Lefever v. K.P. Hovnanian Enterprises, Inc.
160 N.J. 307, 734 A.2d 290, 1999 N.J. LEXIS 997 (1999)
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Rule of Law:
The product-line exception to corporate successor liability applies even when a successor corporation acquires the predecessor's assets through a bankruptcy sale, provided the successor continues the product line and the injured party's claim was not discharged or otherwise resolved in the bankruptcy proceedings.
Facts:
- Lull Engineering Corporation, Inc. (Lull I) manufactured and distributed a forklift.
- In 1986, Lull Corporation (Lull II) acquired the assets of Lull I.
- In 1989, Justin Lefever was operating the forklift manufactured by Lull I when it tipped over, causing him severe crushing injuries.
- In 1992, Lull II filed for bankruptcy.
- In November 1993, Lull Industries Inc. (Lull III) purchased substantially all of Lull II's assets, including the Lull product line, through a bankruptcy sale overseen by a trustee.
- Lull III continued to manufacture and market products under the Lull name, trading on the brand's established goodwill and customer loyalty.
Procedural Posture:
- Justin Lefever sued 'Lull Engineering Co., Inc.' in the Superior Court of New Jersey, Law Division (trial court).
- During discovery, Lefever joined Lull III as a defendant.
- Lull III moved to dismiss the claim, arguing the bankruptcy sale insulated it from liability.
- The trial court granted Lull III's motion to dismiss.
- Lefever appealed to the Superior Court of New Jersey, Appellate Division (intermediate appellate court).
- The Appellate Division reversed the trial court's dismissal, holding that the claim against Lull III could proceed.
- Lull III (as petitioner) successfully petitioned the Supreme Court of New Jersey (highest court) for certification to review the Appellate Division's decision.
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Issue:
Does the product-line exception to the general rule against corporate successor liability apply to a corporation that acquires the predecessor's assets through a federal bankruptcy sale, when the injured party's claim arose before the bankruptcy but was not formally dealt with in the bankruptcy proceeding?
Opinions:
Majority - Ohern, J.
Yes. The product-line exception to successor liability applies even when assets are acquired through a bankruptcy sale if the successor continues the enterprise and the plaintiff's claim was not addressed in the bankruptcy. The court's reasoning rests on the justifications for the product-line exception established in Ramirez v. Amsted Industries Inc., which prioritize risk-spreading and the fairness of imposing liability on a successor that enjoys the predecessor's goodwill. The court determined that the primary focus is the continuity of the manufacturing enterprise, not the form of the corporate transaction. Federal bankruptcy law does not preempt this state law tort principle, because a sale 'free and clear' of 'interests' under Section 363 of the Bankruptcy Code does not automatically extinguish in personam tort claims that were not 'dealt with' in the bankruptcy proceeding. Because Lefever's claim was not adjudicated or discharged in Lull II's bankruptcy, Lull III, which profited from the Lull trade name and enterprise, must bear the burden of liability attached to that goodwill.
Dissenting - Pollock, J.
No. The product-line exception should not apply when a successor acquires assets through a bankruptcy sale and the injured party had notice and an opportunity to file a claim in the bankruptcy proceeding. The majority's holding frustrates the fundamental purposes of federal bankruptcy law, which are to maximize the value of the debtor's estate and provide an orderly distribution to all creditors. By allowing Lefever to pursue a claim against Lull III, the court permits him to 'jump the line' ahead of other creditors who properly filed claims in the bankruptcy. Lefever had a remedy available to him—filing a claim against Lull II's bankruptcy estate—but chose not to pursue it. Imposing successor liability in this context diminishes the value of assets sold in bankruptcy, which ultimately harms all creditors by reducing the size of the estate available for distribution.
Analysis:
This decision significantly expands the reach of New Jersey's product-line exception by applying it to asset acquisitions from bankrupt estates, an area where federal law and policy favoring finality and asset maximization are strong. The ruling establishes that in New Jersey, the tort law goals of consumer protection and risk-spreading can outweigh the traditional finality of a bankruptcy sale. It serves as a strong precedent that successor corporations cannot rely on the 'free and clear' language of a bankruptcy sale to automatically shield themselves from liability for a predecessor's defective products if they continue the product line. This holding likely impacts how potential buyers value and conduct due diligence on the assets of bankrupt manufacturing companies in jurisdictions that follow this approach.
