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Springer v. Nohl Electric Products Corp.

Supreme Court of Wisconsin

May 15, 2018

Penny L. Springer, Plaintiff-Appellant,
Nohl Electric Products Corporation, General Refractories Company, Dana Sealing Products, LLC, John Crane, Inc., Union Carbide Corporation, Rockbestos Surprenant Cable Corporation a/k/a Rockbestos Products Corp and RSCC Wire & Cable, Inc., Garlock Sealing Technologies LLC, Anchor Packing Company, Inc., Gaskets, Inc., Cincinnati Valve Company, Leslie Controls, Inc. and Trac Regulator Company, Inc., Defendants, Powers Holdings, Inc. and Fire Brick Engineers Company, Inc., Defendants-Respondents-Petitioners, Secure Horizons by United Health Care Insurance Company, Subrogated Defendant.

          Submitted on Briefs: oral argument: October 2, 2017

          Circuit court Jefferson county No. 2010CV622 William F. Hue Judge

          REVIEW OF A DECISION OF THE COURT OF APPEALS Reported at 370 Wis.2d 787, 882 N.W.2d 870

          For the defendants-respondents-petitioners, there were briefs by George S. Peek, Eric D. Carlson, Benjamin A. Sparks, and Crivello Carlson, S.C., Milwaukee. There was an oral argument by Eric D. Carlson.

          For the plaintiff-appellant, there was a brief by Kathryn A. Keppel and Gimbel, Reilly, Guerin & Brown LLP, Milwaukee, with whom on the brief was Ronald G. Lays and Lays Law Office, Milwaukee. There was an oral argument by Ronald G. Lays.

          Dissented: ABRAHAMSON, J., dissents, joined by A.W.

          DANIEL KELLY, J.

         ¶1 When one company purchases the assets of another, our law normally does not make the former responsible for the latter's liabilities. There are exceptions to that rule, however, such as when the parties use the transaction to fraudulently escape responsibility for those liabilities. Notwithstanding the great age of this common-law exception to successor non-liability, we have had scant occasion to provide guidance on how to recognize such transactions. We take the opportunity to do so today.[1] Specifically, we conclude that the Wisconsin Uniform Fraudulent Transfer Act does not govern the "fraudulent transaction" exception to the rule of successor non-liability, and so we reverse the court of appeals. I. BACKGROUND

         ¶2 Penny Springer's husband died in 2007 from mesothelioma. She believes his exposure to asbestos-containing products during his employment between 1963 and 1969 contributed to his sickness and eventual death. She sued several companies, including Fire Brick Engineers Company, Inc. and Powers Holdings, Inc., alleging they were negligent in mining, merchandising, manufacturing, supplying, installing, distributing, or selling the asbestos products to which Mr. Springer was exposed.[2]

         ¶3 The complaint identified Powers Holdings, Inc. as the successor to Fire Brick Engineers Company, Inc. But the relevant history of these companies actually goes back much further. In the 1940s, Harry J. Schofield formed a company that came to be known as Fire Brick Engineers Company. The business manufactured and distributed, inter alia, asbestos-containing refractory and foundry supplies. Several successors to this company contained some variation of "Fire Brick Engineers" in their names, so we will refer to the original as "FBE1." In 1983, a group of investors (including attorneys who had previously provided legal representation to FBE1) formed a company that would come to be known as Fire Brick Engineers Company, Inc. ("FBE2") for the purpose of acquiring FBEl's assets. FBE2 accepted some, but not all, of FBEl's liabilities. Several years later, FBE2 merged with Curtis Industries, Inc., and adopted the name Powers Holdings, Inc. Powers Holdings, Inc. currently does business under the name "Fire Brick Engineers Company, " but to avoid confusion, we will refer to it only as "Powers." And because FBE2 was merged into Curtis, and therefore no longer exists as a separate entity, our references to "Powers" will include FBE2 unless we indicate otherwise.

         ¶4 The record does not reflect that either FBE2 or Powers has ever manufactured or distributed asbestos-containing products. FBE2 acquired FBE1 via an asset purchase agreement (the "Agreement"), which is a common method of acquiring a business while limiting exposure to its liabilities.[3] The Agreement provided that the only liabilities FBE2 would assume in the transaction would be a promissory note, trade accounts-payable, open inventory purchase orders, loans against certain life insurance policies, and FBEl's lease obligations with respect to two properties. The Agreement disclaimed the assumption of any other liabilities: "Buyer [FBE2] does not, by this Agreement or otherwise, assume or agree to pay or perform any other liabilities or obligations of Seller [FBE1] of any kind, whether or not related to the Subjects' Business, all of which liabilities and obligations remain the sole responsibility of Seller."

         ¶5 Therefore, Powers' answer to the complaint affirmatively asserted that Mrs. Springer had sued the wrong company: "[T]he Plaintiff has brought an action against the wrong entity insofar as Powers Holdings, Inc. is not liable for the torts of its predecessor corporations based upon corporate successor liability defenses." Neither the original nor the amended complaint named FBE1 as a party. Nothing in the pleadings recognized that FBE2 had been created long after the period of time during which Mrs. Springer says her husband was exposed to asbestos products, or that Powers has never commercially dealt with asbestos-containing products. And the pleadings asserted no facts or legal theories by which FBE2 or Powers could be held responsible for FBEl's liabilities.

         ¶6 Powers eventually moved for summary judgment. It argued, in part, that "there is no basis to impose liability on Powers Holding, Inc. as a successor to Fire Brick Engineers Company [FBE1]." Mrs. Springer responded that Powers is liable to her as successor to FBE1 under the "mere continuation" and "de facto merger" exceptions to the successor non-liability rule. The circuit court suspended summary judgment proceedings so the parties could engage in further discovery. Powers then amended its motion, in response to which Mrs. Springer asserted, for the first time, that the "fraudulent transaction" exception to the successor non-liability rule should apply. The circuit court, the Honorable William F. Hue presiding, granted Powers' motion and dismissed FBE2 and Powers from the case.

         ¶7 Mrs. Springer appealed. Her primary argument was that undisputed evidence proved the Agreement between FBE1 and FBE2 had the purpose of fraudulently escaping liability for FBEl's obligations. She also argued that the circuit court erred in granting summary judgment because there was a genuine factual dispute as to whether the "mere continuation" and "de facto merger" exceptions to the rule of successor non-liability applied to Powers. The court of appeals addressed only the "fraudulent transaction" exception. Although it noted that Mrs. Springer did not adequately explain how a court is supposed to determine whether there has been such a fraudulent transaction, it concluded that "the question of whether a transfer transaction was entered into fraudulently must be answered in the context of Wisconsin's Uniform Fraudulent Transfer Act [Wis. Stat. ch. 242]." Springer v. Nohl Elec. Prods. Corp., No. 2015AP829, unpublished slip op., ¶16 (Wis. Ct. App. June 23, 2016) (per curiam) . So the court of appeals reversed and remanded the cause to the circuit court for a trial in which the jury would apply the "badges of fraud" contained in Wis.Stat. § 242.04 (2015-16)[4] to determine whether Powers should be held responsible for the liabilities of its predecessor company, FBE1.

         ¶8 We granted Powers' petition for review, and now reverse the court of appeals.


         ¶9 We review the disposition of a motion for summary judgment de novo, applying the same methodology the circuit courts apply. Green Spring Farms v. Kersten, 136 Wis.2d 304, 315, 401 N.W.2d 816 (1987); Borek Cranberry Marsh, Inc. v. Jackson Cty., 2010 WI 95, ¶11, 328 Wis.2d 613, 785 N.W.2d 615 ("We review the grant of a motion for summary judgment de novo . . . . ") .

         ¶10 "The first step of that methodology requires the court to examine the pleadings to determine whether a claim for relief has been stated." Green Spring Farms, 136 Wis.2d at 315. "In testing the sufficiency of a complaint, we take all facts pleaded by plaintiff[] and all inferences which can reasonably be derived from those facts as true." Id. at 317. And we liberally construe pleadings "with a view toward substantial justice to the parties." Id. (citing Wis.Stat. § 802.02(6)). "The complaint should be dismissed as legally insufficient only if it is quite clear that under no circumstances can plaintiff[] recover." Id.

         ¶11 Under the second step of this methodology, "[i]f a claim for relief has been stated, the inquiry then shifts to whether any factual issues exist." Id. at 315. Summary judgment is appropriate only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Wis.Stat. § 802.08(2); see also Columbia Propane, L.P. v. Wis. Gas Co., 2003 WI 38, ¶11, 261 Wis.2d 70, 661 N.W.2d 776');">661 N.W.2d 776 (citing and applying Wis.Stat. § 802.08(2)) .


         ¶12 The question before us is a narrow one, to wit, whether the Wisconsin Uniform Fraudulent Transfer Act governs the "fraudulent transaction" exception to the rule of successor non-liability. After resolving that question, we will then determine whether further proceedings in this case are necessary.

         A. The Rule of Successor Non-Liability

         ¶13 In determining whether the fraudulent transaction exception to the rule of successor non-liability should apply in this case, the court of appeals relied on the Wisconsin Uniform Fraudulent Transfer Act (Wis. Stat. ch. 242 (the "WUFTA")) for the standard by which to identify fraud in the transfer of assets from FBE1 to FBE2. We hold today that the WUFTA does not control the analysis of the fraudulent transaction exception. Our opinion will first address the basic principles undergirding the rule of successor non-liability. Then, we will explain why the WUFTA does not control the disposition of this case. 1. The Basics of Successor Non-Liability

         ¶14 Our common law provides that "a corporation which purchases the assets of another corporation does not succeed to the liabilities of the selling corporation." Fish v. Amsted Indus., Inc., 126 Wis.2d 293, 298, 376 N.W.2d 820 (1985) (quoting Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977)) . In Wisconsin, this rule dates back to the late nineteenth century. See Wright v. Milwaukee & St. Paul Ry. Co., 25 Wis. 46, 52 (1869) (stating that a corporation does not "by selling a portion of its property, or even the whole of it, impose upon the purchaser any liability for its general debts").

         ¶15 There are very practical justifications for this rule. It "protect[s] a bona fide purchaser from liabilities caused by a predecessor corporation of which the bona fide purchaser was unaware at the time of acquisition." Columbia Propane, L.P., 261 Wis.2d 70, ¶23 (quoting Eva M. Fromm, Allocating Environmental Liabilities in Acquisitions, 22 J. Corp. L. 429, 441 (1997)). Without such a rule, assets would become unmarketable:

If the liabilities always went with the assets, it would be difficult to sell assets because the purchaser would not know what he was getting. He might be "buying" a lawsuit the expected cost of which exceeded the value of the asset purchased, yet it would be too late for him to back out of the sale or renegotiate the price.

Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1424 (7th Cir. 1993) (applying Illinois law). This is no less true in the context of products liability cases, such as this one. Here's why:

[T]he successor corporation did not create the risk nor did it directly profit from the predecessor's sale of the defective product; it did not solicit the use of the defective product nor make any representations as to its safety; nor is it able to enhance the safety of a product that is already on the market[.]

Fish, 126 Wis.2d at 307 (citing Bernard v. Kee Mfg. Co., 409 So.2d 1047, 1050 (Fla. 1982); Domine v. Fulton Iron Works, 395 N.E.2d 19, 23 (111. App. Ct. 1979); Jones v. Johnson Mach. & Press Co. of Elkhart, Ind., 320 N.W.2d 481, 484 (Neb. 1982); Ostrowski v. Hydra-Tool Corp., 479 A.2d 126, 127 (Vt. 1984)).[5]

         ¶16 But this rule of successor non-liability is not absolute; there are four well-recognized circumstances in which it does not apply:

(1) when the purchasing corporation expressly or impliedly agreed to assume the selling corporation's liability; (2) when the transaction amounts to a consolidation or merger of the purchaser and seller corporations; (3) when the purchaser corporation is merely a continuation of the seller corporation; or (4) when the transaction is entered into fraudulently to escape liability for such obligations. Fish, 126 Wis.2d at 298 (quoting Leannais, 565 F.2d at 439).

         ¶17 We are interested here in the fourth exception. Even though it is over a century old, it has received only sporadic attention. "There are few cases under the fraud exception, . . . partly because creditors prefer to cast these cases as suits to set aside a fraudulent conveyance." Chaveriat, 11 F.3d at 1425. The scarcity is particularly evident when the claim sounds in tort. See, e.g., Restatement (Third) of Torts: Products Liability § 12 cmt. e (Am. Law Inst. 1998) (stating that the fraudulent transfer exception "has rarely been used to impose successor liability for products liability claims"); Timothy J. Murphy, Comment, A Policy Analysis of a Successor Corporation's Liability for its Predecessor's Defective Products When the Successor Has Acquired the Predecessor's Assets for Cash, 71 Marq. L. Rev. 815, 819 (1988) (stating that "the fraudulent transaction exception is usually not successfully invoked by products liability plaintiffs") .

         ¶18 We learn from the few available cases that the justification for the fraudulent transfer exception is that such ...

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