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KRULL v. CELOTEX CORP.

United States District Court, Northern District of Illinois, E.D


May 31, 1985

EDWARD F. KRULL, PLAINTIFF,
v.
CELOTEX CORPORATION, ET AL., DEFENDANTS.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Edward F. Krull ("Krull") initially filed this action seeking both compensatory and punitive damages from The Celotex Corporation ("Celotex") and others as a result of his having contracted pleural mesothelioma after exposure to insulating materials containing asbestos.*fn1 On the eve of trial Celotex moved for partial summary judgment on the issue of its liability for punitive damages. For the reasons stated in this memorandum opinion and order, this Court has denied the motion.*fn2

Facts

All facts material to Celotex's motion are both uncomplicated and undisputed. Phillip Carey Corporation ("Carey") was for many years active in the manufacture of the type of asbestos products to which Krull was allegedly exposed. In April 1970 Carey merged with Briggs Manufacturing Co. to form the Panacon Corporation ("Panacon"), a Michigan corporation. Panacon continued Carey's asbestos manufacturing and mining operations. In June 1972 Panacon was in turn merged into Celotex, a Delaware corporation.

Celotex had not been involved in the mining or manufacture of asbestos products before the Panacon merger. After the merger Celotex both (1) placed warning labels on all asbestos-containing products and (2) restricted its asbestos products sales primarily to products used in manufacturing processes rather than the insulating products to which Krull was exposed.

Celotex's Status As a Successor Corporation

Celotex Motion for Summary Judgment ¶ 3 argues Krull's claim for punitive damages is "solely predicated upon the alleged misconduct of Phillip Carey Corporation." Celotex urges the unfairness of saddling it with such punitive damages because it (id. ¶ 4):

  never participated in or ratified any of the
  allegedly wrongful acts committed by either the
  Phillip Carey Corporation or the Panacon
  Corporation.

Celotex's emphasis on its own conduct is misplaced. That error reflects the fundamental flaw in Celotex's analysis: its failure to distinguish between the liability of a successor corporation by merger from the very different situation that has generated most "successor corporation" litigation in the products liability field.

Celotex argues as if it had simply bought Carey's (or Panacon's) business assets without an express assumption of liabilities. Rules of law dealing with that common kind of acquisition have, in recent years, been in a state of flux. Several jurisdictions have made the policy determination that an asset purchaser may nonetheless be saddled with liability for the predecessor manufacturer's torts. See, e.g., In re Related Asbestos Cases, 566 F. Supp. 818, 821-22 (N.D.Cal. 1983). But the general rule in such cases remains that, subject to certain exceptions, the asset-acquiring company is not liable for the debts and liabilities of the seller. Manh Hung Nguyen v. Johnson Machine & Press Corp., 104 Ill. App.3d 1141, 1143, 60 Ill.Dec. 866, 868, 433 N.E.2d 1104, 1106 (1st Dist. 1982).

But the Celotex-Panacon transaction was a merger, not merely a purchase of assets. And the universal rule applicable to mergers or consolidations is that, by operation of law, the successor corporation assumes all debts and liabilities of the predecessor corporation precisely as if it had incurred those liabilities itself. Hanlon v. Johns-Manville Sales Corp., 599 F. Supp. 376, 378 (N.D.Iowa 1984) (applying Iowa law); Moe v. Transamerica Title Insurance Co., 21 Cal.App.3d 289, 304-05, 98 Cal.Rptr. 547, 556-57 (1971); Nguyen, 104 Ill. App.3d at 1143, 60 Ill.Dec. at 868, 433 N.E.2d at 1106.

That rule is inherent in the concept of a merger, under which the surviving corporation stands in the shoes of the disappearing corporation in every respect. And that concept is uniformly codified in every merger statute, including the Delaware General Corporation Law under which the Celotex-Panacon merger was accomplished.*fn3 Del.Code Ann. tit. 8, § 259(a) specifically provides:

  When any merger or consolidation shall have
  become effective under this chapter, for all
  purposes of the laws of this State the separate
  existence of all the constituent corporations, or
  of all such constituent corporations except the
  one into which the other or others of such
  constituent corporations have been merged, as the
  case may be, shall cease and the constituent
  corporations shall become a new corporation, or
  be merged into one of such corporations, as the
  case may be, possessing all the rights,
  privileges, powers and franchises as well of a
  public as of a private nature, and being subject
  to all the restrictions, disabilities and duties
  of each of such corporations so merged or
  consolidated . . . and all debts, liabilities and
  duties of the respective constituent corporations
  shall thenceforth attach to said surviving or
  resulting corporation, and may be enforced
  against it to the same extent as if said debts,
  liabilities and duties had been incurred or
  contracted by it.

Indeed, Section 11 of the Celotex-Panacon merger agreement has been reported in Hanlon, 599 F. Supp. at 378 as expressly tracking the language of the statute:

  [A]ll debts, liabilities and duties of Panacon
  shall upon the effective date of the merger
  attach to Celotex and may be enforced against it
  to the same extent as if such debt, liabilities
  and duties had been incurred or contracted by
  Celotex.

And of course "liabilities" and "duties" extend to contingent liabilities such as tort claims.

Celotex's presentation to this Court never acknowledged the existence of the quoted statute or adverted to Celotex's unconditional obligation under the merger agreement to shoulder all of Panacon's liabilities. Instead, Celotex Mem. 12 has misleadingly argued:

  Other jurisdictions, which have litigated the
  issue of a successor corporation's liability for
  punitive damages, have consistently held
  successor corporations not to be liable on the
  sole basis of their relationship to the
  predecessor corporation.

In support of that contention Celotex cites three cases that never even discuss the merger issue:

    1. Drayton v. Jiffee Chemical Corp., 395 F. Supp. 1081,
  1097-98, modified and aff'd, 591 F.2d 352
  (6th Cir. 1978) (no indication whether acquisition
  involved a purchase of assets or a merger);

    2. Chapin v. Celotex, No. 579-0272(N) (S.D.Miss.
  Jan. 30, 1984) (analyzing the Celotex-Panacon
  merger as if it were a mere purchase of
  assets);*fn4 and

    3. In re Related Asbestos Cases, 566 F. Supp. 818
  (N.D.Cal. 1983).

Contrary to Celotex's representation, numerous decisions in other jurisdictions have held Celotex liable in asbestos cases for punitive damages occasioned by the conduct of its merged-out predecessors. See Hanlon, 599 F. Supp. at 378-79; Sheppard v. A.C. and S. Co., 484 A.2d 521, 524-26 (Del. Super. Ct. 1984) and cases there cited. As n. 3 reflects, Delaware (where Sheppard was decided) is the controlling jurisdiction for these purposes.*fn5 And that renders especially disturbing Celotex's failure to have apprised this Court of those adverse decisions (particularly Sheppard).*fn6

Corporations are largely the molders of their own destinies in acquisition transactions: They may buy assets without assuming liabilities, they may buy stock and preserve the acquired company as a subsidiary (insulating the parent from subsidiary liabilities), they may engage in upstream or downstream mergers, they may consolidate — there is no need to ring all the changes with which a knowledgeable corporate practitioner is familiar. In the products liability area some imaginative courts have begun to circumscribe the conventional corporate law effects of some of those acquisition methods, looking through the transactions to impose "successor" liability (the "de facto merger" notion is such a device). But if an acquiring corporation — for its own business (and perhaps tax) purposes — chooses a formal de jure merger, with its familiar consequences of the total assumption of predecessor liabilities, the corporation will not be heard to extract itself from its wholly voluntary and deliberately undertaken actions.

Conclusion

Under the terms of the merger agreement and the Delaware General Corporation Law, Celotex unconditionally assumed all debts and liabilities of Panacon. Celotex has presented this Court with no authority for treating punitive damages differently from any other liability. Celotex's motion for summary judgment as to punitive damages is therefore denied.*fn7


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