Berg Chilling Sys v. Hull Corp

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
1-31-2006
Berg Chilling Sys v. Hull Corp
Precedential or Non-Precedential: Precedential
Docket No. 04-3589
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-3589
BERG CHILLING SYSTEMS, INC.,
Appellant
v.
HULL CORPORATION;
SP INDUSTRIES, INC.
ON APPEAL FROM THE UNITED STATES DISTRICT
COURT FOR THE EASTERN DISTRICT OF
PENNSYLVANIA
District Court No. 00-CV-5075
District Court Judge: The Honorable Berle M. Schiller
Argued September 26, 2005
Before: ALITO, AMBRO, and LOURIE*, Circuit Judges
(Opinion Filed: January 31, 2006 )
JOHN J. SOROKO (Argued)
PATRICK J. LOFTUS
JAMES H. STEIGERWALD
Duane Morris LLP
*
Honorable Alan D. Lourie, Judge of the United States
Court of Appeals for the Federal Circuit, sitting by designation.
1650 Market Street
One Liberty Place, 39th Floor
Philadelphia, PA 19103-7396
Counsel for Appellant
MICHAEL O. ADELMAN (Argued)
MICHAEL P. DALY
KATHRYN E. BISORDI
Drinker Biddle & Reath LLP
One Logan Square
18th & Cherry Streets
Philadelphia, PA 19103-6996
Counsel for Appellees SP Industries, Inc.
OPINION OF THE COURT
ALITO, Circuit Judge:
Berg Chilling Systems (“Berg”) appeals a judgment entered
by the United States District Court for the Eastern District of
Pennsylvania. In the earlier proceedings, Berg sought a judgment
rendering SP Industries (“SPI”) liable for breach of contract, most
recently based on the theory that SPI assumed liability when it
purchased the assets of an entire division of the Hull Corporation
(“Hull”), the original party to the contract. Because we find that
SPI did not assume Hull’s contractual liability to Berg under any
of the exceptions to the traditional corporate rule of successor non-
liability, we affirm.
I.
The tangled history of this case began in 1995, when Berg,
a Canadian corporation, contracted with a Chinese company, Hua
Du Meat Products Company (“Huadu”), to provide an industrial
food freeze-drying system (the “Huadu Contract”). The system
included several components that Berg planned to acquire from
subcontractors and suppliers. One of these subcontractors was
2
Hull, a Pennsylvania entity, with whom Berg eventually contracted
to design, engineer, manufacture, test, and modify two freeze
dryers. The purchase agreement between Berg and Hull (the
“Purchase Agreement”) stipulated that the two freeze dryers
conform to particular “through-put” specifications, an industry
term referring to the dryers’ ability to process a certain volume of
food at a high quality level within a 24-hour period.
All did not go according to plan. Initially, various logistical
and timing issues plagued the manufacture and delivery of the
freeze dryers before they were eventually installed at Huadu’s
facility in China in April 1997, and prepared for trial runs. Then,
the freeze dryers failed a preliminary test administered by a Hull
service technician, leading Huadu to send a list of concerns to
Berg, which then forwarded the list to Hull. The Hull technician
supervising the testing left China without running any performance
tests. These tests would have held the freeze dryers to even more
stringent standards than did the failed start-up test, and satisfaction
of the performance tests was required by the Huadu Contract.
Frustrated by Hull’s apparent lack of cooperation, Huadu
threatened to cancel the contract; Berg, in turn, threatened to sue
Hull.
In an effort to salvage the project and persuade Huadu not
to terminate the contract, representatives of Berg and Hull traveled
to China in October 1997 to negotiate a compromise. The result
was an agreement among Huadu, Berg, and Hull, modifying certain
terms in the original contract (the “Modified Agreement”). The
Modified Agreement provided, among other things, that Berg and
Hull would arrange, at their own cost, modifications to the freeze
dryers so they would meet the through-put requirements of the
original Huadu contract. It also obligated Hull to perform technical
work, assembly work, testing work, and production work on the
freeze dryers according to engineering plans prepared by a Hull
engineer. March 1998 was set as the date by which modifications
would be completed and Huadu would grant final acceptance.
Meanwhile, in August 1997, Hull began negotiating a
business deal with SPI, a Delaware corporation with its principal
place of business in New Jersey. The transaction, structured as an
asset purchase agreement, proposed to sell to SPI all assets,
3
properties, rights, and businesses related to Hull’s Food, Drug and
Chemical (“FDC”) Division. Hull’s FDC Division included its
freeze dryer production capacity, and consequently its rights and
obligations under the Modified Agreement and the Purchase
Agreement. At the time of contract negotiations, Hull had at least
two other Divisions: the Emission Monitoring Systems Division
and the Vacuum Components Division.
Hull and SPI entered into an asset purchase agreement dated
August 25, 1997 (“Asset Purchase Agreement” or “APA”), which
closed approximately one week after Huadu, Berg, and Hull signed
the Modified Agreement. SPI’s President and CEO, Jack
Partridge, indicated that SPI specifically intended to acquire Hull’s
FDC Division as an ongoing business. See Berg Chilling Sys., Inc.
v. Hull Corp., No. 00-5075, 2003 WL 21362805, at *4 (E.D. Pa.
June 10, 2003) (hereinafter Berg I). SPI planned to combine the
newly-acquired FDC Division with its own VirTis Division, which
manufactured freeze dryers for research; indeed, a public release by
SPI referenced a “merger agreement between the FDC division of
Hull and the VirTis division of SP Industries.” (A1042).
Several particular provisions of the APA are relevant to our
discussion. The first is a list of purchase assets, detailed in Article
1.2, which included “all contracts and agreements, including,
without limitation, sales orders and sales contracts.” (A962-965).
The second provision at issue is Section 7.8, entitled Product
Warranties, which states that:
Purchaser will, as appropriate, agree to repair (at the
Real Estate or as necessary, at the location of the
customer) or accept returns of products of the
Business shipped by [Hull] on and prior to the
Closing Date ... which are defective or which fail to
conform to the customer’s order in accordance with
the following provisions (but [SPI] does not hereby
assume any liability to any third party claimant. ...)
(A986). Third, the APA’s choice of law provision, set forth in
Section 10.6, stated that the “agreement shall be governed and
controlled as to validity, enforcement, interpretation, construction,
effect and in all other respects by the internal laws of the State of
4
New Jersey applicable to contracts made in that State.” (A994).
Finally, the purchase price of the contract indicated in Section 3.1
was fixed as the sum of six million dollars cash and the aggregate
book amount of assumed liabilities. (A966).
As the APA’s closing date approached, the remaining work
on the freeze dryers for Berg was a cause of concern for all parties.
After the asset transfer, it would have been impossible for Hull to
complete its obligations under the Modified Agreement because
Hull retained neither the personnel nor the capacity for the required
work. Hull and SPI resolved the issue by simultaneously entering
into a “side letter agreement” in which they agreed that SPI would
complete the remaining design modifications and repairs to the
freeze dryers, and that Hull would reimburse SPI for a portion of
its expenses. Berg Chilling, 369 F.3d at 750. The letter provided
that “[e]xcept as amended hereby, the terms and provisions of the
Asset Purchase Agreement shall remain in full force and effect.”
(A1098). Both Hull and SPI considered SPI’s efforts to fix the
freeze dryers to be warranty work, as defined and covered by
Section 7.8 of the APA, and the side letter agreement made no
changes to that section. Meanwhile, Berg attempted to assuage its
own concerns about the project by sending a letter to Hull,
inquiring about “the transfer of liabilities, and specifically who will
be carrying the full financial responsibility for this project.”
(A1045). Hull responded by indicating that “[i]f Hull’s freeze
drying division should be transferred to another entity, Hull’s
responsibility will of course be assumed by the successor.”
(A1043). At the time Hull made this representation, the APA was
still under negotiation, and there was no guarantee that any asset
transfer would ultimately take place. There is no indication that
Hull ever informed SPI about its assurances to Berg, and Berg did
not discuss the matter directly with SPI after the asset transfer was
complete.
After the APA closed, SPI renamed Hull’s former FDC
Division “Hull Company Division,” and marketing materials called
the Hull Company Division the “continuation” of Hull. (A725-27,
737-39). Key former employees of Hull, including the major
players in the Huadu Contract, remained involved in the project.
SPI named Lewis Hull, Hull’s chairman, as honorary chairman of
the Hull Company Division, and employed John Hull as a
5
consultant to the Huadu project. Both men lacked any power to
legally bind SPI. Others, including Hull’s chief engineer,
continued to perform design and engineering work on the Huadu
Project pursuant to the Modified Agreement. The Division’s first
order of business was to complete the remaining work on the
Huadu freeze dryers to bring them into compliance with the
contract.1
SPI’s efforts to bring the freeze dryers up to performance
standards were ultimately unsuccessful. Consequently, Huadu filed
an international arbitration action against Berg for breach of
contract in March, 1999, pursuant to its rights under the Huadu
Contract, as modified by the Modified Agreement. Berg requested
that Hull participate in a joint defense in the proceedings, but Hull
refused to do so. Although the arbitrators found that the only
deficiency in the freeze-drying system was the freeze dryers
themselves, they found that Berg bore full responsibility to Huadu,
and deemed Hull’s liability to be outside the scope of arbitration.
Berg Chilling Sys. v. Hull Corp., 369 F.3d 745, 752 (3d Cir. 2004).
Approximately one year later, Berg informed SPI of the arbitration
for the first time. Ultimately, Huadu won an arbital award of
approximately $2.5 million against Berg, which the parties settled
for a total of $1,000,000 in cash, and $650,000 in equipment value
(Huadu kept the freeze dryers).
While the arbitration continued, Berg filed suit against Hull
and SPI in the United States District Court for the Eastern District
of Pennsylvania, asserting claims for breach of contract, breach of
express warranty, breach of implied warranty, and indemnity and
contribution. Hull and SPI, in turn, each filed cross-claims against
each other for indemnity or contribution After a bench trial in
January 2003, the District Court determined that Berg, Hull, and
SPI were equally at fault for breaching the agreements with Huadu.
Accordingly, the court apportioned the $1,000,000 arbitration
1
Berg intimates that the ultimate failure of the freeze dryers
to perform to Huadu’s specifications was due to SPI’s faulty
design, not to Hull’s. We, however, believe that it is more accurate
to characterize SPI’s work as attempting to fix flaws -- including
design flaws -- in Hull’s original work.
6
settlement equally but separately among Berg, Hull, and SPI. The
District Court did not allow Berg to recover any portion of the
$650,000 equipment credit because Berg did not show that it
accurately reflected the actual value of the equipment, nor did it
take into account the costs Berg would have incurred in retrieving
the equipment. The District Court also found against both Hull and
SPI on their respective cross-claims for indemnification.
Berg and SPI appealed, and this Court reversed, finding that
Section 7.8 of the APA precluded a finding that SPI was liable to
Berg on the basis of the APA. Thus, based on that indemnification
clause, Hull was determined to be solely liable to Berg for the
$1,000,000 cash settlement, the $650,000 equipment credit for the
freeze dryers, and attorneys’ fees and costs incurred in the
arbitration proceedings. Berg Chilling, 369 F.3d at 766. This Court
also found Hull liable to SPI for indemnification, including
attorneys’ fees and costs. The District Court was directed on
remand to determine whether to void Section 7.8 as against public
policy, and whether SPI is liable to Berg under the doctrine of
successor liability.
On remand, Berg contended that SPI is liable for Hull’s
breach of contract as a successor corporation, either because the
substance of their transaction -- despite the label of the APA -- was
truly a de facto merger between SPI and Hull, or because the APA
rendered SPI a “mere continuation” of Hull. Initially, the District
Court decided that there is no material difference between New
Jersey and Pennsylvania successor liability law, and therefore did
not decide which state’s law governed the successor liability issue.
Ultimately, the District Court found that SPI did not succeed to
Hull’s liability under the Modified Agreement. Berg II, at *4. Hull
Corporation did not participate in the remand proceedings, nor does
it participate in this appeal, as it is no longer in business and has no
assets. Berg II, at *2.
Next, Berg argued that Section 7.8 was void as contrary to
public policy, both according to two New Jersey statutes and to
New Jersey common law. Berg Chilling Sys. v. Hull Corp., No.
00-5075, 2004 WL 1749174, at *1 (E.D. Pa. Aug. 3, 2004)
(hereinafter Berg II). First, the District Court summarily rejected
Berg’s argument that N.J. Stat. § 2A:40A-1 and N.J. Stat. §
7
2A:40A-2 prohibited enforcement of Section 7.8. The Court
reasoned that the statutes in question applied only to negligence
disclaimers and were thus irrelevant to a breach of contract action.
Moreover, the Court found the statutes inapplicable because they
only apply in situations where damages are caused by the
contracting party’s sole negligence -- which is not the case here, as
this Court previously held that Hull was also liable. The District
Court similarly rejected Berg’s argument that Section 7.8
contravened New Jersey common law deeming exculpation of
professionals to be against public policy. The District Court found
cases on which Berg relied to be inapplicable to the situation in this
case. Berg II, at *3.
II.
We exercise plenary review over the District Court’s legal
determinations, Shire U.S. Inc. v. Barr Labs. Inc., 329 F.3d 348,
352 (3d Cir. 2003), and review the District Court’s findings of fact
for clear error, United States v. Bell, 414 F.3d 474, 478 (3d Cir.
2005). In order to constitute error, a factual finding must be
“completely devoid of minimum evidentiary support displaying
some hue of credibility.” Berg Chilling Sys. Inc. v. Hull Corp.,
369 F.3d 745, 754 (3d Cir. 2004) (internal citations and quotations
omitted).
We must first determine which state’s substantive law
governs, a question over which we exercise plenary review. See
Garcia v. Plaza Oldsmobile Ltd., 421 F.3d 216, 219 (3d Cir. 2005).
To resolve the issue of what law to apply to Berg’s successor
liability claims, we look to the choice of law rules of the state of
Pennsylvania, because in an action based on diversity of citizenship
jurisdiction, we must apply the substantive law of the state in
which the District Court sat, including its choice of law rules. See
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941);
Yohannon v. Keene, 924 F.2d 1255, 1264 (3d Cir. 1991). Because
choice of law analysis is issue-specific, different states’ laws may
apply to different issues in a single case, a principle known as
“depecage.” See, e.g., Compagnie des Bauxites v. Argonaut-
Midwest Ins. Co., 880 F.2d 685, 691 (3d Cir. 1989).
8
A.
Initially, we must determine whether a true conflict exists
between the application of New Jersey law and Pennsylvania law.
According to conflicts of laws principles, where the laws of the two
jurisdictions would produce the same result on the particular issue
presented, there is a “false conflict,” and the Court should avoid the
choice-of-law question. See Williams v. Stone, 109 F.3d 890, 893
(3d Cir. 1997); Lucker Mfg. v. Home Ins. Co., 23 F.3d 808, 813
(3d Cir.1994) (applying Pennsylvania choice-of-law rules). The
District Court determined that there was no material difference
between New Jersey and Pennsylvania successor liability law, and
therefore did not decide which state’s law governs the successor
liability issue. Berg II, at *4. Berg now argues that New Jersey
law controls, because courts in that state find successor liability
under less compelling circumstances, but asserts that applying
Pennsylvania law is not fatal to its claim; SPI contends that choice
of law analysis is unnecessary, but argues in favor of Pennsylvania
law if the Court is obligated to choose.
Choice of law analysis is necessary because Berg’s claim is
more likely to fail under Pennsylvania law. District Courts
applying Pennsylvania law hold that a “de facto merger or
consolidation cannot exist unless the shareholders of the
predecessor become shareholders of the successor through the
successor’s use of stock in payment for the predecessor’s assets.”
Glynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265, 277 (D.N.J.
1994) (noting the Pennsylvania law before proclaiming the
opposing view under New Jersey law); see also Forrest v. Beloit
Corp., 278 F. Supp. 2d 471, 477 (E.D. Pa. 2003), rev’d on other
grounds, 2005 WL 2245640 (3d Cir., Sept. 15, 2005) (finding that
de facto merger claim failed as a matter of law because there was
no stock transfer between the so-called predecessor and successor
corporations); Tracey v. Winchester Repeating Arms Co., 745 F.
Supp. 1099, 1109-10 (E.D. Pa. 1990) (finding continuity of stock
ownership to be the "essential element" to application of de facto
merger exception). Thus, as the District Court noted, “the lack of
a stock transfer is probably fatal to Berg’s de facto merger
argument” under Pennsylvania law. Berg II, at *4 n.5.
9
Berg has a much better chance under New Jersey law
because its courts have adopted a broader standard of successor
liability that deemphasizes continuity of shareholder interest. See,
e.g., Woodrick v. Jack J. Burke Real Estate, 306 N.J. Super. 61,
74-77, 703 A.2d 306 (App. Div. 1997). This line of cases elevates
the intent of the contracting parties to primary importance, id., and
may disregard entirely whether the selling corporation continues in
business, see Koch Materials Co. v. Shore Slurry Seal, Inc., 205 F.
Supp. 2d 324, 337 (D.N.J. 2002). In Koch, the District Court
allowed for the possibility that a corporation purchasing an entire
division may meet the requirements of a “mere continuation,”
despite the fact that all other divisions of the selling corporation
remain extant and viable. Id. According to that court, it “makes
little sense” to consider whether the selling corporation continues
in business “in the context of modern business, where a corporation
might easily sell an entire division and carry on dutifully in another
area.” Id. Because SPI, like the corporation in Koch, also
purchased an entire division of another corporation, Koch would be
an influential, perhaps dispositive, case if we were to apply New
Jersey law. Thus, because Pennsylvania and New Jersey courts
focus on such disparate elements in determining successor liability,
we must engage in choice of law analysis.
B.
Once it is determined that an actual conflict exists,
Pennsylvania follows a “flexible rule,” that “permits analysis of the
policies and interests underlying the particular issue before the
court.” Griffith v. United Air Lines, 416 Pa. 1, 203 A.2d 796
(1964); see also Myers v. Commercial Union Assurance Cos., 506
Pa. 492, 485 A.2d 1113 (1984) (reiterating importance of “policies
and interests” analysis); Cipolla v. Shaposko, 439 Pa. 563, 267
A.2d 854 (1970) (advising that relevant factors be viewed
qualitatively, not quantitatively). The federal courts of the Third
Circuit have interpreted Griffith to mean that a court applying
Pennsylvania law should use the Second Restatement of Conflict
of Laws as a starting point, and then flesh out the issue using an
interest analysis. See Compagnie des Bauxites, 880 F.2d at 688;
Melville v. American Home Assurance Co., 584 F.2d 1306, 1308-
09 (3d Cir. 1978); American Contract Bridge League v.
Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 74 (3d Cir. 1975); see
10
also United Brass Works, Inc. v. American Guarantee & Liability
Ins. Co., 819 F. Supp. 465 (W.D. Penn. 1992) (providing historical
analysis of federal courts’ determination of Pennsylvania choice of
law approach).
The Second Restatement dictates different approaches
depending on the substantive law at issue. Thus, to properly apply
the Second Restatement and remain true to the spirit of
Pennsylvania’s “flexible approach,” we must first characterize the
particular issue before the court as one of tort, contract, or
corporate law -- or some hybrid -- in order to settle on a given
section of the Restatement for guidance. See Ruiz v. Blentech
Corp., 89 F.3d 320, 324 (7th Cir. 1996) (“To properly apply the
Second Restatement method, a court must begin its choice-of-law
analysis with a characterization of the issue at hand in terms of
substantive law.”). Here, the practical effect of characterizing
successor liability may be significant. This case arose from the
effects of SPI’s purchase of an entire division of the Hull
Corporation, and the Asset Purchase Agreement between those
parties -- the centerpiece of the transaction -- contains a provision
that chooses New Jersey law to govern the contract. According to
the Restatement, if we characterize the issue as purely contractual,
and strictly apply the rules governing choice of law in contracts
interpretation cases, the APA’s choice of law provision would
likely stand unless:
(a) the chosen state has no substantial relationship to
the parties or the transaction and there is no other
reasonable basis for the parties’ choice, or (b)
application of the law of the chosen state would be
contrary to a fundamental policy of a state which has
a materially greater interest than the chosen state in
the determination of the particular issue and which,
under the rule of §188, would be the state of the
applicable law in the absence of an effective choice
of law by the parties.
Restatement (Second) of Conflicts of Law § 187(2).
The ordinary rule of successor liability is rooted in corporate
law, and it states that a firm that buys assets from another firm does
11
not assume the liabilities of the seller merely by buying its assets.
See, e.g., Luxliner P.L. Export Co. v. RDI/Luxliner, Inc., 13 F.3d
69 (3d Cir. 1993); Polius v. Clark Equip. Co., 802 F.2d 75 (3d Cir.
1986) (noting that the general rule of corporate successor liability
was “designed for the corporate contractual world where it
functions well”); 15 William Meade Fletcher et al., Fletcher
Cyclopedia of the Law of Private Corporations § 7122. The
problem of characterization lies in the mottled nature of the
exceptions to the ordinary rule in successor liability law because
they are not uniformly characterized as wholly based in tort,
contract, or corporate law. See, e.g., United States v. General
Battery Corp., 423 F.3d 294, 301 (3d Cir. 2005) (noting that the
choice of law framework governing successor liability remains
“unsettled”); Savage Arms, Inc. v. Western Auto Supply Co., 18
P.3d 49, 53 (Alaska 2001) (analyzing other states’ approaches to
successor liability law and concluding that successor cases dealing
with products liability are appropriately charaterized as torts
questions); Ruiz, 89 F.3d at 326 (noting that many courts have
“struggled to decide whether [successor liability] is part of
corporate law or tort law”); Webb v.Rodgers Mach. Mfg. Co., 750-
F.2d 368, 374 (5th Cir. 1985); In re Asbestos Litigation (Bell), 517
A.2 d 697, 699 (Del. Super. 1986) (holding that contract/corporate
law applied to successor liability case based on legal effect of
contract between corporations).
While the basic tenet of successor liability law is based in
corporate law, the exceptions span a loose substantive continuum
from contract to corporate to tort law. There are four traditional
exceptions, all founded in corporate and contract law. See Ruiz, 89
F.3d at 326. The first exception covers situations where the buyer
either expressly or implicitly agrees to assume some or all of the
seller’s liabilities. It is usually straightforward in application.
Because this exception is based on interpreting the terms of the
parties’ agreement, it is characterized most strictly as contract law.
See, e.g., T.H.S. Northstar Associates v. W.R. Grace & Co.-Conn.,
840 F. Supp. 676, 677-78 (D. Minn. 1993) (indicating that the
Court would enforce the contractual choice of law clause under an
“express assumption of liability” theory of successor liability).
The second exception applies where a transaction is entered into
12
fraudulently in order to evade liability.2 The third and fourth
exceptions, de facto merger and mere continuation, are generally
treated identically, see, e.g., Luxliner, 13 F.3d at 73 (stating that
“[m]uch the same evidence is relevant to each determination,” and
listing the same factors as necessary to determine “whether either
of these exceptions applies”), as both arise where there is
continuity of identity between the buyer and seller, see Ruiz, 89
F.3d at 325 (“In effect, the de facto merger and continuation
exceptions are identical; each exception depends upon an identity
of ownership between the seller and purchaser”). “Mere
continuation” analysis focuses on whether the new corporation is
merely a restructured form of the old, while de facto merger
analysis inquires whether a transaction -- though structured as an
asset purchase -- factually amounts to a consolidation or merger.
Additionally, many states have adopted rules expanding
successor liability in products liability cases. See Dawejko v.
Jorgensen Steel Co., 434 A.2d 106,111 (Pa. Super. 1981); Ramirez
v. Amsted Industries, Inc., 431 A.2d 811, 824-825 (N.J. 1981); see
also Ray v. Alad Corp., 560 P.2d 3 (Cal. 1977) (departing, for the
first time, from traditional corporate law grounding of successor
liability). Under the so-called “product line” theory, the successor
corporation remains strictly liable in tort for the defective products
of its predecessor. We need not, and do not here, characterize the
substantive law of the product line exception, but merely note the
confusing effect of introducing an explicitly tort-based exception
to a traditionally corporate- and contract-based doctrine. Thus, at
one extreme lies the explicit and implicit assumption of liability
exception, interpreted solely based on contract. At the other lies
the product line exception, which is generally analyzed using torts
choice of law principles. The de facto merger/continuation
exception to successor liability rests somewhere in the middle.
2
Some states recognize transfer for inadequate
consideration as an additional exception, see, e.g., Lopata v. Bemis
Co., Inc., 383 F. Supp. 342 (E.D. Pa. 1974); however, this seems
more properly viewed as a form of constructive fraud, see, e.g.,
Marie T. Reilly, Making Sense of Successor Liability, 31 Hofstra
L. R. 745, 757 (2003).
13
The de facto merger exception is not strictly contractual
because it is an equitable principle, ultimately designed to look
beyond the contract. As an initial matter, the Restatement itself
suggests that we consider whether the parties could have contracted
about the subject matter at issue. A contractual choice of law
provision applies, with certain limitations, to issues that the parties
“could have resolved by an explicit provision” of the contract.
Restatement (Second) of Conflicts of Law § 187 (1); see also
Chestnut v. Pediatric Homecare of America, Inc., 420 Pa. Super.
598, 604 (1992) (applying Pennsylvania law to an issue according
to Restatement (Second) of Conflicts of Law § 187(2)(b), while
recognizing that parties did not have the power to contract as to the
issue); Schifano v. Schifano, 471 A.2d 839, 843 n.5 (Pa. Super. Ct.
1984). A de facto merger inquiry investigates whether a
transaction labeled “Asset Purchase Agreement” in fact constituted
a merger -- a determination that does not arise purely from the
agreement itself. Thus, SPI and Hull could not have controlled,
through express contractual language, whether their agreement in
fact constituted a merger. Though strict adherence solely to the
Restatement might lead to a different result, under Pennsylvania’s
flexible combination of Restatement and interest-based analysis,
the contractual choice of law provision should not apply to the
issue. Cf. T.H.S. Northstar Associates, 840 F. Supp. at 678.
Our cases have acted upon this principle, although none has
explicitly addressed it. See SmithKline Beecham Corp. v. Rohm
& Haas Co., 89 F.3d 154, 162 (3d Cir. 1996) (using law chosen by
contract to interpret contract terms, but engaging in Pennsylvania
choice of law analysis to determine successor liability); Rego v.
ARC Water Treatment Co., 181 F.3d 396, 401 (3d Cir. 1999)
(observing that successor liability is “derived from equitable
principles”). Other federal courts have explored the issue in more
detail. See, e.g., Source One Enterprises. v. CDC Acquisition
Corp., No. 02-4925, 2004 WL 1453529 at *1 (D. Minn. June 24,
2004) (indicating that contractual choice of law clause did not
apply to successor liability); East Prairie R-2 School District v.
U.S. Gypsum Co., 813 F. Supp. 1396 (E.D. Miss. 1993) (using the
Restatement-based choice of law rules of Missouri to determine
that, while contractual choice of law clause applied to contract
terms, Mississippi law controlled successor liability issue).
14
In general, while it makes sense to allow the parties to a
contract to control which law applies to their agreement, it does not
follow that the contract provisions should control an inquiry that,
by its nature, looks beyond the contract. In a strict Restatement
analysis, we would be guided towards giving effect to the
contractual choice of law by considerations such as protecting the
parties’ justified expectations and assuring certainty, predictability
and uniformity of results. Restatement 2d of Conflicts of Laws §
6(2)(d) & (f). These factors, however, do not apply to the equitable
application of successor liability. Here, there is no protection of
justified expectations because SPI and Berg did not bargain with
each other; Berg brought a third-party action.3 Cf. International
Paper Co. v. Midvale-Heppenstall Co., 1973 WL 15333 (Pa. Com.
Pl.) (applying freely bargained-for contractual choice of law
provision but failing to characterize individual issues as required
by depecage). Even when we consider that SPI and Hull bargained
over the provisions of the Asset Purchase Agreement, the fact
remains that they bargained for New Jersey law to apply to
interpretation of the provisions of the contract, not to their
real-world effect. In short, the nature of an inquiry into the de
facto merger exception to successor liability speaks against
following the APA’s choice of law provision. As we
acknowledged in Polius, the court steps in “when the form of the
transfer does not accurately portray substance.” 802 F.2d at 78.
Ultimately, in conducting choice of law analysis for this situation,
we should look to the substance of the transaction, rather than to
the form of the agreement; therefore, the APA’s choice of law
provision does not control.
C.
Yet, there is more than one contract to consider. The few
courts applying choice of law analysis to this highly specific
situation -- a third-party breach of contract suit based on successor
liability -- have generated somewhat confusing opinions. This is
3
In fact, as we determined in Berg Chilling Systems, Inc. v.
SP Industries, SPI bargained with Hull to construct the Asset
Purchase Agreement specifically to avoid liability to third parties
such as Berg. 369 F.3d 745, 757-58 (3d Cir. 2004).
15
because there is no clear line of reasoning specifying which
contract is the anchor point for a choice of law analysis. Though
we have already examined the APA, some courts ignore similar
documents entirely. Some courts use the breached contract as the
exclusive basis for their analysis of which state’s successor liability
law to apply. See, e.g., Johnson v. Ventra Group, Inc., 191 F.3d
732, 739-40 (6th Cir. 1999) (using employee’s breached contract
with former employer to supply proper state law to apply to
potential liability of employer’s “successor,” primarily because
employee bargained for choice of law clause). Other courts avoid
looking at any contracts. See, e.g., Schwartz v. Pillsbury Inc., 969
F.2d 840, 845 (9th Cir. 1992) (applying California law, despite
New York choice of law clause in breached franchise agreement,
“because the issue does not involve the interpretation or
enforcement of the franchise agreement;” and failing to mention
corporate “successor” transaction altogether).
The overarching problem is that, however many transactions
interlock to form a factual nucleus, there is no one contract to
which all the involved entities are parties. That is assuredly true in
this case, where, unpacking the contractual relations among the
parties, there are somewhere between two and four relevant
contracts. The first relevant contract is the APA, which we have
already discussed. The second is the Modified Agreement, the
contract that Berg sued Hull and SPI for breaching. SPI did not
even sign the Modified Agreement; it became effective one week
before Hull and SPI finalized the sale of Hull’s FDC Division. The
Modified Agreement, however, does not stand on its own. It is a
relatively short document, and it specifically refers back to the
original Huadu Contract, giving each signatory to the Modified
Agreement all the rights each held under the Huadu Contract. As
to Huadu and Berg, it is clear that all terms of the Huadu Contract
that were not superceded by the Modified Agreement remained in
full effect. This is confirmed by the fact that Huadu and Berg
adhered to the agreement by submitting to arbitration in Sweden,
as provided by the Huadu Contract, for Berg’s breach of the
Modified Agreement. Hull, however, had a previous legal
relationship only with Berg, via the Purchase Agreement. Because
Hull did not bargain for rights under the Huadu Contract, and was
not a signatory to it, Hull remained liable only under the Modified
Agreement.
16
In order to properly follow the flexible approach articulated
in Griffith and since followed by this Court in Compagnie des
Bauxites and its progeny, it makes sense to consider both the APA
and the Modified Agreement (and, to the extent relevant, the
Huadu Contract and Purchase Agreement) in conducting our choice
of law analysis. Because it was impossible for any of these
contracts to have made an effective choice of law on successor
liability, we will look to the grouping of contacts with the various
concerned jurisidictions. See Restatement 2d of Conflicts of Laws
§ 188; Compagnie des Bauxites, 880 F.2d at 689 (interpreting
Griffith to mean that proper choice of law analysis involves
“grouping of contacts with the various concerned jurisdictions and
the interests and policies that may be validly asserted by each
jurisdiction.”). Relevant contacts in a contract case4 include: “(a)
the place of contracting, (b) the place of negotiation of the contract,
(c) the place of performance, (d) the location of the subject matter
of the contract, (e) the domicil, residence, nationality, place of
incorporation and place of business of the parties. These contacts
are to be evaluated according to their relative importance with
respect to the particular issue.” Compagnie des Bauxites, 880 F.2d
at 689. Here, we will analyze only factors (c), (d), and (e), as the
place of contracting and of negotiation are of minor importance to
the issue.
The initial factor in our analysis is place of performance.
Regarding the APA, the performance was the sale of Hull’s FDC
Division to SPI, making this factor essentially a combination of the
location of the Division’s assets and the places of business of the
seller and buyer. The Modified Agreement envisioned essentially
two places of performance: Pennsylvania, the situs of Hull’s freeze
dryer manufacturing facilities, and China, the location where the
freeze dryers were erected and subjected to performance testing.
The second factor is the location of the subject matter of the
contract. The subject matter of the APA is the assets, properties,
rights, and businesses related to the conduct of the “Business,”
4
Although Griffith was a tort action, its analysis has been
regularly applied to contract actions. See, e.g., Compagnie de
Bauxites, 880 F.2d at 689.
17
defined in the contract as: “manufacturing, remanufacturing,
installing, servicing, marketing, selling, and distributing standard
and customized vacuum drying, freeze drying, and vacuum shelf
drying equipment and related products, equipment and systems for
customers involved in the pharmaceutical, animal health,
diagnostic, biotech and food industries.” (A962). Many of these
activities, conducted exclusively through Hull’s FDC Division,
don’t have an easily identifiable “location.” To the extent that Hull
Corporation’s FDC division - the subject matter of the Asset
Purchase Agreement - has a “location,” it is primarily in
Pennsylvania: tangible purchased assets included equipment,
inventory, and real estate located in Pennsylvania. The freeze
dryers were the subject matter of the Modified Agreement.
Manufactured by Hull in Pennsylvania under the original Purchase
Agreement, by the time of the Modified Agreement the freeze
dryers were already installed, albeit imperfectly, at Huadu’s
facilities in China. Berg had delivered the freeze dryers from
Hull’s Pennsylvania site to Huadu’s site in China, where they
remain, pursuant to the arbitration settlement between Berg and
Huadu.
The third factor is the domicil, residence, nationality, place
of incorporation and place of business of the parties. There are two
sets of parties: Hull and SPI, parties to the APA; and Hull, Berg,
and Huadu, parties to the Modified Agreement. Hull is
incorporated in Pennsylvania. SPI is a Delaware corporation.
While SPI’s primary place of business is in New Jersey, it operated
the freeze dryer business that it bought from Hull from the same
premises in Pennsylvania that it leased from Hull Corporation.
Berg is a Canadian Company whose legal address and place of
business is in Ontario, Canada. Huadu is a Chinese company
whose legal address and place of business is in Beijing, China.
We view the relevant contacts qualitatively and in their
totality. See Cipolla, 439 Pa. 563. Although much of the relevant
activity took place in China, the only company actually located
there is Huadu, which is not a party to the present action. The next
most relevant location is Pennsylvania: Hull’s place of
incorporation and the location of the site where the freeze dryers
were manufactured. Accordingly, we will apply the successor
liability law of the state of Pennsylvania.
18
III.
Where one company sells or otherwise transfers all of its
assets to another company, the latter is not normally liable for the
debts and liabilities of the transferor. However, if circumstances
indicate that there was a de facto consolidation or merger of the
corporations or that the purchasing company was a “mere
continuation” of the selling company, liability may attach. The de
facto merger exception is similar to the continuation exception,
save that the latter focuses on situations in which the purchaser is
merely a restructured or reorganized form of the seller. Although
the parties separate their analyses, we follow the trend of the courts
here and treat the exceptions identically.
We now turn to the de facto merger analysis. In
determining whether a transaction is a de facto merger or
continuation, we look to the following factors:
(1) There is a continuation of the enterprise of the
seller corporation, so that there is continuity of
management, personnel, physical location, assets,
and general business operations.
(2) There is a continuity of shareholders which
results from the purchasing corporation paying for
the acquired assets with shares of its own stock, this
stock ultimately coming to be held by the
shareholders of the seller corporation so that they
become a constituent part of the purchasing
corporation.
(3) The seller corporation ceases its ordinary
business operations, liquidates, and dissolves as soon
as legally and practically possible.
(4) The purchasing corporation assumes those
obligations of the seller ordinarily necessary for the
uninterrupted continuation of normal business
operations of the seller corporation.
Philadelphia Electric Co. v. Hercules, Inc., 762 F.2d 303, 310 (3d
Cir. 1985) (applying Pennsylvania law).
19
As noted earlier, the District Courts in this Circuit consider
the second factor - continuity of ownership - to be critical to a
successful successor liability claim under Pennsylvania law. See
Forrest v. Beloit Corp., 278 F. Supp. 2d 471, 477 (E.D. Pa. 2003)
(finding that de facto merger claim failed as a matter of law
because there was no stock transfer between the so-called
predecessor and successor corporations), rev’d on other grounds,
2005 WL 2245640 (3d Cir. Sept. 15, 2005); Glynwed, Inc. v.
Plastimatic, Inc., 869 F. Supp. 265, 277 (D.N.J. 1994); Tracey v.
Winchester Repeating Arms Co., 745 F. Supp. 1099, 1109-10 (E.D.
Pa. 1990) (finding continuity of stock ownership to be the
“essential element” to application of de facto merger exception).
In fact, only one District Court applying Pennsylvania law has been
willing to find liability despite a partial-cash sale. Fiber-Lite Corp.
v. Molded Acoustical Products of Easton, Inc., 186 B.R. 603 (E.D.
Pa. 1994), aff’d mem. 66 F.3d 610 (3d Cir. 1995). However, the
most recent Pennsylvania court decision on the matter did not
specifically adopt the Pennsylvania District Courts’ formulation of
stock ownership as the “essential element.” Yet, it also did not
take the opportunity to disagree with the District Courts, and lists
“continuity of ownership” as the first factor in the four-factor test.
Cont’l Ins. Co. v. Schneider, Inc., 810 A.2d 127, 134-36 (Pa.
Super. Ct. 2002), aff’d, 873 A.2d 1286 (Pa. 2005). If we were to
strictly apply the reasoning of the District Courts, this inquiry
would be over, as there is no continuity of stock ownership
between Hull and SPI . Given the Pennsylvania state courts’
failure to specifically adopt such a bright-line standard, however,
we will instead conduct a full analysis that emphasizes the
ownership factor but does not rely on it alone.
First, we determine whether there was continuity of
ownership between Hull and SPI. The objective of this
requirement is usually to identify situations in which shareholders
of a seller corporation unfairly attempt to impose their costs or
misdeeds on third parties by retaining assets that have been
artificially cleansed of liability. See General Battery, 423 F.3d at
306-07 (evaluating corporate successor liability under CERCLA);
see also SmithKline Beecham, 89 F.3d at 164. Here, there was no
continuity of stock ownership between Hull and SPI, as the APA
fixed consideration at $6 million in cash. Berg II, at *4. Based on
this key factor, we continue the remainder of the analysis with a
20
strong presumption against imposing successor liability.
Next, we investigate whether SPI “continued the enterprise
of the seller corporation” Hull, an inquiry that depends on how we
define the term “enterprise.” There is ample evidence to support
the conclusion that SPI, through its VirTis/Hull Company Division,
continued the business operations of Hull’s FDC Division. SPI
purchased all of the FDC Division’s equipment and inventory,
assumed tenancy of the Division’s manufacturing facilities (though
eventually did not purchase the associated real estate),
manufactured the same products, took over many contractual
obligations, and used the same personnel, telephone number, and
fax number. SPI also renamed its VirTis Division “Hull Company”
specifically to take advantage of the Hull name’s acceptance in the
community, and purchased the Hull logo for the same purpose.
On the corporate level, however, there is no indication that SPI
continued Hull’s enterprise; indeed, until recently, Hull was extant
and master of its own corporate destiny. There was no continuity
of corporate management: no member of Hull’s Board of Directors
held a position on SPI’s Board of Directors. Although Hull’s
Chairman, Lewis Hull, became “Chairman of the Hull Company
Division,” the title was solely honorary and he had no capacity to
bind SPI or its Hull Company Division. John Hull, a corporate
officer at Hull Corporation, became a temporary consultant to the
Hull Company Division, also with no authority to bind either SPI
or the Hull Company Division. Thus, while it is clear that two
divisions combined operations as a result of the APA, there is no
support for the proposition that SPI continued Hull’s corporate
enterprise.
Third, we look to whether the seller corporation ceases
operation and liquidates. The de facto merger doctrine recognizes
that an essential characteristic of a merger is that one corporation
survives while the other ceases to exist. See General Battery, 423
F.3d at 308 (citing Knapp v. N. Am .Rockwell Corp., 506 F.2d
361, 367 (3d Cir. 1974) (applying Pennsylvania law)). Here, the
FDC Division of Hull Corporation ceased its freeze drying
operations and agreed not to compete with SPI’s Hull Company
Division. Yet, Hull continued to exist as a corporate entity, and
continued to operate its other divisions, for years after the APA
closed. Berg II, at *4. Thus, this factor does not support a de facto
21
merger.
Finally, we determine whether the seller corporation has
assumed the obligations ordinarily necessary for uninterrupted
continuation of normal business operations. Here, the APA
unambiguously provided that SPI acquire all accounts receivable
and all contracts relating to the operation of the FDC Division of
Hull. It is equally unambiguous that SPI did not assume any of
Hull’s obligations relating to any other division: the APA itself
defined the subject matter of the contract as only the FDC Division,
and specifically excluded all other corporate assets and liabilities.
Moreover, the APA provided that SPI assume only limited
liabilities from Hull; for example, SPI did not assume Hull’s pre-
closing contractual liabilities to third parties. Berg Chilling, 369
F.3d at 758.
In sum, the APA resulted in a combination of like corporate
divisions, but not of corporate entities. Thus, the de facto merger
exception to the rule of successor non-liability will not render SPI
liable for Hull’s breach of the Modified Agreement.
IV.
This court found that the APA operated to exculpate SPI
from any liability arising from Hull’s work, or from its own
attempts to cure defects in Hull’s work, on the freeze dryers for the
Huadu Contract. Berg Chilling, 369 F.3d at 745. Berg now
presents the same arguments it put forward to the District Court in
Berg II; namely, that the so-called “exculpatory” clause in Section
7.8 is void as against public policy. Applying New Jersey law, per
Section 10.6 of the APA, the District Court held that public policy
did not void the clause. For the following reasons, we agree.
Berg first argues that two sections of the New Jersey Code
act to void Section 7.8. The first section invalidates any agreement
“purporting to indemnify or hold harmless the promisee against
liability for damages arising out of bodily injury to persons or
damage to property caused by or resulting from the sole negligence
of the promisee.....” N.J. Stat. Ann. § 2A:40A-1 (2005). The
second voids any agreement indemnifying an architect, engineer,
or surveyor for “damages, claims, losses, or expenses” caused
22
either by preparing reports or specifications; or by giving or failing
to give instructions. N.J. Stat. Ann. § 2A:40A-2 (2005) (emphasis
added).
Neither statute is applicable to the clause at issue in Section
7.8. First, the clause does not fall under the purview of Section
2A:40A-1 because it does not relate to negligence. By its plain
language, Section 2A:40A-1 is limited to prohibit clauses through
which a party seeks to be indemnified for damages resulting from
“sole negligence.” Further, while Berg seeks to recover damages
related to the breached contract with Huadu,5 Section 2A:40A-1
only applies to traditional negligence recovery; that is, “damages
arising out of bodily injury to persons or damage to property.”
Moreover, the clause at issue does not absolve SPI of responsibility
for its own negligence; rather, it is a disclaimer of liability to third
parties for faulty products shipped by Hull prior to the date SPI
took over the business. The term, therefore, only assures that SPI
will not be liable to third parties based on Hull’s actions.
Therefore, because the clause does not relate to SPI’s negligence --
much less to its sole negligence -- and because both statutes are
limited to actions in tort, neither New Jersey statute voids Section
7.8.
Second, both statutes were intended to apply to construction
contracts. Berg II, at *3. Legislative history confirms the District
Court’s interpretation by introducing both statutes as “amend[ing]
a recently-enacted law, P.L.1981, c. 317, which prohibits hold
harmless clauses in construction contracts which indemnify the
promisee for any damages regardless of the extent of his
negligence.” Assembly, No. 590-L.1983, c.107 (emphasis added);
accord Ryan v. Biederman Indust. 223 N.J. Super. 492, 500; 538
A.2d 1324, 1329 (1988) (indicating that stated purpose of the
amendment was “to clarify the purpose behind the original
enactment.”). We find unconvincing Berg’s argument that New
Jersey courts would find the Huadu freeze dryers to be within the
5
Berg notes in its brief that it did assert tort claims for
contribution and common law indemnification against SPI.
However, neither of these claims relate to the clause in Section 7.8,
nor do they relate to negligence.
23
scope of “appliances or appurtenances” in Section 2A:40A-1. Berg
assumes that the New Jersey courts would term the freeze dryers
appliances or appurtenances based on a Georgia District Court
decision interpreting a similar statute. See Federal Paper Bd. Co.,
Inc. v. Harbert-Yeargin, Inc., 53 F. Supp. 2d 1361 (N.D. Ga. 1999)
(finding paper mills to be “appliances or appurtenances” under
similar Georgia statute). This is unlikely, as the Georgia District
Court specifically noted the “expansive” way that Georgia state
courts interpreted the statute to include leases and maintenance
agreements, a view that the New Jersey state courts do not
demonstrably share. Id.
Berg additionally claims that Section 7.8 violates New
Jersey public policy because it violates common law dictating that
“professionals” be held to the standards of their profession. See,
e.g., Erlich v. First National, 505 A.2d 220 (N.J. Super. Ct. Law
Div. 1984). This argument is unpersuasive. The New Jersey
common law is based on the principle that “courts will not enforce
an exculpatory clause if the party benefiting from exculpation is
subject to a positive duty imposed by law or is imbued with a
public trust, or if exoneration of the party would adversely affect
the public interest.” Erlich, 208 A.3d at 232. Thus, as part of New
Jersey’s basic doctrine disallowing liability limitation in areas of
the public interest, exculpation clauses are disfavored in contracts
for professional services in order to protect the individual relying
on the professional’s expertise. See Lucier v. Williams, 366 N.J.
Super 485, 496 (2004) (determining that exculpation clause in
contract for home inspection was invalid as violating public
policy). This doctrine is not applicable in a situation in which two
sophisticated corporations deliberately rely on one another’s
expertise, yet are able to allocate liability through contract. Further,
Section 7.8 is not voided by the common law because it does not
absolve SPI of liability for its own actions; it merely indicates that
SPI does not assume any of Hull’s liability to third parties. Berg
is seeking to characterize the disputed clause in Section 7.8 as
“exculpatory,” yet it is not, because it does not relate to SPI’s own
negligence. See Valhal Corp. v. Sullivan Assoc., Inc., 44 F.3d 195
(3d Cir. 1995) (defining “exculpatory” as absolving a party from
his own negligence). Thus, because the public trust is not at issue,
and because the Section 7.8 does not seek to exonerate SPI for its
own actions, the common law does not apply.
24
V.
Finally, Berg argues that because SPI did not specifically
appeal the District Court’s original order finding that Berg had a
right to contribution from SPI, the District Court erred by vacating
that order on remand. However, that order was predicated on the
finding that “Berg, SPI, and Hull Corporation were equally at
fault” in breaching the Huadu Contract. Berg I, at *11. As the
District Court explained, contribution is “an attempt by equity to
distribute equally among those who have a common obligation, the
burden of performing that obligation.” Id. at *11 n.15 (citation
omitted). Thus, Berg can no longer assert a right to contribution
because this Court reversed that order and determined that SPI was
not at fault. See Berg Chilling, 369 F.3d at 745. SPI, therefore,
cannot be liable to Berg for contribution.
VI.
We recognize that this judgment places Berg in an untenable
situation. Based on the last several years of litigation, it appears
that Hull Corporation bears the greatest responsiblity for breaching
the Modified Agreement; but Hull is now out of business and lacks
assets. For these reasons, we affirm.
AMBRO, Circuit Judge, Dissenting
Although the majority ably argues for the application of
Pennsylvania law to preclude Berg’s successor liability claim, I
respectfully dissent because (1) I am not convinced that
Pennsylvania law should apply to this dispute and, (2) even if it
does, I do not believe that Pennsylvania law precludes a finding of
successor liability.
There is no question that, for contractual matters arising
under the Asset Purchase Agreement (“APA”) between SPI and
Hull, New Jersey law would apply pursuant to the agreement’s
explicit choice of law. In this case, of course, we are not faced
with a dispute between the parties to the APA, but rather with a
third-party successor liability claim. Notwithstanding this
25
distinction, I am of the view that the successor liability claim
involved here relates to the “interpretation, construction, [and]
effect” of the asset purchase transaction, and is, therefore, within
the scope of the broad choice of law provision contained in the
APA. I am thus unpersuaded that, as the majority states, “SPI and
Hull . . . bargained for New Jersey law to apply to interpretation of
the provisions of the contract, not to their real-world effect.”
To the contrary, in deciding whether the APA accomplished
a de facto merger of SPI and Hull, the “effect[s]” of the APA fall
squarely within SPI’s choice of New Jersey law. Since we have
already held that Berg, a non-party to the APA, is nonetheless
bound by the APA’s exculpatory provisions, see Berg Chilling
Systems, Inc. v. Hull Corp., 369 F.3d 745, 757-58 (3d Cir. 2004),
I find it incongruous for SPI to argue on this appeal, and for the
majority to agree, that Berg’s successor liability claim against SPI
for Hull’s obligations is not “contractual” because Berg was not a
party to the APA and therefore the choice of law provision is
irrelevant. In sum, because SPI agreed in the APA to apply New
Jersey law to all effects of the asset purchase transaction, and
Berg’s successor liability claim clearly implicates the effects of the
APA, I would hold that SPI is bound by the choice of law it made,
especially since it has already benefitted from that choice in
successfully using the APA’s exculpatory provision as a shield
against direct liability to Berg.
Applying the choice of law clause as written, this dispute
should be governed by New Jersey law6 — which, as the majority
correctly notes, would almost certainly result in a victory for Berg.
6
Pennsylvania law states that “[c]hoice of law provisions
in contracts will generally be given effect,” Smith v.
Commonwealth Nat’l Bank, 557 A.2d 775, 777 (Pa. Super. Ct.
1989), and “Pennsylvania courts will only ignore a contractual
choice of law provision if that provision conflicts with strong
public policy interests,” Kruzits v. Okuma Mach. Tool, Inc., 40
F.3d 52, 56 (3d Cir. 1994).
26
Not only does New Jersey’s successor liability standard place great
importance on the parties’ intent and deemphasize continuity of
ownership, see, e.g., Woodrick v. Jack J. Burke Real Estate, 703
A.2d 306, 313 (N.J. App. Div. 1997), but it provides that the mere
fact a purchaser acquires a division of another company, and the
seller maintains its operations in other respects, does not defeat a
finding of successor liability with respect to the acquired division.
See, e.g., Koch Materials Co. v. Shore Slurry Seal, Inc., 205 F.
Supp. 2d 324, 337 (D.N.J. 2002). This answers the majority’s
reliance on the fact that “the APA resulted in a combination of like
corporate divisions, but not of corporate entities” as support for its
conclusion that the de facto merger doctrine is inapplicable.
Even assuming, however, that the majority is correct and
Pennsylvania law applies, I am unconvinced that Pennsylvania
would not find successor liability in this case. Contrary to the
majority’s interpretation, the case upon which it principally relies
as evidence of Pennsylvania law, Continental Insurance Co. v.
Schnedier, Inc., 810 A.2d 127 (Pa. Super. Ct. 2002), does not
“emphasize[]” the continuity of ownership factor nor does it stand
for the proposition that the absence of such continuity yields a
“strong presumption against imposing successor liability.” Rather,
Continental Insurance states:
[W]hen determining if a de facto
merger has occurred, courts generally
consider four factors: (1) continuity of
ownership; (2) cessation of the
ordinary business by, and dissolution
of, the predecessor as soon as
practicable; (3) assumption by the
successor of liabilities ordinarily
necessary for uninterrupted
continuation of the business; and (4)
continuity of the management,
personnel, physical location, and the
general business operation. Although
27
each of these factors is considered, all
need not exist before a de facto merger
will be deemed to have occurred.
Id. at 135 (internal citations omitted; emphasis added).
As the majority states, there is “ample evidence” that SPI
sought to, and did, continue the business operations of Hull’s FDC
Division. SPI used the same facilities, equipment, personnel, logo,
and telephone and fax numbers as Hull’s FDC Division. SPI
continued to manufacture the same products as Hull and
maintained Hull’s contractual obligations. SPI retained Hull’s
Chairman, Lewis Hull, and held him out in its promotional
materials as “Chairman” of the new Hull Division, and retained
Hull’s Executive Vice President, Bernard Kashmer, for two years
as Executive Vice President of the Hull Division. Hull ceased
doing the type of business its FDC Division had been doing and
agreed not to compete with SPI. SPI’s President and CEO, John
Partridge, testified that he was interested in Hull’s FDC Division
as an ongoing business, intended to operate it as an ongoing
business, and wanted to “continue to use the name of Hull because
of its acceptance in the marketplace.” SPI represented in its
promotional materials that its Hull Division was founded in 1952
and was approaching its 50th anniversary, and Partridge testified
that SPI “was saying by way of this [that it was] counting all the
years that the Hull Corporation had been in existence,” and was
“tak[ing] it back to when that company was founded and tak[ing]
credit for that length of service.” When asked if he was taking
credit for Hull’s 50 years of business “because you were really
continuing what had been the FDC freeze-drying business,”
Partridge replied, “Yes.” Perhaps most tellingly, SPI and Hull
represented to their customers and employees that the transaction
was a merger; indeed, Hull informed Berg before the APA was
concluded that Hull’s responsibilities under the agreement with
Berg would “of course be assumed by the successor,” and Lewis
Hull referred to the transaction in a Hull newsletter after the APA
was concluded as a “textbook strategic merger.”
28
Based on this evidence, I am unpersuaded that Pennsylvania
law would not find successor liability in this case. Continental
Insurance, which the majority describes as “the most recent
Pennsylvania court decision on the matter,” does not privilege the
continuity of ownership factor above all others; rather, in keeping
with the modern view of successor liability, it counts continuity of
ownership as one of several factors to consider, and notes that all
factors need not exist. Here, there can be little question that SPI’s
continuation of Hull’s business satisfies the third and fourth factors
listed in Continental Insurance: SPI sought to, and did, continue
Hull’s business, and in doing so assumed the necessary contractual
liabilities and retained key management, personnel, facilities,
trademarks, telephone numbers, etc. As for the second factor, Hull
immediately ceased the business of its FDC Division — the only
Hull property that has anything to do with this appeal — upon
conclusion of the APA and agreed not to resume such business, and
the FDC Division was dissolved. Although Hull continued to
operate unrelated divisions for a short time after it sold its FDC
Division to SPI, Hull, too, eventually ceased to exist. Indeed, the
only factor that clearly does not weigh in favor of a finding of
successor liability here is the continuity of ownership. Contrary to
the majority, I would find that these circumstances should result in
a finding of successor liability under Pennsylvania law.
At base, I am troubled by the consequences of concluding
that successor liability does not exist in this case. SPI purchased
an entire division of Hull and operated that division as an ongoing
business, holding the division out to the world as a continuation of
Hull, and presumably reaping substantial rewards by doing so.
That division was almost entirely responsible for serious
deficiencies in freeze dryers sold to Berg, but SPI disclaimed any
resulting liabilities in an asset purchase agreement that was
negotiated without Berg’s participation, all while Berg was being
assured by Hull that “of course” SPI would assume full liability.
Shortly after the sale of Hull’s FDC Division to SPI, Hull went out
of business. The result, therefore, is that SPI gets the benefit of the
continuation of Hull’s business without any attendant liabilities,
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Hull effectively avoids liability by selling off its assets, and,
because of our holding today, Berg is left to bear all the liabilities
for a problem it did not create. As my majority colleagues note,
this “places Berg in an untenable situation.” As I do not perceive
a compelling reason why we must do so, I respectfully dissent.
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