Corporate Predecessor Liability for Defective Products

By Swain, Bryan | Journal of Corporation Law, Spring 2000 | Go to article overview

Corporate Predecessor Liability for Defective Products


Swain, Bryan, Journal of Corporation Law


I. INTRODUCTION .........................................................................................................613

II. SUCCESSOR LIABILITY .....614

A. The Traditional Rule ............................................................................................ 614

B. The Expanded Continuation Exception ............................................................... 615

C. The Product Line Theory ...........616

D. Arguments Against the Product Line Theory ...................................................... 622

III. PREDECESSOR LIABILITY .......................................................................................... 624

A. Background ......................................................................................................... 624

B. Analysis ............................................................................................................... 626

C. Limitations on Predecessor Liability .................................................................. 628

IV. CONCLUSION ............................................................................................................ 628

I. INTRODUCTION

A traditional rule of corporate law is that when one corporation purchases another, the successor does not assume the predecessor's liabilities.1 This rule can cause problems when applied to the field of products liability.2 The corporation that produced the injurycausing product may no longer exist, leaving a plaintiff searching for some other entity to sue.

The topic of successor liability for the actions of the predecessor corporation has been the concern of many cases and articles,3 but this Note will focus on the rather novel subject of predecessor liability for the actions of the successor corporation. The Note begins with a discussion of successor liability, with particular attention to the product line exception.4 It then turns to an analysis of predecessor liability and how the concepts and arguments from the successor liability context can be used to suggest outcomes for predecessor liability claims.5 It concludes by predicting that those jurisdictions that have adopted the product line theory for successor liability will also embrace predecessor liability.6

II. SUCCESSOR LIABILITY

Many states have instituted strict liability for defective products.7 The goals of strict liability are to compensate those harmed by defective products; to spread the risk of harm from defective products to the manufacturer and all consumers of a product rather than placing the burden on the individual who happens to be harmed; to put the burden of paying for defective products on the manufacturer, who got the benefit of selling the products; and to deter manufacturers from producing defective products.8 Strict products liability normally works well in the context of a corporate manufacturer, but when the corporation has sold its assets to another corporation, the question of liability becomes more complicated.

A. The Traditional Rule

The traditional rule is that there is no assumption of liability when a successor corporation purchases the predecessor's assets.9 There are four well-established exceptions to this rule. The first exception to the traditional rule occurs when the successor corporation expressly or impliedly agrees to assume the debts and liabilities of the predecessor corporation.10 The second exception involves a transaction that constitutes a merger of the buyer corporation with the seller corporation.11 The third exception happens when the purchaser is a mere continuation of the seller.12 The fourth exception is invoked when the transaction is a fraudulent attempt by the seller corporation to escape liability rather than a genuine transfer of assets.13 Some courts add a fifth exception when adequate consideration for the sale is lacking,14 although this seems to be merely an indication that the fourth exception has been met. …

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