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I decided to do some digging after reading of last week's tragic story about the four-month old infant strangled to death when her head got caught in between the metal bars of a defectively designed bassinet manufactured by Simplicity, Inc., of Reading, Pennslyvania. What struck my eye was the statement from Simplicity's successor, SFCA, Inc.
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– a subsidiary of the Bethesda, MD-based $88 million private equity fund, Blackstreet Capital (itself managed by some prominent D.C. financiers, lobbyists, and "political luminaries"
)
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– that it was not responsible for products previously manufactured by Simplicity since it had purchased only the assets of Simplicity at foreclosure last April, not the liabilities.
Quoting (or misquoting) Wilkie Farr's Barry Barbash, the Washington Post story reported that "[l]egal experts said SFCA is not obligated to comply with the CPSC's request to do a recall because of the way its purchase of Simplicity's assets was structured."
It may be true as a practical matter that SFCA is not obligated to fund the recall of 1 million bassinets (since assumption of that responsibility would surely force SFCA out of business just as it had forced its predecessor out of business). It may even be true as a matter of law that this Minnesota district court decision is correct and that even Simplicity itself (and hence SFCA without question) has no direct legal liability for breach of warranty or consumer fraud to any consumer uninjured by the design defect. It is by no means clear, however, that SFCA has sidestepped liability for deaths or other injuries caused by the defectively design cribs.
The background to how SFCA came to own Simplicity is itself interesting. Simplicity was a family-owned company that was founded in 1947 and grew into the nation's largest crib manufacturer on the backs of the post-WWII baby boom and the "echo boom" of the next generation. Difficult business conditions, and the September 2007 product recall (prompted by a Chicago Tribune reporter's dogged pursuit of the story), forced Simplicity to "explore strategic alternatives, including a sale or restructuring." According to this press release,
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After conducting a broad sale process and negotiating with several strategic and financial partners, professionals with the [National City Capital Markets] Special Situations Group concluded that the greatest value for Simplicity's stakeholders would be achieved through a sale of Simplicity's senior debt and subsequent UCC Article 9 asset sale to an affiliate of Blackstreet Capital Management ("Blackstreet"). This solution allowed Simplicity's management team to remain in place while leveraging Blackstreet's Asian sourcing and retail expertise. The sale closed in April 2008.
The transfer of Simplicity's assets to SFCA is as notable for the route not chosen as it is for the route chosen. Many have prophesized that the "end of bankruptcy" is near, and the decision not to pursue a bankruptcy sale of Simplicity's assets is surely a sign that this prophesy has merit. After all, the Third Circuit's decision in United States v. Knox-Schillinger (In re Trans World Airlines, Inc.), 322 F.3d 283 (3d Cir. 2003) (pdf), had significantly enhanced (at least for bankruptcies filed in Pennsylvania, Delaware, and New Jersey) the ability of purchasers to buy a bankrupt debtor's assets "free and clear" of "any interest," including potential successor liability claims arising under federal law. Had the buyer felt that the bankruptcy route could have extinguished potential successor products liability claims, it's hard to believe it wouldn't have chosen that path.
The fact that it didn't certainly suggests that, at least privately, SFCA isn't as certain about its lack of responsibility for successor product liability claims as it's willing to confess publicly. And with good reason, too, for as the 7th Circuit held in Chicago Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund v. Tasemkin, Inc., 59 F.3d 48, 49-51 (7th Cir. 1995), purchasers of a chapter 7 debtor's assets in a state foreclosure sale are not shielded from potential successor liability claims for delinquent pension liabilities.
Further, and more to the point, even "free and clear" bankruptcy sales under Bankruptcy Code § 363(f) often don't insulate a successor corporation from product liability claims that could have been asserted against its predecessor. As the New Jersey Supreme Court stated in Lefever v. K.P. Hovnanian Enters., Inc., 734 A.2d 290, 160 N.J. 307 (N.J. 1999), in affirming the "product line exception" to the general rule that a purchaser of assets is not responsible for the seller's liabilities simply because it has succeeded to ownership of the assets: Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} Normal 0 false false false MicrosoftInternetExplorer4
New Jersey, along with several other jurisdictions, has adopted a product-line exception to the general rule. Under that doctrine, by purchasing a substantial part of the 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 products. The question in this appeal is whether the product-line exception is applicable when the successor has purchased the predecessor's assets at a bankruptcy sale....
We share the instinctive reaction of those who hesitate to apply the product-line exception to a successor at a bankruptcy sale. At first glance, to apply the doctrine to one who could be contemplating the purchase of assets free and clear of any predecessor liability seems unfair. That concern turns out to be unfounded. In its dealings with plaintiff, [the successor] appears to have been represented by remarkably competent counsel. Practice manuals assist attorneys and clients to deal with issues of successor liability, whether they arise in the context of environmental liability, employment discrimination, or, as here, successor products liability....
In these circumstances, we do not consider it unfair to impose liability on the successor manufacturers of the Lull forklift. As [the author of the dissent] explained in Globe Slicing, ... “[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, good will and the continuation of an established manufacturing enterprise.’ " Ready access to counseling ... enabled [the successor] to structure the acquisition to avoid or accept successor liability. It should not seek to have it both ways-trading on the good will generated by a long-standing customer base, yet disavowing responsibility to those same customers.
According to George Kuney's excellent Taxonomy and Evaluation of Successor Liability, 6 Fla. St. Bus. L. Rev. 9 (2007) (appendix updated annually), Pennsylvania's Supreme Court hasn't yet considered the issue of product line successor liability, but a number of lower Pennsylvania courts have adopted the exception. As such, SFCA's disclaimers of responsibility will likely be challenged under the "product-line exception." And though it may not have made much of a difference in the end, SFCA won't have a Third Circuit bankruptcy court's "free and clear" order to rely upon for at least some measure of comfort.
Those wanting more on the interplay between bankruptcy sales and state law principles of successor liability are advised to read Michael Reed's Successor Liability and Bankruptcy Sales Revisited
– A New Paradigm, 61 Bus. Law 179 (2006) (also available at any local law library). In this article he revisits and updates his 1996 article entitled Successor Liability and Bankruptcy Sales, 51 Bus. Law 653 (1996). It's about as good a summary as you'll find.
The treatment of "mass future claims in bankruptcy" outside of the asbestos context (which was codified in Code section 524(g)) was the subject of considerable debate in connection with the proceedings of the 1997 National Bankruptcy Review Commission, from which BAPCPA was spawned. A number of recommendations were made by the Commission, which generated significant comment from diverse sources,
but the entire matter died on the vine. Maybe our resident BAPCPA-guru, Cathy Vance, will provide some insight as to why (other than nobody could agree and Congress had littler fish to fry).
As Hanna-Barbera taught us through Snagglepuss, one of its earliest characters, "exiting stage left" doesn't guarantee that you'll leave your problems behind. It's an apt lesson for companies trying to shed product liability claims while retaining all the going-concern benefits from the shell it left behind.
Happy hunting!
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