Will you please assume my liability?

Several weeks ago, the defendant in Altman v. Motion Water Sports, Inc., No. 3:07-cv-01383, 2010 WL 2747306 (D. Conn. July 12, 2010), asked the District of Connecticut to grant its motion for summary judgment finding that it, as a successor corporation, is not liable to plaintiff for his injuries from a defective product that it neither manufactured nor sold to plaintiff. The Court denied defendant’s motion, providing some insight into the law of Connecticut on successor liability.

Plaintiff, Russell Altman (“Altman”), purchased water skis from Earth and Winter Sports, Inc. (“EWS”) some time prior to March 28, 2003. On this date, EWS sold all of its assets to Motion Ocean Sports, Inc. (“MOS”). The purchase agreement between EWS and MOS expressly provided that MOS did not assume any liabilities of EOS. Further, there was no continuity of stock, stockholders, or directors. On the other hand, after the MOS purchased EWS’s assets, MOS continued to manufacture the same products, under the same names; took over the EWS factory; and hired approximately 50 of EWS’s former employees.

After the take-over, on July 21, 2004, Altman fell while water skiing and one of the skis failed to release from his foot. Altman alleged permanent physical injuries arguing that the ski was defective in several respects. Thereafter, Altman filed suit against MOS to recover for his injuries. In response, MOS moved for summary judgment on the ground that “under a general common law rule relating to corporations, a purchaser of the assets of a corporate business is not liable for the debts and liabilities of the previous owner of those assets.” Altman’s arguments in opposition to MOS’s motion included an argument that certain exceptions to the common law rule against asset-purchaser liability applied in this situation. See this opinion for all the other grounds Altman asserted in opposition of MOS’s motion.

The general rule is that “a corporation which purchases all the assets of another company does not become liable for the debts and liabilities of its predecessor unless (1) the purchase agreement expressly or impliedly so provides; (2) there was a merger or consolidation of the two firms; (3) the purchaser is a ‘mere continuation’ of the seller; or (4) the transaction was entered into fraudulently for the purpose of escaping liability.” Ricciardello v. J.W. Gant & Co., 717 F. Supp. 56 (D. Conn. 1989). Altman relied upon the third exception and argued that MOS was a mere continuation of EWS.

Within the “mere continuation” exception, the Court identified several different theories. The first is the so-called common law exception. Under this theory, the Court found that MOS was entitled to summary judgment because there was no transfer of corporate stock between the two companies and there was a total lack of continuity of shareholders and directors. Next, the Court stated that the continuity-of-enterprise theory applies where “the successor maintains the same business, with the same employees doing the same jobs, under the same supervisors, working conditions, and production processes, and produces the same products for the same customers.” The Court found that MOS did many of these things and that Altman was entitled to full discovery on this theory.

The final theory was the “product line” exception to the rule against successor liability. The Court noted that unlike the other two theories which were widely accepted in Connecticut, no Connecticut appellate court had considered the product-line theory. After considering the decisions of Superior Courts that have considered this theory, the Altman Court stated that since this theory was more consistent with the consumer-protection goals of the Connecticut Products Liability Act, he was entitled to invoke this exception and engage in full discovery on its applicability.

This case shows that there are not merely four exceptions to the rule against successor liability but theories within those exceptions that are being continually argued. If a corporation, such as MOS, takes over the assets of another corporation, it should be aware of these exceptions and ensure that their practices would not allow a plaintiff to successfully argue successor liability.

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