Lefever v. K.P. Hovananian Enterprises, Inc.

160 N.J. 307, 734 A.2d 290 (1999)
  • Opinion Date: July 29, 1999

SUCCESSOR LIABILITY—A manufacturer that buys a product line in a bankruptcy sale may be liable for claims arising from products manufactured by the bankrupt company under New Jersey’s “product-line exception.”

A forklift driver was injured when the forklift he was operating tipped over. The original manufacturer and distributor of the forklift sold its assets to a successor corporation. That successor corporation went into bankruptcy and the trustee in the bankruptcy conveyed substantially all of the bankrupt’s assets to a third company. The forklift driver sued the third company, but never sued the company that had gone bankrupt. Therefore, the issue raised was whether the current manufacturer, having acquired its predecessor’s product line through a bankruptcy sale, was liable to the injured forklift driver. The general rule of corporate-successor liability is that when a company sells its assets to another company, the acquiring company is not liable for the debts and liabilities of the selling company simply because it has succeeded to the ownership of its assets. New Jersey has adopted a product-line exception to that rule. Under New Jersey doctrine, by purchasing a substantial part of a manufacturer’s assets and continuing to market goods in the same product line, a corporation may be exposed to strict liability in tort for defects in the predecessor’s product. The question was whether the product-line exception was applicable here. The Court examined the history of the product-line exception and reaffirmed New Jersey’s position notwithstanding that it was both a minority position among the states and contrary to the position of the drafters of the Restatement (Third) of Torts. It then examined whether the supremacy of federal bankruptcy law prevented the application of state common law to claims against a successor business enterprise that had acquired assets through a bankruptcy sale. The Court said that the federal bankruptcy law would override state common law, but only if the federal bankruptcy court had “dealt with” the particular claim. It then examined the two ways in which a bankruptcy trustee or debtor-in-possession could sell assets: (1) by a sale pursuant to Section 363 of the Code; or (2) by a sale pursuant to a confirmed Chapter 11 Plan of Reorganization. Its review of bankruptcy cases led to the understanding that there was no clear answer and that different facts brought about different results. For example, even if the Bankruptcy Court has the power to convey assets free and clear of “claims,” it does not have the power to cut off obligations or rights, such as environmental agency injunctions or future products liability claims, which are not cognizable as claims for dischargabililty purposes. Further, even though an asset purchase agreement between a trustee and a buyer at a bankruptcy sale may expressly recite that the buyer “will not assume, undertake, accept or be bound by or responsible for ... any liabilities or obligations,” such disclaimers are ineffective in insulating a buyer from successor liability when other principles of law require the imposition of liability. Here, the injured driver was not a creditor of the bankrupt estate and filed no claim in the bankruptcy proceeding. The driver had “no interest” in the sense of a lien or encumbrance on the property and the bankruptcy trustee had specifically authorized the driver to proceed with his suit against the asset buyer because the suit was not against the bankrupt. However, the Court found it harder to decide whether “the policies behind the ‘product line’ exception applied to the purchase of assets in a bankruptcy sale.” It acknowledged that California, the jurisdiction that initiated the product-line exception, had declined to apply the exception to the acquisition of the product line in a bankruptcy sale. The New Jersey Supreme Court believed that the California decision was based on the premise that a buyer at a bankruptcy sale is not responsible for having destroyed its predecessor’s ability to pay claims. The New Jersey Supreme Court, however, believed that a second justification for the product-line exception was dominant in cases such as this. In particular, it believed that imposing successor liability served the public interest “of spreading the risk to society at large for the costs of injuries from defective products.” In addition, it felt that the question ultimately was whether when the successor traded on the loyalty of its predecessor’s customers such that the imposition of a duty on the successor to respond to the complaints of those customers was fair. Its answer was yes. Citing an earlier case, it believed that “[r]ecourse against a successor corporation is justified ‘as a burden necessarily attached to [the successor’s] enjoyment of [the original manufacturer’s] trade name, goodwill and the continuation of an established manufacturing enterprise.’”