Purchaser Of Assets May Be Held Liable For Tort Claims Arising Out Of Seller's Products
July, 2010
In American Standard, Inc. v. OakFabco, Inc., 14 N.Y.3d 399 (N.Y. 2010), the Court of Appeals held that a successor corporation may be held liable for tort claims based on the predecessor’s defective products where the sales agreement under which the successor obtained the predecessor’s assets contains language assuming certain liabilities. Defendant purchased Plaintiff's boiler business under a sales agreement providing that the purchase was “subject to all debts, liabilities, and obligations connected with or attributable to such business and operations.” Under the sales agreement, the term “liabilities” was defined to include “all the debts, liabilities, obligations and commitments . . . existing and outstanding” on the closing date of the agreement. Id. at 402.
Prior to the sale of its assets in 1970, Plaintiff manufactured boilers insulated with asbestos and, as a result, many tort claims were brought in the years and decades following the purchase of the business. Some of those claims were brought after the closing of the sale agreement by individuals who had suffered injuries allegedly attributable to boilers manufactured and sold before the closing. As a result, Defendant sought to avoid the claims on the basis that the asset purchase and sale agreement did not transfer tort liability to Defendant.
Defendant argued that a tort claim could not be “existing and outstanding” at the time of the sales agreement because the tort plaintiff was injured after the sale. Id. at 403. Plaintiff argued that other language in the agreement clearly indicated Defendant would be responsible for problems after the closing date with boilers installed prior to the agreement. The agreement transferred to Defendant all warranty, service, repair and return claims of Plaintiff’s customers and also contained a hold-harmless provision for claims arising out of Plaintiff’s actions. By including these broad liabilities, Plaintiff sought to demonstrate that the words “existing and outstanding” did not refer only to claims that existed on the closing date of the agreement. Id.
The Court of Appeals found that Plaintiff’s position was “strongly supported by the purpose of the transaction, as described in the agreement itself.” Id. The Court noted that the agreement was clearly a purchase and sale of substantially all the assets of Plaintiff’s boiler business “subject to all debts, liabilities, and obligations connected with or attributable to such business and operations.” Id. The Court found that nothing in the nature of the transaction suggests that the parties intended Defendant to escape any of the related obligations.
Defendant argued for a narrow reading of the term “Liabilities” in the agreement. Defendant stressed that a tort claim could not be “existing and outstanding” before the tort plaintiff had been injured, because until then, it is not possible for a tort lawsuit to be brought. Id. The Court conceded that if the words “existing and outstanding” were read in isolation, Defendant’s interpretation would be plausible and acknowledged that the interpretation urged by Defendant was adopted in Grant-Howard Assoc. v. General Housewares Corp., 63 N.Y.2d 291, 295 (1984). However, the Court distinguished Grant-Howard on the basis that the agreement in that case “carefully limited its assumption of liabilities.” Id. The agreement in Grant-Howard provided that the purchaser would “not be liable for any damages, claims, losses, liabilities or expenses . . . with respect to any liabilities, obligations or other commitments not assumed.” Id. By contrast, the agreement in the instant matter assumed all of Plaintiff’s business and, therefore, “nothing in the purchase and sale agreement suggests an intention to leave any obligations related to that business behind.” Id. at 403-404.
The Court found further support for its conclusion based on obligations owed to Plaintiff’s customers under the agreement. The agreement provided that Defendant would “assume and agree to pay, and defend and hold Seller harmless against, all [Plaintiff’s] Liabilities….” Furthermore, the agreement transferred to Defendant all “warranty, service, repair and return obligations . . . and other claims and complaints arising out of or in connection with any products manufactured, sold, leased or installed by [Plaintiff] on or prior to” the closing date of the agreement. Id. at 404. The Court concluded that this language clearly meant that Defendant would deal with any problems customers had after the closing date with boilers that had been installed previously. Id. By including a hold-harmless clause in the agreement along with assumption of warranty, service, repair and return claims, the agreement demonstrated that it intended to transfer all liabilities to Defendant. Id. Therefore, the hold-harmless clause was found to have transferred liability for claims made after the date of the sales agreement arising out of Plaintiff’s business that was conducted prior to the agreement. Id.
Learning Point:
When a claim is made against a successor corporation for acts of a predecessor corporation, careful analysis of sales and asset purchase agreements is necessary to determine the extent of the successor corporation’s liability.
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