The Perils of Successor Liability: Who is Really in the Hot Seat?
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The Perils of Successor Liability:
Who is Really in the Hot Seat?
MARCH 17, 2014
Lawrence G. Cetrulo, Esq. Tom Radcliffe, Esq.
CETRULO LLP DeHay & Elliston,
Two Seaport Lane L.L.P.
Boston, MA 02210 36 South Charles Street
www.cetllp.com Baltimore, MD 21201
www.dehay.comSuccessor Liability: Four Traditional Exceptions
General Rule: A successor corporation is not
responsible for the liabilities of its predecessor.
Four Traditionally Recognized Exceptions:
1. The successor expressly or impliedly agrees to assume
the liabilities of the predecessor;
2. The transaction is a de facto merger or consolidation;
3. The successor is a mere continuation of the
predecessor; or
4. The transaction is a fraudulent effort to avoid the
liabilities of the predecessor.Product Line Exception
In addition to the four traditional exceptions, a fifth exception
recognized in a small number of jurisdictions is the product line
exception.
Under the product line exception, first recognized by the California Supreme Court
in Ray v. Alad Corporation, a corporation can be strictly liable for products of an
acquired corporation by continuing output of the product line.
States That Possibly
States That Recognize The Product Line States That Do Not Recognize The Product
States That Have Yet to Determine Recognize the Product Line
Exception Line Exception
Exception
Alabama Arizona New Hampshire Alaska Georgia
California Colorado New York Arkansas Indiana
Connecticut Florida North Carolina Delaware
Maine Illinois North Dakota Hawaii
Michigan* Iowa Ohio Idaho
Mississippi Kansas Oklahoma Montana
New Mexico Kentucky Texas Nevada
Pennsylvania Louisiana Utah Oregon
Maryland Vermont Rhode Island
Massachusetts Virginia South Carolina
Minnesota Wisconsin Tennessee
Missouri West Virginia
Nebraska WyomingKeene Corporation Keene a conglomerate that owned an insulation company In 1981-82, Keene engaged in corporate restructuring in which it created Bairnco There was then a drop down merger in which Keene became a subsidiary of Bairnco Keene then sold a number of its constituent companies to other subsidiaries of Bairnco 1993 Keene filed for bankruptcy
Keene Corporation
Keene created
Ehret Magnesia Bairnco Corp.
Manufacturing acquired by
Keene Corporation
Company
1959 1968 1981 2014
merged with Baldwin-Hill to 1993
create Baldwin-Ehret-Hill
Keene files for
bankruptcy
Bairnco Corp.
drop down merger
KeeneKeene Corporation § 544 (b) of the Bankruptcy code permits the trustee to void the transfer of an interest of a debtor if the claim is voidable under applicable law by an unsecured creditor Trustees of the Keene trust who represented plaintiffs sued to void the transfer of assets and payment of dividends to Keene Plaintiffs pursued theories of fraudulent conveyance and successor liability
Keene Corp. Challenges- Lippe v. Bairnco Corp. In Lippe v. Bairnco, Keene Creditors Trust (the “Trust”) brought against three former sister companies of Keene for their alleged fraudulent conveyances. In affirming the district court’s dismissal of Trust’s claims, the Second Circuit confirmed the well-established rule that no actual or constructive fraudulent conveyance occurs unless creditors are harmed by the transfer of assets.
Crown Cork & Seal
CC&S never manufactured any products that
contained asbestos, it made bottle caps (“crowns”)
and other packaging
November 1963, CC&S predecessor (also known as
CC&S) acquired the majority of the stock of Mundet
Mundet manufactured insulation and “crowns”
Within 90 days (February 1964), Mundet had sold all
assets related to insulation business
February 1966, the two companies merged
1989, old CC&S reincorporated as CC&S in Pa.Crown Cork & Seal
Insulation Business
Insulation Insulation
Product Business sold to a New
Business
Ceased
Jersey Company
1963 1966 2014
Mundet merged
business into CC&S
Bottle Cap Business
1963 1966 2014
CC&S sued for
Mundet’s old
Insulation
businessCrown Cork & Seal Crown acknowledged that under NY and Pa law, it succeeded to Mundet’s liabilities CC&S was named in thousands of cases CC&S acquired Mundet for $7 million By May 2003, Crown stated that it had paid over $413 million
CC&S’s Challenges No documents (all with the NJ company) No witnesses (all with the NJ company) How is CC&S sued? Mundet? CC&S individually and as successor to Mundet? Tender the case to the NJ business? Bring the NJ business in as a third party? Who is the verdict for/against? CC&S? Mundet? The NJ Company?
Walter Corporation 1955: Ongoing business incorporated as Jim Walter Corporation. 1964: The company acquires Celotex and goes public. 1964: Celotex a Delaware corporation reincorporated in 1964, which manufactured and distributed roofing and building products for residential and commercial use. Carey Canada, a wholly owned subsidiary of Celotex, was formerly engaged in the mining, milling and processing of asbestos fiber
Walter Corporation 1972: Panacon Corporation, Canada's number three asbestos producer, merges with Celotex. 1985: Celotex struggles under the load of asbestos lawsuits. 1987: KKR acquires the Jim Walter Corporation and takes the company private.
Walter Corporation 1988: Celotex is sold off, Walter's other subsidiaries organized as Hillsborough Holdings Corporation and renamed Walter Industries. 1990: Celotex and Carey Canada filed for bankruptcy 1994: The courts find Walter not liable for Celotex asbestos claims. 1998: Celotex trust created
Walter’s PC Challenges
No witnesses or documents
would be with former Panacon when owned by Glen
Alden
Lost/destroyed in the ordinary course of business
Pre-1972 before asbestos suits began
1972-at the time of the Walter/Celotex acquisition
from Alden
Post-1973 when Celotex discontinued the business
Walter did not own Panacon/PC at the time of the
incident so knowledge is limitedRecent Cases Lefevre v. CBS Corp., No. C13-5058-RBL, 2013 WL 4804471 (W.D. Wash. Sept. 9 2013). Review of product line exception DeJesus v. Park Corp., 530 Fed. Appx. 3 (1st Cir. 2013). Review of de facto merger exception In re: Emoral, Inc., 740 F.3d 875 (3d Cir. 2014). Review of mere continuation exception
Challenges In Defending
Successor Liability Claims
Development/Preparation of Corporate
Witnesses
Is NewCo obligated to invest in a “corporate archaeologist” to
mine information about OldCo?
How do you develop a Person Most Knowledgeable for OldCo,
when no one has personal knowledge?
Development/Creation of “Corporate
Identity” At Trial
How do you “introduce” your client, NewCo at trial?Challenges In Defending
Successor Liability Claims
Discovery Obligations
Locate all necessary documents related to the sale or
subsequent corporate reorganization
Identify persons knowledgeable of the terms of the sale or
reorganization as well as management of the former company
Potential Imposition of Punitive Damages
Courts have used two different approaches in imposing
punitive damages against successor corporations:
1. Statutory Merger Approach – Celotex Corp. v. Picket, 490 So.
2d 35, 38 (Fla. 1986)
2. Two-Step Approach- Brotherton v. Celotex Corp., 202 N.J.
Super. 148 (N.J. Super. Ct. Law Div. 1985)Prospective Challenges Legacy liabilities from acquisitions made long before asbestos litigation started Plaintiffs will continue to seek out new targets Discovering new “products” or “liabilities”?
Prospective Challenges Defend and indemnify agreements for asbestos litigation for acquisitions Who is proper party for lawsuit? Who retains counsel? How does a company prepare a corporate witness? Do witnesses exits? Do documents exist (who owns them)? Does information about the product still exist?
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