Wednesday, July 22, 2009

The Basics: Successor Liability in Products Liability Actions

By Brian A. Comer

As I have begun settling in with my new law firm, I have received a couple of case files that have successor liability issues in the products liability arena. Therefore, it seemed like a good topic for a quick blog entry to summarize this area of the law.

A former colleague of mine, Tim Orr, wrote an excellent article for South Carolina Lawyer in the March 2006 edition that fully summarizes this area of the law, and I would highly recommend the article for anyone with a products liability successor liability issue. The article is aptly titled "Successor Liability" and fully analyzes this area of the law. It also provided me with a great primer for a conference call with a client today.

In a nutshell, Simmons v. Mark Lift Indus., Inc., 366 S.C. 308, 622 S.E.3d 213 (2005) addressed this issue in a certified question from the United States District Court. The court stated as follows:
[I]n the absence of 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 [sic] a finding of a consolidation or merger of the two corporations, (3) the successor company was a mere continuation of the predecessor, or (4) the transaction was entered into fraudulently for the purpose of wrongfully defeating creditors’ claims.
Id. at 312, 622 S.E.2d at 215 (quoting Brown v. Am. Ry. Express Co., 128 S.C.428, 123 S.E. 97 (1924). Simmons is significant because it adopted the court's opinion in the commercial case of Brown v. Am. Ry. Express Co. and extends the test applied by the Brown court for successor liability to all products liability actions. Adoption of these four exceptions aligns South Carolina with the majority of states that have adopted these same four exceptions. As of the date of Tim's article, he cites to 30 states that have also retained an applied these exceptions in the products liability setting. See Tim Orr, Successor Liability, March 2006 edition of South Carolina Lawyer, at 35.

As I am learning, it is critical to examine the transaction documents at issue in a successor liability case to determine if the purchasing entity intended to assume the seller's liabilities. This can also become a "form versus substance" issue where the purchasing company is merely a continuation of the predecessor, i.e., it has a "common identity" of the officers, directors and stockholders between the predecessor and successor. In such cases, a court may find that the owners and directors of a company merely dissolved the company and formed a new one to avoid the prior debts and liabilities. In such cases, the "mere continuation" exception may apply to make the successor company liable.

I will try to profile each of these exceptions in future blog entries, but the above serves as "the basics" for now.

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