Welco Industries, Inc. v. Applied Cos.

• Decision Date: 15 September 1993
• Docket Number: No. 92-471,92-471
• Citation: 67 Ohio St.3d 344,617 N.E.2d 1129
• Parties: WELCO INDUSTRIES, INC., v. APPLIED COMPANIES, Appellee; Vickers, Inc., Appellant.
• Court: Ohio Supreme Court

Page 344

67 Ohio St.3d 344

617 N.E.2d 1129

WELCO INDUSTRIES, INC., v. APPLIED COMPANIES, Appellee; Vickers, Inc., Appellant.

No. 92-471.

Supreme Court of Ohio.

Submitted May 18, 1993.

Decided Sept. 15, 1993.

SUPREME COURT OF OHIO

Bauer, Morelli & Heyd Co., L.P.A., Arnold Morelli and John M. Isidor, Cincinnati, for appellee.

Dinsmore & Shohl, Lawrence R. Elleman and Linda A. Cooper, Cincinnati, for appellant.

MOYER, Chief Justice.

This case presents the question whether a stranger corporation that purchases the assets of another corporation may be held liable for the unassumed contractual obligations of the predecessor under a theory of successor liability. This case specifically requires us to define the contours of the "mere continuation" exception to the general rule of successor nonliability as it applies to claims sounding in contract.

Under Civ.R. 56, summary judgment is proper when "(1) [n]o genuine issue as to any material fact remains to be litigated; (2) the moving party is entitled to judgment as a matter of law; and (3) it appears from the evidence that reasonable minds can come to but one conclusion, and viewing such evidence most strongly in favor of the party against whom the motion for summary judgment is made, that conclusion is adverse to that party." Temple v. Wean United, Inc. (1977), 50 Ohio St.2d 317, 327, 4 O.O.3d 466, 472, 364 N.E.2d 267, 274. Trial courts should award summary judgment with caution, being careful to resolve doubts and construe evidence in favor of the nonmoving party. Murphy v. Reynoldsburg (1992), 65 Ohio St.3d 356, 604 N.E.2d 138. Nevertheless, summary judgment is appropriate where a plaintiff fails to produce evidence supporting the essentials of its claim. Wing v. Anchor Media, Ltd. of Texas (1991), 59 Ohio St.3d 108, 570 N.E.2d 1095, paragraph three of the syllabus.

The well-recognized general rule of successor liability provides that the purchaser of a corporation's assets is not liable for the debts and obligations of the seller corporation. Flaugher v. Cone Automatic Machine Co. (1987), 30 Ohio St.3d 60, 30 OBR 165, 507 N.E.2d 331; Cyr v. B. Offen & Co., Inc. (C.A.1, 1974), 501 F.2d 1145; 15 Fletcher, Cyclopedia of the Law of Private Corporations (1990), Section 7122. Equally well recognized are the four exceptions to this general rule. A successor corporation may be held liable when

"(1) the buyer expressly or impliedly agrees to assume such liability;

"(2) the transaction amounts to a de facto consolidation or merger;

"(3) the buyer corporation is merely a continuation of the seller corporation; or

"(4) the transaction is entered into fraudulently for the purpose of escaping liability." Flaugher, supra, 30 Ohio St.3d at 62, 30 OBR at 167, 507 N.E.2d at 334.

The plaintiff in Flaugher was injured by a piece of industrial machinery. Because the corporation that made the machine no longer existed, the plaintiff sued a successor corporation that had purchased the assets of the manufacturer. We held that no liability could attach to the successor corporation absent one of the traditional exceptions to the rule of nonliability. We further held that none of the exceptions applied under the facts of the case. Id.

Although Flaugher was a products liability case, the rule and four traditional exceptions evolved in nonproducts cases involving contracts, tax liabilities, and shareholders' rights. Flaugher, supra, 30 Ohio St.3d at 68, 30 OBR at 172, 507 N.E.2d at 338 (A.W. Sweeney, J., dissenting); Cyr, supra, 501 F.2d at 1152; Turner v. Bituminous Cas. Co. (1976), 397 Mich. 406, 417-418, 244 N.W.2d 873, 878. In nonproducts cases, the liability of the successor has usually depended on whether the transaction was a merger (liability imposed by statute), de facto merger (liability imposed by common law), or cash-for-assets transaction (no liability). Turner, supra, 397 Mich. at 419-420, 244 N.W.2d at 879.

In recent years, some courts have criticized the strictness and formality of this approach in the products liability cases and have expanded the circumstances under which successor corporations may be held liable for injuries caused by products manufactured by the predecessor corporation. California, for example, has adopted the so-called "product line" theory of successor liability, under which a successor corporation that manufactures the same line of products as its predecessor may be held liable for injuries caused by products manufactured by the predecessor corporation. Ray v. Alad Corp. (1977), 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3. This court has expressly declined to adopt the product line theory in Ohio. Flaugher, supra. Another approach has been to relax the requirements of the "mere continuation" exception, with the result that even in a cash-for-assets transaction a court may impose liability on the basis of significant shared features between the predecessor and successor corporations. Id., 30 Ohio St.3d at 64, 30 OBR at 169, 507 N.E.2d at 336.

Courts have justified the product line and have expanded mere-continuation tests in products liability cases on many of the same public policy grounds that justify strict products liability in tort. Manufacturers, for example, are in a better position than consumers to bear and spread the costs of the injuries their products cause, and they are in a unique position to improve their products. Flaugher, supra, 30 Ohio St.3d at 66, 30 OBR at 170-171, 507 N.E.2d at 337; Cyr, supra, 501 F.2d at 1154. Another factor is the benefit the acquiring corporation derives from the accumulated goodwill of the seller corporation. Cyr, supra, at 1154. These policy considerations have led some courts to conclude that in some cases the consequences of a sale of assets should be no different from a de facto merger for the purposes of tort liability. Turner, supra.

This court in Flaugher declined to adopt the product line theory because such an expansion of liability should come from the General Assembly. This court was unwilling to run the risk of imposing a "potentially devastating burden on business transfers and * * * convert[ing] sales of corporate assets into traps for the unwary." 30 Ohio St.3d at 66, 30 OBR at 171, 507 N.E.2d at 337.

When the Supreme Court of Michigan in Turner expanded the mere-continuation theory, it stressed that "[t]his is a products liability case first and foremost." 397 Mich. at 416, 244 N.W.2d at 877. The court concluded that in the context of products liability, it did not promote justice to treat a transfer of assets for cash differently from a merger or de facto merger when the needs and interests of the injured party and corporation are identical in each case. Id. at 429-430, 244 N.W.2d at 883.

However valid the justifications for expanding the liability of successor corporations in products liability cases, those justifications do not apply here. Unlike tort law, which is guided largely by public policy considerations, contract law looks primarily to the intentions of the contracting parties. See Victorson v. Bock Laundry Machine Co. (1975), 37 N.Y.2d 395, 401, 373 N.Y.S.2d 39, 41, 335 N.E.2d 275, 277. The concerns for predictability and free transferability in corporate acquisitions that led this court to decline to expand the test for tort successor liability in Flaugher are even more compelling where the claim is in contract. To expand the mere-continuation exception to a contractual claim would virtually negate the difference between an asset purchase and a stock purchase. Courts would be forced to look beyond the surface of any asset purchase to determine the extent of shared features between predecessor and successor in order to decide whether liability should attach to contractual obligations that were explicitly excluded from the transaction. The sale of a corporation's assets is an important tool in raising liquid capital to pay off corporate debts. A court-imposed expansion of contractual liability of successor corporations beyond the traditional exceptions would unnecessarily chill the marketplace of corporate acquisitions. For these reasons, we decline to expand the traditional exceptions to the general rule of nonliability of successor corporations, and hold that a corporation that purchases the assets of another corporation is not liable for the contractual liabilities of its predecessor corporation unless (1) the buyer expressly or impliedly agrees to assume such liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the buyer corporation is merely a continuation of the seller corporation; or (4) the transaction is entered into fraudulently for the purpose of escaping liability. Flaugher v. Cone Automatic Machine Co., 30 Ohio St.3d at 62, 30 OBR at 167, 507 N.E.2d at 334.

We next apply the rule of law to the facts of this case. It is clear that Vickers did not expressly or impliedly assume any contractual liability to Applied. The purchase agreement expressly disclaimed both Welco's rights in its claim against Applied and its liability in the counterclaim.

Nor is there any indication that the parties entered the transactions with fraudulent intent to escape liability. Indicia of fraud include inadequate consideration and lack of good faith. Turner, supra, 397 Mich. at 437, 244 N.W.2d at 887 (Coleman, J., dissenting). Applied does not contend that it is entitled to relief under this theory. Nor does the record support a claim that the approximately $8,300,000 paid for Welco's assets was inadequate. Applied never attempted to rebut Vickers's affidavit in support of summary judgment, which asserted that the purchase price was fair and the result of arm's-length negotiations.

The de facto merger theory is also unavailing. A de facto merger is a transaction that results in the dissolution of the predecessor corporation and is in the nature of a total absorption of the previous business into the successor. Flaugher, supra, 30 Ohio...