By Nicholas Kaster, J.D.
Because North Carolina was both the state where the injury occurred and the forum in which the case was brought, the court applied North Carolina law. The incorporation state was not relevant here because the suit did not affect any "internal affairs" of the corporation.
A suit brought by a decedent’s estate against American International Industries (AII), as purchaser of a talcum powder brand that allegedly caused the decedent’s mesothelioma, was dismissed by a federal district court in North Carolina. Given that AII did not effectively merge with the selling company, it was not a legal successor under North Carolina law and, therefore, was not liable for products manufactured by the selling company, the court determined (Bell v. American International Industries, July 30, 2021, Osteen, W.).
Background. A hairdresser used Clubman talcum powder for over 30 years, beginning in the 1970s and continuing through 2009. She used the talcum powder while she was a student, during her employment at hair salons, and while working at her own home hair salon. The hairdresser was diagnosed with mesothelioma and died in 2017.
The executor of her estate brought a claim against AII, which had purchased the Clubman brand from The Neslemur Company in 1987. The asset purchase agreement explicitly provided that Neslemur would indemnify AII for Neslemur’s pre-existing liabilities.
The talcum powder container that the decedent used was a one-size tin, primarily white, with a green label. The container had a white top that turned to release the powder. According to her deposition testimony, the decedent used the same powder throughout her years as a hairdresser, as it was her preferred brand. She did not claim to have used any differently packaged or labeled talcum powder during her career, nor did she recall the packaging ever changing. However, the talcum powder manufactured by AII after its purchase of Neslemur was sold in green packaging, which looked noticeably different from that belonging to the hairdresser. Moreover, two years after AII purchased the brand, it began selling the talc in a plastic-rather than tin-container.
The estate’s claim against AII relied on the assumption that AII was liable as a corporate successor to Neslemur. In other words, rather than asserting that AII itself manufactured the product that allegedly harmed the decedent, the estate argued that AII should be held responsible for the product manufactured by Neslemur. AII moved for summary judgment, arguing that it was not a corporate successor and that the estate, therefore, had no viable claim against it.
Applicable state law. The parties disagreed over whether North Carolina or California law should govern the successor liability analysis. The estate argued that California law should be applied due to the "internal affairs doctrine," while AII maintained that North Carolina substantive law should be applied.
Neither party disputed that federal courts sitting in diversity cases in North Carolina are to apply the North Carolina choice of law rules. North Carolina choice of law rules use the internal affairs doctrine, which dictates that "only one State should have the authority to regulate a corporation’s internal affairs-matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders." The estate argued that, because California law governed the internal operations of AII, California law should be applied.
The internal affairs doctrine is intended to minimize the potential for corporations to be subjected to the "conflicting" standards of different states’ laws with regard to matters of internal corporate governance and the relationships between and among shareholders, officers, and directors. Here, however, the issue involved an asset sale and resulting tort liability, the court stated. It did not affect any "internal affairs" of the corporation-neither corporate governance nor shareholder relationships were implicated. Thus, under North Carolina choice of law rules, the incorporation state was not relevant to the applicable state law in this instance.
Setting aside the internal affairs doctrine, which was inapplicable here, the court noted that North Carolina choice of law rules dictate that the law of either the forum or the situs of the claim should apply. Since North Carolina was both the state where the decedent’s injury occurred and the forum in which the case was brought, the court applied North Carolina law.
Successor liability. The estate argued that AII was a legal successor to Neslemur and, therefore, should be held responsible for any alleged harm done by Neslemur products. Under the general successor liability rule, a corporation which purchases all or substantially all of the assets of another corporation is not liable for the transferor’s liabilities. Under North Carolina law, there are only four exceptions to this rule against successor liability: (1) when there is an express or implied agreement by the purchasing corporation to assume the debt or liability; (2) when the transfer amounts to a de facto merger of the two corporations; (3) when the transfer of assets was done for the purpose of defrauding the corporation’s creditors; or (4) when the purchasing corporation is a mere continuation of the selling corporation in that the purchasing corporation has some of the same shareholders, directors, and officers.
As North Carolina has not recognized the product line exception available in California, it did not apply in this case. At issue were the second and fourth exceptions: whether there was a de facto merger of the corporations or whether AII was a mere continuation of Neslemur.
Although the de facto merger doctrine has never been applied in North Carolina, it has been acknowledged by courts in the state. The court noted that application of the de facto merger exception requires a variety of factors only partially alleged in this case, including continued management between the two corporations, continuity of shareholders with stock as consideration for the purchase, and the immediate dissolution of the seller.
The estate pointed to an affidavit from the former chairman of Neslemur, in a prior case, which stated that "Neslemur ceased conducting operations on the date of the asset purchase agreement" and "had no additional income from that point forward." However, this alone was not sufficient to create a de facto merger, the court said, because there was no evidence of an exchange of shares or continuity of ownership. The court therefore did not apply the de facto merger doctrine.
More commonly applied in North Carolina courts is the "mere continuation" exception. A purchaser may be a legal successor if it is a "mere continuation" of the seller. For this analysis, North Carolina courts primarily look to "continuity of stockholders and directors between the selling and purchasing corporation."
In this case, however, there was no continuity between the selling and purchasing corporations. None of the same directors or board members were present in the purchasing corporation. Neslemur continued to exist, though on a smaller scale, after the sale.
North Carolina law does not deem a purchaser a mere continuation of the seller when: (1) there is no continuity of directors, (2) two separate corporations continue to exist, and (3) the purchase was made in good faith. Given that AII did not effectively merge with Neslemur and was not a mere continuation of it, AII was not a legal successor to Neslemur under North Carolina law. AII therefore could not be found liable for products manufactured by Neslemur, the court determined. Accordingly, the claims against AII were dismissed and AII’s motion for summary judgment was granted.
This case is No. 1:17CV111.
Attorneys: Frank J. Wathen (Simon Greenstone Panatier PC) for Lloyd Bell. Timothy Peck (Fox Rothschild LLP) for American International Industries. Tracy E. Tomlin (Nelson Mullins Riley & Scarborough LLP) for Brenntag Specialties, Inc. f/k/a Mineral Pigment Solutions, Inc. Michael Alan Brown (Nelson Mullins Riley & Scarborough LLP) for Colgate-Palmolive Co.
Companies: American International Industries; Brenntag Specialties, Inc. f/k/a Mineral Pigment Solutions, Inc.; Colgate-Palmolive Co.
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