Academic journal article Harvard Law Review

Successor Liability, Mass Tort, and Mandatory-Litigation Class Action

Academic journal article Harvard Law Review

Successor Liability, Mass Tort, and Mandatory-Litigation Class Action

Article excerpt

I. INTRODUCTION

When one corporation purchases another corporation (or substantially all of another corporation's assets), the doctrine of successor liability determines the distribution of tort liability. Current doctrine often protects the successor corporation from liability for the predecessor's torts, even when the predecessor is unavailable for suit. Optimal deterrence requires defendants to pay for the harm they cause, but the liability loophole in current doctrine allows potential defendants to discount the cost of the risks they inflict on the public because a future asset sale provides an avenue for escaping liability.

Deterrence is an important goal for any successor liability doctrine, but the law should also encourage efficient corporate asset transfers. Current doctrine fails on this front as well--the piecemeal nature of tort litigation makes it difficult for the parties involved to know the extent of the predecessor's liability. In addition, in those cases in which a successor is liable, there is no effective mechanism for limiting its liability to the value of the assets acquired in the transaction.

This Note proposes a model for successor liability in the mass tort context (1) that will better serve the goals of deterrence and efficient corporate transfers. The model includes a presumption in favor of successor liability in which successor corporations will generally be held liable for predecessors' torts so that both successors and predecessors structure transactions with this liability in mind. (2) The parties can defeat the model's presumption, however, if the predecessor chooses to undergo a mandatory-litigation class action prior to the transfer. (3) Allowing corporations the option of discharging tort liability through the mandatory aggregation and litigation of both current and future claims will promote efficient transfers and reduce the uncertainty that can inhibit corporate asset transfers. (4)

This Note proceeds as follows. Part II analyzes the existing successor liability regime and discusses the problems with the status quo. Part III describes the new model proposed here and applies the model to a hypothetical corporate asset transfer. Part IV addresses potential objections to the model and proposes solutions. Part V undertakes a case study of the successor liability problems that plagued GAF Corporation due to its asbestos liability.

II. THE CURRENT LAW GOVERNING SUCCESSOR LIABILITY

The doctrine of successor liability attempts to bridge the gap between tort and corporate law. However, because it allows both predecessor and successor corporations to avoid liability for harm inflicted by predecessors, the current rule does not lead to optimal deterrence or compensation in some cases.

The "traditional," more restrictive version of successor liability adheres to the corporate law tradition of limited liability. According to the Restatement (Third) of Torts: Products Liability, which adopts this "traditional" doctrine, the default rule is that the successor is not liable for the predecessor's torts. (5) There are four exceptions to this rule: (1) if the successor agrees to assume the predecessor's liability; (2) if the transfer is fraudulent; (3) if the transaction amounts to a consolidation or merger; or (4) if the successor is a mere continuation of the predecessor. (6) These exceptions recognize that a regime with no successor liability would allow tortfeasors to evade responsibility too easily. The fundamental assumption underlying the traditional rule, however, is that in a nonmerger asset acquisition, none of the liabilities should be transferred unless the parties agree: (7) "imposing liability on the piecemeal purchase of productive assets would, for no compelling reason, impede the free alienability of corporate assets, thereby discouraging shareholder investment of capital and increasing social costs." (8)

It would be unreasonable to attach successor liability to each individual asset sold, such that the sale of a single piece of equipment would carry with it some portion of the predecessor's tort liability. …

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