Ortiz v. South Bend Lathe

• Decision Date: 04 April 1975
• Parties: Refugio ORTIZ, Plaintiff and Respondent, v. SOUTH BEND LATHE, and incorporated division of Amsted Industries, Inc., Defendant, Cross-Defendant and Appellant, Meyer Sheet Metal Machinery Company, a corporation, Defendant, Cross-Complainant and Respondent, Fremont Indemnity Company, Intervenor and Respondent. Civ. 44003.
• Court: California Court of Appeals Court of Appeals

Page 556

120 Cal.Rptr. 556

46 Cal.App.3d 842

Refugio ORTIZ, Plaintiff and Respondent, v. SOUTH BEND LATHE, and incorporated division of Amsted Industries, Inc., Defendant, Cross-Defendant and Appellant, Meyer Sheet Metal Machinery Company, a corporation, Defendant, Cross-Complainant and Respondent, Fremont Indemnity Company, Intervenor and Respondent.

Civ. 44003.

Court of Appeal, Second District, Division 2, California.

April 4, 1975.

Hearing Denied May 28, 1975.

Cummins, White & Breidenbach by W. F. Rylaarsdam, Los Angeles, for appellant.

Michael J. McHale, Los Angeles, for defendant-respondent.

No appearance for plaintiff or intervenor.

COMPTON, Associate Justice.

Sometime prior to August of 1955, the Johnson Machine and Press Company, Inc. (Johnson) manufactured a punch press which was admittedly defective. In August of 1955, Meyer Sheet Metal Machinery Company (Meyer), the sole distributor for Johnson in this area, sold the press to Western Lighting Corp. who continued to use the press until September 1967. In September 1967, plaintiff Refugio Ortiz, an employee of Western Lighting Corp. was injured as a result of the defect in the press. He received workmen's compensation benefits from Fremont Idemnity Company (Fremont), the compensation carrier for Western Lighting.

In 1967, Amsted Corporation, through its subsidiary South Bend Lathe, was engaged in the manufacture of the Johnson press under that trade name and with facilities which formerly belonged to Johnson.

Ortiz commenced this action for damages in tort against Amsted and Meyer. Meyer cross-complained against Amsted for indemnity. Fremont intervened on behalf of plaintiff to recover the Workmen's Compensation benefits it had paid out. A jury returned a verdict in favor of Ortiz and Fremont as against Amsted and Meyer. The trial court then entered judgment in favor of Meyer as against Amsted for indemnification. Amsted appeals.

Amsted makes no contention that Meyer was guilty of any active negligence, thus the question of Meyer's right to indemnification is not challenged. (See Rossmoor Sanitation, Inc. v. Pylon, Inc., Cal., 119 Cal.Rptr. 449, 532 P.2d 97, filed 2--28--1975.) Nor does Amsted deny that Johnson would be liable to Ortiz and Meyer because of the defect in the press. As of the time of Ortiz' injury, however, Johnson no longer existed.

The issue which is dispositive of the appeal in this case is whether by tracing the history of Johnson and its assets to their ultimate acquisition by Amsted, the latter became burdened with the liabilities of the former.

In 1956, after the manufacture and sale of the machine in question, Johnson was acquired by Bontrager Corporation (Bontrager) an Indiana corporation. The exact nature of this acquisition is not made clear in the record. Suffice to say that shortly thereafter the physical assets of Johnson were transferred to Bontrager and Johnson became a mere 'shell' corporation with no assets. A single outstanding share of stock in Johnson was held by Bontrager and carried on its books as an asset of the latter corporation. The corporate 'shell' was preserved in order to continue the Johnson trade name in corporate form. Johnson as an entity, however, transacted no business on its own following the acquisition by Bontrager. Both parties agree that as a result of this acquisition Bontrager did assume the liabilities of Johnson, either because the transaction constituted a non-statutory merger or by virtue of the alter ego doctrine. The primary activity of Bontrager was then the manufacture of the Johnson press line.

In 1962, Amsted, pursuant to a purchase agreement with Bontrager, acquired the principal assets of Bontrager, which assets included a manufacturing facility at Elkhart, Indiana, together with the equipment therein, the trade name and customer lists and the single share of stock in the Johnson 'shell'. After the acquisition of its assets by Amsted, Bontrager continued in existence for a period of time, holding the cash received in the transaction until it was ultimately liquidated by distributing this cash to its stockholders.

Following the acquisition, as noted earlier, Amsted continued to manufacture the Johnson press line through tis subsidiary South Bend Lathe. In August 1965, Johnson was dissolved. Since Johnson's assets had previously been acquired by Bontrager and sold to Amsted, there was at the time of the dissolution no distribution of anything of value to Amsted, the holder of the single share of stock.

The purchase agreement by which Amsted acquired the assets of Bontrager provided that among other things Amsted acquired the right to adopt and use the name Johnson Machine and Press Corporation. The agreement also provided that Amsted would assume certain liabilities of Bontrager but expressly recited that Amsted Would not assume 'any liability, debt or obligation of Bontrager except those expressly . . . assumed under (the) agreement and that Bontrager shall continue to be solely responsible for all its other known or unknown liabilities, debts or obligations arising prior or subsequent to the closing.'

There is no question but what Amsted paid adequate and valid consideration, a sum in excess of $1,000,000, for the assets of Bontrager. Nor is there the slightest hint of any fraud in the transaction. The injury in question, and for which liability is sought to be imposed on Amsted, occurred some five years after this acquisition and two years after the total dissolution of Johnson.

The general rule is where one corporation sells or transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former unless (1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts. (Pierce v. Riverside Mtg. Securities Co., 25 Cal.App.2d 248, 77 P.2d 226; 15 Fletcher W., Cyclopedia of the Law of Private Corporations, § 7122; Kloberdanz v. Joy Manufacturing Company, D.C., 288 F.Supp. 817; Schwartz v. McGraw-Edison Co., 14 Cal.App.3d 767, 92 Cal.Rptr. 776.)

By the terms of the purchase agreement between Amsted and Bontrager there was no express or implied assumption of liability. There was, as noted, no fraud in the transaction and the consideration flowing to Bontrager was ample. Bontrager and Amsted dealt at armslength, there was no mixture of officers or stockholders. The two corporate entities were completely separate and distinct both before and after the sale. Under these facts there was neither a consolidation or merger nor a continuation or reincarnation of Bontrager, the old corporation. Before one corporation can be said to be a mere continuation or reincarnation of another it is required that there be insufficient consideration running from the new company to the old. (Enos v. Picacho Gold Min Co., 56 Cal.App.2d 765, 133 P.2d 663; Malone v. Red Top Cab Co., 16 Cal.App.2d 268, 60 P.2d 543.) ¹

'An essential foundation of the rule . . . (that equity will regard a new corporation as being a mere continuation of the former corporation under a different name) is the lack of consideration running from the new company to the old.' (Enos, 56 Cal.App.2d p. 779, 133 P.2d p. 671.)

Amsted did not assume the liabilities of Bontrager either by agreement, express or implied, or involuntarily by operation of law. Nor does it make any difference that the assets which were acquired consisted of trade names, customer lists or business good will. (See Schwartz v. McGraw-Edison Co., Supra,)

The evidence of the history of these corporate acquisitions was not in dispute, nor was the purchase agreement between Amsted and Bontrager ambiguous so as to require any factual resolution of extrinsic evidence in interpreting its meaning. Thus it was improper for the trial court to submit the question of Amsted's liability to the jury. The question was purely one of law based upon uncontroverted evidence. As such we are not bound to apply the substantial evidence test in determining the correctness of the jury's verdict against Amsted. We are at liberty to make an independent interpretation of the legal questions presented in order to determine whether, under the undisputed evidence, there was, as a matter of law, an imposition of liability on Amsted for the tort of Johnson.

Respondents make the argument that because Johnson continued in existence as a 'shell' corporation after the transfer from Bontrager to Amsted of the single share of stock, Amsted assumed Johnson's liabilities at the time of the dissolution of Johnson.

No consolidation or merger of Johnson with Amsted resulted from the dissolution of the Johnson 'shell'. Strictly speaking, a consolidation signifies such a union as necessarily results in the creation of a new corporation and the termination of the constituents whereas a merger signifies the 'absorption of one corporation by another which retains its name and corporate identity with the added capital, franchises and powers of a merged corporation.' (15 W. Fletcher, Cyclopedia of the Law of Private Corporations, § 7041.) The dissolution of the Johnson 'shell' did not result in the creation of a new corporation nor did Amsted as a...