Schmoll v. Acands, Inc.

• Decision Date: 23 December 1988
• Docket Number: Civ. No. 86-1313-PA.
• Citation: 703 F. Supp. 868
• Parties: Raymond A. SCHMOLL, Plaintiff, v. ACANDS, INC., a Pennsylvania Corporation, et al., Defendants.
• Court: U.S. District Court — District of Oregon

703 F. Supp. 868

Raymond A. SCHMOLL, Plaintiff, v. ACANDS, INC., a Pennsylvania Corporation, et al., Defendants.

Civ. No. 86-1313-PA.

United States District Court, D. Oregon.

December 23, 1988.

Jeffrey S. Mutnick, Henry Kantor, Pozzi, Wilson, Atchison, O'Leary & Conboy, Portland, Or., for plaintiff.

William N. Reed, Donald R. Jones, Watkins Ludlan & Stennis, Jackson, Miss., William D. Okrent, Acker, Underwood & Smith, Portland, Or., for defendants.

OPINION

PANNER, Chief Judge.

Plaintiff Raymond Schmoll brings this products liability action against Raymark Industries Inc. and Raytech Corporation (Raytech). The issue is whether Raytech is liable as a successor for Raymark Industries' production, sale and distribution of products containing asbestos. I find that Raytech is a successor in liability to Raymark Industries.

Plaintiff seeks damages against multiple defendants, including Raymark Industries and Raytech, for injuries allegedly caused by inhaling asbestos dust from products manufactured or sold by defendants. The parties stipulated to bifurcation of the proceedings and agreed to submit to the court the question whether Raytech is a successor in liability to Raymark Industries. Plaintiff and Raytech have submitted thousands of pages of documents and deposition transcripts, covering a variety of corporate transactions from 1982 through 1988. The parties agreed that I would base my decision upon the briefs, and depositions and exhibits cited in the briefs.

Background

Raymark Industries manufactured and distributed energy absorption and transmission products, including asbestos and asbestos-containing products. Since the early 1970's, Raymark Industries¹ has been named in an ever-increasing number of asbestos related personal injury lawsuits. By June 26, 1988, Raymark Industries had been named as a defendant in more than 68,000 cases. Approximately 1,000 new cases are filed each month.

Raymark Industries has suffered severe financial declines as a result of the asbestos litigation. In 1981, Raymark Corporation² had a net worth of $112.4 million. By 1985, the reported net worth of the company had dropped to $3.6 million. Between 1982 and 1988, Raymark Corporation reorganized its corporate structure in response to this financial decline. Raymark told its shareholders that the corporate restructuring would:

permit the Company to gain access to sources of capital and borrowed funds and thereby finance the acquisition and operation of new businesses unrelated to Raymark Corporation in a corporate structure that should not subject the holding company or such acquired businesses to asbestos-related liabilities of Raymark Corporation.

The corporate restructuring involved a complex series of transactions that transformed Raybestos-Manhattan into Raymark Industries and Raytech. The steps of this restructuring are diagrammed and described below.

RAYBESTOS-MANHATTAN (RAYBESTOS) RAYMARK CORPORATION | RAYMARK INDUSTRIES (RAYBESTOS) | ---------------------------------------------------------------- | | | | | WET CLUTCH & DRY CLUTCH & RIPG R/M FORMED DAIKIN-R/M BRAKE BRAKE PRODUCTS

STEP 1: Raybestos-Manhattan (Raybestos), originally organized as a New Jersey corporation in 1929, was reorganized as a Connecticut corporation in 1976. In 1982, Raybestos-Manhattan changed its name to Raymark Industries and created Raymark Corporation as a holding company for Raymark Industries. Raymark Corporation's only asset was the stock of Raymark Industries. In 1985, Raymark Industries' assets included two operating divisions, Wet Clutch & Brake (WC & B) and Dry Clutch & Brake (DC & B); the stock of a German subsidiary, Raybestos Industrie—Produkte G.m.b.H. (RIPG); the stock of a shell corporation, R/M Formed Products; and a 50% interest in a foreign joint venture, Daiken — R/M.

RAYMARK CORPORATION | ------------------------------------------- | | RAYMARK INDUSTRIES (RAYBESTOS) RAYTECH | ------------------------------------- | | | | | WC&B DC&B RIPG R/M DAIKIN

STEP 2: In June 1986, Raymark Corporation created Raytech as a wholly owned subsidiary.

RAYMARK CORPORATION | ------------------------------------------- | | RAYMARK INDUSTRIES (RAYBESTOS) RAYTECH | | ------------------------------------- RAYSUB | | | | | WC&B DC&B RIPG R/M DAIKIN

STEP 3: Raytech then created Raysub as a wholly owned subsidiary. Raytech and Raysub were created solely to carry out the merger described in the next step.

RAYTECH | RAYMARK CORPORATION | RAYMARK INDUSTRIES (RAYBESTOS) | ---------------------------------------------------- | | | | | WC&B DC&B RIPG R/M DAIKIN

STEP 4: In October 1986, Raymark Corporation merged into Raysub, with Raymark Corporation surviving as a wholly-owned subsidiary of Raytech. In this merger, each outstanding share of Raymark common stock was converted into one share of Raytech stock. Raytech, designated the "holding company," was entirely owned by the former shareholders of Raymark Corporation. As a result of this merger, Raytech, the parent of Raysub, became the parent of Raymark Corporation. Raytech then owned 100 percent of the stock of Raymark Corporation, which owned 100 percent of the stock of Raymark Industries.

RAYTECH | -------------------------------------------------------- | | | RAYMARK CORPORATION WC&B RIPG | RAYMARK INDUSTRIES (RAYBESTOS) | ----------------- | | | DC&B R/M DAIKIN

STEP 5: In 1987, Raytech purchased Raymark Industries' two most profitable assets, the Wet Clutch and Brake Division and RIPG stock. Raytech purchased the Wet Clutch and Brake Division for $76.9 million. Payment consisted of approximately $15 million in cash, $10 million worth of Raytech stock at closing with another $6 million in stock to be transferred later,³ and $46 million in unsecured notes. The Wet Clutch and Brake Division, the largest of Raymark Industries' business operations, had significant profit potential.⁴ Furthermore, the asbestos claims against Raymark Industries did not arise from the Wet Clutch and Brake Division.⁵

Raytech also purchased the RIPG stock owned by Raymark Industries for $8.2 million. RIPG does not manufacture or sell its asbestos products in the United States and has never been named in asbestos-related litigation. Terms of the sale included a cash payment of $3.9 million, with the balance financed by an unsecured note.

RAYTECH LITIGATION CONTROL CORP. | | ----------------- ASBESTOS LITIGATION MANAGEMENT | | | WC&B RIPG RAYMARK CORPORATION | RAYMARK INDUSTRIES | ------------------ | | | DC&B R/M DAIKIN

STEP 6: In 1988, Raytech sold Raymark Corporation, and thus Raymark Industries, to Asbestos Litigation Management (ALM) for $1 million. ALM paid $50,000 in cash and a $950,000 unsecured promissory note for all Raymark Corporation's assets and liabilities.

ALM is a wholly owned subsidiary of Litigation Control Corporation (LCC), whose business includes claims processing, document control and retention, and other services to companies involved in complex litigation. ALM serves only companies defending asbestos litigation. ALM now owns the stock of Raymark Corporation, whose only asset is Raymark Industries' stock.

As a result of this involved corporate restructuring, Raytech now owns WC & B and RIPG, the two historically lucrative businesses of Raymark Industries, without the drain of asbestos-related litigation. By selling the stock of Raymark Corporation, Raytech was able to dispose of a subsidiary whose asbestos-related expenses had decreased its earnings by $8.6 million during the first quarter of 1988.

Discussion

In this action, plaintiff seeks to hold Raytech liable for Raymark Industries' production, sale, and distribution of asbestos-containing products. Plaintiff contends that, for purposes of liability, Raytech and Raymark Industries are the same corporate entity.⁶ Defendant Raytech argues that as an innocent, successor corporation, it should not be liable for the acts or omissions of its predecessors.

I have found no reported case quite like this case. This is not surprising. Plaintiff's business expert testified that he thought this case involves the first corporate restructuring of its kind. Raymark Corporation told its shareholders that the transformation was "novel." Defendants and their counsel have engineered an elaborate, apparently unique transfer of corporate assets, carefully preserving the appearance of an arms-length transaction between separate corporations.

As a general rule, when a corporation purchases all or most of the assets of another corporation, the purchasing corporation does not assume the debts and liabilities of the selling corporation. Erickson v. Grande Ronde Lumber Co., 162 Or. 556, 568, 92 P.2d 170, 174, 94 P.2d 139 (1939). However, the purchasing corporation may be responsible for the selling corporation's obligations if (1) the purchasing corporation expressly or impliedly agrees to assume those liabilities; (2) the transaction amounts to a consolidation or merger of the corporations; (3) the purchasing corporation is a continuation of the selling corporation; or (4) the corporations enter the transaction to escape liability. Id.; see also Dairy Coop. Ass'n v. Brandes Creamery, 147 Or. 488, 496, 30 P.2d 338, 341 (1934) (successor corporation liable for contractual debt of its predecessor because successor formed solely to escape liability); Peterson v. Harville, 445 F.Supp. 16, 24 (D.Or.1977) (applying Oregon law), aff'd, 623 F.2d 611 (9th Cir.1980).

Oregon courts reject transfers of corporate assets designed to escape liability. For example, in Dairy Coop., a cooperative sought to enforce an exclusive marketing contract against the corporate successor of Brandes Creamery, a milk distributor. Brandes Creamery had dissolved, and a new corporation, Brandes Creamery, Inc., was formed in its place. The court held Brandes Creamery, Inc. liable for Brandes Creamery's contracts, noting that:

the

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