Foster v. Cone-Blanchard MacHine Co.

597 N.W.2d 506, 460 Mich. 696

• Court: Michigan Supreme Court
• Decided: July 20, 1999
• Docket: 108465, Calendar No. 8
• Status: Published

Opinions

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 predecessor. The trial court granted defendant Cone-Blanchard Machine Company’s motion for summary disposition. The Court of Appeals reversed, holding that summary disposition was improper. It concluded that the plaintiff established a prima facie case of continuity of enterprise sufficient to allow a products liability claim against Cone-Blanchard. It also concluded that the plaintiff had established facts sufficient to allow the claim of breach of duty to warn to go forward.

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 plaintiffs 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.

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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 tom from her head. Plaintiff sued Cone-Blanchard and Seven Ranges. She alleged that Cone-Blanchard was liable as the legal successor of Cone Automatic Machine Company (Cone I), the company that designed and manufactured the machine in 1943.

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 MCR 2.116(C)(10). Defendant argued that it could not be liable because it was not the manufacturer of the machine. Further, Cone-Blanchard argued that there was no continuity of enterprise between Cone I, the manufacturer, and itself that would support imposition of successor liability.

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 Dynamics and, thereafter, continued the manufacture and design of the Conomatic line of screw machines. Pneumo Dynamics ceased designing and manufacturing the Conomatic line of screw machines, although it remained an active corporation. Pneumo Dynamics changed its name to Pneumo Abex Corporation.

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 plaintiffs 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

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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 Am Jur 2d, Corporations, § 1546, pp 922-924; Malone v Red Top Cab Co, 16 Cal App 2d 268, 273 [60 P2d 543 (1936)].)” [Turner, supra at 417, n 3, quoting Schwartz v McGraw-Edison Co, 14 Cal App 3d 767; 92 Cal Rptr 776 (1971).[⁵]

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, and dissolves as soon as legally and practically possible; and (3) the purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the selling corporation. Turner identified as an additional principle relevant to determining successor liability, whether the purchasing corporation holds itself out to the world as the effective continuation of the seller corporation.⁶

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

Although in the appropriate case a tertiary successor might be liable for a manufacturer’s defective product, we conclude, on the basis of our interpretation of Turner, that this is not such a case.

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-a-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 Turner Court reasoned that “distinctions between types of corporate transfers are wholly unmeaningful” because the injured plaintiff “has no place to turn for relief except to the second corporation.” Id. The underlying rationale for the Turner Court’s decision to disregard traditional coiporate law principles was to provide a source of recovery for injured plaintiffs.

Pneumo Dynamics, now Pneumo Abex, continued on as an active coiporation 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.

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DUTY TO WARN

This Court has not previously addressed whether a successor coiporation has an independent duty to warn a third party of a predecessor’s negligently designed and manufactured product.⁹ Generally, “an individual has no duty to protect another who is endangered by a third person’s conduct.” Murdock v Higgins, 454 Mich 46, 54; 559 NW2d 639 (1997).

Whether a duty exists is a question of law.

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 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. See Travis v Harris Corp, 565 F2d 443, 449 (CA 7, 1977) (without knowledge of the machine’s current location the successor has no one to warn).

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 had access to Cone I’s customer lists and that her employer possessed a Cone-Blanchard business card on its premises. We conclude that while Cone-Blanchard may have solicited continuing business from Cone I’s customers, such evidence alone is insufficient to support a “special relationship.”

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.

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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.

1 221 Mich App 43; 560 NW2d 664 (1997).

2 457 Mich 866 (1998).

3 In reviewing a motion for summary disposition brought under MCR 2.116(C)(10), a trial court considers affidavits, pleadings, depositions, admissions, and documentary evidence filed in the action or submitted by the parties, MCR 2.116(G)(5), in the light most favorable to the party opposing the motion. A trial court may grant a motion for summary disposition under MCR 2.116(C)(10) if the affidavits or other documentary evidence show that there is no genuine issue in respect to any material fact, and the moving party is entitled to judgment as a matter of law. MCR 2.116(C)(10), (G)(4). [Quinto v Cross & Peters Co, 451 Mich 358, 362; 547 NW2d 314 (1996).]

4 There is no need to address the continuing viability of Turner because we hold that plaintiff is not entitled to relief under it.

5 Plaintiff did not separately argue that Cone-Blanchard expressly or impliedly assumed Cone I’s liabilities. Plaintiff's argument that Cone-Blanchard assumed Cone I’s liabilities arises only under Turner’s continuity of enterprise theory that includes consideration of whether the purchasing corporation assumed those liabilities and obligations of the seller ordinary and necessary for the uninterrupted continuation of normal business operations of the seller.

6 This principle has been called the fourth guideline of the Turner continuity of enterprise analysis. However, we note that a truer reading of Turner suggests that the first three guidelines were intended to complete the continuity enterprise inquiry where there is a sale of corporate assets. Turner went on to identify as a separate and relevant inquiry whether a purchasing corporation holds itself out as the effective continuation of the seller.

7 In Haney v Bendix Corp, 88 Mich App 747; 279 NW2d 544 (1979), the Court of Appeals found that summary judgment for the defendant, a tertiary successor, was properly denied. In Haney, the plaintiff had established that approximately ninety percent of the production force, ninety percent of the sales force, and fifty percent of the management from the manufacturer remained with the tertiary successor. Further, the defendant took over what had been the manufacturer’s entire plant facilities, equipment, machinery, inventory and patents. We note that Haney is overruled to the extent that it is inconsistent with our holding that the availability of a predecessor is fatal to actions for successor liability.

8 See also Santa Maria v Owens-Illinois, Inc, 808 F2d 848, 859 (CA 1, 1986) (interpreting Turner as requiring that the injured plaintiff has been “deprived by the asset transaction of an effective remedy against the predecessor corporation that actively manufactured the product causing the injury”); Diaz v South Bend Lathe, Inc, 707 F Supp 97, 102-103 (ED NY, 1989) (refusing to apply Turner because predecessor corporation remained in existence); McCarthy v Litton Industries, 410 Mass 15, 22; 570 NE2d 1008 (1991) (interpreting Turner as requiring dissolution of the predecessor corporation).

9 The Court of Appeals has concluded that a successor may be liable for negligence stemming from an independent duty to warn in Powers v Baker-Perkins, Inc, 92 Mich App 645; 285 NW2d 402 (1979), and in Pelc v Bendix Machine Tool Corp, 111 Mich App 343; 314 NW2d 614 (1981). In Powers, the Court of Appeals held that an independent ground for successor liability could be found where

some control over the product is given to the successor, as in servicing, or the successor becomes aware of a defect in the product, causing an assumption of liability by the successor for injuries thereafter caused by that product. [Id. at 662-663.]

In Pele the Court of Appeals applied the principles outlined by Powers, declining to find a duty to warn where a successor corporation had not serviced or exercised any control over the machine in question and had not been aware of any defect in the machine before the plaintiff’s injury. Pele, supra at 358.