New York Rejects “Product Line” Theory of Corporate Successor Liability
September 14, 2006
U.S. courts have long struggled with the issue of when a corporation that purchases assets of another corporation is responsible for product liability claims arising from products manufactured and sold by the acquired entity. The general rule in New York, as articulated by the New York Court of Appeals in Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 464 N.Y.S.2d 437 (1983), is that “a corporation which acquires the assets of another is not liable for the torts of its predecessor.” Schumacher also recognized four exceptions to this general rule that could result in corporate successor liability: (1) where the purchasing corporation expressly or impliedly assumed the acquired entity’s tort liability; (2) where there was a consolidation or merger of seller and purchaser; (3) where the purchasing corporation was a mere continuation of the acquired entity; or (4) where the transaction was entered into fraudulently to escape liability.
A fifth exception, generally referred to as the “product line” exception, was first announced by the California Supreme Court in Ray v. Alad Corp., 19 Cal. 3d 22, 560 P.2d 3 (1977) and subsequently adopted by a minority of U.S. jurisdictions. In Ray, the Court imposed successor liability on the purchasing corporation for an accident arising from the fall off a ladder that had been manufactured by the acquired entity. The Ray Court concluded that successor liability was proper when the purchasing corporation acquires a manufacturing business and continues manufacturing the same line of products. The justifications given by the Court for the adoption of this “product line” exception were: (1) the virtual destruction of remedies against the original manufacturer caused by the successor’s purchase of the business; (2) the purchasing corporation’s ability to assume the original manufacturer’s risk-spreading role; and (3) the fairness of requiring the purchasing corporation to assume responsibility for the original manufacturer’s defective products because the purchaser was benefiting from the acquired entity’s good will by virtue of its continued operation of the business.
Until recently the New York intermediate appellate courts were split on the issue of whether the “product line” exception could be applied to hold a purchasing corporation liable for product liability claims arising from products manufactured and sold by the acquired entity. See City of New York v. Pfizer & Co., 260 A.D. 2d 174 (1st Dep’t 1999) (rejecting the “product line” theory of successor liability); Hart v. Bruno Mach. Corp., 250 A.D.2d 58 (3rd Dep’t 1998) (adopting the “product line” exception).
In a decision issued on June 13, 2006, in the case Semenetz v. Sherling & Walden, Inc., 7 N.Y.3d 194 (2006), the New York Court of Appeals, the state’s highest court, held that it would not adopt the “product line” exception because adoption “would mark ‘a radical change from existing law implicating complex economic considerations better left to be addressed by the Legislature’” (quoting City of New York v. Pfizer).
In Semenetz, an infant suffered significant injuries when he caught his hand in a sawmill that had been sold in 1998 by S&W Edger Works. In 2000, S&W sold most of its assets to Sawmills and Edgers, Inc. pursuant to a contract under which Sawmills did not assume S&W’s liabilities (except for some liabilities pertaining to undelivered inventory). Sawmills, the purchaser, continued manufacturing sawmills at the same plant that had been used by S&W, retained some of S&W’s employees and advertised itself as “formerly S&W Edger Works.”
Sawmills and others were named as defendants in the product liability action brought on behalf of the infant. Sawmills subsequently moved for summary judgment on several grounds, including that it had no corporate successor liability for product liability claims arising from products manufactured and sold by S&W. The trial court denied the motion, in part on the adoption of the “product line” theory of liability in the Hart v. Bruno Mach. Corp. case, and concluded that Sawmills was the “successor” to S&W. Sawmills appealed the denial. The intermediate appellate court reversed and granted summary judgment to Sawmills on the ground that New York courts did not have personal jurisdiction over Sawmills, an Alabama corporation that did very minimal business in New York. Semenetz v. Sherling & Walden, Inc., 21 A.D.3d 1138 (3d Dep’t 2005).
The Court of Appeals affirmed the dismissal on the ground that S&W, the purchasing corporation, did not have corporate successor liability for defective products manufactured and sold by Sawmills. The Court rejected the “product line” exception and each of the three justifications for the exception that had been stated by the California Supreme Court in Ray. Notably, the Court recognized that adoption of the exception would threaten “economic annihilation” to small companies with limited assets if they were saddled with liabilities for predecessors’ torts and also would deter the purchase of ongoing manufacturing businesses. The Court further noted that extending corporate successor liability to a party that did not manufacture or sell a defective product was inconsistent with the “basic justification for strict products liability.”
New York’s repudiation of the “product line” theory of liability was clear, unambiguous and based upon sound rationale. The “product line” theory of liability is clearly a minority view that has been rejected by the majority of courts in other jurisdictions where the theory has been urged. A significant change in law premised on public policy considerations is best undertaken by the legislature – not the courts.
For more information, e-mail Richard A. Menchini at richard.menchini@hklaw.com or call toll free, 1-888-688-8500.