Successor Corporate Liability in Product Liability Actions in Connecticut: the Convergence of Tort and Corporate Law
| Jurisdiction | Connecticut,United States |
| Publication year | 2021 |
| Citation | Vol. 73 Pg. 297 |
| Pages | 297 |
73 CBJ 297. SUCCESSOR CORPORATE LIABILITY IN PRODUCT LIABILITY ACTIONS IN CONNECTICUT: THE CONVERGENCE OF TORT AND CORPORATE LAW
Is a successor corporation liable for damages caused by a defective product that was sold, manufactured, or distributed by another corporation whose assets the successor corporation had acquired from the predecessor corporation?
Generally, a successor corporation is not liable for a product liability claim involving a product sold by the predecessor on the basis of having purchased the assets of the predecessor corporation. Appellate courts, however, have recognized exceptions to this general rule in jurisdictions outside of Connecticut, as have several trial court judges in Connecticut state courts. These four exceptions arise if- (1) the purchase agreement expressly or impliedly so provides; (2) there was a merger or consolidation of the two firms; (3) the purchaser corporation is a "mere continuation" of the seller corporation; or (4) the transaction is entered into fraudulently for the purpose of escaping liability. (fn1) Courts in other jurisdictions, and several Connecticut Superior Court decisions, have also recognized a fifth exception to the general rule of nonliability, called the "product line exception." (fn2)
Additionally, courts in other jurisdictions have imposed liability on successor corporations for product liability claims under a theory of a continuing duty to warn. (fn3)
Neither the Connecticut Supreme Court nor the Appellate Court - nor the General Assembly - has addressed the specific issue of whether to adopt exceptions to the general rule. Consequently, both trial lawyers who confront the issue of successor liability in a given case and corporate counsel who attempt to structure transfers of ownership of corporations face much uncertainty.
The authors of this article will analyze the issue of successor liability for product liability claims by taking stock of the various court decisions - both in Connecticut and in other jurisdictions - that have addressed this issue. In doing so, we will discuss the principles and policy considerations behind the issue of successor, liability for product liability claims in both the strict liability and corporate law context. We will explore the different corporate transactions and factors that provide the backdrop against which courts decide whether to impose product liability on a successor corporation. Finally, we will discuss whether the legislature, rather than the court, should make the rule or rules of law governing this area.
A. The Product Liability Act and Successor Liability
The Connecticut Product Liability Act (the "Act") (fn4) provides the exclusive remedy for all claims of injury and property damage alleged to have been caused by defective products. The Act contains various definitions. None specifically addresses whether liability can be imposed on a successor corporate entity, nor under what conditions, if any. Under the Act, a product liability claim may be brought only against any "product seller," which is defined as "any person or entity, including a manufacturer, wholesaler, distributor or retailer engaged in the business of selling such products, whether the sale is for use or consumption." (fn5)
Under the Act, a claim may be asserted under the theory of strict liability, as set forth in the Restatement (Second) of Torts Section 402A (1965). To recover under strict liability a plaintiff must prove, among other things, that the defendant was engaged in the selling of the defective product in question. (fn6) The question arises whether expanding liability to product sellers who did not actually sell the product in question inappropriately expands the scope of the Act. The Act, however, was never intended to eliminate completely the various elements of common law. (fn7)
Generally, under the common law of successor corporate nonliability in Connecticut, courts view different corporations as distinct legal entities. (fn8) Traditionally, a corporation that merely purchases all or substantially all of the assets of another corporation in good faith and for valuable consideration does not become liable for the debts and liabilities of the transferor corporation (fn9) because the liabilities follow separate corporate legal entities. As will be discussed in the following sections, the traditional rule that liabilities follow separate corporate legal entities has been challenged by policy concerns underpinning the notions of strict liability in the product liability context.
B. Connecticut Trial Court Decisions Addressing Successor Liability in Product Liability Actions
Several Connecticut Superior Court decisions have addressed the issue of successor liability in the context of a product liability action. Many of these decisions accept the interpretation of the law of successor liability as set forth in United States District Court decision, Ricciardello v. J. W. Grant & Co. (fn10) Ricciardello was not, however, a product liability action; it involved claims of securities violations against a successor corporation. Relying on Connecticut state law precedent and a well known treatise on corporations, Ricciardello held that a successor corporation is not liable for the torts of its predecessor, where there was no merger, where the successor was not the "mere continuation" of the predecessor, and where there is no allegation of fraud in connection with the transaction transferring ownership to the corporation.
In the Connecticut Superior Court decision of Sullivan v. A. W. Flint Co. (fn11) the court addressed successor liability issues unique to product liability claims. The plaintiff in Sullivan was injured as a result of a fall from an extension ladder. The complaint had alleged that the ladder was manufactured and sold by A.W. Flint Company, Inc., and that Lynn Ladder & Scaffolding Company, Inc. was the successor in interest to Flint. The purchase and sale agreement had expressly excluded liability for those liabilities listed in the agreement, none of which included products liability claims. Lynn Ladder moved for summary judgment on the basis that it had not incurred successor liability as a result of the transaction by which it acquired substantially all of the assets of Flint.
Lynn Ladder argued that the plaintiff had failed to establish all of the traditional exceptions to nonliability of successor corporations as set forth in Ricciardello. Moreover, Lynn Ladder argued that after the purchase and sale agreement was executed, the companies remained separate legal entities; they did not share officers, directors, stock or stockholders. The successor - Lynn Ladder - did not continue to do business under the name of the predecessor - Flint. Nor did the transaction consist of a merger or consolidation in which the predecessor was extinguished, nor one in which there was an inadequacy of consideration or where a new corporation had been formed. Finally, Lynn Ladder argued that there was no allegation that the transaction had been entered into fraudulently.
The plaintiff in Sullivan argued that the court should recognize two exceptions to the general rule of nonliability of successor corporations: the "continuity of enterprise theory" or the "product line" (fn12) exceptions. The plaintiff urged the court to do so in light of the principles of product liability of spreading the risk and cost of accidents from defective products away from persons injured by defective products and onto corporate entities that can better shoulder the risk and cost.
The court in Sullivan weighed the various policy concerns for imposing successor liability and considered the manner in which courts from other jurisdictions had resolved these policy concerns. The court refused to adopt the continuity of enterprise theory but concluded that the product line exception was a viable theory of liability in Connecticut. The court denied Lynn's motion because Lynn had presented no evidence that the product line exception did not apply to the facts of the case.
In addressing the "mere continuation" (fn13) or continuity of enterprise exception, the court recognized that in some instances, although a merger or consolidation had not technically taken place between the successor and predecessor, a "de facto merger" occurs when there is a continuity of enterprise of the seller corporation through the predecessor by way of management, personnel, physical location, assets, general business operations, or a continuity of shareholders. The court recognized that the traditional rule against successor liability was developed out of a concern for the rights of creditors and dissenting shareholders, and not out of concern for plaintiffs in a product liability action predicated on a theory of strict liability. The court refused to adopt the continuity of enterprise exception, reasoning that the theory focuses on the continuation of the business enterprise and not the continuation of the corporate entity. The court stated " [i] t makes as much sense to impose liability on a successor corporation under the Turner theory [continuity of enterprise exception] as it would to place liability on society as a whole or at least on all businesses in the same industry as the successor corporation." (fn14)
However, the court in Sullivan expanded the general rule of nonliability by recognizing the product line exception as a potential theory of liability. The court explained that the focus of the product line exception is "whether the successor corporation continues to manufacture the product alleged to have caused the injury." The court stated that the product line exception...
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