COMPANIES WORK TO AVOID LIABILITY WHEN MERGING

A recent recall of children’s furniture has highlighted the efforts that companies go through during mergers to protect themselves from being held accountable when they injure someone. When Blackstreet Capital Management (specifically its affiliate SFCA) purchased the assets of Simplicity for Children, a manufacturer of children’s furniture, the deal was structured so SFCA would not assume responsibility for products already on the market should they injure someone or be deemed defective. In April, SFCA bought Simplicity’s assets at an auction, fully aware of a recall of over 1 million cribs, but believing they would not have any accountability for injuries. Late last week, however, the Consumer Product Safety Commission directed stores to pull Simplicity bassinets from their shelves after the deaths of two infants. SFCA refused, arguing that while it had the right to sell products under the Simplicity brand, it did not assume the liability of products already on the market.

This scenario, commonly referred to as “successor liability,” is an issue that attorneys and injured consumers often face due to the complexities of a changing economy. The SFCA issue mirrors a case decided by the Maryland Court of Appeals (Maryland’s highest appellate court) in 1990. In that case, Nissen Corporation v. Miller, the Maryland Court of Appeals faced the issue of whether a person injured by a treadmill could recover against the company which purchased the original manufacturer of the treadmill. In January of 1981, Frederick B. Brandt purchased from Atlantic Fitness Products a treadmill which was designed, manufactured and marketed by American Tredex Corporation. Later in 1981, Nissen Corporation entered into an asset purchase agreement with American Tredex, under which Nissen purchased the trade name, patents, inventory and other assets of American Tredex. Nissen also assumed some of American Tredex’s obligations and liabilities, but the contract expressly excluded assumption of liability for injuries arising from any product previously sold by American Tredex.

Five years later in 1986, Mr. Brandt was injured while trying to adjust the running treadmill. More than a year later, American Tredex was administratively dissolved. Mr. Brandt and his wife filed suit on September 1, 1988, against American Tredex and Nissen, as well as AT Corporation and Atlantic Fitness Products. (AT Corporation was a second name for American Tredex).

The Maryland Court of Appeals faced the issue of whether the Court should adopt in Maryland a general rule of “nonliability of successor corporations.” In its ruling, the Court held that a corporation which acquires all or part of the assets of another corporation does not acquire liabilities and debts of the predecessor unless there is one of four exceptions: Express or implied agreement to assume such liabilities; the transaction amounts to consolidation or merger; successor company is a continuation or reincarnation of the previous company, or the transaction was fraudulent. The Court in Nissen held that since Nissen purchased assets of American Tredex under a contract that expressly excluded the assumption of liability for injuries arising from any product previously sold by manufacturer, therefore Nissen was not liable for any injury caused by the treadmill.

According to an article in the Washington Post discussing the SFCA recall:

Traditionally, only mergers result in one company taking on the liability of another, said Alan O. Sykes, a professor at Stanford Law School. A major benefit of buying assets is that no liabilities are incurred. “When a company is bankrupt and sells off its old factory and stuff, the people who buy those assets in those sorts of asset sales are not liable,” Sykes said.

According to SFCA, since the assets of Simplicity were purchased in a foreclosure sale, SFCA “did not assume directly or indirectly liabilities associated with Simplicity.”

In the end, it is you, the consumer, who is injured. These are just a few more examples of how companies work to protect their bottom lines, often at the expense of consumer safety. In the SFCA example, a company is resisting a call from the Consumer Product Safety Commission to recall baby bassinets, knowing full well that the product has caused the deaths of two infants. Its’ reasoning? A legal technicality that states SFCA may not be liable for any injuries that result. Every day, companies work to increase their bottom line, and this is yet another example. Defective products shown to cause the death of infants will remain on the market, and continue to be sold, due to this technicality. Yet every day, the attorneys at Goldberg, Finnegan & Mester, LLC work on behalf of consumers injured by faulty and/or defective products. If you or a loved one has been injured as the result of a defective product, call the attorneys at Goldberg, Finnegan & Mester, LLC at 301-589-2999 extension 102 for a free consultation.