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MENACHO v. ADAMSON UNITED CO.

August 19, 1976

Victor MENACHO, Plaintiff,
v.
ADAMSON UNITED COMPANY et al., Defendants



The opinion of the court was delivered by: COOLAHAN

 This case comes before the Court on motion for summary judgment by defendants Adamson United Company, United Engineering & Foundry Co., and Wean United, Inc., pursuant to Fed.R.Civ.P. 56. Movants claim they cannot be held liable as a matter of law for the injuries sustained by plaintiff while cleaning a machine manufactured by movants' predecessor. Plaintiff and defendant Zurn Industries, Inc. -- Div. of EEMCO *fn1" contend that movants are either a continuation of, or a corporation created by merger with, the corporation that manufactured the machine which caused plaintiff's injuries, and can therefore be held liable under the doctrine of successor corporations enunciated in McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 264 A.2d 98 (L.Div. 1972), aff'd per curiam, 118 N.J.Super. 480, 288 A.2d 585 (App.Div.1972), and reinterpreted in Wilson v. Fare Well Corp., 140 N.J.Super. 476, 356 A.2d 458 (L.Div.1976), leave to appeal denied (unpublished order, Docket No. AM-599-75, July 1, 1976). This motion requires the Court to determine the effect of the recent Wilson opinion on prevailing New Jersey law.

 The present action is one brought in this Court's diversity jurisdiction. 28 U.S.C. § 1332(a). *fn2" In diversity jurisdiction, a federal court is bound to apply the conflict of laws rule of the State in which it sits. Klaxon Co. v. Stentor Electrical Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). Therefore, the Court must apply New Jersey's conflict of laws rule. The New Jersey conflict rule is to apply a weighing of governmental interests test patterned after Restatement 2d, Conflict of Laws. See, Heavner v. Uniroyal, Inc., 63 N.J. 130, 305 A.2d 412 (1973); Rose v. Port of N.Y. Authority, 61 N.J. 129, 293 A.2d 371 (1972); Henry v. Richardson-Merrell, Inc., 508 F.2d 28 (3rd Cir. 1975). However, movants argue that New Jersey substantive law and Ohio substantive law are identical on the question before the Court so that new Jersey law may be applied. See, McKee v. Harris-Seybold Co., supra (where the very same States were involved in exactly the same question as now confronts the Court; there the New Jersey court applied its own substantive law). *fn3" The Court agrees with the parties that the substantive law of the two States is similar on this point and, therefore, will do what the New Jersey court did in the same situation and apply New Jersey substantive law. *fn4"

 On January 3, 1973, Victor Menacho, the plaintiff, was employed as a machine operator by Continental Plastics and Chemical Co. in Avenel, New Jersey. While cleaning a plastic null machine, his hand became lodged between two rollers. When the machine was finally stopped, plaintiff had sustained severe injuries to his right hand, which resulted in the amputation of three fingers. Plaintiff claims the machine was defective and lacked adequate safeguards.

 The plastic null machine was originally manufactured in May, 1920, by the Adamson Machine Co. of Ohio. (Westin affidavit, Sept. 10, 1975; Leyhane affidavit, Sept. 22, 1975.) It was purchased by plaintiff's employer in 1966 after it had been rebuilt by Erie Engine Co., a subsidiary of Zurn Industries. *fn5" Plaintiff contends that the rebuilding of the machine did not change it, neither correcting nor worsening the alleged defect. Movants claim that the rebuilder changed the machine substantially so that it could perform functions for which the machine was not originally designed. These facts are in dispute and can only be resolved by a jury. However, the fact that the machine was rebuilt does have a bearing on the present motion.

 On December 31, 1944, Adamson Machine Co. agreed to sell all its assets to United Engineering & Foundry Co., a Pennsylvania corporation, or to United Engineering & Foundry Company's wholly owned subsidiary, Adamson United Co., an Ohio corporation. *fn6" The sale was actually consummated in January, 1946, at which time Adamson Machine Co. was liquidated. Adamson United continued in the same business as Adamson Machine Co. On April 21, 1970, Adamson United merged with its parent corporation, United Engineering & Foundry Co. *fn7" Almost two years later, on December 15, 1971, United Engineering & Foundry Co. merged with Wean Industries, Inc., to become Wean United, Inc. *fn8" (See affidavit of Henry C. Westin, counsel for Wean United, Inc., Sept. 10, 1975.)

 Plaintiff contends that because Adamson Machine Co., the manufacturer of the machine which caused plaintiff's injury, is no longer in existence, the corporation which purchased its assets or those which were subsequently merged with the purchaser of Adamson Machine Company's assets, should be held to have assumed Adamson Machine Company's tort liability.

 The issue before the Court is whether tort liability should be imposed upon the movant corporations if it is found that Adamson Machine Co. had manufactured a defective machine, or one without adequate safeguards. The leading case in New Jersey on this subject before Wilson was McKee v. Harris-Seybold Co., supra.

 The court in McKee succinctly stated the position accepted by a majority of jurisdictions on this question. The court said (109 N.J.Super. at 561, 264 A.2d at 101):

 
"It is the general rule that where one company sells or otherwise transfers all its assets to another company the latter is not liable for the debts and liabilities of the transferor, including those arising out of the latter's tortious conduct, except where: (1) the purchaser expressly or impliedly agrees to assume such debts; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently in order to escape liability for such debts."

 The court added that "[a] fifth exception, sometimes incorporated as an element of one of the above exceptions, is the absence of adequate consideration for the sale or transfer." See also, W. Fletcher, Cyclopedia of the Law of Private Corporations, §§ 7122-7124 (Rev.ed.1962); 19 Am.Jur.2d § 1546.

 In order to determine whether the sale of assets in the present case falls within one of the five McKee exceptions to the general rule of nonliability it will be necessary to examine the circumstances of the sale of Adamson Machine Company's assets. It is clear that if one of these exceptions applies to Adamson United Co., then the subsequent de jure mergers would have retained liability for the corporations that succeeded Adamson United Co. right down to the present company, Wean United, Inc.

 The contract of sale between Adamson Machine Co. (hereinafter Adamson) and United Engineering & Foundry Co. (hereinafter United) made it clear that United planned to carry on, through its subsidiary Adamson United Co., the same business previously conducted by Adamson. See, Contract of Sale (Dec. 31, 1944), p. 2 (appended to Westin affidavit). It was agreed that Adamson would sell all its assets, including all its real estate, buildings, articles, machinery, tools, implements, appliances, patents, drawings, designs, trademarks, good will, inventories, raw materials, stock, work in progress, and accounts receivable as of January 1, 1945. *fn9" Upon completion of the sale Adamson was to be liquidated. *fn10" The purchase price was $500,000 cash. There was no exchange of stock. The name of the new corporation, created just a few days before the purchase, was so similar to the selling corporation's as to give rise to the inference that the purchasing corporation was attempting to capitalize on Adamson's good will and continue in much the same way as Adamson.

 The contract specifically stated that Adamson's vice president, F. L. Dawes, who signed the contract of sale for the company, and Andrew Hale, another management-level employee, were to be retained by Adamson United Co. In fact, the contract made the sale contingent upon their availability to work for Adamson United. The contract reads (p. 6):

 
"It is understood that United is not familiar with the rubber machinery business and it is agreed that the consummation and carrying out of this Agreement by the purchaser is contingent upon the purchaser obtaining the services for a period of years of F.L. Dawes and Andrew Hale, and, unless it is certain that both of these men are free to accept such employment, free and clear of any obligation or restriction of the War Manpower Commission, the War Production Board or other Government agency, this Agreement shall, at the option of the purchaser, be of no force or effect."

 The contract also specifically disclaimed assumption of any liabilities of Adamson. It states:

 
"It is understood and agreed that neither United nor the new corporation to be organized by it assumes any liabilities or obligations whatsoever of Adamson, except the obligation to complete orders in process of manufacture or previously accepted for sale or manufacture by Adamson, all of which the purchasing corporation shall prosecute to completion for its own account. Except as to any such obligations, Adamson will pay all its corporate debts and discharge all its corporate liabilities and obligations, to the end that there shall not be at any time any lien, charge or encumbrance whatsoever upon any of the property and assets hereby acquired from Adamson."

 The contract does call for the retention of $25,000 to cover the cost of contingent liability over the amount owed to creditors and the amount owed in taxes. This sum obviously was intended to cover any tort claims from those who might become injured by Adamson's products. The contract states (p. 4):

 
"To assure its responsibility for the full discharge of all its obligations and liabilities, Adamson, in the process of liquidation and dissolution, shall, for a period of not less than one (1) year after the transfer of its assets, retain in its treasury a sum of not less than Twenty-five Thousand Dollars ($25,000.00), which shall be over and above the amount of its liabilities to creditors, plus the amount of its federal tax liability as shown by its closing statement of assets and liabilities."

 None of the directors or stockholders of Adamson became directors or stockholders of Adamson United. Westin affidavit, para. 9.

 These facts give no indication of fraud on the part of either contracting party. Obviously, there was no attempt to avoid satisfaction of a tort claim that would not occur for almost another 30 years. The $25,000 contingent liability fund is dispositive of a lack of intent to defraud tort claimants in this situation. Thus exception 4 does not apply. Nor does exception 5 apply, because the consideration, $500,000, appears perfectly adequate.

 The contract makes no explicit nor implicit assumption of tort liability. In fact, the clause disclaiming Adamson's liability can be interpreted as disclaiming tort liability as well as contractual liability. However, a disclaimer of tort liability will not prevent a corporation from having liability imposed on it, if there has been either a ...


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