One of the interesting types of projects your humble blogger gets to work on from time to time concerns product liability and mass tort issues that arise from the M&A context, including due diligence going into a deal and successor liability issues coming out of a deal.  Recently a federal court held that the successor to the assets of an aircraft manufacturer was not liable for injuries arsing from the crash of an airplane built before the acquisition. See Thornton v. M7 Aerospace LP, No. 12 C 329, (N.D. Ill., 10/23/12).

The aircraft was a Fairchild Aircraft SA227-DC Metro 23, with tail number VH-TFU.  On approach to Lockhart River Airport, Australia, the aircraft crashed, resulting in the deaths of the passengers and crew. The incident was one of the worst civil aviation accidents in Australian history.  The plane was designed, manufactured, assembled, tested, and sold by Fairchild Aircraft, Inc. Fairchild went bankrupt in 2002 and as a result, Fairchild and defendant executed an Asset Purchase Agreement.  The agreement stated that the buyer/defendant assumed no ”liability for personal injury or property damage arising at any time out of or in connection with goods manufactured, produced, distributed or sold by the Sellers prior to the Closing Date, including but not limited to any Product Liability claims.”

In 2007, plaintiffs commenced this negligence and strict products liability action against numerous defendants including defendant M7. In the Second Amended Complaint, plaintiffs asserted claims against M7 in two categories: direct claims and indirect claims. First, plaintiffs’ indirect claims sought to impose vicarious liability on defendant as successor-in-interest to Fairchild. Plaintiffs alleged that defendant “is indirectly liable in strict product liability and negligence for the actions of its predecessor, Fairchild, in its defective and negligent design of the [Subject Aircraft], its failure to warn of the defects and its failure to advise operators to fit the aircraft with an “Enhanced Ground Proximity Warning System.” Second, plaintiffs’ direct claims sought to impose liability on defendant for its independent conduct in allegedly breaching of its own duty to so warn and advise.

The EGPWS claims argued M7 was negligent in failing to advise the owner and operator of the aircraft to install a new system that system was an improvement on the conventional ground proximity warning system because, among other reasons, it allegedly was capable of providing increased warning time to pilots about potential terrain conflicts by incorporating additional functions into the conventional ground proximity warning system.

Defendant moved for summary judgment.  On plaintiff’s claims of successor liability, it argued that
M& had as a matter of law “no liability as the successor corporation to Fairchild.” The Court agreed.
Under applicable Illinois law, a corporation which purchases the assets of another corporation is not generally liable for the debts and liabilities of the transferor in the absence of an agreement providing otherwise. The court explained that this traditional rule of successor corporate non-liability developed as a response to the need to protect bona fide purchasers from unassumed liability and was designed to maximize the fluidity of corporate assets. See Diguilio v. Goss Int’l Corp., 389 Ill. App. 3d 1052, 1059-60, 329 Ill. Dec. 657, 906 N.E.3d 1268 (Ill. App. Ct. 2009).

A successor corporation can face liability, if one of the following four exceptions applies: (1) if there is an express or implied agreement of assumption; (2) if the transaction between the purchaser and the seller corporation is a consolidation or merger; (3) if the purchaser is a continuation of the seller; or (4) if the transaction is an attempt to escape liability for the seller’s obligations.  Illinois does not recognize the so-called product line exception.

Here, the undisputed evidence showed that the Bankruptcy Court approved the transfer of
Fairchild’s assets “free and clear of any and all liens, claims and encumbrances”, and to a purchaser that was not an insider, affiliate or owner of Fairchild. Plaintiffs argued that defendant ought to have successor liability because it “impliedly assumed Fairchild’s continuing duty to warn.”  But, the court noted, the question is not whether M7 impliedly assumed a duty to warn, but rather whether M7 had an implied agreement with Fairchild whereby M7 agreed to assume Fairchild’s liabilities.  And it did not.

On the direct claim, plaintiffs alleged that defendant owed – and breached – an independent duty to advise owners and operators of the accident aircraft to fit that aircraft with an Enhanced Ground Proximity Warning System. To prevail on their claims of direct (i.e. non-successor) liability, plaintiffs needed to establish that defendant owed an independent duty to warn of the alleged defects in the plane.  Illinois courts have recognized a limited cause of action against the purchaser of a
product line for failing to warn of defects in its predecessor’s products. See Kaleta v. Whittaker Corp., 221 Ill. App. 3d 705, 715, 164 Ill. Dec. 651, 583 N.E.2d 567 (1991).  The critical element required for the imposition of this duty is a continuing relationship between the successor and the
predecessor’s customers benefitting the successor. To determine the presence of a nexus or
relationship effective to create a duty to warn, the following factors are considered: (1) succession to a predecessor’s service contracts; (2) coverage of the particular machine under a service contract; (3) service of that machine by the purchaser corporation; and (4) a purchaser corporation’s knowledge of defects and of the location or owner of that machine.

Here, viewing the evidence in the light most favorable to plaintiffs, there was an insufficient nexus or relationship between defendant and the operator of the aircraft to impose an independent duty to warn upon defendant. Plaintiffs focused their argument on the relationship between defendant and the product line generally, but that is not the legal standard: Illinois law focuses on the relationship between the successor (here, defendant) and the operator of the allegedly defective unit (here, Transair).  It was undisputed that M7 did not assume any of Fairchild’s serve contracts relating
to the plane, and that M7 never serviced, maintained, or repaired the plane. There was no evidence that it worked on or had any contact with the subject aircraft.

Finally, under a voluntary undertaking theory of liability, the duty of care to be imposed upon a defendant is limited to the extent of the undertaking.” Bell v. Hutsell, 2011 IL 110724, 353 Ill. Dec. 288, 293-95, 955 N.E.2d 1099 (2011) (stating that Illinois courts look to the Restatement (Second) of Torts to define the theory). Here, defendant argued that plaintiffs’ voluntarily undertaking theory fails because even if it undertook a duty (which it disputed) regarding warnings and advice to owners and operators, plaintiffs failed to proffer sufficient evidence of reliance. Again, the Court agreed. Illinois law requires proof of reliance; that is, proof that the operator (here, Transair) relied on the defendant’s voluntary undertaking of a duty to warn. See, e.g., Chisolm v. Stephens, 47 Ill. App. 3d 999, 7 Ill. Dec. 795, 365 N.E.2d 80, 86 (Ill. App. Ct. 1977). Plaintiffs offered no such proof.

Summary judgment granted.