Blogs

Posted: September 26, 2018

Court Analyzes Question of Successor Liability

On August 22, 2018, Judge Vignuolo of the Middlesex County Superior Court (Law Division) issued a decision in Babulal v. Dynamic Metals Processing, Inc., Docket No. L-1508-14, analyzing whether two defendants were entitled to summary judgment dismissing claims based on successor liability, explaining:

We turn now to the substance of Gary Metal and Gary Machinery’s Motion. The issue is whether the defendants may be held liable under the successor liability doctrine despite the undisputed fact that neither entity manufactured the Subject Straightener, nor does either entity continue to manufacture the Subject Straightener.

. . .

Generally, 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. However, traditionally four exceptions to the general rule of successor liability have been applied, which exposed the purchasing corporation to the liabilities of the selling corporation:

(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.

In Ramirez, the Supreme Court analyzed the appropriateness of the traditional approach and determined that it is inconsistent with the developing principles of strict products liability and unresponsive to the interest of persons injured by defective products in the stream of commerce. The Court reasoned the traditional approach “was developed not in response to the interests of parties to product liability actions, but rather to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions..

Further, the traditional approach has been narrowly applied, placing an unjustified amount of emphasis on the form of the corporate transaction, rather than its practical effect..

After analyzing the approaches of multiple other jurisdictions, the Ramirez Court decided to adopt the product line exception for successor corporation liability. The product line exception completely abandons the traditional rule and its exceptions. The product line exception provides that a successor corporation will be held strictly liable for the product liability claims of its predecessor if two requirements are met: (1) the successor corporation acquires all or substantially all the assets of the predecessor corporation; and (2) the successor corporation continues essentially the same manufacturing operation as the predecessor corporation. The plaintiff bears the burden of establishing these requirements. Potwora ex rel. Gray v. Grip, 319 N.J. Super. 386, 406 (App. Div. 1999).

The policy considerations justifying the product line exception are three-fold:

(1) The virtual destruction of the plaintiff’s remedies against the original manufacturer caused by 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 of 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.

Ultimately, the product line exception presents a mixed question of law and fact to a trial judge, and if the factual component of the issue is subject to a bona fide issue of material fact, the resolution of the question must await a trial.

(Internal quotations and citations omitted).

This decision relates to tort liability for a defective product, something that is not usually considered business litigation. But cases like this raise a question that applies to all companies: when will a successor company be liable for something a predecessor did. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business’ liability for something done by a company that it acquired or with which it merged.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

View posts