Appeal from the District Court of the Virgin Islands, District of St. Croix, D.C. Civil No. 84-078.
Before: HUNTER, WEIS, and MANSMANN, Circuit Judges
In this appeal we examine a claim caught up in the swirling cross currents of products liability and corporate successor responsibility. Plaintiff was injured while using an allegedly defective product manufactured by a now defunct corporation that had sold a substantial part of its assets to defendant. Reasoning that in practical effect defendant had carried on the business of the original manufacturer and therefore should assume its liabilities, the district court refused to dismiss the case. We conclude that this continuity of enterprise theory, adopted by a minority of jurisdictions, is an unsound exception to the general rule of corporate successor liability. We also determine that defendant did not owe a duty to warn under the circumstances here. Accordingly, in conformance with the answers to controlling questions of law as framed by the district court under 28 U.S.C. § 1292(b), we will direct an entry of judgment for defendant.
In response to motions submitted to it, the district court entered partial summary judgment in favor of plaintiff Michael Polius, holding that defendant Clark Equipment Company could be found liable as a successor to the Baldwin-Lima-Hamilton Corporation.*fn1 The Court also entered partial summary judgment in favor of defendant, concluding that it had no duty to warn under the circumstances.
The plaintiff's injury occurred in November 1983, when his foot caught in the clutch assembly of the winding drum of a crane. The machine had been designed and manufactured in 1969 by Baldwin-Lima-Hamilton (Baldwin) and sold to a distributor, Hoffman Equipment Company, in 1970. The plaintiff's employer, General Engineering Company, was the third user of the crane, two other construction companies have previously owned and operated it.
At the time it initially manufactured and sold the crane to the distributor, Baldwin was a large corporation functioning through seven divisions. All of its stock was owned by Armour and Company, which in turn was wholly owned by Greyhound Corporation.
In 1971, as a matter of corporate development, Greyhound decided to sell Baldwin's assets. In April of that year, defendant Clark Equipment Company purchased the construction equipment division for $45,656,000 cash.*fn2 The agreement provides that Clark would receive all of the assets of Baldwin "required to operate the business" of the division "in the manner in which [it] is currently being operated." The sale included two manufacturing facilities, inventory, accounts receivable, customer lists, and good will as well as trade names, patents, and trademarks of Baldwin.
Clark assumed liability for the Baldwin division's trade accounts, payroll, vacation pay, and some taxes and selected contractual obligations. The sales agreement did not transfer Baldwin's service contracts. Clark expressly refused to assume any tort liabilities, and Baldwin and Armour agreed to indemnify Clark for all claims arising from the division's operations.
No sale or exchange of stock took place, nor did officers or directors of Baldwin become officers or directors of Clark. The agreement did not mandate dissolution, but Baldwin was required to use its best efforts to keep the division's employees available for Clark.
By 1972, when it changed its name to "BLH, Inc.," Baldwin had sold the six remaining divisions and had become an inactive corporate shell. Formal dissolution occurred in 1976, some seven years before the plaintiff's injury.
After the purchase, Clark manufactured several large cranes, apparently using its own name, and at least for a time, Baldwin's as well. Clark provided replacement parts to its distributors but did not sell directly to crane owners, nor did it service the machines except through distributors. The purchase proved an unhappy one for Clark, and after suffering substantial losses, it ceased manufacturing cranes in 1981.
In February 1984, a year after he was injured by the Baldwin crane, plaintiff filed suit against Clark, alleging strict liability and failure to warn.*fn3 Clark tendered the defense to Armour, which accepted it and provided representation.
Both parties moved for summary judgment. The district court carefully reviewed the various theories of corporate successor liability and, being "uncomfortable" with the "product line" approach, rejected the cases which espoused it. The district court concluded, however, that the "continuity of enterprise" rule was applicable because Clark had assumed the liabilities and obligations "ordinarily necessary for the uninterrupted continuation of normal business operations." 608 F. Supp. 1541, 1546 (D.V.I. 1985). Moreover, "by reaping the benefits of the predecessor corporation . . . the successor should bear some of the burdens of continuity." Id. Added to those considerations was "the public policy underlying strict products liability [which] is to protect the injured party by placing the burden on the party most able to bear the loss by spreading the risk." Id.
Because it believed that "Armour [was] the entity to whom the risk of loss should be shifted under a public policy argument in the context of this case," the district court emphasized the importance of the indemnification agreement with Armour, which had owned Baldwin and caused its dissolution. Id. Based on this line of reasoning, the district court concluded that Clark could be liable for the torts of Baldwin.
The summary judgment motions also included the defendant's contention that it could not be liable under the failure to warn theory. The district court agreed with defendant, noting that Clark neither assumed Baldwin's service contracts nor had any other contract with the plaintiff's employer. Furthermore, the record did not show that Clark had actual notice of a defect. Accordingly, on this issue, the court granted partial summary judgment for defendant.
On the parties' motions, the district court formulated the following controlling questions of law for an interlocutory appeal of its order pursuant to 28 U.S.C. § 1292(b):
"1. Did the district court properly grant plaintiff's motion for partial summary judgment where it held that plaintiff Michael Polius, injured by an allegedly defective crane manufactured by Baldwin-Lima-Hamilton Corporation ("BLH"), may recover from defendant Clark Equipment Company, the corporation that purchased substantially all of the assets of the construction equipment division of BLH, under the continuity of enterprise exception to the general rule of corporate successor liability?
"2. Did the district court properly grant Clark's motion for partial summary judgment where it held that Clark did not have a duty to warn plaintiff Michael Polius of the allegedly defective condition of the crane that caused the injury?"
On appeal the parties agree that the law of the Virgin Islands should apply to the case at hand, and we accept that choice of law. Where the Virgin Islands has no governing statute, as here, 1 V.I.C. § 4 directs us to examine the common law, first as expressed in the Restatements, and then as generally understood and applied in the United States. Where the Restatement is silent and a split of authority exists, courts should select the sounder rule. Wells v. Rockefeller, 728 F.2d 209 (3d Cir. 1984).
Describing the characteristics of the corporate body, Blackstone wrote that "all the individual members that have existed from the foundation to the present time, or that shall ever hereafter exist, are but one person in law, a person that never dies; in like manner as the river Thames is still the same river, though the parts which compose it are changing every instant." 1 W. Blackstone, Commentaries *467-469. A corporation whose stock is actively traded on an exchange has a constantly changing ownership; however, that fluctuation does not affect the corporation's liability for its past actions.
The same concepts of continuing life and accountability underlie the law governing corporate merger through the purchase of stocks. Liability continues because the corporate body itself survives. A different rule applies when one corporation purchases the assets of another. Under the well-settled rule of corporate law, where one company sells or transfers all of its assets to another, the second entity does not become liable for the debts and liabilities, including torts, of the transferor. 15 W. Fletcher, Cyclopedia of the Law of Private Corporations, § 7122 (Perm. Ed. 1983).
Four generally recognized exceptions qualify this principle of successor nonliability. The purchaser may be liable where: (1) it assumes liability; (2) the transaction amounts to a consolidation or merger; (3) the transaction is fraudulent and intended to provide an escape from liability; or (4) the purchasing corporation is a mere continuation of the selling company. See Philadelphia Elec. Co. v. Hercules, Inc., 762 F.2d 303, 308-09 (3d Cir. 1985); Knapp v. North American Rockwell Corp., 506 F.2d 361, 363-64 (3d Cir. 1974). See generally, Note, Products Liability-Successor Corporations, 33 Kan. L. Rev. 791, 792-97 (1985).
The successor rule was designed for the corporate contractual world where it functions well. It protects creditors and dissenting shareholders, and facilities determination of tax responsibilities, while prompting free alienability of business assets. See Phillips, Product Line Continuity and Successor Corporation Liability, 58 N.Y.U. L. Rev. 906, 909 (1983). The doctrine reflects the general policy that liabilities adhere to and follow the corporate entity. However, when the form of the transfer does not accurately portray substance, the courts will not refrain from deciding that the new organization is simply the older one in another guise. In that instance, the continuation approach articulated by Blackstone remains applicable. Note, Postdissolution Product Claims and the Emerging Role of Successor Liability, 64 Va. L. Rev. 861, 866 (1978).
Application of traditional corporate doctrine to tort actions, however, has caused some dissatisfaction. Advocates of change have proposed variations that seek a responsible defendant to satisfy the claims of persons injured by corporate products. Cyr v. B. Offen & Co., Inc., 501 F.2d 1145 (1st Cir. 1974).
The New Jersey Supreme Court observed that traditional corporate law limits the number of those subject to liability "and places unwarranted emphasis on the form rather than the practical effect of a particular corporate transaction." Ramirez v. Amsted Industries, Inc., 86 N.J. 332, 341-43, 431 A.2d 811, 816 (1981). From the perspective of the injured plaintiff, the Michigan Supreme Court commented, "distinctions between types of corporate transfers are wholly unmeaningful." Turner v. Bituminous Casualty Co., 397 Mich. 406, 419, 244 N.W.2d 873, 878 (1976).
These observations were strongly influenced by the social and economic views espoused by the Restatement (Second) of Torts § 402A and the California courts. The supreme court of that state, unhappy with the traditional rule of corporate successor liability, concluded that "'the paramount policy to be promoted by [strict liability] is the protection of otherwise defenseless victims of manufacturing defects and the spreading throughout society of the cost of compensating them.'" Ray v. Alad Corp., 19 Cal. 3d 22, 31, 560 P.2d 3, 8, 136 Cal. Rptr. 574 (1977), quoting Price v. Shell Oil Co., 2 Cal. 3d 245, 251, 466 P.2d 722, 725, 85 Cal. Rptr. 178 (1970). The court justified extension of liability to a successor corporation not otherwise responsible because of (1) the virtual destruction of the plaintiff's remedies against the original manufacturer through its acquisition by the successor; (2) the successor's ability to assume the original manufacturer's risk spreading role; and (3) the fairness of requiring the successor to assume responsibility for defective products that had been the original manufacturer's burden and therefore part of the good will the successor continued to employ in the operation of the business. Id. at 33-34, 560 P.2d at 9.
Following this approach, a successor that continues to manufacture the same type of article as its predecessor becomes liable "for defects in units of the same product line previously manufactured" by the predecessor. 19 Cal.3d at 34, 560 P.2d at 11. This "product line" exception imposes liability where traditional corporate law does not. See Note, Products Liability of Successor Corporations: A Policy Analysis, 58 Ind. L. J. 677, 678-82 (1982); Note, 64 Va. L. Rev. at 876-78.
Another alternative emerged from Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W.2d 873 (1976), where the Michigan Supreme Court expanded the traditional exceptions to increase a successor's exposure in products liability cases. The court reasoned that whether the corporate transaction was an acquisition of assets for cash, or a traditional form of merger, was irrelevant from the standpoint of the injured party.
Applying that rationale, the court found a "continuity of enterprise" where the successor had retained key personnel, assets, and general business operations as well as the company name, and had assumed liabilities and obligations of the seller ordinarily necessary for normal business operations. Furthermore, in Turner the successor held itself out to the world as an effective continuation of the seller, which had ceased operations and dissolved soon after the sale.*fn4
The Turner dissent argued that the analysis should focus, not on the continuation of the business operation, but on the continuation of the corporate entity. Moreover, the plaintiff was in the same situation as any other claimant with a judgment against a corporation that had simply dissolved, leaving nothing behind.
In this circuit, New Jersey has adopted the product line exception. Ramirez v. Amsted Industries, Inc., 86 N.J. 332, 431 A.2d 811 (1981). The state supreme court found fundamental differences between the "continuity" theory of Turner and the product line approach of Ray v. Alad Corp. Turner merely represented an extension of the traditional rule, while Alad abandoned it and looked instead to the successor's manufacture of products of the same nature as that which injured the plaintiff. The New Jersey court recognized difficulties with the product line approach, but believed they should not "overshadow the basic social policy, now so well-enhanced in our jurisprudence, that favors imposition of the costs of injuries from defective products on the manufacturing enterprise and consuming public rather than on the innocent injured party." 86 N.J. at 354, 431 A.2d at 823.
A panel of the Pennsylvania Superior Court also adopted the product line theory, relying on the need to provide recovery for victims. Dawejko v. Jorgensen Steel Co., 290 Pa. Super. 15, 434 A.2d 106 (1981). The Pennsylvania Supreme Court has not yet passed on the issue.
Similarly, the Delaware Supreme Court has not addressed these minority doctrines. In Fehl v. S.W.C. Corp., 433 F. Supp. 939, 946-47 (D. Del. 1977), the district court noted the absence of state cases defining products liability exposure of successor corporations but after a thorough review, concluded that a continuation theory would be applied narrowly by Delaware courts. "It must be the same legal person having a continued existence under a new name." 433 F. Supp. at 947.
In Knapp v. North American Rockwell Corp., 506 F.2d 361 (3d Cir. 1974), we predicted that under the circumstances presented, the Pennsylvania Supreme Court would be influenced by the policy consideration of spreading the risk and would find a de facto merger. Knapp is essentially a merger case; the seller had received stock in the successor corporation as payment for the assets and was required to dissolve "as soon as practicable" after the sale. 506 F.2d at 363. Moreover, the seller's officers and employees then serving were made available to the purchaser. The concurring opinion rested on the premise that the transaction amounted to a merger under state corporate law. Knapp, therefore, does not represent a prediction that the Pennsylvania Supreme Court would join the minority of jurisdictions which have adopted either the continuity of enterprise or product line theories of liability.
In Knapp we were limited in our role as a diversity court to predicting the appropriate state law. In our role as the Supreme Court of the Virgin Islands, however, when the Restatement does not control, we must apply the law which represents the better approach, be that the minority or majority rule.
Plaintiff adopts the position of the minority jurisdictions and argues that we should jettison well-established corporate law because the claim arises from an allegedly defective product. Satisfaction of this type of claim is so important, the argument goes, that plaintiffs must be given preferred consideration in their efforts to recover damages. Thus, unlike other creditors of the selling corporation, product injury claimants may look, not only to the assets of the corporation primarily liable, but also to ...