On certification to the Superior Court, Appellate Division, whose opinion is reported at 171 N.J. Super.. 261 (1979).
For affirmance -- Justices Sullivan, Pashman, Clifford, Schreiber, Handler and Pollock. For reversal -- None. The opinion of the Court was delivered by Clifford, J. Schreiber, J., concurring. Schreiber, J., concurring in the result.
This products liability case implicates principles of successor corporation liability. We are called upon to formulate a general rule governing the strict tort liability of a successor corporation for damages caused by defects in products manufactured and distributed by its predecessor. The Appellate Division, in an opinion reported at 171 N.J. Super. 261 (1979), devised the following test, based essentially on the holding of the Supreme Court of California in Ray v. Alad Corp., 19 Cal. 3d 22, 560 P. 2d 3, 136 Cal.Rptr. 574 (1977):
[W]here, as in the present case, the successor corporation acquires all or substantially all the assets of the predecessor corporation for cash and continues essentially the same manufacturing operation as the predecessor corporation the successor remains liable for the product liability claims of its predecessor. [171 N.J. Super. at 278.]
In affirming the judgment below we adopt substantially this test for determining successor corporation liability in the factual context presented.
On August 18, 1975 plaintiff Efrain Ramirez was injured while operating an allegedly defective power press on the premises of his employer, Zamax Manufacturing Company, in Belleville, New Jersey. The machine involved, known as a Johnson Model 5, sixty-ton punch press, was manufactured by Johnson Machine and Press Company (Johnson) in 1948 or 1949. As a result of the injuries sustained plaintiffs filed suit against Amsted Industries, Inc. (Amsted) as a successor corporation to Johnson, seeking to recover damages on theories of negligence, breach of warranty and strict liability in tort for defective
design and manufacturing.*fn1 After discovery had been completed, Amsted moved for summary judgment on the ground that the mere purchase of Johnson's assets for cash in 1962 did not carry with it tort liability for damages arising out of defects in products manufactured by Johnson. The trial court granted summary judgment for Amsted, holding that there is no assumption of liability when the successor purchases the predecessor's assets for cash and when the provisions of the purchase agreement between the selling and purchasing corporations indicate an intention to limit the purchaser's assumption of liability. That holding was consistent with the traditional rule governing the liability of successor corporations. See McKee v. Harris-Seybold Co., 109 N.J. Super. 555 (Law Div.1970), aff'd 118 N.J. Super. 480 (App.Div.1972).
On their appeal to the Appellate Division plaintiffs argued that a corporation that purchases the assets of a manufacturer and continues the business of the selling corporation in an essentially unchanged manner should not be allowed to use exculpatory contractual language to avoid liability for contingent personal injury claims arising out of defects in the predecessor's product. The Appellate Division agreed and reversed the trial court. Although it recognized that the purchase agreement manifested a clear intent to negate any assumption of liability by Amsted for contingent product claims, the court below took notice of "[t]he recent trend towards a rule imposing liability on the successor corporation without regard to the niceties of corporate transfers where the successor has acquired and has continued the predecessor's commercial activity in an essentially unchanged manner." 171 N.J. Super. at 269-70. Taking cognizance of New Jersey's position "in the vanguard"
advancing the principle of enterprise liability and the philosophy of spreading the risk to society for the cost of injuries from defective products, the Appellate Division reasoned that the result in this troublesome area of products liability law should not be controlled by the form of the corporate transfer nor by exculpatory language in the purchase agreement. Id. at 275-76. It concluded that because Amsted ultimately acquired all or substantially all the assets of Johnson and continued essentially the same manufacturing operation, Amsted could not as a matter of law avoid potential liability for injuries caused by defects in the Johnson product line, notwithstanding an intervening ownership by an intermediate corporation. Id. at 278. It therefore remanded the cause for trial. We granted Amsted's petition for certification. 82 N.J. 298 (1980).
Defendant's contention in essence is that the question of whether the debts and liabilities of the selling corporation succeed to the corporation that acquires its manufacturing assets should be controlled by the form of the acquisition and the language of the agreement between the selling and purchasing corporations. Amsted urges that although it ultimately acquired the assets of Johnson, the actual manufacturer of the press that allegedly caused plaintiff's injuries, it is not a successor corporation for purposes of assuming responsibility for liability claims arising out of defects in Johnson's products. In evaluating defendant's contentions we must examine the corporate history of Johnson and trace the assets of Johnson's manufacturing business to their ultimate acquisition by Amsted in 1962.
As indicated above, the machine that caused the injury was manufactured in 1948 or 1949 by Johnson Machine and Press Company of Elkhart, Indiana. In 1956 Johnson transferred all of its assets and liabilities to Bontrager Construction Company (Bontrager), another Indiana corporation. Johnson transacted
no business as a manufacturing entity following its acquisition by Bontrager, but Bontrager did retain a single share of Johnson common stock in order to continue the Johnson name in corporate form. Bontrager's primary activity then became the manufacture of the Johnson press line.
By purchase agreement dated August 29, 1962, Amsted acquired all of the assets of Bontrager, including all the Johnson assets that Bontrager had acquired in 1956, plus the one share of Johnson stock. The purchase price was $1,200,406 in cash.*fn2 The assets purchased by Amsted in the 1962 transaction included the manufacturing plant in Elkhart, which had been operated by Johnson prior to its transfer to Bontrager in 1956. Amsted also acquired all of Bontrager's inventory, machinery and equipment, patents and trademarks, pending contracts, books and records, and the exclusive right to adopt and use the trade name "Johnson Machine and Press Corporation." Bontrager further agreed to "use its best efforts to make available" to Amsted the services of all of its present employees except its three principals, who covenanted not to compete with Amsted for a period of five years.
In addition, the August 1962 agreement provided that Amsted would assume responsibility for certain specified debts and liabilities necessary to an uninterrupted continuation of the business. Included, however, was the following reservation:
It is understood and agreed that Purchaser shall not assume or be liable for any liability or obligations other than those herein expressly assumed by Purchaser; all other liabilities and obligations of Seller shall be paid, performed and discharged by Seller.
This limitation on the express assumption of liability was further emphasized in another provision of the contract, that Amsted was "not assuming any liability, debt or obligation of [Bontrager] except those expressly required to be assumed * * * under [the] agreement and that [Bontrager] shall continue to be solely responsible for all its other known or unknown liabilities, debts and obligations arising prior or subsequent to the Closing." The purchase agreement likewise addressed the question of repair of defective products:
Defective Products. All machines sold by Seller on or prior to the Closing Date shall be deemed for the purpose of this Section 8 to be products of Seller, and Seller alone shall be responsible, to the extent of the warranties heretofore given by Seller to its customers, for all liability for the correction and repair of defects in material or workmanship thereof involving costs and expenses in excess of $50 per machine. Purchaser agrees to perform the necessary work to correct and repair the defects involved in such claims for and on behalf of Seller, and Seller agrees to assume and pay for the costs and expenses occasioned by such work to the extent of the warranties heretofore given by Seller to its customers * * *.
Thus it is clear that Amsted expressly declined to assume liability for any claims arising out of defects in products manufactured by its predecessors.
Following the 1962 acquisition Amsted manufactured the Johnson press line through its wholly-owned subsidiary, South Bend Lathe, Inc. (South Bend I), in the original Johnson plant in Elkhart. The Bontrager assets assigned by Amsted to South Bend I included the single outstanding share of Johnson common stock that had been transferred to Bontrager in 1956. The corporate existence of Johnson was dissolved in July 1965 pursuant to the Indiana General Corporation Act, with Amsted being the sole shareholder. Prior to the dissolution Amsted's officers had served as the officers and directors of the corporate shell that was Johnson Press.
In September 1965 South Bend I, the Amsted subsidiary that had been manufacturing the Johnson product line, was dissolved and its assets and liabilities were assumed by Amsted. The manufacturing business was operated by Amsted until June 1975, at which time the business was sold to a newly-formed Indiana corporation also named South Bend Lathe, Inc. (South
Bend II). As part of this transaction Amsted agreed to indemnify South Bend II for any losses arising out of machinery manufactured and sold prior to the date of closing. Amsted acknowledges that by virtue of this indemnity agreement, it is responsible for the defense against and payment of any liability claims against South Bend II arising out of any defects in the Johnson product line.
Amsted urges this Court to judge its potential liability for defective Johnson products on the basis of the traditional analysis of corporate successor liability. Although not heretofore treated by this Court the general principle has been accepted in New Jersey 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." Menacho v. Adamson United Co., 420 F. Supp. 128, 131 (D.N.J.1976) (applying New Jersey law); Jackson v. N.J. Mfrs. Ins. Co., 166 N.J. Super. 448, 454 (App.Div.1978); N.J. Transp. Dep't v. PSC Resources, Inc., 175 N.J. Super. 447, 454 (Law Div.1980); Wilson v. Fare Well Corp., 140 N.J. Super. 476, 484 (Law Div.1976); McKee, supra, 109 N.J. Super. at 561. See also 15 W. Fletcher, Cyclopedia of the Law of Private Corporations, § 1722 at 187 (rev. perm. ed. 1973); 19 Am.Jur. 2d Corporations § 1546 at 922-24 (1965). However, there are four established exceptions to the general rule of corporate successor nonliability in asset acquisitions. Under the traditional approach the purchasing corporation will be held responsible for the debts and liabilities of the selling corporation, including those arising out of defects in the latter's products, where (1) the purchasing corporation expressly or impliedly agreed to assume such debts and liabilities; (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 responsibility for
such debts and liabilities. Menacho v. Adamson United Co., supra, 420 F. Supp. at 131; Jackson v. N.J. Mfrs. Ins. Co., supra, 166 N.J. Super. at 454; N.J. Transp. Dep't v. PSC Resources, Inc., supra, 175 N.J. Super. at 453; Wilson v. Fare Well Corp., supra, 140 N.J. Super. at 484; McKee, supra, 109 N.J. Super. at 561. In McKee supra, which is presently recognized as the seminal New Jersey case on corporate successor liability in the products context, 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." 109 N.J. Super. at 561. Courts applying this traditional corporate law approach have examined the nature and consequences of the asset acquisition in order to determine whether successor liability can be imposed upon the purchasing corporation under one or more of the exceptions to the general rule of nonliability.
In recent years, however, the traditional corporate approach has been sharply criticized as being inconsistent with the rapidly developing principles of strict liability in tort and unresponsive to the legitimate interests of the products liability plaintiff. Courts have come to recognize that the traditional rule of nonliability was developed not in response to the interests of parties to products liability actions, but rather to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions, as well as to determine successor corporation liability for tax assessments and contractual obligations of the predecessor. Turner v. Bituminous Cas. Co., 397 Mich. 406, 418, 244 N.W. 2d 873, 878 (1976); see Cyr v. B. Offen & Co., Inc., 501 F.2d 1145, 1152 & n. 12 (1st Cir. 1974); Appelstein v. United Board & Carton Corp., 60 N.J. Super. 333, 349-53 (Ch.Div.), aff'd o.b., 33 N.J. 72 (1960) (finding merger or consolidation in order to insure dissenting stockholders their appraisal rights).
Strict interpretation of the traditional corporate law approach leads to a narrow application of the exceptions to nonliability, and places unwarranted emphasis on the form rather than the
practical effect of a particular corporate transaction. The principal exceptions to nonliability outlined in McKee, supra, condition successor liability on a determination of whether the transaction can be labeled as a merger or a de facto merger, or whether the purchasing corporation can be described as a mere continuation of the selling corporation. Traditionally, the triggering of the "de facto merger" exception has been held to depend on whether the assets were transferred to the acquiring corporation for shares of stock or for cash -- that is, whether the stockholders of the selling corporation become the stockholders of the purchasing corporation. See Travis v. Harris Corp., 565 F.2d 443, 447 (7th Cir. 1977); Shannon v. Samuel Langston Co., 379 F. Supp. 797, 801 ...