Simmons v. Mark Lift Industries, Inc. ( 2005 )

Justice WALLER:

We granted certification from the United States District Court of South Carolina pursuant to Rule 228, SCACR, to address the following three questions:

1. May a plaintiff maintain a product liability claim in South Carolina under a successor liability theory against a defendant which purchased only assets of a voluntarily bankrupt selling company in an arms-length and court-approved bankruptcy sale and the purchasing company did not approve of, participate in, cause, or contribute to the selling company’s bankruptcy?

2. In the product liability context in South Carolina, what test is employed to determine whether there is successor liability of a company which purchased the assets of an unrelated company?

3. May a plaintiff maintain a product liability claim in South Carolina under a successor liability theory against a defendant when there are one or more other viable product liability defendants that may be liable to the plaintiff as a post-manufacturer seller of the allegedly defective product?

FACTUAL/PROCEDURAL BACKGROUND

James Simmons (Simmons) brought a product liability action in state court against Mark Industries, Inc., Terex Corp. (Terex), Mark Lift Industries, Inc., and BPS Equipment Rental and Sales, Inc. (BPS Equipment). The case was removed to federal court based on diversity jurisdiction. Simmons’ only basis of liability against Terex and Mark Lift Industries is a successor liability theory.

Simmons’ complaint alleges he was injured in a work-related accident at a construction site on August 9, 1999, when an elevated scissorlift aerial work platform collapsed. Mark Industries (Mark), a California corporation, designed, manufactured and sold the scissorlift in 1990. BPS Equipment sold the scissorlift to the end user, which provided it for use on the construction site.

Mark filed for bankruptcy in federal bankruptcy court in July 1991. The bankruptcy court entered an order granting Mark’s motion to sell specified assets for adequate consideration on November 6, 1991. Terex was the winning bidder for the assets at an auction the next day.

Following the auction, Mark and Terex entered into a purchase agreement. Section 1.1 of the agreement provides:

Except as otherwise specifically provided in this Agreement, at the Closing ... all the Assets shall be transferred from seller to Buyer free and clear of all security interests, liens, claims, encumbrances, restrictions or rights of others of every kind and description, including, without limitation, tax liens. Nothing herein shall be construed as the assumption of or by Buyer of any liabilities of the Seller, including, without limitation, any liability for products manufactured or sold by Seller.

Under the agreement, the assets purchased by Terex included the inventory of supplies, raw materials, work in progress, finished goods, trademarks, service marks, trade names, goodwill, all intellectual property, such as drawings, designs, blueprints, patents, licenses, and technology.

On November IB, 1991, the bankruptcy court issued an order approving the auction of assets and the terms and conditions of the purchase agreement entered into by Mark and Terex on November 7, 1991. Specifically, the order provided “that [Mark] is authorized to sell the assets of its estate to Terex Corporation, the maker of the highest and best offer at the auction, on terms and conditions consistent with the Purchase Agreement and related attachments.” The order stated that “the sale of the assets authorized hereby is free and clear of any and all liens and encumbrances as may presently attach to the assets----” The order further stated that the “sale of assets shall be free and clear of all liens and encumbrances of those creditors who had adequate notice of the Debtor’s motion and opportunity to appear and object at the time of the hearing on the Motion.... ”

On December 5, 1991, Terex created a wholly owned subsidiary to implement the asset purchase agreement between Mark and Terex. The new corporation was named Mark Lift Industries, Inc. (Lift Industries). The assets of Mark were transferred to Lift Industries several days later.

Lift Industries continued to manufacture similar scissorlifts at the California plant for several months, until mid-1992. At this time, Lift Industries closed the plant in California, and relocated the assets and equipment to Terex’s manufacturing plant in Waverly, Iowa. Only three Mark employees, none of whom were officers or directors, continued with Terex following the closing of Lift Industries’ California plant. From 1992 to 2001, Lift Industries marketed and distributed scissorlifts from its Iowa plant using the trade name used by Mark.

Terex did not have any business relationship with Mark until purchasing its assets in the bankruptcy court auction. There has never been any commonality of officers, directors, or stockholders between Mark and Terex.

DISCUSSION

We find the certified questions may be resolved in accordance with existing South Carolina authority.

In Brown v. American Ry. Express Co., 128 S.C. 428, 123 S.E. 97 (1924), this Court held that in the absence of a statute, a successor or purchasing company ordinarily is not liable for the debts of a predecessor or selling company unless (1) there was an agreement to assume such debts, (2) the circumstances surrounding the transaction warrants a finding of a consolidation or merger of the two corporations, (3) the successor company was a mere continuation of the predecessor,¹ or (4) the transaction was entered into fraudulently for the purpose of wrongfully defeating creditors’ claims. Brown v. American Ry. Express Co., 128 S.C. 428, 123 S.E. 97 (1924) (successor corporation which purchased part of predecessor’s assets was not liable for lost shipment by predecessor, where successor did not assume liability for such debts and predecessor remained a live and going concern with substantial assets).

Our opinion in Brown sets forth the proper test to determine, in a products liability action, whether there is successor liability of a company which purchases the assets of an unrelated company. Certified Question number 2 is answered accordingly.

Further, we conclude a plaintiff may maintain a state law-based product liability claim under a successor liability theory against a successor corporation which purchased the predecessor’s assets in a voluntary sale approved by the federal bankruptcy court provided one of the exceptions set forth in the Brown opinion applies. Accordingly, we find the District Court in this case may answer Certified Question number 1 by reference to the existing precedent set forth in Brown.

Lastly, Terex urges us to find it may not be held liable as a successor because Simmons may seek recovery from the seller, BPS Equipment. Terex asserts that when other entities may answer in damages under a strict liability or negligence theory, it is unnecessary to hold a successor corporation liable in a product liability action. We disagree.

We find a plaintiff may maintain a product liability claim under a successor liability theory against a defendant when there are one or more other viable product liability defendants. The status and availability of other potential defendants is irrelevant in determining the issue of a successor corporation’s liability in a product liability action. However, as noted in the answer to the first two certified questions, a plaintiff must fall within one of the four exceptions set forth in Brown.

We hold that each of the certified questions presented in this case may be answered in accordance with our opinion in Brown.

CERTIFIED QUESTIONS ANSWERED.

MOORE, J., Acting Justices JOHN W. KITTREDGE and JAMES R. BARBER, concur. BURNETT, J., dissenting in a separate opinion.

1 . Essentially, the dissent advocates an expansion of the mere continuation exception. However, as noted by the dissent, the majority of courts interpreting the mere continuation exception have found it applicable only when there is commonality of ownership, i.e., the predecessor and successor corporations have substantially the same officers, directors, or shareholders. We decline to extend the exception to cases in which there is no such commonality of officers, directors and shareholders. Further, we find no conflict with Holloway v. John E. Smith's Sons Co., 432 F.Supp. 454 (D.S.C.1977). We do not find that the Holloway court established a new test of successor liability. Although the court in Holloway did not cite the test established in Brown, it applied the mere continuation exception. Unlike the present case in which Mark Lift and Terex did not share common officers, directors and shareholders, it appears from a reading of Holloway that there was, indeed, a commonality of ownership. Accordingly, the mere continuation exception was properly applied to that case.