Pearson ex rel. v. National Feeding Systems

• Decision Date: 21 November 2002
• Docket Number: No. 2001-SC-0379-DG.,2001-SC-0379-DG.
• Citation: 90 S.W.3d 46
• Parties: Justin PEARSON, by and Through Carolyn TRENT, as Mother and Next Friend, Appellant, v. NATIONAL FEEDING SYSTEMS, INC., Appellee.
• Court: United States State Supreme Court — District of Kentucky

90 S.W.3d 46

Justin PEARSON, by and Through Carolyn TRENT, as Mother and Next Friend, Appellant, v. NATIONAL FEEDING SYSTEMS, INC., Appellee.

No. 2001-SC-0379-DG.

Supreme Court of Kentucky.

November 21, 2002.

COPYRIGHT MATERIAL OMITTED

Mike Breen, David Thomas Sparks, Mike Breen, P.S.C., Bowling Green, Counsel for Appellant.

Charles E. English, Jr., Brett A. Reynolds, English, Lucas, Priest & Owsley, Bowling Green, Counsel for Appellee.

Opinion of the Court by Justice WINTERSHEIMER.

This appeal is from an opinion of the Court of Appeals which affirmed a summary judgment entered by the circuit court in favor of National Feeding Systems, Inc., in a products liability lawsuit brought by Pearson on a theory of successor-in-interest liability.

The questions presented are whether the exceptions to the successor-in-interest rule impose liability on National Feeding Systems, Inc.; whether the corporation contracted to assume liability for the debts and liabilities of a predecessor corporation; whether the transaction between National and a predecessor corporation falls into the merger/consolidation exception or the continuation exception, and whether this Court should adopt the product-line exception to the general rule of nonliability.

On November 16, 1996, 13-year-old Justin Pearson was feeding dairy cattle on his stepfather's farm when the silo unloader became clogged. He climbed into the silo and attempted to clear an augur but his leg became entangled in the saw teeth when the auger suddenly started again. As a result of the accident, Justin lost the bottom portion of his right leg.

Carolyn Trent, his mother, initiated this lawsuit against National Feeding Systems, Inc. Although National did not design, manufacture or sell the product that injured Justin, it now manufactures and advertises silo unloaders under its predecessor's brand name, Silo-Matic, and continues to use the same logo. The suit was based on two theories of liability. One was under the successor-in-interest principle; and the other was, in the alternative, a product-line exception under the same principle.

The circuit judge granted summary judgment in favor of National Feeding relying on American Railway Express Co. v. Commonwealth, 190 Ky. 636, 228 S.W. 433 (1920) and Conn v. Fales Division of Mathewson Corp., 835 F.2d 145 (6th Cir.1987). He rejected the product-line theory for two reasons. First, the Sixth Circuit refused to recognize the theory in Conn, supra. Second, this was a new theory of potential liability and as such it needed to be adopted by a Kentucky appellate court. The Court of Appeals affirmed and this Court accepted discretionary review.

We find it necessary to review the history related to the manufacture of the unloaders in question. In 1956, Van Dusen and Company, Inc., registered a trademark for the name "Silo-Matic" with the United States Patent Office and manufactured and sold unloaders under the Silo-Matic trade name until the early 1980s. It manufactured the unloader involved in this accident. In the early 1980s, Van Dusen was purchased by Joan Olson and Joyce Van Dusen who subsequently sold the business or business assets to Dynamatic Feeding Systems, Inc. In 1989 or 1990, Dynamatic filed bankruptcy and was discharged from liability to its creditors or potential future creditors. On January 8, 1990, National Feeding purchased some of Dynamatic's assets through a bankruptcy sale for $850,000, and in return, received its accounts receivables, inventories, prepaid expenses and fixed assets, including its trademark. We realize that Pearson strongly contests the fact of bankruptcy, but it is supported by an uncontroverted affidavit.

I. Standard of Review

The standard of review on appeal of a summary judgment is whether the circuit judge correctly found that there were no issues as to any material fact and that the moving party was entitled to a judgment as a matter of law. Summary judgment is appropriate where the movant shows that the adverse party could not prevail under any circumstances.

The function of summary judgment is to terminate litigation when it appears that it would be impossible for the respondent to produce evidence at trial warranting judgment in his or her favor. It is proper where the movant shows that the adverse party cannot prevail under any circumstances. James Graham Brown Foundation, Inc. v. St. Paul Fire and Marine Ins. Co., Ky., 814 S.W.2d 273 (1991). As noted in Steelvest Inc. v. Scansteel Service Center, Inc., Ky., 807 S.W.2d 476 (1991) and Paintsville Hospital Co. v. Rose, Ky., 683 S.W.2d 255 (1985), a party opposing a properly documented summary judgment cannot defeat it without presenting at least some affirmative evidence indicating that there is a genuine issue of a material fact. In addition, the construction of a contract is a matter of law for the court to decide. See Morganfield National Bank v. Damien Elder & Sons, Ky., 836 S.W.2d 893 (1992).

II. Exceptions to Successor-in-interest Rule

It is generally accepted in Kentucky that a corporation which purchases another corporation does not assume the payment of any debts or liabilities of the corporation which it has purchased. American Railway, supra; Conn. It is also well settled in Kentucky that when the sale of a corporation is a bona fide transaction, and the selling corporation, Dynamatic, here, receives money to pay its debts or property that may be subjected to the payment of its debts and liabilities, the purchasing corporation will not, in the absence of a contract obligation or fraud, be held responsible for the debts or liabilities of the selling corporation. American Railway, 228 S.W. at 437. The only exceptions to the general rule that a purchaser, in the absence of a contract obligation, cannot be held responsible for the debts and liabilities of the selling corporation, are:

(1) where the purchaser expressly or impliedly agrees to assume such debts or other liabilities;

(2) where the transaction amounts to a consolidation or merger of the seller and purchaser;

(3) where the purchasing corporation is merely a continuation of the selling corporation; or

(4) where the transaction is entered into fraudulently in order to escape liability for such debts.

Id. at 437; Conn, 835 F.2d at 146.

American Railway is Kentucky's seminal case on the application of successor liability. The Court held that American Railway was liable for the liabilities of the Adams Company on a successor liability theory. Unlike National Feeding, American Railway was organized for the express purpose of taking over all of the property and rights of the Adams Company. The only consideration paid by American Railway for the purchase of the Adams Company was the capital stock of American Railway. The sale and transfer simply had the effect of putting American Railway in possession of Adams' property for the sole purpose of continuing to carry on the business of the Adams Company. Id. at 436.

The Court stated that its decision to hold American Railway liable for the debts and obligations of the Adams Company was based upon "the broad equitable principle that where one corporation takes over the assets of another corporation, without paying to it any consideration therefor, as is the fact in this case, the absorbing corporation takes the assets of the absorbed corporation ..." Id. at 438. The Court noted that the circumstance in American Railway, that "was ultimately seized hold of to make the purchasing corporation liable" was that the selling corporation was paid for in the stock of the purchasing corporation, and the property of the selling corporation, to which the creditors might look with certainty for the payment of their debts, was turned over to the purchasing corporation. Id. at 440.

We cannot accept the argument by Pearson that National has liability under the first exception because it agreed to assume liability under the purchase and sale agreement between it and Dynamatic. In the 1990 agreement, National consented only to assume "specifically designated and listed liabilities". The agreement contained a separate addendum entitled "general assumptions of liability" which stated:

National Feeding Systems, Inc., ... does hereby assume and agree to pay and perform the obligations and liabilities of DynaMatic Feeding Systems, Inc. existing at the date of closing, and in particular those liabilities of DynaMatic Feeding Systems reflected on or reserved against in its unaudited financial statement of August 31, 1989, and January 31, 1990, and incurred in the usual course of business thereafter, as adjusted to the date of closing, except:

....

C. Except claims, actions, or suits arising out of events occurring prior to closing.

Pearson contends that National agreed to assume liability for claims, actions or suits except those arising out of events occurring prior to the closing of the sale of Dynamatic to National. Pearson claims that because Justin was injured after the closing date, National had agreed to assume liability for the claim.

We must disagree, as did the Court of Appeals, for two reasons. First, we do not read the assumption of liability clause in the same fashion as Pearson. Although the language of the document excludes liability for claims, actions or suits arising out of events occurring prior to the closing, there is no express or implied assumption of liability for events occurring after the closing. It is clear that National agreed to assume only obligations and liabilities which existed at the date of the closing and other liabilities reflected or reserved against its unaudited financial statement as of certain dates and incurred in the usual course of business thereafter.

Second, even if National assumed the liabilities of Dynamatic for claims, actions or suits arising out of events after the closing, there is simply no indication of products liability because there is no evidence that Dynamatic had...