FOSTER v CONE-BLANCHARD MACHINE COMPANY
Docket No. 108465
Supreme Court of Michigan
Decided July 20, 1999
Rehearing denied September 10, 1999
460 Mich 696
Argued November 9, 1998 (Calendar No. 8). Rehearing denied 461 Mich 1205.
In an opinion by Chief Justice WEAVER, joined by Justices TAYLOR, CORRIGAN, and YOUNG, the Supreme Court held:
Because Cone-Blanchard‘s predecessor was available for recourse, as witnessed by plaintiff‘s negotiated settlement with the predecessor for $500,000, the continuity of enterprise theory of successor liability is inapplicable. Further, summary disposition was appropriate with regard to the claim of breach of duty to warn. The plaintiff did not produce evidence sufficient to show a relationship between Cone-Blanchard and her employer or that Cone-Blanchard actually was aware of the alleged design defect in the type of machine owned by her employer.
1. Under Turner v Bituminous Casualty Co, 397 Mich 406 (1976), a prima facie case of continuity of enterprise exists where
2. Under Turner, the continuity of enterprise doctrine applies only when the transferor is no longer viable and capable of being sued. Where a plaintiff has in fact successfully pursued a remedy against a predecessor, the policy concerns that underscored the adoption of the continuity of enterprise theory in Turner simply are not present. In this case, in light of the availability of Pneumo Abex to suit as evidence by plaintiff‘s $500,000 settlement with Pneumo Abex, Turner is inapplicable.
3. Consistent with general negligence principles, a successor corporation‘s duty to warn a predecessor‘s customer of the predecessor‘s negligence requires a “special relationship” either between the defendant and the victim, or the defendant and the third party who caused the injury. The mere status of a defendant as a successor corporation is insufficient to create a duty to warn. Relevant indicia of a special relationship include a successor‘s actual or constructive knowledge of a defect in its predecessor‘s product, a continuing relationship with the predecessor‘s customer, service agreements between the successor and the predecessor‘s customer relating to the machine in question, and evidence that the successor had actually serviced the machine in question. A successor‘s awareness of the location or present owner of a defective product is a logical predicate to liability. In this case, Cone-Blanchard did not have a duty to warn of alleged defects in the machine at issue. While Cone-Blanchard may have solicited continuing business from Cone Automatic‘s customers, such evidence, alone, is insufficient to support a special relationship.
Reversed.
Justice BRICKLEY, joined by Justices CAVANAGH and KELLY, dissenting, stated that under Turner, the evidence presented by the plain-
The successor liability issue in this case is controlled by Turner, which held that there may be a cause of action for a plaintiff where the totality of the transaction demonstrates a basic continuity of the enterprise. Turner‘s continuity of enterprise doctrine does not simply seek to guarantee that the plaintiff has some source of recovery, nor is it based on principles of strict liability, as the majority apparently believes. Rather, the test in Turner is designed to determine whether the company (or “enterprise“) involved in a lawsuit is essentially the same company that was allegedly negligent in designing or manufacturing the offending product. Turner, thus, eschewed reliance upon the legal formalities of corporation law, and sought to determine, by examining the relevant criteria, whether the corporate defendant, in essence, was a continuation of the corporation that was allegedly negligent in designing or manufacturing the product at issue, or whether it was a stranger to the allegedly negligent corporation.
Baker, Durst, Nelson, Benz & Baldwin (by Gary R. Baldwin) for plaintiff-appellee.
Sullivan, Ward, Bone, Tyler & Asher, P.C. (by Thomas M. Slavin and Ronald S. Lederman), for defendant-appellant.
Amici Curiae:
Lupo & Koczkur, P.C. (by Paul S. Koczkur and Dane A. Lupo, Jr.), for Pneumo Abex Corporation.
Ford & Kobayashi, P.C. (by James B. Ford), for Michigan Trial Lawyers Association.
WEAVER, C.J. In this products liability case, we examine the scope of successor liability in general, and of a successor corporation‘s duty to warn its customers of defects in a product manufactured by its
We reverse and hold that, because Cone-Blanchard‘s predecessor was available for recourse as witnessed by plaintiff‘s negotiated settlement with the predecessor for $500,000, the continuity of enterprise theory of successor liability is inapplicable. Further, plaintiff did not produce evidence sufficient to show a relationship between Cone-Blanchard and plaintiff‘s employer or that Cone-Blanchard was actually aware of the alleged design defect in the type of machine owned by plaintiff‘s employer. Thus, summary disposition was appropriate with regard to the claim of breach of duty to warn.
I
FACTUAL AND PROCEDURAL BACKGROUND
While operating a Conomatic feed screw machine on her job at defendant Seven Ranges, Inc., plaintiff‘s hair became ensnarled in the rapidly spinning and unguarded rod being processed by the machine. Her hair and scalp were torn from her head. Plaintiff sued Cone-Blanchard and Seven Ranges. She alleged that Cone-Blanchard was liable as the legal successor of
Plaintiff specifically alleged a design or manufacturing defect on the ground that the machine contained no emergency shutoff button or other safety devices. She also alleged breach of warranty of fitness for intended purposes and breach of implied warranty of merchantability. Finally, she alleged that Cone-Blanchard breached its duty to warn of the known or reasonably suspected danger posed by operation of the machine.
Defendant Cone-Blanchard filed a motion for summary disposition pursuant to
In 1963, Pneumo Dynamics purchased Cone I by acquiring all its stock. Shortly thereafter, Cone I ceased operations and dissolved. Pneumo Dynamics formed Cone Automatic Machine Co, Inc. (Cone II). Cone II had no employees, assets, or place of business and existed solely to hold the Cone name. Pneumo Dynamics continued to manufacture the Conomatic line of machines through a wholly owned subsidiary, Pneumo Dynamics Machine Tool Group (PDMTG). PDMTG included assets of the dissolved Cone I in addition to assets from two other machine companies.
In 1972, Cone-Blanchard purchased the assets of PDMTG and the stock of Cone II from Pneumo Dynam-
The trial court granted defendant Cone-Blanchard‘s motion for summary disposition, determining that it was not a successor corporation for purposes of successor liability under Turner v Bituminous Casualty Co, 397 Mich 406; 244 NW2d 873 (1976). The trial court also dismissed plaintiff‘s claim that Cone-Blanchard failed to warn of alleged defects in the machine. The Court of Appeals reversed, holding that plaintiff had established a question of fact concerning whether there was sufficient continuity of enterprise for successor liability and whether Cone-Blanchard had breached a duty to warn of the machine‘s alleged defects.1 We granted leave to appeal.2 We review a motion for summary disposition de novo.3
CONTINUITY OF ENTERPRISE
In Turner, supra, this Court held that a corporate successor may be liable for its predecessor‘s defective products if the totality of the acquisition demonstrates a basic continuity of the enterprise between the predecessor and successor corporations. Thus, under Turner, successor liability becomes an element of the plaintiff‘s prima facie case of products liability. Turner was a departure from the traditional rule of nonliability for corporate successors who acquire the predecessor through a purchase of assets.4
The traditional rule of successor liability examines the nature of the transaction between predecessor and successor corporations. If the acquisition is accomplished by merger, with shares of stock serving as consideration, the successor generally assumes all its predecessor‘s liabilities. However, where the purchase is accomplished by an exchange of cash for assets, the successor is not liable for its predecessor‘s liabilities unless one of five narrow exceptions applies. The five exceptions are as follows:
“(1) where there is an express or implied assumption of liability; (2) where the transaction amounts to a consolidation or merger; (3) where the transaction was fraudulent; (4) where some of the elements of a purchase in good faith were lacking, or where the transfer was without consideration and the creditors of the transferor were not provided for; or (5) where the transferee corporation was a mere continuation or reincarnation of the old corporation.” (19
The traditional rule reflects the general policy of the corporate contractual world that liabilities adhere to and follow the corporate entity. It serves to protect creditors and shareholders, to facilitate determination of tax responsibilities, and to promote free alienability of business assets. In the context of tort law, the traditional rule with its narrow exceptions has been criticized as an elevation of form over substance, that may leave victims of a defective product without recourse.
These policy concerns shaped this Court‘s expansion of the traditional rule in Turner. After examining the relevant policy concerns, this Court in Turner concluded that a continuity of enterprise between a successor and its predecessor may force a successor to “accept the liability with the benefits” of such continuity. Id. at 430. Turner held that a prima facie case of continuity of enterprise exists where the plaintiff establishes the following facts: (1) there is continuation of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations of the predecessor corporation; (2) the predecessor corporation ceases its ordinary business operations, liquidates,
Application of Turner in this case is complicated by the fact that the manufacturer, Cone I, is twice removed from defendant Cone-Blanchard. In other words, Cone-Blanchard did not directly purchase Cone I. Rather, Cone I was purchased by Pneumo Dynamics. Pneumo Dynamics then continued manufacturing the Conomatic line of machines through its wholly owned subsidiary, PDMTG, and formed a new company, Cone II, for purposes of carrying on the Cone name. Cone-Blanchard purchased the assets of PDMTG and the stock of Cone II. It then took over the manufacture of Conomatic machines. We note at the outset, that the tertiary nature of the relationship between Cone I and Cone-Blanchard generally factors against a finding of continuity, but does not preclude it.7
This case illustrates the limits of Turner‘s applicability. Turner‘s holding indicates that the “continuity of enterprise” doctrine applies only when the transferor is no longer viable and capable of being sued:
In our analysis of the matter we must conclude at this point that in a products liability case where the corporation fabricating the injury-producing item changes corporate structure before injury and suit, as a matter of policy neither the victim nor the successor corporation has a different interest vis-à-vis the suit whatever the type of corporate metamorphosis—merger, de facto merger, or sale of assets for cash—so long as the transferor corporation becomes defunct. [Id. at 429 (emphasis added).]8
The thrust of the decision in Turner was to provide a remedy to an injured plaintiff in those cases in which the first corporation “legally and/or practically becomes defunct.” Turner, supra at 419. Thus, the
Pneumo Dynamics, now Pneumo Abex, continued on as an active corporation after the transaction with Cone-Blanchard. While failure of the predecessor to dissolve may not be fatal in every action for successor liability, especially, for example, where the predecessor continues as a shell or is otherwise underfunded, the fact that a predecessor remains a viable source for recourse is. Certainly, where a plaintiff has in fact successfully pursued a remedy against a predecessor, the policy concerns that underscored the adoption of the continuity of enterprise theory in Turner simply are not present. Here, in light of the availability of Pneumo Abex to suit as evidence by plaintiff‘s $500,000 settlement with Pneumo Abex, Turner is inapplicable.
III
DUTY TO WARN
This Court has not previously addressed whether a successor corporation has an independent duty to warn a third party of a predecessor‘s negligently designed and manufactured product.9 Generally, “an
In determining whether to impose a duty, this Court evaluates factors such as: the relationship of the parties, the foreseeability of the harm, the burden on the defendant, and the nature of the risk presented. [Id. at 53.]
We conclude that in certain circumstances a successor may have an independent duty to warn a predecessor‘s customer of defects in a predecessor‘s product.
Consistent with general negligence principles, a successor corporation‘s duty to warn a predecessor‘s customer of the predecessor‘s negligence requires a “special relationship” either between the defendant and the victim, or the defendant and the third party who caused the injury. Id. at 54. The mere status of a defendant as a successor corporation is insufficient to create a duty to warn. See Polius v Clark Equipment Co, 802 F2d 75, 84 (CA 3, 1986). Relevant indicia of a “special relationship” include: a successor‘s actual or
Plaintiff contends that existence of Flaugher v Cone Automatic Machine Co, 30 Ohio St 3d 60, 67; 507 NE2d 331 (1987), and a 1979 Texas lawsuit cited by the Flaugher case alleging similar injuries caused by Conomatic machines supports a finding that Cone-Blanchard had actual or constructive knowledge of the alleged defect in the design of the Conomatic feed screw machine. While earlier lawsuits involving similar products and similar injuries might conceivably be sufficient to inform a successor of a defective product, Flaugher was summarily dismissed, and it was never established that the Conomatic product involved in that case was defective. Similarly, plaintiff presented no evidence that the machine involved in the Texas lawsuit was deemed defective. For these reasons, we conclude plaintiff cannot rely on the Flaugher and Texas cases as evidence of Cone-Blanchard‘s actual or constructive knowledge of a defect in the particular machine at issue in this case.
As to a “special relationship” with Cone I‘s customers, there is no evidence that Cone-Blanchard actually or by agreement serviced the machine in question. Plaintiff was able to establish that Cone-Blanchard
For these reasons we find that Cone-Blanchard did not have a duty to warn of alleged defects in the machine at issue in this case.
IV
CONCLUSION
We hold that Turner‘s continuity of enterprise theory is inapplicable to the facts of this case: plaintiff has successfully pursued a remedy against Cone-Blanchard‘s predecessor. We further hold that the plaintiff has not established a genuine issue of material fact concerning whether defendant breached a duty to warn of the alleged defect in the Conomatic feed screw machine operated by plaintiff. Consequently, we reverse the decision of the Court of Appeals.
TAYLOR, CORRIGAN, and YOUNG, JJ., concurred with WEAVER, C.J.
BRICKLEY, J. (dissenting). Because I disagree both with the majority‘s interpretation of the relevant law, and with its view of the facts in the record, I respectfully dissent.
Contrary to the majority, I believe that the successor liability issue in this case is controlled by Turner v Bituminous Casualty Co, 397 Mich 406; 244 NW2d 873 (1976). In Turner, this Court stated that “there may be a cause of action [for the plaintiff] where the totality of the transaction demonstrates a basic continuity of the enterprise.” Id. at 411. This statement demonstrates that Turner‘s continuity of enterprise doctrine does not simply seek to guarantee that the plaintiff has some source of recovery, nor is it based on principles of strict liability, as the majority apparently believes. Indeed, Turner has nothing to do with determining whether an injury was negligently inflicted. Rather, the test in Turner is designed to determine whether the company (or “enterprise“) involved in the lawsuit is essentially the same company that was allegedly negligent in designing or manufacturing the offending product.
In making this determination, the Turner Court recognized that a corporation is susceptible to changes in ownership and structure that simply cannot occur in the life of a human tortfeasor.1 Id. at 419-420. Thus, the Turner Court eschewed reliance upon the legal
We explained that the policy basis of this “continuity of the enterprise” requirement ” ‘is that the enterprise, the going concern, ought to bear the liability for the damages done by its defective products.’ ” Turner, supra at 414, quoting Shannon v Samuel Langston Co, 379 F Supp 797, 802 (WD Mich, 1974). We also reasoned that such an enterprise enjoys certain continuing benefits, such as goodwill and expertise, and therefore must also accept continuing responsibility for the costs that the enterprise has imposed on society through its negligence. Turner at 425.
This reasoning is not inconsistent with our insistence upon fault-based products liability theory in Prentis v Yale Mfg Co, 421 Mich 670, 681; 365 NW2d
The traditional rule of successor liability arose from technical rules of law “developed not in response to products liability problems, but largely in the areas of creditors’ protection, . . . and of tax assessments, . . . or, in the case of the de facto merger, in the context of shareholder rights.” Turner, supra at 418. In Turner, we rejected reliance on these technical rules when deciding whether a defendant enterprise was, as a matter of practical fact, a mere continuation of the allegedly negligent enterprise. Id. at 426 (“[T]o say Old Sheridan is a stranger to New Sheridan, and vice versa, is to honor form over substance. . . . Continuity is the purpose, continuity is the watchword, continuity is the fact“).
For these reasons, I cannot agree with the majority that Turner‘s applicability depends on whether there has already been a recovery in the case in question. Nor can I agree that Turner‘s reasoning was based on notions of strict liability. While many of the cases that Turner cited were strict liability cases, Turner‘s central rationale is consistent with this Court‘s observation that “[w]hen the societal goal of holding manu-
Because the question presented in this case is who is responsible for the alleged negligence, rather than whether there actually was negligence, I would hold that Turner‘s continuity of the enterprise test is the controlling test in this case.
II
The Court in Turner adopted the following guidelines to determine if there was sufficient continuity between a successor corporation and its predecessor to justify imposing liability on the successor. “If there is such continuity, then the transferee must accept the liability with the benefits.” Turner, supra at 430. These guidelines examine whether:
“(1) There is a continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations.
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“(2) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible.
“(3) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.” [Id. at 420, quoting Shannon, supra at 801, in turn citing McKee v Harris-Seybold Co, Div of Harris-Intertype Corp, 109 NJ Super 555, 563-567; 264 A2d 98 (1970), aff‘d 118 NJ Super 480; 288 A2d 585 (1972).]
The first factor examines whether Pneumo Dynamics and Cone-Blanchard “continu[ed] the enterprise of the seller corporation.” The sales contract shows that when Cone-Blanchard bought Pneumo‘s machine tool division in 1972, it took over what had been Cone I‘s “entire plant facilities, equipment, machinery, inventory and patents.”
The sales contract lists all Cone I‘s assets that Pneumo sold to Cone-Blanchard. These assets include, among other things, accounts receivable, raw materials and other inventory, machinery, equipment, tools, real property, trademarks and patents, leases, customer books, and files and records. Furthermore, Cone-Blanchard assumed all the contracts with unionized employees serving Cone I‘s plant. It assumed the obligations of Pneumo‘s hourly and salaried employee pension programs, expressly granting employees pension credit for time served under both Pneumo and Cone I. While the contract does not expressly provide for retention of “management” personnel, it is a reasonable inference that the “salaried employees” include management employees. A jury could find on these facts that Cone-Blanchard purchased Cone I from Pneumo as a continuing enterprise.
The second criterion examines whether “[t]he seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practi-
The third criterion examines whether the “purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.” Turner, supra at 420. In the contract of sale between Cone-Blanchard and Pneumo, Cone-Blanchard expressly assumed “liabilities incurred . . . in the ordinary course of business in operating the Business,” “obligations and liabilities . . . under all open sales contracts and purchase contracts,” and “obligations and liabilities . . . under all other contracts, plans, agreements and commitments,” such as labor, pension, and insurance agreements. Unquestionably, these are the types of continuing liabilities and obligations a buyer must assume if the purchased corporation is to be operated as a going concern. Cone-Blanchard‘s assumption of the liabilities and obligations of Pneumo‘s machine tool group, as well as Pneumo‘s complete exit from the
The fourth factor, whether the purchasing corporation holds itself out as “the effective continuation of the seller corporation,” merits little discussion. By its very name and the name of its product, it is clear that Cone-Blanchard capitalizes on the Cone name. The evidence shows that Pneumo did so, as well: not only did it use Cone I‘s product trade name (Conomatic), but it also continued to use the original company‘s corporate trade name, describing it in a product manual as the Cone Automatic Machine Company: A Division of Pneumo Dynamics Corporation.
There are numerous triable questions of material fact regarding whether Cone-Blanchard is the corporate successor of Cone I. The Court of Appeals should be affirmed with respect to this issue.
III
The majority holds that a successor corporation may have an independent duty to warn of defects in its predecessor‘s products, where there is a “special relationship” between the defendant and the victim or the defendant and the third party who caused the injury. Ante, pp 706-707, quoting Murdock v Higgins, 454 Mich 46, 54; 559 NW2d 639 (1997). According to the majority, the
[r]elevant indicia of a “special relationship” include: a successor‘s actual or constructive knowledge of a defect in its predecessor‘s product, a continuing relationship with the predecessor‘s customer, service agreements between the successor and the predecessor‘s customer relating to the
Under the majority‘s test, drawing all reasonable inferences from the given evidence in the plaintiff‘s favor, Cone-Blanchard had an independent duty to warn.
The majority, however, dismisses the plaintiff‘s claims that the defendant had constructive knowledge of the defect in the machine that injured the plaintiff. The plaintiff alleged that in two previous lawsuits against Cone-Blanchard, one in 1979 and one in 1982, an individual sued after being scalped by a Conomatic Feed Screw Machine. These cases involved the same type of machines and the same type of injury as are involved in the instant case. The majority asserts, however, that in neither case was the machine proved to be defective. Therefore, the defendant had no constructive knowledge of any defect in the machine in question. Id., p 708.
In so holding, the majority fails to observe the proper standard for judging evidence on a summary judgment motion. From the fact of these two lawsuits, a jury could reasonably find that the defendant had knowledge that these machines might cause this injury. Giving the plaintiff the benefit of all reasonable inferences, two lawsuits alleging the same injury from the same machine are sufficient notice to the defendant that there may be a defect in that type of machine, worth investigating further. “If one by exercise of reasonable care would have known a fact, he is deemed to have had constructive knowledge of such fact. . . .” Black‘s Law Dictionary (6th ed), p 314. A jury could reasonably find that the defend-
With respect to Cone-Blanchard‘s contact with the owner of the machine that injured the plaintiff, the majority again fails to look at the evidence in a light most favorable to the plaintiff, and fails to draw reasonable inferences in the plaintiff‘s favor. The majority acknowledges that “Cone-Blanchard had access to Cone I‘s customer lists and that [plaintiff‘s] employer possessed a Cone-Blanchard business card on its premises,” but states that “while Cone-Blanchard may have solicited continuing business from Cone I‘s customers, such evidence alone is insufficient to support a ‘special relationship.’ ” Ante, pp 708-709.
To infer from this evidence that Cone-Blanchard was merely “soliciting” business from the plaintiff‘s employer is an inference from the evidence in favor of the defendant, which is not proper on summary disposition. Chandler v Dowell Schlumberger Inc, 456 Mich 395, 397; 572 NW2d 210 (1998). A jury could reasonably find, from the evidence acknowledged by the majority, that an agent of Cone-Blanchard had specifically examined the machine in question and had a “special relationship” with the plaintiff‘s employer, whether or not the purpose of that relationship was solicitation.
A jury could reasonably find from the evidence before the Court that Cone-Blanchard had construc-
IV
The Turner test is applicable to the facts of the instant case, and under that test, the evidence presented by the plaintiff is more than adequate to go to a jury regarding whether Cone-Blanchard is a corporate successor to Cone I. The plaintiff has also submitted evidence sufficient to raise questions of fact regarding whether Cone-Blanchard had a duty to warn the plaintiff of the dangers presented by the machine in question. For these reasons, I respectfully dissent, and would affirm the judgment of the Court of Appeals.
CAVANAGH and KELLY, JJ., concurred with BRICKLEY, J.