The Eastern District of New York dismissed successor liability allegations against the manufacturer of an allegedly defective hip replacement, but held questions of fact regarding the manufacturer's possible duty to warn precluded the granting of Summary Judgment.  In DeLuca v. Portland Orthoapeadics Limited, plaintiffs sued defendant manufacturer Mipro US for damages flowing from a failed hip replacement defendant purchased as an asset at the public bankruptcy auction of original implant designer/manufacturer Portland Orthopaedics, Inc.  In moving for Summary Judgment, defendants successfully argued plaintiff's strict liability claims could not survive because in New York a corporation that purchases the assets of another corporation is not automatically responsible for the seller's liabilities. Douglas v. Stamco, 363 F. App'x 100, 101 (2d Cir. 2010) (internal citations omitted); New York v. Nat'l Serv. Indus., Inc., 460 F.3d 201, 209 (2d Cir. 2006); Kessenich v. Raynor, 120 F.Supp.2d 242, 255 (E.D.N.Y. 2000).

Before dismissing the successor liability claims, the Court analyzed the four exceptions to this well-settled concept: "(1) the successor corporation either expressly or impliedly agrees to assume the predecessor's liabilities; (2) the transaction is a de facto merger; (3) the successor may be considered a mere continuation of the predecessor; or (4) the transaction is fraudulent. Kessenich, 120 F. Supp. 2d at 255; accord Douglas, 363 F. App'x at 101-02; Nat'l Serv. Indus., Inc., 460 F.3d at 209; Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45 (2d Cir. 2003).  The Court held none of these exceptions applied as defendant expressly contracted not to assume Portland's liabilities and the sale of unencumbered assets furthered the interests of Bankruptcy law. The Court also noted no overlap in ownership between the original manufacturer and moving defendant, noting the continued existence of the two corporations as separate entities. Lastly, plaintiffs presented no evidence that the asset purchase agreement was made pursuant to a fraudulent transfer.

Plaintiffs argued that Pennsylvania (Defendant's state of incorporation) recognized the “product line” exception, which holds "a corporation [who] buys substantially all of the assets of a corporation manufacturer and thereafter continues essentially the same manufacturing operation  . . . may be strictly liable for defects in products” made by the predecessor.  See Schemidt v. Boardman Co., 608 Pa. 327, 357 11 A.3d 924, 942 (Pa. 2011).  Nevertheless, the Court noted that the Pennsylvania Supreme Court had expressly declined to adopt this exception. Furthermore, the Court held choice of law analysis favored New York as plaintiff was a New York resident and the sale of the device, as well as plaintiff's surgery and subsequent care, all occurred in New York.  Accordingly, plaintiffs’ successor liability claim was dismissed.

While the DeLuca decision is consistent with the growing body of New York law holding that purchasers of assets will not automatically liable for the seller corporation’s liabilities, agreements should be carefully structured to avoid running afoul of the exceptions to this rule.  Specifically, purchasers should expressly contract for the non-assumption of seller liabilities, as well as structuring asset transfer to avoid any appearance of merger between the two parties.