New York Law Review

Tag: successor liability

  • Semenetz v. Sherling & Walden, Inc., 7 N.Y.3d 194 (2006): Rejection of the Product Line Exception to Successor Liability

    7 N.Y.3d 194 (2006)

    A corporation that purchases the assets of another corporation is generally not liable for the seller’s torts unless one of four established exceptions applies; New York does not recognize a “product line” exception to this rule.

    Summary

    This case addresses whether New York should adopt the “product line” exception to the general rule against successor liability in corporate acquisitions. Sean Semenetz was injured by a sawmill manufactured by S & W Edger Works, Inc. Edger Works subsequently sold its assets to Sawmills & Edgers, Inc. The plaintiff sued Sawmills, arguing it was liable as a successor corporation. The Court of Appeals declined to adopt the “product line” exception, holding that a corporation that purchases another’s assets is not liable for the seller’s torts unless one of the four established exceptions applies. The Court reasoned that adopting the exception would be a radical change with complex economic implications best left to the legislature.

    Facts

    S & W Edger Works, Inc. sold a sawmill to Semenetz Lumber Mill, Inc. in 1998.
    In 1999, Sean Semenetz was injured while using the sawmill.
    In 2000, Edger Works sold most of its assets to Sawmills & Edgers, Inc. The purchase agreement stated Sawmills did not assume Edger Works’ liabilities, except for ordered but undelivered inventory.
    Edger Works then changed its name to Sherling & Walden, Inc.
    Sawmills manufactured sawmills at the same plant and used some of Edger Works’ former employees. It advertised itself as “formerly S & W Edger Works.”

    Procedural History

    Plaintiff sued Sawmills, Edger Works, Sherling & Walden, and Semenetz Lumber, alleging strict products liability, negligence, breach of duty to warn, and breach of warranty.
    Sawmills moved for summary judgment, arguing lack of personal jurisdiction.
    Supreme Court initially denied the motion, finding that while the four Schumacher exceptions didn’t apply, Sawmills could be liable under the “product line” or “continuing enterprise” exceptions to successor liability.
    The Appellate Division reversed, finding no jurisdiction over Sawmills based on the corporate presence doctrine or long-arm statute, and holding that the product line exception dealt with liability, not jurisdiction.
    The Court of Appeals granted permission to appeal.

    Issue(s)

    Whether New York should adopt the “product line” exception to the general rule against successor liability in cases of strict products liability.

    Holding

    No, because adopting the “product line” exception would be a radical change from existing law with complex economic considerations best addressed by the legislature.

    Court’s Reasoning

    The Court declined to adopt the “product line” exception articulated in Ray v. Alad Corp., which imposes liability on a successor corporation for defects in a predecessor’s products. The rationales behind the Ray decision (destruction of plaintiff’s remedies, successor’s ability to spread risk, and fairness of burdening the successor with predecessor’s liabilities) were found unpersuasive.

    The Court noted that destruction of remedies is merely a restatement of the problem, not a justification for changing corporate law. The successor may lack the capacity to spread risk effectively, especially for small manufacturers facing insurance and pricing challenges. Additionally, imposing liability based on goodwill would force the successor to pay twice for the same asset.

    The Court emphasized the potential for “economic annihilation” of small businesses, which constitute 90% of the nation’s manufacturing enterprises. Adoption of the product line exception would deter the purchase of ongoing businesses and encourage liquidation. Further, it places liability on a party that did not put the defective product into the stream of commerce, undermining the core justification for strict products liability.

    The Court quoted City of New York, stating that the product line exception represents “a radical change from existing law implicating complex economic considerations better left to be addressed by the Legislature.” Therefore, the Court joined the majority of jurisdictions in rejecting the “product line” exception, adhering to the established Schumacher exceptions to successor liability.

  • Sullivan v. J.W. Greer Co., Inc., 64 N.Y.2d 807 (1985): Defining “Special Relationship” for Duty to Warn

    Sullivan v. J.W. Greer Co., Inc., 64 N.Y.2d 807 (1985)

    A successor corporation’s single service call on a machine is insufficient to establish a “special relationship” with the purchaser, thus precluding a duty to warn about defects, particularly concerning equipment not yet installed or present during the inspection.

    Summary

    Thomas Sullivan, an employee of Dunkirk Ice Cream Company, was injured by a fan blade while working on an ice cream hardening machine. He sued J.W. Greer Co., Inc. (Greer), the successor to the machine’s manufacturer, alleging negligence for failing to warn of the machine’s dangers. The New York Court of Appeals held that a single service call by Greer was insufficient to establish a “special relationship” with Dunkirk, which is necessary to impose a duty to warn. The Court also found that Greer had no duty to inspect or warn about equipment (the fans) that were not present or installed during its inspection of the ice cream machine.

    Facts

    J.W. Greer Company manufactured an ice cream hardening machine and sold it to Foremost Dairies in 1962. Dunkirk Ice Cream purchased the machine from Foremost in 1970. After a period of storage, Dunkirk requested J.W. Greer Incorporated (Greer), which had acquired the assets of J.W. Greer Company, to inspect the machine in 1974. During the inspection by Greer’s employee, Francis MacDonald, the cooling fans and the catwalk near the machine were not yet installed or possibly even present. Sullivan was injured in 1976 when a tool he was using struck a fan blade, causing a splinter to hit him in the eye. The fans were manufactured by Joy Manufacturing Company.

    Procedural History

    Sullivan and his wife sued Greer, asserting claims based on strict products liability, breach of warranty, and negligence. The Supreme Court granted summary judgment to Greer on the strict liability and breach of warranty claims but allowed the negligence claim to proceed, based on a purported duty to warn. The Appellate Division reversed, dismissing the remaining negligence claim, concluding that no “special relationship” existed between Dunkirk and Greer to impose a duty to warn. Sullivan appealed to the New York Court of Appeals.

    Issue(s)

    Whether a single service call by a successor corporation is sufficient to establish a “special relationship” with the purchaser of a machine, thus creating a duty to warn of potential dangers associated with the machine and related equipment?

    Whether Greer had an independent duty to warn Dunkirk about the cooling fans even though they were not present or installed during Greer’s inspection of the ice cream machine?

    Holding

    No, because a single service call is insufficient to establish the necessary “special relationship” required to impose a duty to warn under the circumstances.

    No, because Greer’s arrangement to inspect the ice cream machine did not create a duty to inspect or warn about equipment of another manufacturer that was not present or installed at the time of the inspection.

    Court’s Reasoning

    The Court of Appeals affirmed the Appellate Division’s decision, emphasizing the importance of a “special relationship” to impose a duty to warn. Citing Schumacher v. Richards Shear Co., 59 NY2d 239, the court reiterated that a duty to warn “commonly is imposed because of some special relationship, frequently economic.” The court found that a single service call was insufficient to establish such a relationship. The court referred to the factors identified in Schumacher, such as service contracts, coverage of the machine under a service contract, service of the machine by the successor corporation, and the successor corporation’s knowledge of defects, to determine the existence of sufficient links. The Court stated that these factors were not met in this case. The Court explicitly stated that it did not need to reach the question of whether Greer could be liable for harm caused by the fan. Regarding the independent duty to warn, the Court reasoned that Greer’s inspection arrangement for the ice cream hardening machine could not give rise to a duty to inspect or warn about equipment (the fans) that was not yet installed—or possibly not even present—when Greer made its inspection.

  • Grant-Howard Associates v. General Housewares Corp., 63 N.Y.2d 291 (1984): Contractual Allocation of Tort Liability Between Successor and Predecessor Corporations

    Grant-Howard Associates v. General Housewares Corp., 63 N.Y.2d 291 (1984)

    A successor corporation is not required to indemnify its predecessor for tort liabilities when the reorganization agreement between them explicitly excludes liabilities that did not exist at the time of the closing, irrespective of the successor liability doctrine’s effect on third-party claims.

    Summary

    Grant-Howard Associates sought a declaration that General Housewares Corporation was obligated to indemnify them for a product liability lawsuit stemming from a ceramic pitcher sold by Grant-Howard’s predecessor. The New York Court of Appeals held that the reorganization agreement between the companies controlled the allocation of liability. Because the injury occurred after the closing date and was thus not an existing liability at that time, General Housewares was not obligated to indemnify Grant-Howard, regardless of whether General Housewares could be held directly liable to the injured party as a successor corporation. The court emphasized that companies can allocate risk contractually but cannot alter the rights of third parties.

    Facts

    Holt Howard Associates, Inc. (later Grant-Howard Associates) sold housewares. General Housewares Corporation purchased Holt Howard’s assets via a Reorganization Agreement. The agreement included a section where General Housewares assumed Holt Howard’s existing liabilities, with specific exclusions. Stephanie Pohl allegedly suffered injuries in 1974 from a ceramic pitcher Holt Howard sold in 1967. Pohl sued Holt Howard and General Housewares.

    Procedural History

    Grant-Howard sued General Housewares for a declaration that General Housewares was liable for the Pohl injuries and must provide indemnity. Special Term granted summary judgment for Grant-Howard, finding General Housewares liable as a successor corporation and owing common-law indemnity. The Appellate Division affirmed. The New York Court of Appeals granted General Housewares’ motion for leave to appeal.

    Issue(s)

    Whether General Housewares was obligated to indemnify Grant-Howard for the Pohl lawsuit based on the Reorganization Agreement, considering the claim arose from an injury that occurred after the closing date.

    Holding

    No, because the Reorganization Agreement only obligated General Housewares to assume existing liabilities, and the Pohl claim did not exist at the time of closing because the injury had not yet occurred.

    Court’s Reasoning

    The court reasoned that the doctrine of successor corporation liability, which allows an injured party to recover from a company that has taken over the assets of the original tortfeasor, is distinct from the issue of indemnification between the predecessor and successor companies. The court stated that “Allowing recovery in tort against a successor corporation is merely an extension of the concept of products liability… Strict liability assures that a responsible source is available to compensate the injured party.” While the injured party can elect to proceed against either corporation, the companies themselves can contractually determine how such liability is allocated between them. The Reorganization Agreement specified that General Housewares assumed existing liabilities. Because Pohl’s injury occurred after the closing, the liability was not “existing” at the time of the agreement. The court rejected the argument that a contingent liability existed simply because the pitcher had been sold before the closing. “A tort action does not accrue until injury occurs.” The court added, “An uninjured party simply is not a ‘contingent liability’ in the usual sense of that term.” The court reversed the lower courts’ rulings and remanded for consideration of General Housewares’ counterclaims.

  • Goldman v. Zafir, 63 N.Y.2d 851 (1984): Requirements for Requesting Leave to Replead After Motion to Dismiss

    63 N.Y.2d 851 (1984)

    A party opposing a motion to dismiss for failure to state a cause of action must specifically request leave to replead in their opposing papers and demonstrate good ground to support the proposed new pleading.

    Summary

    This case addresses the procedural requirements for a plaintiff seeking leave to replead their complaint after a motion to dismiss has been granted. The Court of Appeals affirmed the Appellate Division’s denial of leave to replead, emphasizing that the plaintiff failed to include a request for such relief in their original opposing papers and did not adequately demonstrate grounds supporting a successor liability theory. The court clarified that merely raising the issue for the first time on appeal is insufficient when the statutory requirements for requesting leave to replead are not met. The decision underscores the importance of adhering to procedural rules and demonstrating a valid basis for an amended pleading.

    Facts

    The plaintiff, Goldman, brought an action against defendants Zafir and Brooklyn Garbage Bag Co. The defendants moved to dismiss the complaint under CPLR 3211 for failure to state a cause of action and on Workers’ Compensation Law grounds. The plaintiff opposed the motion. Special Term denied the motion to dismiss.

    Procedural History

    Special Term denied the defendants’ motion to dismiss. On appeal to the Appellate Division, the plaintiff, for the first time, requested leave to replead to assert a theory of successor liability if the motion to dismiss were granted. The Appellate Division reversed Special Term’s order and dismissed the complaint, implicitly denying the plaintiff’s request to replead. The plaintiff then appealed to the Court of Appeals.

    Issue(s)

    Whether the Appellate Division erred in implicitly denying the plaintiff’s request for leave to replead, given that the request was made for the first time on appeal and the plaintiff did not comply with CPLR 3211(e) by requesting such relief in their opposing papers at Special Term.

    Holding

    No, because the plaintiff failed to comply with the procedural requirements of CPLR 3211(e) by not requesting leave to replead in their opposing papers at Special Term and did not adequately demonstrate good grounds to support a theory of successor liability.

    Court’s Reasoning

    The Court of Appeals upheld the Appellate Division’s decision. The court emphasized that under CPLR 3211(e), a party opposing a motion to dismiss who desires leave to replead must set forth and support that request in their opposing papers. The court found that the plaintiff’s papers were missing allegations supporting a claim of successor liability under Schumacher v Richards Shear Co., which requires showing specific circumstances to support such a claim. The court stated, “In order to reverse the implicit refusal by the Appellate Division of leave to replead to plaintiff we would have to say that plaintiff’s papers, as a matter of law, necessarily satisfied that court that there was good ground to support a theory of successor liability (CPLR 3211, subd [e]) and, further, that the appellate court was required (again as a matter of law) to excuse compliance with the statutory mandate of inclusion of a request to replead in the opposing papers. We can do neither.” The Court distinguished Sanders v. Schiffer, noting that in that case, the plaintiffs had complied with the statutory requirement by requesting permission to replead in their attorney’s affidavit opposing the motion to dismiss.

  • Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239 (1983): Successor Liability and Duty to Warn

    Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239 (1983)

    A company that purchases the assets of a manufacturer may have an independent duty to warn the original customers of the manufacturer’s products of known dangers, even if it does not assume the predecessor’s liabilities; however, traditional successor liability does not apply unless specific conditions are met.

    Summary

    Otto Schumacher was injured by a shearing machine manufactured by Richards Shear and later acquired by Logemann Brothers. Schumacher sued Logemann, claiming successor liability and negligent failure to warn. The court held that Logemann was not liable under traditional successor liability principles, but could be liable for negligently failing to warn Schumacher’s employer, Wallace Steel, of the machine’s dangers, based on Logemann’s contacts with Wallace Steel and knowledge of the machine’s defects. The court reversed the grant of summary judgment to Logemann on the negligence claim.

    Facts

    Richards Shear sold a shearing machine to Wallace Steel in 1964. In 1968, Logemann acquired the assets of Richards Shear, including the right to manufacture and sell Richards Shear products. Logemann contacted Wallace Steel, notifying them of the acquisition and offering service for the machine. In 1978, Schumacher, an employee of Wallace Steel, was injured while operating the machine, which lacked a safety guard. Schumacher sued Logemann, arguing that the machine was defectively designed and that Logemann had a duty to warn of its dangers.

    Procedural History

    The trial court granted Logemann’s motion for summary judgment, dismissing the complaint and Richards Shear’s cross-claim. The Appellate Division affirmed. The New York Court of Appeals modified the Appellate Division’s order, granting summary judgment on the strict products liability claim but denying it on the negligence claim for failure to warn.

    Issue(s)

    1. Whether Logemann, as a successor corporation, can be held strictly liable for the torts of Richards Shear.

    2. Whether Logemann had an independent duty to warn Wallace Steel of the dangers associated with the shearing machine.

    Holding

    1. No, because the circumstances do not meet the established exceptions for successor liability.

    2. Yes, because Logemann’s relationship with Wallace Steel, coupled with Logemann’s knowledge or reason to know of the machine’s dangerous condition, could create a duty to warn.

    Court’s Reasoning

    The court applied the general rule that a corporation that acquires the assets of another is not liable for the predecessor’s torts, citing Hartford Acc. & Ind. Co. v. Canron, Inc., and outlined the exceptions: (1) express or implied assumption of liability, (2) consolidation or merger, (3) the purchaser is a mere continuation of the seller, or (4) the transaction is fraudulent. The court found none of these exceptions applicable.

    The court declined to adopt the “product line” or “continuity of enterprise” theories of successor liability, as applied in other jurisdictions. It found the facts distinguishable from cases such as Ray v. Alad Corp. and Turner v. Bituminous Cas. Co., where such theories had been applied.

    However, the court found that Logemann might be liable for negligently failing to warn Wallace Steel of the machine’s dangers. The court reasoned that a duty to warn may arise from a special relationship, often economic, where a party knows or has reason to know of a danger. It cited cases such as Leannais v. Cincinnati, Inc. and Travis v. Harris Corp., which found a potential duty to warn based on the successor corporation’s relationship with the predecessor’s customers and the economic benefit derived. The court considered Logemann’s contacts with Wallace Steel, including offering service and expertise, as sufficient evidence to defeat summary judgment on the negligence claim.

    The court emphasized that Logemann’s liability, if any, arises from this relationship with Wallace Steel, not from successor liability or acting as a repairman. The court also found that there was a jury question as to whether Logemann knew or had reason to know of the machine’s defect, stating that “there is evidence on the record to indicate that this defect was open and notorious based on prevailing industry standards.” The court also noted that the open and obvious nature of the defect does not negate the duty to warn, citing Micallef v. Miehle Co.

  • Billy v. Consolidated Machine Tool Corp., 51 N.Y.2d 152 (1980): Employer Liability as Successor to Negligent Third Party

    Billy v. Consolidated Machine Tool Corp., 51 N.Y.2d 152 (1980)

    The exclusivity provisions of the Workers’ Compensation Law do not bar a common-law action against an employer when the employer’s liability arises solely from its independent assumption, by contract or operation of law, of the obligations and liabilities of a third-party tortfeasor.

    Summary

    The New York Court of Appeals addressed whether an employer, USM Corporation, could be sued in a common-law tort action for the death of its employee, Billy, caused by a defective machine manufactured by a company USM later acquired. Billy’s widow received workers’ compensation benefits but also sued USM, arguing USM assumed the liabilities of the machine’s manufacturer. The Court held that while the “dual capacity” doctrine does not allow suits against employers in their roles as property owners or equipment manufacturers, USM could be liable as the successor to the liabilities of the negligent third-party manufacturer.

    Facts

    Billy, an employee of USM Corporation, died when a 4,600-pound part from a vertical boring mill broke loose and struck him during his employment. The machine was designed and manufactured decades earlier by Consolidated Machine Tool Corporation and Farrel-Birmingham Company. Through a series of mergers, USM Corporation absorbed both Consolidated and Farrel-Birmingham, assuming their liabilities. Billy’s widow received worker’s compensation benefits and then commenced a common-law tort action against USM, alleging the accident resulted from defects in the machine’s manufacture and design.

    Procedural History

    The Special Term and the Appellate Division granted summary judgment to USM Corporation, dismissing the claims based on the exclusivity provision of the Workers’ Compensation Law. The plaintiff appealed to the Court of Appeals. The Court of Appeals reversed the lower courts’ rulings regarding USM’s liability as a successor corporation but affirmed the dismissal of claims against Emhart Corporation (USM’s parent company) and the defunct manufacturing corporations.

    Issue(s)

    1. Whether the “dual capacity” doctrine allows an employee to sue their employer in common law for injuries sustained because of the employer’s role as the owner of the premises or manufacturer of equipment.

    2. Whether the exclusivity provision of the Workers’ Compensation Law bars a common-law action against an employer when the employer’s liability stems from its assumption of a third-party tortfeasor’s liabilities through corporate merger.

    3. Whether a parent corporation can be held liable for the actions of its subsidiary.

    Holding

    1. No, because the employer’s duty to provide a safe workplace is inseparable from their other roles arising from the employment relation.

    2. No, because the exclusivity rule does not shield an employer from liabilities it voluntarily assumed as a successor to a third-party tortfeasor.

    3. No, because there was no showing Emhart disregarded the separate identity of USM.

    Court’s Reasoning

    The Court rejected the “dual capacity” doctrine, stating that employers cannot be treated as having dual legal personalities. The obligation to provide a safe workplace is integral to the employment relationship, and allowing suits based on an employer’s roles as property owner or equipment manufacturer would undermine the workers’ compensation scheme. The Court quoted Williams v. Hartshorn, 296 NY 49, 50-51, stating that “an employer remains an employer in his relations with his employees as to all matters arising from and connected with their employment. He may not be treated as a dual legal personality, ‘a sort of Dr. Jekyl and Mr. Hyde.’”

    However, the Court distinguished the case from typical “dual capacity” scenarios. USM’s liability stemmed from its voluntary assumption of the liabilities of Consolidated and Farrel-Birmingham, the original manufacturers. The court reasoned that these manufacturers would have been subject to suit as third-party tortfeasors had their corporate identities been preserved. Permitting USM to avoid these assumed liabilities due to the worker’s compensation law would be inequitable. The court emphasized that “[I]n compensation law, social policy has dispensed with fault concepts to the extent necessary to ensure an automatic recovery by the injured workman; but the disregard of fault goes no further than to accomplish that object, and, with payment of the workman assured, the quest of the law for the actual wrongdoer may proceed in the usual way” (quoting 2A Larson, Workmen’s Compensation Law, § 71.10, at p 14-2).

    Regarding the claim against Emhart, the parent corporation, the Court reiterated the general rule that corporations are distinct from their shareholders, and liability cannot be imposed on shareholders solely based on ownership. There was no evidence Emhart disregarded USM’s separate identity or directly intervened in its affairs. The Court found that “At the very least, there must be direct intervention by the parent in the management of the subsidiary to such an extent that ‘the subsidiary’s paraphernalia of incorporation, directors and officers’ are completely ignored (Lowendahl v Baltimore & Ohio R. R. Co., 247 App Div 144, 155, affd 272 NY 360, supra).” Therefore, summary judgment for Emhart was appropriate.