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LA POLLO v. GE

July 15, 1987

Charles J. La Pollo, by his father and Guardian ad litem, Charles P. La Pollo, Plaintiffs
v.
General Electric Company, Ponderosa, Inc., Hobart Manufacturing Company, John Does I-V, John Doe Corporations I-V, John Doe Joint Venture, and Roe Non-Profit Corporations I-II, Defendants



The opinion of the court was delivered by: COHEN

 Presently before the court in this diversity suit for personal injuries by plaintiff, Charles J. LaPollo, is a motion by defendant Hobart Manufacturing Company, Inc. ("Hobart") for summary judgment. For the following reasons, Hobart's motion shall be granted in part and denied in part.

 On June 3, 1985, plaintiff, a restaurant employee at defendant Ponderosa, Inc. ("Ponderosa"), suffered burns and other injuries in the course of operating a deep fryer at work. It appears undisputed that the deep fryer, Model No. AK-40, was manufactured and distributed by defendant General Electric Co. ("GE") - more specifically, by GE's former Food Service Equipment Department.

 In April, 1980, after the particular deep fryer involved in this case had been manufactured and distributed by GE, Hobart purchased the assets of GE's Food Service Equipment Department. Those portions of the Purchase Agreement between Hobart and GE that have been submitted to the court indicate that Hobart was permitted to use GE's trademarks and trade names only for a period of six months after the closing date, following which time such use was prohibited. *fn1" Under a Warranty Service Agreement between GE and Hobart, Hobart agreed to provide warranty service for products sold by GE and GE agreed to reimburse Hobart for its costs in doing so. The Purchase Agreement provided that GE would indemnify Hobart against any liabilities incurred through breach of any GE warranty, and also against any tort liabilities incurred with respect to products sold by GE. *fn2" After the sale, Hobart apparently continued to use the designation AK-40 for the type of deep fryer involved in this case until the production of these deep fryers ceased.

 Plaintiff filed suit against Ponderosa, Hobart, GE, and various John Doe individuals and corporations. Plaintiff seeks to recover against Hobart on strict products-liability, breach of warranty, and negligence grounds, the latter encompassing, inter alia, the alleged failure to maintain, inspect, repair or service and the failure to warn of the dangers associated with the deep fryer.

 Hobart here moves for summary judgment, which motion is opposed by plaintiff and by Ponderosa. Hobart asserts, first, that it cannot be held liable, on strict products-liability grounds, as a successor corporation to GE, primarily because GE is still a viable entity and in fact is a party to this suit. Second, Hobart asserts that it cannot be held liable for negligence because it has not been established that Hobart serviced the particular deep fryer involved in this case. We shall discuss each of these arguments in turn.

 I. Strict Products-Liability Claim

 Established principles of corporate law provide that when one company sells or transfers its assets to another company, the purchasing company does not become liable for the debts and liabilities of the selling company, including tort liabilities, unless (1) the purchasing company assumes liability; (2) the transaction amounts to a consolidation or merger of the two companies; (3) the transaction is entered into fraudulently in order to escape from liability; or (4) the purchasing company is a "mere continuation" of the selling company. See, e.g., Polius v. Clark Equipment Co., 802 F.2d 75, 77-78 (3d Cir. 1986). Traditionally, the "mere continuation" exception has been applied when the purchasing company acquires the assets of the selling company in exchange for shares of stock, rather than for cash. See, e.g., Travis v. Harris Corp., 565 F.2d 443, 447 (7th Cir. 1977). If the selling company dissolves after its assets are acquired by a successor, a plaintiff injured by a defective product manufactured by the selling company who cannot establish that one of these four exceptions applies is, in most states, left without a remedy.

 The traditional corporate approach has been 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," Ramirez v. Amsted Industries, Inc., 86 N.J. 332, 341, 431 A.2d 811, 815 (1981). In response to these concerns, a minority of courts have imposed liability on successor corporations for the torts of their predecessors in circumstances not encompassed by the traditional exceptions to corporate successor nonliability.

 For instance, in Turner v. Bituminous Casualty Co., 397 Mich. 406, 244 N.W. 2d 873 (1976), the Michigan Supreme Court rejected the traditional distinction between an acquisition for cash and an acquisition for shares of stock, stating that "it would make better sense if the law had a common result and allowed products liability recovery in each case." Id. at 423, 244 N.W. 2d at 880. In what has been described as an expansion of the mere continuation exception, e.g. Ramirez, 86 N.J. at 345, 431 A.2d at 817, the Turner court held that the "continuity of enterprise" rather than the continuity of shareholders was the better standard. Such factors as the retention of personnel, assets, business operations, trade name, and management are relevant in determining whether there is continuity of enterprise. 397 Mich. at 429-30, N.W. 2d at 883-84.

 A second approach, known as the "product line" exception to successor nonliability, was developed by the California Supreme Court in Ray v. Alad, 19 Cal. 3d 22, 560 P.2d 3, 136 Cal. Rptr. 574 (1977), and has since been adopted by a panel of the Pennsylvania Superior Court and, more significantly for present purposes, by the New Jersey Supreme Court. See Dawejko v. Jorgensen Steel Co., 290 Pa. Super. 15, 434 A.2d 106 (1981); *fn3" Ramirez, supra. In contrast to the expanded mere continuation exception, the product line test "is concerned not with the continuation of the corporate entity as such but rather with the successor's undertaking to manufacture essentially the same line of products as the predecessor." Ramirez, 86 N.J. at 347, 431 A.2d at 819. In selecting the product line approach, the New Jersey Supreme Court reasoned that the social policies underlying strict products liability were best served by extending liability to a successor when it acquires the predecessor's business assets, continues its product line, and enjoys various concomitant benefits such as the name, good will and business reputation of the predecessor. Id. at 358, 431 A.2d at 825.

 In Ramirez, as in Ray and Dawejko, the successor corporation was the only viable corporation that plaintiff could sue; remedies against the original manufacturer had been destroyed by the successor's acquisition of its business assets. In the instant case, the predecessor corporation, GE, remains a viable entity and is a party to this suit. Therefore, the issue we face is whether a successor corporation is liable, under New Jersey's product line exception, when the predecessor corporation sells one or more of its product lines to the successor, but continues to manufacture and distribute other product lines and, accordingly, retains assets from which a products-liability plaintiff may recover.

 The Supreme Court of New Jersey has yet to directly address the issue before us. Consequently, we must predict how that court would rule, considering relevant state precedents, analogous decisions, considered dicta, scholarly works, and any other reliable data. McGowan v. University of Scranton, 759 F.2d 287, 291 (3d Cir. 1985) (citations omitted); McNeilab, Inc. v. North River Ins. Co., 645 F. Supp. 525, 532 n. 9 (D.N.J. 1986) (citations omitted). In addition, "a federal court must determine the rule that the state Supreme Court would probably follow, not fashion a rule which an independent federal court might consider best." Meadow Ltd. Partnership v. Heritage Sav. & Loan, 639 F. Supp. 643, 653 (E.D. Va. 1986).

 The logical starting point is the Ramirez decision itself. In Ramirez, the New Jersey Supreme Court "adopt[ed] substantially" the product line approach developed by the California Supreme Court in Ray, which it cited as holding that "a party which acquires a manufacturing business and continues the output of its line of products under the circumstances here presented assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired." 86 N.J. at 349, 431 A.2d at 820 (citing Ray, 19 Cal. 3d at 34, 560 P.2d at 11, 136 Cal. Rptr. at 582). Although this formulation of the product line exception makes no direct mention of the ...


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