ., and J. WILLIAM HINKEL, Administrative Judge of the Third Judicial Circuit of Maryland Specially Assigned.

CHASANOW, Judge.

On January 31, 1981, Frederick B. Brandt (Brandt) purchased from Atlantic Fitness Products (Atlantic) a treadmill that was designed, manufactured, and marketed by American Tredex Corporation (American Tredex). Later the same year, on July 31, Nissen Corporation (Nissen) entered into an asset purchase agreement with American Tredex. Pursuant to that agreement, Nissen purchased the trade name, patents, inventory and other assets of American Tredex. Nissen also assumed some of American Tredex's obligations and liabilities, but the contract expressly excluded assumption of liability for injuries arising from any product previously sold by American Tredex. The contract contemplated the continuation of the selling corporation, American Tredex, for five years and that during that period American Tredex would be known by a new name, AT Corporation.

There is no reason to believe that this was not an arms length transaction or that American Tredex (later known as AT Corporation) did not receive and retain full value for its assets. While the record does not disclose the purchase price, the contract did call for an advance of $600,000 on its execution. In addition to the purchase price, Nissen agreed to pay to AT Corporation, for a 5-year period, a fee of 4% of net sales of any treadmill models that were offered or under development by American Tredex at the time of the purchase of assets or that were mere adaptations or modifications of those models. This clause also provided that the amount of this payment be a minimum of $100,000 to a maximum of $1,000,000 per year. AT Corporation also retained all accounts receivable arising from sales shipped prior to the contract inventory date. The contract further provided that "neither [AT Corporation] nor any of its shareholders shall have any right to use any of the trademarks, trade names, designs and symbols theretofore used by [American Tredex] in connection with its business or any trademark or trade names similar thereto or any designs or symbols imitative thereof."

After the sale, although the agreement expressly provided that Nissen was not required to retain American Tredex employees, Nissen did hire a few of American Tredex's former employees. It relocated all inventory and manufacturing capabilities from Indiana to Iowa and notified its dealers of the acquisition. It provided catalogs with a "Tredex by Universal" logo, as well as a new customer service number at Nissen. Nissen also continued to sell replacement parts for equipment that had been sold by American Tredex before the sale of assets.

Over five years after his purchase of the treadmill, on October 18, 1986, Brandt was injured while trying to adjust the running treadmill. More than a year later, on December 31, 1987, American Tredex (then known as AT Corporation) was administratively dissolved. Brandt and his wife filed suit on September 1, 1988, against American Tredex, AT Corporation, Nissen, and Atlantic, seeking damages for negligence, strict liability, breach of express and implied warranties, and loss of consortium. Atlantic cross-claimed against Nissen for indemnity and contribution. Nissen filed a motion for summary judgment, which was granted by the trial court and certified as a final judgment pursuant to Maryland Rule 2-602(b). Brandt and Atlantic appealed to the Court of Special Appeals. In Miller v. Nissen Corp., 83 Md.App. 448, 575 A.2d 758 (1990), the Court of Special Appeals reversed the trial court. We granted Nissen's petition for writ of certiorari on the issue of whether it, as a successor to American Tredex, is liable to Brandt for his injuries.

The issue in the instant case is whether this Court should adopt the general rule of nonliability of successor corporations, with its four well-recognized traditional exceptions, or whether we should add a fifth exception for "continuity of enterprise."

The general or traditional rule of corporate successor liability has been stated by many cases and treatises:

"[A] corporation which acquires all or part of the assets of another corporation does not acquire the liabilities and debts of the predecessor, unless: (1) there is an express or implied agreement to assume the liabilities; (2) the transaction amounts to a consolidation or merger; (3) the successor entity is a mere continuation or reincarnation of the predecessor entity; or (4) the transaction was fraudulent, not made in good faith, or made without sufficient consideration. Thus, the general rule is one of successor nonliability, subject to four 'traditional' exceptions...." (Footnotes omitted.)

1 American Law of Products Liability 3d § 7:1, at 10-12 (Travers, rev. ed. 1990); accord 1 L. Frumer & M. Friedman, Products Liability § 2.06 (1989); 15 W. Fletcher, Cyclopedia of the Law of Private Corporations § 7122, at 231 (rev. perm. ed. 1990).

In Smith v. Navistar Intern. Transp. Corp., 687 F.Supp. 201, republished as corrected, 737 F.Supp. 1446 (D.Md.1988), Judge Niemeyer discussed the application of the general rule of corporate successor liability in Maryland. He observed:

"Some of the exceptions are expressly codified by statute in Maryland. Section 3-115(c) of the Corporations and Associations Article, Maryland Annotated Code, provides that upon the transfer of all or substantially all assets, '[t]he successor is liable for all the debts and obligations of the transferror to the extent provided in the Articles of Transfer.' Section 3-114(e), Corporations and Associations Article, Maryland Annotated Code, provides that following a consolidation or merger '[t]he successor is liable for all debts and obligations of each nonsurviving corporation.' These two statutes are very similar to the first two exceptions to the traditional rule.... Additionally, the Maryland Uniform Fraudulent Conveyance Act, § 15-201 et seq., Commercial Law Article, Maryland Annotated Code, protects the rights of creditors of a corporation which transfers its assets with an intent to defraud or without fair consideration in a manner similar to the fourth exception noted above."

Id. at 204. That logic was applied by the Court of Special Appeals when it decided Baltimore Luggage v. Holtzman, 80 Md.App. 282, 562 A.2d 1286 (1989), cert. denied, 318 Md. 323, 568 A.2d 28 (1990), a case involving corporate successor liability in a contract law setting. The Baltimore Luggage court also discussed the third exception, known as the "mere continuation" or continuity of entity exception, where there is continuity of entity between the successor and the predecessor:

"Although this exception is not codified or adopted in Maryland case law, the policy behind this exception, as well as the other exceptions, permeates the Corps. & Ass'ns and the Com. Law Articles. See, e.g., §§ 3-114 and 3-115 of the Corps. & Ass'ns Art., Md. Uniform Fraudulent Conveyance Act, and the Md. Bulk Transfers Act.... The policy is that, whenever there is a transfer of assets, the rights of a creditor must be protected. The 'mere continuation' [or continuity of entity] exception reinforces this policy by allowing a creditor to recover from the successor corporation whenever the successor is substantially the same as the predecessor. The exception is designed to prevent a situation whereby the specific purpose of acquiring assets is to place those assets out of reach of the predecessor's creditors. In other words, the purchasing corporation maintains the same or similar management and ownership but wears a 'new hat.' Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451, 1458 (11th Cir.1985). To allow the predecessor to escape liability by merely changing hats would amount to fraud."

Id. 80 Md.App. at 296-97, 562 A.2d at 1293. All parties agree that this Court should adopt the general rule of nonliability of a successor corporation, with its four traditional exceptions. Brandt and Atlantic (Respondents) contend we should also adopt the more liberal "continuity of enterprise" theory as a fifth exception in products liability cases.

In products liability litigation, three types of claims are generally involved: negligence, breach of warranty, and strict liability in tort. The negligence count of a products liability claim comports with longstanding common law tort principles. Breach of warranty is a traditional contract action, and strict liability in tort has been developed to remedy the harsh result sometimes imposed where a plaintiff is limited to bringing negligence and breach of warranty claims for injuries caused by a defective and unreasonably dangerous product. See Phipps v. General Motors Corp., 278 Md. 337, 352-53, 363 A.2d 955, 963 (1976). The United States Court of Appeals for the Third Circuit has recognized that "[t]he rationale of the ... continuity of enterprise theor[y] rests in large part on a postulated need to compensate plaintiffs eligible under [Restatement (Second) of Torts ] § 402A [ (1965) ] [ (strict liability) ]." Polius v. Clark Equipment Co., 802 F.2d 75, 80 (3rd Cir.1986). Since many of the public policy arguments generally offered to justify imposition of products liability on a corporate successor, and the arguments made in this case, are the same arguments offered to justify...