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Wilkerson v. C.O. Porter Machinery Co.

Decided: June 30, 1989.

JAMES WILKERSON, PLAINTIFF,
v.
C.O. PORTER MACHINERY CO., COPCO, INC., A SUBSIDIARY OF TANNEWICZ, INC., STARMARK INDUSTRIES, INC., JOHN DOE I AND JOHN DOE II, DEFENDANTS



Wecker, J.s.c.

Wecker

Defendant COPCO, INC. ("COPCO") seeks summary judgment on this products liability claim on the ground that it did not manufacture the radial saw that caused plaintiff's injury. Defendant admits it purchased assets of the actual manufacturer, C.O. Porter Machinery Co. ("C.O. Porter") in bankruptcy and continued to produce a similar model saw. However, COPCO argues that New Jersey's successor liability doctrine, as set forth in Ramirez v. Amsted Industries, Inc., 86 N.J. 332 (1981) and its companion case, Nieves v. Bruno Sherman Corp., 86 N.J. 361 (1981), does not apply.

Defendant seeks to avoid the Ramirez successor liability principle based upon a factual distinction between this plaintiff's circumstances and those of the claimants in Ramirez and Nieves. The question is whether this distinction makes a

difference. The issue is one of first impression in New Jersey.*fn1 The factual distinction is that the sale of assets here was a sale in bankruptcy. The accident and injury for which plaintiff seeks recovery occurred after the asset sale and the bankruptcy order approving the sale. For reasons detailed below, I find that the bankruptcy sale makes no legal difference, and defendant COPCO is not entitled to summary judgment on this ground.

C.O. Porter filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C.A. ยง 1101 et seq., on March 1, 1983. On February 28, 1983, an agreement for the sale of most of the manufacturing equipment and related assets to defendant COPCO was executed.*fn2 That sale was approved in an order of the bankruptcy court in the western district of Michigan on April 25, 1983. The order confirming the sale provides, in part:

The property is sold free and clear of all liens, claims (absolute or contingent) and encumbrances, with the interest of any parties asserting liens therein and claims and/or encumbrances thereon attaching to the proceeds thereof with the same validity and in the same order of rank and priority as said liens, encumbrances and claims now exist in said property.

On May 2, 1985 a debtor's amended plan for liquidation*fn3 was confirmed*fn4 and on March 5, 1987 an amended order closing the case was signed. C.O. Porter did not survive the bankruptcy and its dissolution is set forth in the order closing the case. The plan provides also that "confirmation of this Plan . . . shall constitute complete settlement with creditors and interest holders, except as to payments called for by this Plan."

On August 13, 1984, plaintiff James Wilkerson ("Wilkerson") injured his hand while operating a cross-cut saw on the job. That saw had been manufactured by defendant C.O. Porter in 1974. It eventually came to be owned by plaintiff's employer. The saw on which plaintiff was injured was C.O. Porter's model 47-A-36. COPCO has continued to manufacture and sell what is admitted to be the same model, 47-A, and offers it in three different sizes: 20", 30", and 36". COPCO was incorporated in 1983. Its sales brochure advertises the saw under the COPCO name as follows:

A DESIGN PROVEN OVER 40 YEARS.

Its literature further states:

Over 40 years of on-the-job service in plants throughout the country have proven the Hydracut 47-A to be the best hydraulically-controlled cut-off saw design in the industry.

In order to analyze defendant's claim, the claimed distinction must be examined carefully. On the obvious level, one can find that a potential claimant with a non-existent injury, who could not be notified of the bankruptcy proceeding, cannot be precluded from seeking a remedy by such orders. See, e.g., Schweitzer v. Consolidated Rail Corp., 758 F.2d 936, 943 (3 Cir.1985); Mooney Aircraft Corp. v. Foster (In re Mooney Aircraft, Inc.), 730 F.2d 367 (5 Cir.1984); In re UNR Industries, Inc., 29 Bankr. 741 (N.D.Ill.1983), app. dism., 725 F.2d 1111 (7 Cir.1984) (denying application to appoint nominal legal representative for unknown future asbestos victims to bind those victims in present bankruptcy proceeding). In Schweitzer, the circuit court distinguished a tort claimant from a plaintiff on a contract, who "bargain[ed] for a legal relationship with that debtor. . . ." 758 F.2d at 943. But see, e.g., Conway v. White Trucks, 692 F. Supp. 442, 455, n. 9 (M.D.Pa.1988) (trucker's accident occurred after the manufacturer's reorganization and asset sale in bankruptcy, but before the deadline for filing claims against the debtor-manufacturer).

That is perhaps too simplistic. The real question is whether the product-line theory of successor liability as carved out in Ramirez is so narrow as to exclude (and immunize) a purchaser of assets in bankruptcy. In other words, is there anything about a sale of business assets in bankruptcy that warrants greater protection from subsequent products liability claims than a purchase in a non-bankruptcy setting?*fn5

The mere fact that the bankruptcy order approves a sale purporting to transfer assets free and clear of various claims, even including contingent products liability claims, should not be determinative, as further discussed below. In Ramirez a purchase agreement that expressly denied the purchaser's assumption of liability for products claims that might be asserted against the manufacturer-seller was held not controlling. A bankruptcy order approving a sale of assets is intended to assure that assets are not being sold for less than fair market value, thereby depleting the estate to the detriment of its creditors. It has been argued that subjecting a sale of assets in bankruptcy to successor liability will devalue the bankrupt's estate and unfairly favor contingent claimants over other unsecured creditors. The New Jersey Supreme Court in Ramirez recognized and disposed of this argument, concluding that since the assets of the selling manufacturer were subject to the very same contingent claims, recognition of successor liability creates a more accurate market value for the assets. 86 N.J. at 353-355.

Ramirez adopted the "product line" exception to traditional successor liability law for certain products liability claimants who would otherwise be without a remedy.

[T]he 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); (additional citations omitted). 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. [ Id. 86 N.J. at 340.]

Our Supreme Court chose to follow California and abandon

the traditional rule and its exceptions, utilizing instead the policies underlying strict liability in tort for injuries caused by defective products. [ Id. at 347.]

To determine the scope of Ramirez requires examination of the "threefold justification" of the California Supreme Court decision that originated the "product line" theory of successor liability, adopted by the New Jersey Supreme Court in Ramirez, supra, 86 N.J. at 349. See Ray v. Alad Corp., 19 Cal. 3d 22, 136 Cal.Rptr. 574, 560 P. 2d 3 (1977). The first justification is:

the virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business.*fn6 [136 Cal.Rptr. at 580, 560 P. 2d at 9; emphasis supplied.]

Unless the bankruptcy was brought on by a creditor who then purchased the assets, one might conclude from the literal language that a bankruptcy sale could never support successor liability. On the other hand, one must ask whether the courts in Ray or Ramirez focused on the specific purchaser's role or whether they assumed that any transfer of a manufacturing business (or all of its assets) by definition destroys a products liability claimant's remedy against the manufacturer.

In other words, in the phrase "caused by the successor's acquisition of the business," is it the successor or the sale that is viewed as the cause of the "destruction of . . . remedies"? If it is the sale, then bankruptcy warrants no blanket exemption. Nieves, the companion case to Ramirez, indicates that it is the

acquisition or transfer and not the particular acquirer that triggers liability. There the immediate purchaser of the manufacturer's assets, as well as a subsequent purchaser,*fn7 were both held potentially liable as successors. Clearly, the final purchaser did not cause the destruction of remedies against the original owner-manufacturer; but the transfer or acquisition or both destroyed such remedy. Responding to the argument that the first Ray justification is concerned solely with finding one viable defendant, the New Jersey Supreme Court said:

In so arguing [the intermediate owner] misinterprets the underlying purpose of this justification for the imposition of successor corporation liability. In Ray v. Alad, supra, the court was concerned not as much with the availability of one particular viable successor as it was with the unavailability of the original manufacturer by reason of its divestiture of assets and dissolution. [ Ramirez, supra, 86 N.J. at 370-371.]

This language is strong evidence that our Supreme Court sees the transfer of assets and the manufacturer's unavailability to answer in damages*fn8 as the triggering circumstances and not the precise role ...


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