collection agent and the assignment, therefore, was "collusive." To hold otherwise, the Court said, would be to invite the very type of "manufactured jurisdiction" that § 1359 was designed to prevent. The fact that the assignment was valid under state law was of little consequence, since the real issue was one of jurisdiction, clearly a matter controlled by federal rather than state law.
Under Kramer, therefore, it is not enough that the assignment be valid under state law, it must also be real, as opposed to merely colorable, in the sense that the assignee had a substantial pre-existing interest in the dispute. See Carribean Mills, Inc. v. Kramer, 392 F.2d 387 (5th Cir. 1968); McSparran, supra, 402 F.2d at 873. In the words of Professor Moore, it is significant to ascertain whether the assignee "had some independent, legitimate interest in the dispute that predated the assignment and was not a complete stranger to the transaction." 3A Moore's, supra, P 17.05(3.-1) at 17-47.
Kramer left open the question, at least where the transfer of the claim is true and absolute, as to the relevance of the motive for the assignment; i. e., how much weight is to be attached to the fact that the purpose of the assignment was to invoke diversity jurisdiction. While some courts have held that motive is irrelevant, See cases at 6 Wright & Miller, Federal Practice and Procedure: Civil § 1557 (1971), the law in this circuit is to the contrary. Corabi was expressly overruled in that regard by McSparran, where the court held that while a motive to create diversity is not in and of itself improper, neither can it be ignored altogether in evaluating the circumstances of a particular case. Thus, in examining any § 1359 claim of collusion in this jurisdiction, motive must be considered together with a determination as to whether the assignment was real or colorable and whether there is the presence or absence of some independent, pre-existing legitimate interest in the assignee.
Defendant Berridge argues principally that the assignment here must be deemed collusive because the assignors, the individual shoppe owners and franchisees, retained an interest in the claims, since, as noted above, the assignment stated that the franchisees "may share in the recovery, if any." However, we do not deem that factor to be sufficient to sustain a finding of manufactured jurisdiction.
Initially, it is not clear that any of the assignors will in fact retain an interest in their assigned claims, since the assignment instrument uses the term "may" rather than "shall". But even assuming that we conclude that an interest of some indefinable nature is retained, that does not end our inquiry for, as noted in Ferrara v. Philadelphia Laboratories, Inc., 272 F. Supp. 1000 (D.Vt.1967), the primary authority upon which Berridge relies, retention of a substantial interest in the litigation, while perhaps the most important factor to be examined, is not alone determinative. Inquiry must be had into all the circumstances surrounding the transfer.
The other factors which we believe to be significant are, first, that this litigation in its entirety is being paid for and directed by LJS. See Id. at 1012. Obviously, therefore, LJS is to be distinguished from other assignees who, in view of the assignor's retention of the beneficial interest in the claim, have been characterized as mere collection agents, Kramer, supra, 394 U.S. at 827-28, 89 S. Ct. at 1489-90. Collection agents in this context do not assume legal fees and costs and direct litigation.
Secondly, and most importantly it is clear that LJS had a legitimate independent business interest in this dispute which predated the execution of the assignments. As noted previously, LJS required their franchisees to install Korad-coated roofs and therefore has an interest, and quite possibly a legal obligation, to rectify the problem which has arisen with regard to them. Moreover, it has a legitimate interest to maintain not only good relations with its franchisees, but also its public image and goodwill. It is the owner of a registered service mark covering the distinctive building design and appearance of its shoppes, including roof structure and appearance, and, therefore, has a valid business reason to protect the appearance of its franchised shoppes in order to avoid an adverse reflection on the entire LJS chain.
In addition to the maintenance of goodwill, the superior knowledge of LJS in this controversy is an additional basis for its claim of legitimate independent interest. Much of this suit involves breach of warranty claims regarding the performance of Korad acrylic film. These warranties, both written and oral, allegedly were made directly to plaintiffs during the period that the three suppliers approached LJS and solicited its use of Korad-coated roofs. Obviously, LJS is in the best position to litigate the claims based upon a "sales pitch" allegedly made directly to it. This observation is confirmed by the fact that when the roofs began to fail the franchisees looked to LJS for assistance, and it was LJS which conducted settlement negotiations with Berridge and the two other roof suppliers. Therefore, we conclude that the assignee had an independent interest in this dispute at least equal, and probably greater than, that deemed sufficient in other cases, See Prudential Oil Corp. v. Phillips Petroleum, 546 F.2d 469 (2nd Cir. 1976); Henley and Co. v. Miller Golf Equipment Corp., 300 F. Supp. 872 (D.P.R.1969); National Surety Corp. v. Inland Properties, Inc., 286 F. Supp. 173 (E.D.Ark.W.D.1968). And in our judgment, that interest outweighs any suggestion of collusion based on the fact that the assignors may share in the recovery.
Berridge also urges that the assignments may have been motivated by the improper desire to preserve diversity of citizenship among the parties. It argues that even if we assume, as plaintiffs contend, that just those cases alone which arose out of LJS-owned shoppes satisfied the $ 10,000.00 jurisdictional requirement, nevertheless LJS needed the assignments because without them the quite natural joinder of remaining franchisees as co-plaintiffs would have destroyed diversity. However, the question of motive, as noted in McSparran, is just one of the factors to be considered in determining whether or not there was collusion, and we conclude that the undeniable legitimate independent interest which LJS has in this dispute is sufficient to overcome any suggestion that collusion may be inferred from the circumstances cited by Berridge in its speculative argument based on possible motive. The motion to dismiss under § 1359 will be denied.
II. THE MOTION FOR PARTIAL SUMMARY JUDGMENT
Korad moved for partial summary judgment on all claims arising out of roofs constructed before March 24, 1976, on the ground that it was not until after that date that it acquired the rights to the Korad process from third-party defendant RH. This motion raises the issue of successor liability, i. e., under what circumstances may a successor in interest (Korad) be liable for the wrongs committed by its predecessor (RH). We find the following facts from the movant's uncontested affidavit, admissions by respondent in its brief, and recitations in the Korad-RH sales agreement tendered by the respondent. Prior to January 1, 1976, Korad-brand acrylic film was exclusively manufactured and sold under that name by RH. On that date, the Korad film business, including machinery, equipment, inventory, trademarks, formulae, patents, marketing records, customer lists, was sold by RH to a company which had been formed to conduct the sale of the Korad acrylic film and which had in fact adopted its name, Korad, Inc. Pertinent terms of the sales agreement included the fact that the Korad film would be manufactured by Korad from acrylic polymer furnished exclusively by RH (agreement P 14), and RH would receive a three percent royalty payment on all Korad sales until the end of 1987 (agreement P 3b).
The parties agree that the question of successor liability in this circuit is controlled by Knapp v. North American Rockwell Corp., 506 F.2d 361 (3rd Cir. 1974). In that diversity case in which Pennsylvania law applied, the plaintiff was injured by a machine manufactured by Textile Machine Works (TMW), a company which one year prior to the accident had sold all of its interest in the machine as well as the name TMW to the defendant Rockwell. Substantially all of the assets of TMW were exchanged for Rockwell stock. Under the terms of the sales agreement, TMW was to distribute the Rockwell stock to its shareholders and then to dissolve as soon as practicable.
In resolving the question of Rockwell's liability for injuries caused by a machine sold by its predecessor, the Third Circuit reasoned:
The general rule is that "a mere sale of corporate property by one company to another does not make the purchaser liable for the liabilities of the seller not assumed by it." ... There are, however, certain exceptions to this rule. Liability for obligations of a selling corporation may be imposed on the purchasing corporation when (1) the purchaser expressly or impliedly agrees to assume such obligations; (2) the transaction amounts to a consolidation or merger of the selling corporation with or into the purchasing corporation; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability for such obligations.
Shane v. Hobam, Inc., 332 F. Supp. 526, 527-528 (E.D.Pa.1971) (citations omitted) (decided under New York Law)."
Id. 506 F.2d at 363-4.
The court recognized that under strict corporate law principles the transaction between Rockwell and TMW was not a consolidation, merger, or continuation, since to qualify as any of those TMW would have had to cease to exist at the time of the sale, and it was undisputed that TMW's dissolution took eighteen months to complete. Nevertheless, the court concluded that in light of Farris v. Glen Alden Corp., 393 Pa. 427, 143 A.2d 25 (1958)
the Pennsylvania courts would be guided by "public policy considerations rather than by a mere procrustean application of (corporate) formalities." Knapp, supra, 506 F.2d at 369. In applying public policy considerations, the court found a defacto merger to exist because a) while technically continuing to exist after the sale of its assets, TMW's existence lacked real substance since its sole business was to cease doing business as soon as practicable, whereas Rockwell had essentially continued the TMW business; and b) Rockwell was in a better position to absorb the loss since it could have sought assignment of TMW's insurance policy providing coverage for injuries of this sort.
Our case is similar to Knapp in that technically there was no merger, consolidation, or continuation here. However, plaintiffs go further and say, in effect, that it is on all fours with Knapp because Korad, like Rockwell, has continued its predecessor's business substantially without change in name or manufacturing or marketing practices. Assuming that to be the case, and even accepting plaintiffs' assertion that RH has a continuing financial interest in Korad as a result of the sale of raw materials and royalty rights by RH to Korad, there nevertheless remains a critical distinction between this case and Knapp. The predecessor here, RH, appears to have continued as a substantial on-going business entity unlike TMW in the Knapp case, which became a mere shell. RH has filed an appearance in this suit and is actively defending the claim. Berridge admits, in fact stresses, that RH continues to supply materials to Korad, to receive royalty payments from their acrylic film sales, and to consult with Korad on product failure cases. Moreover, the agreement of sale refers to RH as a general manufacturer of chemicals, plastics, and related materials desirous of selling one aspect of its business, namely, its acrylic film business. In contrast to the predecessor in Knapp which remained anything but a going business concern following its sale, here, plaintiffs have an apparently solvent existing party from whom to seek satisfaction, and are not in the position of the plaintiff in Knapp who was faced with "the melancholy prospect of being barred from his day in court unless Rockwell (was) held subject to suit." Knapp, supra, 506 F.2d at 368.
Under the circumstances in Rockwell, we can appreciate the significance of its having substantially continued its predecessor's business. But here we think that the degree of continuation or financial inter-dependence thus far evident in the Korad-RH relationship, or that which might be developed with further discovery, is immaterial in view of the fact that the entity which sold the product, and therefore the one which should be burdened with the primary responsibility for defects therein, is an on-going business apparently capable of satisfying the claim. In short, policy considerations suggest to us that as between two on-going businesses of the type involved here, who as far as the record is concerned are equally capable of responding to a claim, the risk of loss should fall on the party who marketed the product. And we believe that this is precisely how the risk would have been apportioned in Knapp had TMW been a viable defendant. Therefore, the motion for partial summary judgment will be granted as to claims arising out of roofs the construction of which was completed prior to March 24, 1976, the date Korad first sold Korad film.
Korad also seeks partial summary judgment as 1) those roofs the construction completion date of which cannot be specified at this time by plaintiffs; and 2) those roofs which have not evidenced damage and for which plaintiffs seek declaratory judgment in their prayer for relief. The first of these motions will be denied, for, as plaintiffs point out, they have not yet had the benefit of complete discovery. At time of trial they will, of course, have to adduce proof that all roofs for which they seek recovery from Korad were completed after March 24, 1976.
The second motion, however, will be granted in essence. We have reviewed the declaratory judgment statute and the cases pertinent thereto, and conclude that this case is simply not appropriate for that device. Obviously there will be disputed issues of fact surrounding each and every roof failure. Hence, it is questionable whether any benefit will be derived by the use of a declaratory judgment action. To the extent that facts are determined in these proceedings which will be relevant to later cases, if any, between the same parties, the doctrine of collateral estoppel will be available. Moreover, plaintiffs can seek to amend their complaint as other damaged roofs are discovered. For these reasons, that aspect of plaintiffs' prayer for relief seeking declaratory judgment on all roofs which similarly deteriorate in the future will be stricken.
An appropriate order will be entered.
ORDER OF COURT
AND NOW, this 6th day of August, 1981, for the reasons set forth in an opinion filed by the court in the within matter on August 5, 1981, IT IS ORDERED that the motion to dismiss filed by the defendant Berridge Manufacturing Co. be, and the same hereby is, denied; and
IT IS FURTHER ORDERED that the motion for partial summary judgment filed by defendant and third-party plaintiff Korad, Inc. be, and the same hereby is, granted in part and denied in part, as specifically set forth in the aforesaid opinion.