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Lefever v. K.P. Hovnanian Enterprises

July 29, 1999

JUSTIN LEFEVER, PLAINTIFF-RESPONDENT,
v.
K.P. HOVNANIAN ENTERPRISES, INC., LULL ENGINEERING CO., INC. AND GILES & RANSOME, INC., INDIVIDUALLY AND T/A RANSOME LIFT, DEFENDANTS, AND LULL INDUSTRIES, INC., DEFENDANT-APPELLANT.



The opinion of the court was delivered by: O'hern, J.

Argued January 21, 1999

On certification to the Superior Court, Appellate Division, whose opinion is reported at 311 N.J. Super. 1 (1998).

This appeal concerns the meaning of the product-line exception in Ramirez v. Amsted Industries Inc., 86 N.J. 332 (1981), when a successor corporation acquires the predecessor's product line through a bankruptcy sale.

The general rule of corporate-successor liability is that when a company sells its assets to another company, the acquiring company is not liable for the debts and liabilities of the selling company simply because it has succeeded to the ownership of the assets of the seller. Traditionally, there have been only four exceptions: (1) the successor expressly or impliedly assumes the predecessor's liabilities; (2) there is an actual or de facto consolidation or merger of the seller and the purchaser; (3) the purchasing company is a mere continuation of the seller; or (4) the transaction is entered into fraudulently to escape liability. 15 William & Fletcher, Cyclopedia of the Law of Corporations § 70, 122 nn.9-15 (1990).

New Jersey, along with several other jurisdictions, has adopted a product-line exception to the general rule. Under that doctrine, by purchasing a substantial part of the manufacturer's assets and continuing to market goods in the same product line, a corporation may be exposed to strict liability in tort for defects in the predecessor's products. The question in this appeal is whether the product-line exception is applicable when the successor has purchased the predecessor's assets at a bankruptcy sale. Our task is made easier in this case because the bankrupt was not the manufacturer of the defective product, but rather an intermediary owner of the product line against whom no claim had been made by the injured party.

I.

The facts of this case are more fully set forth in the reported opinion of the Appellate Division, 311 N.J. Super. 1 (1998). For convenience, we shall eliminate reference to certain intermediate business entities used by the parties. Conceptually, there were three distributors of the product line. Plaintiff, Justin Lefever, was injured in 1989 when a forklift he was operating tipped over and caused him to suffer crushing injuries. The Lull Engineering Corporation, Inc., whom we shall refer to as "Lull I," had manufactured and distributed the forklift. Through a series of transfers, Lull I's assets were acquired in 1986 by Lull Corporation ("Lull II"). In 1992, Lull II went into bankruptcy. In November 1993, the trustee in the bankruptcy proceedings conveyed to Lull Industries Inc. ("Lull III"), interests in substantially all of Lull II's assets.

On September 24, 1990, plaintiff sued "Lull Engineering Co., Inc." in the Superior Court, Law Division, Middlesex County. *fn1 Plaintiff never sued Lull II. During the course of discovery, plaintiff learned that Lull II had acquired the assets of Lull I, and that Lull II had transferred its assets to Lull III through a bankruptcy sale. Plaintiff joined Lull III as a party defendant. Lull III moved to dismiss plaintiff's claim on the basis that the bankruptcy sale was free and clear of any interests in the property, including any successor-liability claims. The trial court granted Lull III's motion.

On appeal, the Appellate Division reversed. The Appellate Division found that plaintiff had brought his complaint against the manufacturer and current defendant, Lull I, rather than against Lull II, the bankrupt. 311 N.J. Super. at 7. The court noted that "plaintiff does not claim an interest in the property of Lull [II]" and the bankruptcy court order "does not affect plaintiff's products liability claim against Lull [III] as a successor corporation of the Lull Engineering entities." Id. at 9. The court found that "Lull [III] has not established, and it is unlikely it could establish, that plaintiff would have received full satisfaction for his damages had he filed a claim against Lull [II] in the Bankruptcy Court." Ibid. We granted Lull III's petition for certification, 156 N.J. 387 (1998).

II.

What are the sources of the product-line exception to the general rule against successor liability?

As the comparable doctrine of privity once sheltered the manufacturers of products from consumer claims, the doctrine of corporate-successor liability is an example of a doctrine previously "resting on formalistic and conceptual foundations" that has become a doctrine "with functional and pragmatic roots rather than conceptual roots." Phillip I. Blumberg, The Continuity of the Enterprise Doctrine: Corporate Successorship in United States Law, 10 Fla. J. Int'l L. 365, 366-67 (1996). The new doctrines "focus[] on the economic realities of the enterprise rather than on the [involved] entity. . . ." Id. at 367. In Ramirez, supra, Justice Clifford traced the evolution of the law of corporate-successor liability for defective products. "[T]he traditional corporate approach [to successor liability] 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." Ramirez, supra, 86 N.J. at 341. The traditional rule "was designed for the corporate contractual world where it functions well." Polius v. Clark Equipment Co., 802 F.2d 75, 78 (3d Cir. 1986). "Strict interpretation of the traditional corporate law approach leads to a narrow application of the exceptions to non-liability, and places unwarranted emphasis on the form rather than the practical effect of a particular corporate transaction." Ramirez, supra, 86 N.J. at 341-42.

The first crack in the traditional rule of non-liability occurred in 1974. See Knapp v. North Am. Rockwell Corp., 506 F.2d 361 (3d Cir. 1974), cert. denied, 421 U.S. 965, 95 S. Ct. 1955, 44 L. Ed. 2d 452 (1975). In Knapp the Third Circuit eliminated the requirement in de facto mergers that the selling corporation dissolve after the transfer of the assets. The court said, "Pennsylvania courts have emphasized the public policy considerations served [in products liability law] by imposing liability on the defendant rather than formal or technical requirements." Id. at 367. Thus, although the selling corporation had not dissolved after the transfer of assets, the court observed that if the successor were not held liable, the plaintiff would be left without a remedy. The plaintiff in Knapp had been injured when his hand was caught in a "Packomatic" machine manufactured by the selling corporation. Although the Third Circuit recognized that neither the predecessor nor the successor was in a position to avoid the accident, it concluded that the successor was the party better able to spread the burden of the loss. Id. at 370.

In Turner v. Bituminous Casualty Co., 244 N.W.2d 873 (1976), the Michigan Supreme Court relaxed the traditional rule that would not have imposed liability. The Michigan court expanded the "mere continuation" exception to the traditional rule of non-liability. Id. at 892-94. After observing that there would have been liability under the de facto merger exception if the acquisition had been made for stock rather than cash, the court held that it could find no reason to treat acquisitions for stock or cash differently. It found that the analysis in Knapp should also apply to cash transactions, and concluded that it would be proper to impose liability on the purchasing corporation after an evaluation of such factors as the ownership and management of the successor's corporate entity and its personnel, physical location, assets, trade name, and general business operation.

"[A]s to the injured person, distinctions between types of corporate transfers are wholly unmeaningful." Powers v. Baker-Perkins, Inc., 285 N.W.2d 402, 405 (Mich. Ct. App. 1979). The functional result is the same whether the transfer results from (1) a traditional merger accompanied by an exchange of stock of the corporations, or (2) a de facto merger brought about by the purchase. The inquiry is framed not by the manner in which the successor corporation acquires the assets, but rather by what it does with the assets after it acquires them.

In 1977, the year after the decision in Turner, supra, the California Supreme Court adopted the "product line exception." See Ray v. Alad Corp., 560 P.2d 3 (Cal. 1977). In Ray, the buyer had purchased the seller's physical plant, manufacturing equipment, inventories, trade name, good will, and records of manufacturing designs. The buyer continued the employment of the factory personnel and hired the seller's general manager as a consultant. The buyer also continued to manufacture the same product line under the same name and held itself out to potential customers as the same enterprise. The California Supreme Court concluded "that a party [that] 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." Ray, supra, 560 P.2d at 11. Its justification for imposing strict liability

rest[ed] upon (1) the virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business, (2) the successor's ability to assume the original manufacturer's risk-spreading [role] and (3) the fairness of requiring the successor to assume a responsibility for defective products that was a burden necessarily attached to the original manufacturer's good will being enjoyed by the successor in the continued operation of the business. [Id. at 9.]

After analyzing the differences between the continuity exception formulated by the Michigan Supreme Court in Turner and the product-line exception in Ray, the Ramirez Court adopted the rule of Ray with its focus on the product causing the injury. Concerning its own justifications for the "product line" exception, the Court in Ramirez emphasized the two latter justifications of spreading the risk and enjoyment of the predecessor manufacturer's good will. In both Ramirez and Nieves v. Bruno Sherman Corp., 86 N.J. 361 (1981), the successor corporation's acquisition of the product line had not been the event that caused the loss of the plaintiff's remedies against the original manufacturer. The Court said, "What is most important, however, is that there was continuity in the manufacturing of the . . . product line throughout the history of these asset acquisitions." Ramirez, supra, 86 N.J. at 350.

The drafters of the Restatement (Third) have rejected the product-line exception adopted in New Jersey. See Restatement (Third) of Torts: Products Liability, § 12, comment b. The reporters to the Restatement observed that exceptions to the general rule against holding successors liable are not unique to products liability law and the Restatement (Third), but that the exceptions are designed to preserve fundamental principles of debtor-creditor law. Id. at comment a. It strikes us as somewhat anomalous that after the long journey from MacPherson v. Buick Motor Co., 111 N.E. 1050 (N.Y. 1916), the drafters of the Restatement (Third) would frame the issue in terms of contract law, not products liability law.

Not surprisingly, "a strong minority of states take less restrictive positions on successor liability than the position set forth in the Restatement (Third)." Richard L. Cupp, Jr., Liability of Successor for Harm Caused by Defective Products Sold Commercially by Predecessor, 8 Kan. J.L. & Pub. Pol'y 113, 114 (1998). "Thirteen jurisdictions, representing 43 percent of the United States' population, follow either the product line approach or the continuity of enterprise approach." Ibid. *fn2

III.

Does the supremacy of federal bankruptcy law prevent the application of state common law to claims against a successor business enterprise that has ...


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