Lead Opinion
This case presents the question whether a stranger corporation that purchases the assets of another corporation may be held liable for the unassumed contractual obligations of the predecessor under a theory of successor liability. This case specifically requires us to define the contours of the “mere continuation” exception to the general rule of successor nonliability as it applies to claims sounding in contract.
Under Civ.R. 56, summary judgment is proper when “(1) [n]o genuine issue as to any material fact remains to be litigated; (2) the moving party is entitled to judgment as a matter of law; and (3) it appears from the evidence that reasonable minds can come to but one conclusion, and viewing such evidence most strongly in favor of the party against whom the motion for summary judgment is made, that conclusion is adverse to that party.” Temple v. Wean United, Inc. (1977),
The well-recognized general rule of successor liability provides that the purchaser of a corporation’s assets is not liable for the debts and obligations of the seller corporation. Flaugher v. Cone Automatic Machine Co. (1987), 30 Ohio
“(1) the buyer expressly or impliedly agrees to assume such liability; •
“(2) the transaction amounts to a de facto consolidation or merger;
“(3) the buyer corporation is merely a continuation of the seller corporation; or
“(4) the transaction is entered into fraudulently for the purpose of escaping liability.” Flaugher, supra,30 Ohio St.3d at 62 , 30 OBR at 167,507 N.E.2d at 334 .
The plaintiff in Flaugher was injured by a piece of industrial machinery. Because the corporation that made the machine no longer existed, the plaintiff sued a successor corporation that had purchased the assets of the manufacturer. We held that no liability could attach to the successor corporation absent one of the traditional exceptions to the rule of nonliability. We further held that none of the exceptions applied under the facts of the case. Id.
Although Flaugher was a products liability case, the rule and four traditional exceptions evolved in nonproducts cases involving contracts, tax liabilities, and shareholders’ rights. Flaugher, supra,
In recent years, some courts have criticized the strictness and formality of this approach in the products liability cases and have expanded the circumstances under which successor corporations may be held liable for injuries caused by products manufactured by the predecessor corporation. California, for example, has adopted the so-called “product line” theory of successor liability, under which a successor corporation that manufactures the same line of products as its predecessor may be held liable for injuries caused by products manufactured by the predecessor corporation. Ray v. Alad Corp. (1977),
Courts have justified the product line and have expanded mere-continuation tests in products liability cases on many of the same public policy grounds that justify strict products liability in tort. Manufacturers, for example, are in a better position than consumers to bear and spread the costs of the injuries their products cause, and they are in a unique position to improve their products. Flaugher, supra,
' This court in Flaugher declined to adopt the product line theory because such an expansion of liability should come from the General Assembly. This court was unwilling to run the risk of imposing a “potentially devastating burden on business transfers and * * * converting] sales of corporate assets into traps for the unwary.”
When the Supreme Court of Michigan in Turner expanded the mere-continuation theory, it stressed that “[t]his is a products liability case first and foremost.”
However valid the justifications for expanding the liability of successor corporations in products liability cases, those justifications do not apply here. Unlike tort law, which is guided largely by public policy considerations, contract law looks primarily to the intentions of the contracting parties. See Victorson v. Bock Laundry Machine Co. (1975),
We next apply the rule of law to the facts of this case. It is clear that Vickers did not expressly or impliedly assume any contractual liability to Applied. The purchase agreement expressly disclaimed both Welco’s rights in its claim against Applied and its liability in the counterclaim.
Nor is there any indication that the parties entered the transactions with fraudulent intent to escape liability. Indicia of fraud include inadequate consideration and lack of good faith. Turner, supra,
The de facto merger theory is also unavailing. A de facto merger is a transaction that results in the dissolution of the predecessor corporation and is in the nature of a total absorption of the previous business into the successor. Flaugher, supra,
Applied’s primary argument is that Vickers is liable as a mere continuation of Welco. Having declined to adopt the expanded mere-continuation theory, we must decide whether Applied may recover under the traditional mere-continuation theory. We have held that the basis of this theory is the continuation of the corporate entity, not the business operation, after the transaction. Flaugher, supra. Such would be the case when “one corporation sells its assets to another corporation with the same people owning both corporations. Thus, the acquiring corporation is just a new hat for, or reincarnation of, the acquired corporation. This is actually a reorganization.” Turner, supra,
Applied argues, and the court of appeals held, that there exist several issues of material fact through which Vickers might be liable as a mere continuation of Welco. These asserted indicia of mere continuation include Vickers-Welco having the same physical plant, officers, employees and product line as Welco had. As we have stated, these facts are relevant only to the expanded mere-continuation and product line theories of successor liability. It is not in dispute that Vickers and Welco were strangers and that the owners of Vickers are not the owners of Welco. If Wesche has been drained of assets to avoid liability, Applied’s remedy lies against Wesche or its parent corporation, E.A.C. The facts not in dispute thus demonstrate that Vickers is not liable for the contractual liabilities of Welco under any of the traditional exceptions to the rule of nonliability of corporate successors. Summary judgment was thus appropriate and the court of appeals erred in reversing the trial court’s grant thereof.
The judgment of the court of appeals is reversed and the judgment of the trial court is reinstated.
Judgment reversed.
Dissenting Opinion
dissenting. While I concur in the conclusion of the majority that the traditional exceptions to successor corporate liability are
“ ‘The gravamen of the traditional “mere continuation” exception is the continuation of the corporate entity rather than continuation of the business operation.’ (Emphasis sic.) 1 Frumer & Friedman, supra, at 70.58(12), Section 5.06[2][c]. The exception has been narrowly construed to protect corporations from unassumed liabilities. Id. at 70.58(13), Section 5.06[3]. Those courts which have expanded this exception have done so on the basis of significant shared features between the buyer and the seller, such as the same employees, a common name, or the same management. See, e.g., Cry v. B. Offen & Co. (C.A. 1, 1974),501 F.2d 1145 , 1153-1154 (same employees continued after transfer of ownership to produce same product, in same plant, with same supervision); Turner v. Bituminous Cas. Co. (1976),397 Mich. 406 ,244 N.W.2d 873 (retention of key personnel and trade name). The reasoning behind this expanded view of continuity is that where the successor corporation shares significant features with its predecessor, no basis exists for treating a purchase of assets differently from a de facto merger. Id. at 423,244 N.W.2d at 880 . The cases have required that the predecessor be dissolved or liquidated soon after the transfer of assets. Id. at 419-420,244 N.W.2d at 878-879 ; Bonee v. L & M Constr. Chemicals (M.D.Tenn. 1981),518 F.Supp. 375 , 381.” (Emphasis added.) Id. at 64-65, 30 OBR at 169,507 N.E.2d at 336 .
I agree with the rationale that the sharing of significant features between successor and predecessor corporations eliminates any basis “for treating a purchase of assets differently from a de facto merger.” However, I would part company with those decisions which require the dissolution of the predecessor as a condition precedent to the application of the expanded continuity-of-enterprise doctrine. My disagreement with this requirement is based on the view that it invites the avoidance of liability based on the mere expedient of maintaining a shell corporation in the place of the predecessor enterprise. Liability should not be dependent upon such a facile maneuver.
Instead, I would measure whether the successor corporation was a continuation of its predecessor based upon the following factors:
1. Continuity of management, personnel, physical location and assets;
2. Assumption of the ordinary business obligations and liabilities by the successor; and
These factors cannot be resolved by summary judgment based upon the state of the record below. Genuine issues of material fact exist as to whether the factors are present in this case. I . would therefore affirm the court of appeals and remand the cause for a trial on the merits.
My embrace of the expanded continuity-of-enterprise exception is limited to those actions involving issues of corporate, contract and tax law. I continue to adhere to the product line theory as the appropriate rule of law to be applied in the context of products liability. See Flaugher, supra,