Shorb By Shorb v. Airco, Inc.

• Decision Date: 30 September 1986
• Docket Number: Civ. A. No. 82-1983.
• Citation: Shorb By Shorb v. Airco, Inc., 644 F.Supp. 923 (E.D. Pa. 1986)
• Parties: Larry SHORB, an incompetent, by his guardian, Barbara SHORB, and Barbara Shorb, in her own right v. AIRCO, INC., et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

644 F. Supp. 923

Larry SHORB, an incompetent, by his guardian, Barbara SHORB, and Barbara Shorb, in her own right v. AIRCO, INC., et al.

Civ. A. No. 82-1983.

United States District Court, E.D. Pennsylvania.

September 30, 1986.

David J. Griffith and Peter J. Deeb, Philadelphia, Pa., for Sandoz.

Peggy L. Kerr and Michael Margaril, New York City, William T. Hangley and Charles F. Forer, Philadelphia, Pa., for Hospal.

OPINION

JOSEPH S. LORD, III, Senior District Judge.

Third-party defendants Sandoz, Inc. ("Sandoz") and Hospal Medical Corporation ("Hospal") have filed cross-motions for summary judgment. Before discussing these motions, I will briefly review the procedural history of this action.

I.

Plaintiff Larry Shorb suffered severe brain damage when the tubing of a Monaghan series 300 D.O. anesthesia ventilator ("series 300 D.O. ventilator") became disconnected during oral surgery. Plaintiffs sued Airco, Inc. ("Airco"),¹ which sold the allegedly defective ventilator. Airco impleaded three parties: J.J. Monaghan Co., Inc. ("Monaghan"), the original manufacturer of the series 300 D.O. ventilator, and Sandoz and Hospal, Monaghan's alleged corporate successors. Sandoz, in turn, cross-claimed against Hospal for contribution and/or indemnification, alleging that Hospal had, by contract and operation of law, assumed all liabilities relating to the series 300 D.O. ventilator.

On the eve of trial, a settlement was agreed to by all parties. Pursuant to that settlement, all claims were satisfied except Sandoz's cross-claim against Hospal, which was expressly reserved. That cross-claim is the subject of the pending summary judgment motions.

II.

The facts of record relevant to Sandoz's claim against Hospal are as follows. The series 300 D.O. ventilator was designed and originally manufactured by the J.J. Monaghan Co., Inc. Sandoz purchased that company, together with all aspects of the production of the series 300 D.O. ventilator, in June, 1969. Thereafter, Monaghan became an unincorporated division of Sandoz (the "Monaghan division"). J.J. Monaghan Co., Inc. no longer exists, having filed articles of corporate dissolution in June, 1970.

Sandoz continued to manufacture the series 300 D.O. ventilator until 1976, when it transferred its Monaghan division to Hospal,² which at that time was Sandoz's wholly owned subsidiary. That transfer was part of a larger transaction involving a joint venture between Sandoz, Ltd. (hereinafter referred to as "Limited" to distinguish it from Sandoz, Inc., which will be referred to as Sandoz), which was Sandoz's parent corporation, and Rhone-Poulenc, a French corporation. The overall purpose of the transfer of the Monaghan division from Sandoz to Hospal was to centralize in one corporation all aspects of Limited's hospital supply business in the United States. After the transfer, Sandoz sold all of Hospal's outstanding stock to Limited, which contributed the stock to its joint venture with Rhone-Poulenc.

The transfer of Sandoz's Monaghan division to Hospal occurred in two steps. By agreement dated November 30, 1976 and entitled "Agreement to Transfer Assets and Bill of Sale" ("the 1976 Agreement"), Sandoz transferred to Hospal the physical and business assets of the Monaghan division, including, inter alia, land, equipment, enumerated contract rights, patents, trademarks, goodwill and customer lists. In a second agreement, entitled "Agreement for Assignment of Receivables, Sale of Inventory and Assumption of Payables" and dated January 15, 1977 ("the 1977 Agreement"), Sandoz assigned and sold to Hospal the inventory and its interest in the accounts receivable of the Monaghan division. In consideration of that assignment, Hospal assumed all liability for the payables of the Monaghan division and agreed to issue to Sandoz a promissory note in the principal amount of $6,814,883.75. In the same agreement, Limited guaranteed the obligations of Hospal to Sandoz on the payables and the promissory note. In exhibits to the 1977 Agreement, precise dollar amounts were attributed to the receivables and payables.

Neither the 1976 nor the 1977 Agreement (collectively the "Agreements") contained an express assumption by Hospal of the contingent or inchoate liabilities of Sandoz. The 1976 Agreement, in fact, expressly provided that no liabilities of Sandoz were to be transferred to Hospal:

Sandoz does hereby grant, convey, assign, transfer and set over unto Hospal ... the assets of Sandoz described herein (but in no case to include any indebtedness or other liabilities of Sandoz).

The 1977 Agreement expressly provided for assumption by Hospal of Sandoz's liabilities only as follows:

Hospal agrees to indemnify and hold Sandoz harmless from and against any and all claims, obligations, costs, liabilities, loss or damage ... (including reasonable attorney's fees) arising out of or related to the Payables.

The "Payables" were identified in an exhibit to the 1977 Agreement as "amounts owing to vendors and other parties for obligations incurred by Sandoz, Inc.'s Monaghan division in the purchase of inventory ... in the ordinary course of business" and "amounts owing by Sandoz, Inc. and incurred in the oridinary sic course of business of its Monaghan division."

The scrivener of the Agreements was Richard M. Burt, who in 1976 and 1977 was assistant counsel for Sandoz. In an affidavit submitted by Sandoz in support of its motion for summary judgment, Burt avers that there was an "explicit and implicit" agreement among Sandoz, Hospal, Limited, and Rhone-Poulenc that Hospal would assume "all aspects ... including contingent or inchoate liabilities of the Monaghan division." According to Burt, he did not include in the Agreements an express clause concerning contingent or inchoate liabilities because "litigation was not foreseen on the issue as it was uncontested and of little relative importance at the time." He avers that, had he foreseen the present dispute, he would have included in the Agreements a clause transferring contingent or inchoate liabilities to Hospal in order to "express the agreement which existed and to avoid disputes." Finally, Burt avers that, after the ownership of Hospal was transferred to the joint venture between Limited and Rhone-Poulenc, Hospal "proceeded to insure itself against product liability claims."

Sandoz also submitted the affidavit of Herbert Wohlmann, who in 1976 and 1977 was a member of Limited's legal division. In that capacity, he participated in negotiating the joint venture between Limited and Rhone-Poulenc. Wohlmann avers, inter alia, that "it was understood, by the parties to the jointventure, that each of the hospital supply businesses contributed would carry with them sic liabilities, including contingent liabilities" and that "there was an implicit agreement to this effect." Hospal did not submit affidavits averring facts contrary to the averments of Burt and Wohlmann.

As a result of the 1976 and 1977 Agreements, Hospal acquired Sandoz's entire anesthesia ventilator line. After the acquisition, Hospal produced the series 300 D.O. ventilator for some unspecified period of time,³ using the same business procedures, production methods and production plant that Sandoz had used. The accident which left plaintiff Larry Shorb brain damaged occurred in February, 1980. The date of sale of the ventilator involved in the accident is unknown, although Sandoz does not contend that the sale occurred after it transferred its Monaghan division to Hospal.⁴

III.

Sandoz advances two theories upon which Hospal may be liable. First, Sandoz argues that Hospal expressly and impliedly agreed to assume all liability for claims related to the sale and manufacture of the series 300 D.O. ventilator. Second, it argues that Hospal should be held liable under the product line theory of successor liability.⁵

Initially, I must determine which state's law applies to each of these issues. As to the contract claims, both Sandoz and Hospal assert, and I agree, that the applicable law is that of New Jersey.

As to the product line theory, Hospal asserts that the applicable law is either that of Pennsylvania, the plaintiffs' domicile at all relevant times, or that of New Jersey or Colorado, the principal places of business of Sandoz and Hospal, respectively, at the time Sandoz transferred its Monaghan division to Hospal. Hospal argues that, as to the product line theory, the law of these three states is the same, and therefore that no choice of law is necessary. In contrast, Sandoz argues that, at least as between Pennsylvania and New Jersey, there is a true conflict of laws. Sandoz and Hospal agree, however, that if a choice of law must be made, interest analysis, see Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796 (1964), mandates the application of Pennsylvania law.

I agree with Hospal that no choice of law is necessary. I also agree with the parties that, insofar as a choice of law is necessary, Pennsylvania law appears to apply, because the purpose of the product line theory is to compensate tort victims, see infra pp. 927-928, giving plaintiffs' state of domicile the strongest interest. To examine this conclusion, however, one must go beyond choice of law principles and address a question of substantive law: What does an interest in compensating tort victims have to do with determining the rights and duties inter se of predecessor and successor corporations? This question is at the heart of the parties' disagreement as to the applicability of the product line theory to Sandoz's cross-claim against Hospal, an issue to which I now turn.

IV.

The product line theory is an exception to the general rule that "when one company sells or transfers all of its assets to a successor company, the successor does not acquire the liabilities of the transferor corporation merely because of its succession to the transferor's assets." Dawejko v. Jorgensen Steel Co., 290 Pa.Super....