The opinion of the court was delivered by: ROBERT L. CARTER
Defendants Concordia Custom Yachts, Inc. ("Concordia Custom") and Burlington Industries, Inc. ("Burlington") assert that they are improper parties and move for summary judgment on the causes of action asserted against them by the plaintiff and on the cross-claims asserted against them by co-defendants. All defendants move for summary judgment on plaintiff's strict liability and negligence causes of action on the grounds that solely economic damages are alleged. Defendants System Three Resins ("System Three"), Burlington, Northern Fiberglass Sales, Inc. ("Northern") and RP Associates, Inc. ("RP Associates") move for summary judgment on plaintiff's breach of warranty causes of action against them on the grounds that they are not in privity with plaintiff. Defendants Concordia Yacht Builders, Inc. ("Concordia Yacht") and Concordia Custom move for summary judgment on plaintiff's breach of warranty causes of action against them and on the issue of plaintiff's entitlement to consequential damages for breach of warranty. Concordia Yacht requests that in the event that the court dismisses the action against Burlington for a reason other than a finding that Burlington is not a proper party, then the court should convert Concordia Yacht's counter-claims against Burlington into cross-claims. Northern moves for summary judgment on the cross-claims brought against it by Concordia Custom, RP Associates and System Three. Finally, plaintiff moves to amend the complaint and seeks partial summary judgment as regards liability.
The court has diversity jurisdiction over this case pursuant to 28 U.S.C. § 1332 (1988).
Defendant Concordia Yacht built the "Josher III," a fifty-two foot custom yacht, for plaintiff Richard Hadar. The hull and deck of the yacht were covered by a fiberglass and epoxy laminate consisting of layers of fiberglass combined with epoxy resin. Concordia Yacht constructed the laminate according to the vacuum-bagging method, in which a layer of fabric known as peel ply is used to release the vacuum bag from the laminate. The Phase Two epoxy resin used in the Josher III was manufactured by defendant System Three and distributed by defendant RP Associates, and the Super Release Blue Peel Ply ("SRB Peel Ply") used in the manufacture of the Josher III was manufactured by Precision Fabrics and distributed by defendant Northern.
Before delivery of the yacht, Watson noticed flaws in the laminate, which he characterized as print-through, a cosmetic problem that occurs when resin shrinks as a result of exposure to heat. Concordia Yacht attempted to address the problem by sanding and repainting the hull. The yacht was delivered to plaintiff on May 26, 1989. Late in the summer of 1989 Watson again noticed what he characterized as print-through on the hull, and during the summer of 1990 Concordia Yacht repainted the boat at Hadar's expense. During the fall of 1990, Watson noticed another flaw in the hull, which he characterized as delamination. In an attempt to remedy the problem, Hadar had the flawed areas of the laminate repaired at the Derecktor Shipyard, and he later had the entire laminate removed and replaced. Hadar alleges that during the repair process the yacht was suspended upside-down for an extended period of time, causing damage to various parts of the yacht.
II. Burlington Motion for Summary Judgment
Burlington asserts that it did not manufacture the peel ply at issue in this case and moves for summary judgment on the negligence and strict liability causes of action asserted against it by plaintiff and on the cross-claims asserted against it by Concordia Yacht, Concordia Custom, RP Associates, and System Three. A party is entitled to summary judgment as a matter of law 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." Rule 56(c), F.R. Civ. P. The moving party can carry this burden "merely by pointing out that there is an absence of evidence to support the non-moving party's claims." Pressman v. Estate of Steinvorth, 860 F. Supp. 171, 176 (S.D.N.Y. 1994) (Carter, J.) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)). When the moving party has met its burden, the adverse party can defeat the motion only if it can "set forth specific facts showing that there is a genuine issue for trial." Rule 56(e), F.R. Civ. P. "Mere allegations in the non-moving party's pleadings are insufficient to show that there is a triable issue of fact," Project Release v. Prevost, 722 F.2d 960, 969 (2d Cir. 1983), -- to meet his burden, the non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). For the purpose of this motion, facts must be viewed in the light most favorable to the nonmoving party, id. at 587, and "when the factual allegations in the pleadings of the party opposing summary judgment are supported by affidavits or other evidentiary material, they must be taken as true." First Nat'l Bank of Cincinnati v. Pepper, 454 F.2d 626, 629 (2d Cir. 1972).
Hadar contends that Burlington was either the manufacturer or the seller of the SRB Peel Ply used in the laminate of the Josher III. It is uncontroverted that the peel ply at issue was manufactured and sold by Precision Fabrics and that prior to February, 1988, Precision Fabrics was a division of Burlington. The issue is whether Burlington has shown that there is an absence of evidence to support Hadar's claim that Precision was still a division of Burlington on the date of the sale of the peel ply. Plaintiff contends that the sale occurred in September 1988, while Burlington contends that it occurred in May 1988. Both parties support these allegations with invoices for the sale of peel ply addressed to Concordia Yacht, creating an issue of fact regarding the exact date of sale. It is undisputed, however, that the sale occurred no earlier than May 1989.
Burlington alleges that it sold its Precision Fabrics division ("Precision division") to Precision Fabrics Group, Inc. ("Precision, Inc.) on February 17, 1988, and thus was neither the manufacturer nor the seller of the peel ply purchased by Concordia in May 1988. As evidence of this sale, Burlington points to a purchase agreement between Burlington and Precision, Inc. dated February 8, 1988, and signed by Burlington's vice chairman and the president of Precision, Inc. In this agreement, Burlington promises to sell and Precision, Inc. promises to buy the Precision division on the closing date, but each party's promises are conditional on the performance of certain obligations by the other party at or prior to the closing. There is a "Bill of Sale and Assignment" dated February 17, 1988, attached as an exhibit to the purchase agreement, but this document is unsigned and therefore does not provide admissible evidence that the conditions were ever waived or met and that the sale was completed.
Despite the absence of a signed closing document, however, there is ample evidence before the court that Burlington sold its Precision division prior to May, 1988. Burlington submits a sworn affidavit of Charles Stricklen, manager of the Accounts Payable Department of Burlington, stating that on February 17, 1988, Burlington sold its division which produced the SRB Peel Ply to Precision, Inc. and that after that date Burlington did not sell SRB Peel Ply. Affidavits submitted in support of summary judgment motions "shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein." Rule 56(e), F.R. Civ. P. Here, the affidavit is admissible because it is based on the personal knowledge of Mr. Stricklen, sets forth only those facts to which he is competent to testify, and shows that he is competent to testify to the matters stated therein. Furthermore, Hadar does not object to the use of this affidavit for purposes of this motion, and therefore the court is free to consider it.
To counter Stricklen's allegation, Hadar points to commission statements paid to Northern monthly from March 10, 1988, to October 6, 1988, for sales made to Concordia. Although the commission statements bear the Precision, Inc. letterhead, the checks were drawn on Burlington's account through September 1988. Hadar asserts that this provides proof that Burlington had some involvement with the manufacture and sale of the SRB Peel Ply, but he offers no evidence for this contention. Stricklen avers that the commission checks were drawn on a Burlington account solely because Burlington and Precision, Inc. had a service agreement in which Burlington charged Precision, Inc. for performing bookkeeping services. This affidavit, based on Stricklen's personal knowledge as manager of Burlington's Accounts Payable Department, provides ample evidence that Hadar's allegation of Burlington's responsibility for the manufacture and sale of the SRB Peel Ply is unfounded. Where, as here, the moving party has presented evidence which the non-moving party counters only with bare conjecture, summary judgment is appropriate. Matsushita Elec. Indus. Co., 475 U.S. at 586.
Hadar contends that even if Burlington sold its Precision division in February, 1988, Precision, Inc. remained a department or division of Burlington after that date because the management of the Precision division of Burlington became shareholders of Precision, Inc. Burlington denies this allegation, pointing to its sale of its Precision division and the resultant separate corporate identities of Precision, Inc. The issue is whether the court may disregard Precision, Inc.'s separate corporate identity and pierce its corporate veil. The court need not decide which state's law to apply to this issue, because the applicable law in New York, Massachusetts, and North Carolina (the place of incorporation of Burlington) prohibits the court from piercing the veil in this case. In all three states, a court may pierce a corporate veil only if there is evidence that, among other things, such a measure is necessary to prevent a fraud, a wrong, or a gross inequity. New York Ass'n for Retarded Children, Inc., Montgomery County Chapter v. Keator, 199 A.D.2d 921, 606 N.Y.S.2d 784, 785 (App. Div. 1993); Statesville Stained Glass, Inc. v. T.E. Lane Constr. & Supply Co., 110 N.C. App. 592, 430 S.E.2d 437, 440 (N.C. Ct. App. 1993); NCR Credit Corp. v. Underground Camera, Inc., 581 F. Supp. 609, 612 (D. Mass. 1984). Hadar has not claimed that Burlington either sold its Precision division or is now disregarding the separate corporate identities of Burlington and Precision, Inc. in order to perpetrate a fraud or to injure some third party, and therefore he has not proffered evidence sufficient to raise a question of fact regarding whether the veil should be pierced.
Hadar claims that Burlington may not raise "the issue of manufacture of the product by a successor corporation as a defense because Burlington failed to assert the facts as an affirmative defense in their answer," (Pl.'s Revised Mem. in Opp'n to Mot. for Summ. J. by Defs. Concordia Custom, Burlington, & Northern, at 9), as required by Rule 8(c) of the Federal Rules of Civil Procedure, and that he consequently waived his right to assert this defense pursuant to Rule 12(h)(1), F.R. Civ. P.
The claim that a product at issue in a case was manufactured by another corporation is not one of the enumerated defenses that must be pled affirmatively pursuant to Rule 8(c), F.R. Civ. P. Nor does Hadar cite any cases holding that this defense falls under the residual clause of Rule 8(c) which includes as an affirmative defense "any other matter constituting an avoidance or affirmative defense." A defense is not affirmative where it "merely negates an element of the plaintiff's prima facie case." Marino v. Otis Eng'g Corp., 839 F.2d 1404, 1407 (10th Cir. 1988) (quoting Sanden v. Mayo Clinic, 495 F.2d 221, 224 (8th Cir. 1974)). Burlington's manufacture of the SRB Peel Ply is an element of Hadar's prima facie case on both his negligence and strict liability claims, and therefore the defense at issue is not an affirmative defense. Furthermore, Hadar asserted in his complaint that Burlington manufactured the peel ply, and Burlington properly denied that assertion in its complaint, (see Compl. PP 44, 49; Burlington's Answer PP 15, 17), and thus the notice-providing purpose of Rule 8(c) has been met. See Blonder-Tongue Labs., Inc. v. University of Ill. Found., 402 U.S. 313, 350, 28 L. Ed. 2d 788, 91 S. Ct. 1434 (1971) (purpose of Rule 8(c) is to "give the opposing party notice of the plea" and a chance to answer it). Therefore, the court finds that Hadar and the cross-claimants have not presented evidence sufficient to raise a question of fact regarding whether Burlington manufactured the SRB Peel Ply, and summary judgment on this issue is appropriate.
III. Concordia Custom's Motion for Summary Judgment on the Ground that it is an Improper Party
Concordia Custom asserts that it is not liable for Concordia Yacht's obligations and moves for summary judgment on the plaintiff's claims against it and also on the cross-claims asserted by co-defendants. In September, 1990, Concordia Custom purchased substantially all of the assets of Concordia Yacht,
with the exception of its cash, accounts receivable and investment assets. (See Foster Aff., 3/3/94, Ex. F ("Purchase Agreement")). As part of the Purchase Agreement, Concordia Company, Inc. ("Concordia Company")
agreed to license to Concordia Custom the right to use the name "Concordia" and the Concordia mark and logo. Concordia Company also agreed to lease to Concordia Custom the premises which had been leased by Concordia Yacht. The Josher III was manufactured by Concordia Yacht before this transaction occurred, and the issue here is whether Concordia Custom inherited Concordia Yacht's liability, if any, for the alleged flaws in the Josher III.
The general rule in New York and Massachusetts is that a company that buys the assets of another is not liable for the debts or liabilities of the seller. Dayton v. Peck, Stow & Wilcox Co. (Pexto), 739 F.2d 690, 692 (1st Cir. 1984); Parra, 611 F. Supp. at 223. There are four exceptions to this rule which allow liability to be imposed on the buyer if: "(1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations." Parra, 611 F. Supp. at 223 (quoting Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 244, 464 N.Y.S.2d 437, 451 N.E.2d 195 (1983)). Hadar asserts that the transaction between Concordia Yacht and Concordia Custom falls under the second and third exceptions.
A transaction will fall under the second exception if it constitutes a de facto merger. In re Acushnet River & New Bedford Harbor Proceedings re Alleged PCB Pollution, 712 F. Supp. 1010, 1015 (D. Mass. 1989). A number of courts have found the de facto merger and mere continuation exceptions to the general rule practically indistinguishable, see, e.g., Lumbard v. Maglia, Inc., 621 F. Supp. 1529, 1535 (S.D.N.Y. 1985) (Goettel, J.), and following their lead this court will consider the two exceptions together.
Whether a transaction is a de facto merger depends upon whether it meets the following criteria:
(1) There is a continuation of the enterprise of the seller corporation, so that there is continuity of management, personnel, physical location, assets, and general business operations.
(2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation.
(3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible.
(4) The purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.
In re Acushnet River & New Bedford Harbor Proceedings re Alleged PCB Pollution, 712 F. Supp. at 1015. A transaction can constitute a de facto merger without meeting all of these criteria -- the court must weigh the factors individually in each case. Lumbard, 621 F. Supp. at 1535.
Hadar does not allege that Concordia Custom expressly assumed Concordia Yacht's obligations, so the fourth criteria of the de facto merger test clearly has not been met. He asserts that there exists a question of fact whether the second criteria has been met because Robert MacGregor, who was the sole shareholder of Concordia Yacht, is a twenty percent shareholder in Concordia Custom and because MacGregor testified that "he became a 20% stockholder in the purchaser as a result of the transaction." (Cooke Aff., 5/24/94, at P 8.) However, the Purchase Agreement clearly states that the consideration for Concordia Yacht's assets was $ 120,000 in "bank cashier's check or other immediately available funds," (Purchase Agreement § 1.2), and Concordia Custom has submitted a signed resolution by the directors of CCY, Inc. authorizing the issuance of 20% of its common stock to MacGregor "in exchange for the payment of $ 1 per share." (Foster Aff., 7/13/94, Ex. I.) In the face of this evidence that the sale was paid for with cash, Hadar's mere hypothesis that there was a stock-for-assets exchange cannot survive, and the second criteria of the de facto test has not been met.
Hadar has raised factual issues regarding the continuity of enterprise criteria of the de facto merger test. The parties agree that three employees of Concordia Yacht -- the key production person, the boat builder, and the office manager -- went to work for Concordia Custom immediately after the merger. Concordia Custom denies that there is continuity of employees, however, because Concordia Yacht had between twelve and eighteen employees and Concordia Custom has between forty-five and fifty employees. Concordia Custom also denies that there is continuity of management because of its four directors only Robert MacGregor was formerly associated with Concordia Yacht, and of its three officers only Donald Watson was associated with Concordia Yacht. The problem with these arguments is that de facto mergers require not uniformity between the buyer and seller but rather continuity. Lumbard, 621 F. Supp. at 1535; see also In re Acushnet River & New Bedford Harbor Proceedings re Alleged PCB Pollution, 712 F. Supp. at 1016 (finding continuity of management where three of the seller's eight directors became directors of the seller, which had only four directors); Shannon v. Samuel Langston Co., 379 F. Supp. 797, 800 (W.D. Mich. 1974) (finding continuity of management although "a policy-making level of management in the form of a new Chairman of the Board" was added). In fact, it is in the nature of mergers that most will produce an enterprise that is larger than either of the two merging companies. Here, plaintiff has presented deposition evidence that the three Concordia Yacht employees who moved to Concordia Custom ran the day-to-day operations of Concordia Yacht and that Watson and MacGregor, the two officers and directors who made the move, were the sole officers and directors of Concordia Yacht. (See, MacGregor Dep. at 25-26.) Therefore, questions of fact remain regarding the importance of the employees and managers who made the move from Concordia Yacht to Concordia Custom and the extent to which they maintained continuity between the two corporations.
It is evident that there was continuity of premises. Prior to the sale, Concordia Yacht leased its premises from Concordia Company. On the closing date, pursuant to the Purchase Agreement Concordia Yacht terminated its lease and Concordia Custom entered into a lease with Concordia Company for the same premises. Concordia Custom argues that because Concordia Yacht did not sell its premises to Concordia Custom there is no continuity of premises. This argument ignores the point of the continuity of premises criteria -- if the buyer stays in the same premises and uses the same equipment as the seller, that is an indication of continuity of the entire enterprise. For example, one district court found adequate continuity where the buyer "utilized" the same premises, banking facilities, and insurance company. In re Acushnet River & New Bedford Harbor Proceedings re Alleged PCB Pollution, 712 F. Supp. at 1016. Furthermore, the facts that Concordia Yacht's lease termination and Concordia Custom's agreement to enter into a lease were contained in the Purchase Agreement and that Concordia Yacht agreed to transfer all improvements on the property (Purchase Agreement § 1.1) indicate that continuity of premises was a significant aspect of the sale.
There was substantial continuity of assets because Concordia Custom bought from Concordia Yacht its fixed assets (including all vehicles, furniture, fittings, molds, furnishings, machinery, equipment), inventory (including finished goods, works in progress and raw materials), goodwill, patents, designs, drawings, distributor lists, customer lists, marketing information, employment records, and miscellaneous other assets. Cash and accounts receivable were excluded from the sale, but these were of small consequence because Concordia Custom was insolvent at the time of the sale.
Finally, Concordia Custom argues that there is insufficient continuity of enterprise because it never intended to perform the same type of work as Concordia Yacht did and because it has begun a new product line, expanded into Europe, developed new advertising, hired a new design and engineering team, and hired new salespeople. As evidence that the enterprise has substantially continued, Hadar counters that Concordia Custom uses the same name, issues advertisements stating, "Sail a Legend! . . . Tradition; more than half a century of craftsmanship & seaworthiness," and continues to use composite epoxy vacuum-bagging technology to build yachts. This evidence is sufficient to raise a question of fact regarding the extent to which Concordia Custom continued Concordia Yacht's enterprise. See In re Acushnet River & New Bedford Harbor Proceedings re Alleged PCB Pollution, 712 F. Supp. at 1015-16 n.8 (finding that technological innovations, the addition of some new product lines, and the discontinuance of other product lines did not create excessive discontinuity where the primary business remained the same).
Hadar has also raised an issue of fact regarding whether the transaction met the third criteria of the de facto merger test -- dissolution of the seller. Hadar asserts that Concordia Yacht filed its last tax return and certificate of dissolution within two months of the sale. Concordia Custom argues, however, that this criteria has not been met because Concordia Company continues to exist and to build custom yachts. (Concordia Custom's Mem. in Supp. of Mot. for Summ. J. at 9.) The court does not have adequate evidence before it to determine the nature of the relationship between Concordia Company and Concordia Yacht. MacGregor, the sole shareholder of Concordia Yacht, owns 70% of the stock of Concordia Company, but the mere fact that the sole shareholder of Concordia Yacht holds a majority stake in another corporation does not inevitably lead to the conclusion that the two companies are at all interrelated. Concordia Custom asserts that Concordia Yacht was a subchapter S corporation "affiliated" with Concordia Company, but it does not describe the nature of the affiliation. Id. In the absence of evidence that Concordia Yacht was a subdivision or department of Concordia Company such that Concordia Company would be considered a continuation of Concordia Yacht, see, e.g., Roy v. Bolens Corp., 629 F. Supp. 1070, 1071 (D. Mass. 1986) (declining to hold buyer of division of FMC, Corp. liable when FMC Corp. still existed), the court cannot determine whether Concordia Yacht continues to exist.
Hadar has shown that the transaction between Concordia Yacht and Concordia Custom was characterized by continuity of premises and assets, and he has raised issues of fact regarding whether it also involved continuity of management, personnel and general business operations, and whether the seller dissolved after the transaction. Therefore, the court cannot find that Concordia Custom is not liable as a matter of law for any flaws that may exist in the Josher ...