Successor Liability in Washington: When a Successor Should Be Liable for a Predecessor's Products Liability-meisel v. M and N Modern Hydraulic Press Company

• Publication year: 1983

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 6, No. 2SPRING 1983

Successor Liability in Washington: When a Successor Should be Liable for a Predecessor's Products Liability-Meisel v. M and N Modern Hydraulic Press Company

Robert C. Manlowe

In Washington, with four narrow exceptions, a company that acquires the assets of another company ia not liable for the latter's debts and liabilities.(fn1) Courts developed these rules of "successor(fn2) liability" from theories underlying debtor-creditor relationships. Because the transactions arise out of arms-length bargaining, the parties' liabilities reflect their legitimate expectations.(fn3) Yet, when the claim is raised by a victim of the predecessor's defective product rather than a creditor, the liability of a successor cannot rest on the expectations of the parties. Modern products liability(fn4) rests on a public policy that mandates that society bear the costs associated with technological innovation without regard to the parties' expectations.(fn5) Courts addressing the issue of successor liability for the defective product of the predecessor face a dilemma: whether to follow the traditional corporate rules or develop new rules to effectuate the policy of products liability doctrine.(fn6)

Addressing this problem, courts have reached varying results. Some courts apply traditional successor liability law, disregarding the conflict between the considerations underlying those rules and the rules of products liability.(fn7) Other courts attempt to fashion new rules within the framework of traditional successor liability principles.(fn8) A third group of courts have developed a modern law exception to the traditional rule for strict tort liability cases.(fn9) Exemplifying this third group, the California Supreme Court in Ray v. Alad Corp.,(fn10) ruled that an acquiring corporation assumes a predecessor's products liability when the acquiring corporation receives the business and continues the predecessor's same product line. Courts following this modern exception recognize that the traditional corporate rules ignore the policy supporting modern products liability. While rejecting the traditional rule's applicability to product liability claims, the modern exception nonetheless accounts for both the expectations of the successor corporation and the needs of the public.

In Meisel v. M and N Modern Hydraulic Press Co.,(fn11) the Washington Supreme Court had its first opportunity to address the problem of reconciling the traditional successor corporation rules and products liability doctrine. Rather than take a determinative posture, the court dodged the issue and instead placed Washington successor liability law in question. Though in dicta the Meisel court recognized the Ray rule(fn12) and noted its consistency with the court's prior holdings, the court narrowly read the successor classification. The court held that a corporation acquiring a business through a transfer of leased assets and continuing the transferor's product line will not be liable for the transferor's products liability. In misinterpreting what constitutes a transfer of assets, the Meisel ruling effectively subverts the modern rule and provides an easy method for successor corporations to avoid products liability through commonly utilized corporate designs. Ultimately, the court's holding frustrates the recognized public policy that seeks to spread the cost of injury from defective products throughout society rather than force individual consumers to bear the burden.(fn13)

This note examines the problem of products liability in the context of modern corporate practice. First, this note will address products liability doctrine and its underlying rationale.(fn14) Next, discussion will focus on the conflict between the policies underlying the products liability doctrine and the traditional successor liability rules. Finally, this note will examine the manner in which the modern rule resolves this inherent conflict and Meisel'a effect on that rule, concluding that the Washington courts should adopt the modern rule without limitations.

In Meisel v. M and N Modern Hydraulic Press Co., the facts showed that M and N Modern Hydraulic Press Company (M and N) had been founded in 1955 by Nicholas Brodsky.(fn15) Brodsky was the sole owner of the corporation and, in his individual capacity, owned all the manufacturing capital equipment, the land, and the building necessary to M and N's operation.(fn16) He leased these assets to M and N. Brodsky died in 1974, and his son, Nicholas Brodsky, Jr., inherited all the leased assets from his father along with nearly sole stock ownership of the corporation.(fn17) In June 1976, Nicholas formed a new corporation named Modern Hydraulic Corporation (Modern).(fn18) After incorporating Modern, he evicted M and N from use of the leased assets, divested himself of his M and N ownership, then leased all the business assets to Modern.(fn19) With Nicholas as president and sole shareholder, Modern continued to manufacture hydraulic presses. Without the leased business assets, M and N continued to run as a service company, repairing presses. Shortly thereafter M and N dissolved.(fn20) Prior to both M and N's eviction from the leased assets and M and N's dissolution, however, M and N had manufactured and sold a 20 ton press that, in March 1979, malfunctioned and severed Marie Meisel's hand.(fn21) Plaintiff Meisel argued that Modern Corporation should be held liable as a successor under Ray's analysis.(fn22)

The modern rule that the plaintiff asked the court to apply was forged from the conflicting policies represented by the rules of modern products liability and traditional corporate successor liability. The doctrine of modern products liability expands beyond traditional tort liability the scope of a manufacturer's liability to consumers for injuries caused by defective products.(fn23) In Washington, a product manufacturer is subject to strict liability if the product is not reasonably safe in construction or if the product does not conform to the manufacturer's express or implied warranties, and the construction or warranty defects caused plaintiff's harm.(fn24) The rationale of modern products liability is that manufacturers who place their goods in the stream of commerce impliedly represent their goods as safe for their intended use.(fn25) The purpose is to place the responsibility for the costs of injuries resulting from defective products on the manufacturer who put such products on the market, rather than on the injured persons who are powerless to protect themselves.(fn26) Modern products liability doctrine recognizes the relative abilities of the consumer and manufacturer to bear the risk of loss from defective products. Because the general consumers in a technological society lack the ability to weigh the risks of danger and the costs associated with defective products, they should not bear the loss for injuries from those products. Moreover, the consumer is generally ill-equipped to handle the overwhelming cost of an injury.(fn27) Manufacturers, however, are better able to discern risks associated with products. When forced to compensate those injured, they will also have an incentive to make their products safe.(fn28) Moreover, with his superior knowledge of the product and its risks, the manufacturer is in a more cost-effective position to spread the risk of harm. On one hand, the manufacturer can acquire insurance at a fair price. On the other hand, with or without liability insurance the manufacturer can pass the cost of products liability claims on to customers, thus placing the risk of loss finally on society as a whole, the ultimate beneficiary of technological innovation. The modern products liability doctrine, therefore, shifts the cost of defective products to society in order to assure that the individual is compensated for this innocent loss.

In contrast to the products liability rules, the traditional rule of successor liability does not seek to assure recovery for products liability plaintiffs. The traditional rule seeks, rather, to effectuate the legitimate expectations of the parties to particular transactions.

At common law, the general rule is that a business entity(fn29 ) may purchase, or otherwise acquire, the assets of another business entity without acquiring its debts or obligations.(fn30) In the context of corporate structures, liability adheres to the fictional corporate entity regardless of the severing of the business assets. By forcing the corporate entity to retain its liabilities, the traditional rule assures that creditors and minority shareholders can look to the entity with whom they dealt for satisfaction of their obligations. Moreover, by freeing the acquiring corporation from liability for the transferring corporation's obligations, the rule facilitates the transfer of capital. Freed from the possibility of judgment awards and other types of unascertainable debts,(fn31) the purchaser can accurately assess the value of the purchase.

The courts have recognized, however, that the traditional rule may allow a transferring corporation, under certain circum- stances, effectively to avoid its obligations to the detriment of creditors and minority shareholders.(fn32) The courts have identified four circumstances where this may occur: first, where the acquiring entity expressly or...