Yanez v. GRACO Inc et al
Filing
183
MEMORANDUM OPINION AND ORDER denying defendant ExitFlex USA, Inc.' 148 Motion for Summary Judgment; denying defendant J.P. Flexibles, Inc's 153 Motion for Summary Judgment; granting defendants Graco, Inc.'s and Midway Industrial Supply Co. Inc.'s 157 Motion for Summary Judgment (Written Opinion). Signed by Judge John R. Tunheim on September 8, 2014. (DML)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
CHARLES YANEZ,
Civil No. 13-2243 (JRT/JSM)
Plaintiff,
v.
GRACO INC., MIDWAY INDUSTRIAL
SUPPLY CO. INC., J.P. FLEXIBLES,
INC., and EXITFLEX USA, INC.,
MEMORANDUM
OPINION AND ORDER ON
DEFENDANTS’ MOTIONS FOR
SUMMARY JUDGMENT
Defendants.
Duane A. Lillehaug, MARING WILLIAMS LAW OFFICE, PC,
P.O. Office Box 2103, Fargo, ND 58108, for plaintiff.
Scott M. Rusert, NILAN JOHNSON LEWIS P.A., 120 South Sixth
Street, Suite 400, Minneapolis, MN 55402, for defendants Graco Inc. and
Midway Industrial Supply Co., Inc.
Nicholas C. Grant and Paul F. Ebeltoft, EBELTHOFT SICKLER
LAWYERS PLLC, 46 West Second Street, Dickinson, ND 58601, for
defendants J.P. Flexibles, Inc. and ExitFlex USA, Inc.
Plaintiff Charles Yanez was injured while working as a paint sprayer at DMI
Industries, Inc. (“DMI”) in West Fargo, North Dakota. He suffered injuries to his left
hand when a whip hose that was part of a paint spray system failed while he was highpressure spray painting the inside of a wind turbine tower.
The hose itself was
manufactured by a Swiss corporation, ExitFlex S.A. (“ExitFlex SA”), which is not a
party to this action. Yanez instead brings this products liability action against various
other entities that were involved in the distribution of the hose and paint system: J.P.
Flexibles, Inc. (“JP Flexibles”), the now-dissolved United States distributor for ExitFlex
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SA’s products; ExitFlex USA, Inc. (“ExitFlex USA”), the current United States
distributor for ExitFlex SA’s products; GRACO, Inc. (“Graco”), a Minnesota corporation
that purchased the hose to be used in a paint spray system; and Midway Industrial Supply
Co. (“Midway”), which installed the paint spray system at DMI. All defendants move for
summary judgment, arguing that they are not the manufacturers of the hose and cannot be
held liable as nonmanufacturing sellers under North Dakota law. The Court concludes
that a reasonable jury could find both that JP Flexibles falls within the definition of
manufacturer under North Dakota law and that ExitFlex USA may be held liable as a
successor to JP Flexibles, and will thus deny JP Flexibles’ and ExitFlex USA’s motions
for summary judgment.
With regard to Graco and Midway, however, the Court
concludes that no reasonable jury could find that either can be held liable under North
Dakota law and will grant their motion for summary judgment.
BACKGROUND
The Court will recite the relevant background facts according to the various
entities involved in the manufacture and distribution of the hose and paint system that
Yanez claims caused his injury.
I.
EXITFLEX SA
The hose in question, often referred to as a “Graco 246193” or a “WE24” hose
(hereinafter “the hose”), was manufactured by ExitFlex SA. (Aff. of Joseph Medvecky in
Supp. of J.P. Flexibles’ Mot. for Summ. J. (“Medvecky Aff. Docket No. 155”) ¶ 7,
Jan. 15, 2014, Docket No. 155.) ExitFlex SA is a Swiss corporation engaged in the
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business of manufacturing hoses, fittings, and other component parts.
(Id. ¶ 6.)
ExitFlex SA was 100% owned by a man named Marcel Leisi from 1985 through 2006
and Leisi was its sole shareholder. (Aff. of Duane A. Lillehaug, Ex. C (“J.P. Flexibles &
ExitFlex USAs Resp. to Pl.’s Interrogs.”) at 2, Feb. 5, 2014, Docket No. 166.)1 Leisi was
also the 100% owner and sole shareholder of a separate Swiss corporation called Exit
S.A. (“Exit SA”) from 1985 through 2006. (Id.) Joseph Medvecky, the president of JP
Flexibles (Aff. of Joseph Medvecky in Supp. of ExitFlex USA’s Mot. for Summ. J.
(“Medvecky Aff. Docket No. 150”) ¶ 1, Jan. 15, 2014, Docket No. 150), also stated in his
affidavit that “[a]t all times relevant to this case, Exit SA was the sole shareholder of
ExitFlex SA” (Medvecky Aff. Docket No. 155 ¶ 15). Leisi’s ownership of ExitFlex SA
ended in 2010.
(Aff. of Nicholas C. Grant, Ex. 1 (Dep. of Joseph M. Medvecky
(“Medvecky Dep.”)) 116:3-11, Jan. 15, 2014, Docket No. 156.)
II.
JP FLEXIBLES AND EXITFLEX SA
JP Flexibles was the exclusive distributor of ExitFlex SA’s products in the United
States beginning in 1985. (Medvecky Dep. 6:12-18; 7:16-19.) It sold ExitFlex SA’s
products to distributors and original equipment manufacturers (“OEMs”) in the paint
spray industry. (Id. 9:10-19.) JP Flexibles did not do business with any other products
besides those from ExitFlex SA. (Id. 8:21-24.) OEMs typically purchase a product from
a manufacturer like ExitFlex SA and incorporate it into a product of its own. (Id. 9:17-
1
Except for depositions and unless otherwise noted, the Court cites to the CMECF
pagination.
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23.) Graco is an OEM that JP Flexibles sold to, which Medvecky called “the leader in
[the paint spray industry],” explaining that “everybody knows them.” (Id. 15:11-20.)
According to Medvecky, JP Flexibles “did not design, manufacture or apply end fittings
or identification band to hoses of the type at issue in this case, but rather, was a mere
reseller of hoses of the general type involved in this litigation which were designed,
manufactured and fitted by others not under the direction or control of [JP Flexibles].”
(Medvecky Aff. Docket No. 155 ¶ 4.)
A.
Ownership of JP Flexibles
Medvecky explains that
[w]hen it was incorporated in 1985, J.P. Flexibles, Inc. was owned in the
following proportions: J.P. Fatzer – 80%; Exit SA – 20%. After beginning
my employment in 1998, J.P. Flexibles, Inc. was owned in the following
proportions: J.P. Fatzer – 75%; Exit SA – 20%; and myself, Joseph
Medvecky – 5%. At some point in 2000, my ownership interest was
increased to 10%, with J.P. Fatzer continuing to own 70%, and Exit SA
owning 20%. This ownership percentage did not change until July 21,
2006. Following his death on April 13, 2005, the Estate of J.P. Fatzer, on
July 21, 2006, sold all of his stock in J.P. Flexibles, Inc. to Exit SA. The
sale of J.P. Fatzer’s stock by his Estate was memorialized by the . . . ‘Stock
Purchase Agreement.’
(Id. ¶¶ 8-13.)
Medvecky testified in his deposition, taken on August 9, 2012: “After J.P. Fatzer
died, his 70 percent was purchased by ExitFlex SA. So it was now 90 percent ExitFlex
SA, 10 percent myself.” (Medvecky Dep. 118:7-10.) Medvecky’s 5% share increased to
10% sometime around the year 2000, and Fatzer’s share accordingly decreased to 70%.
(Id. 117:22-118:2.) Fatzer died in April 2005, but the purchase of the shares took place
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in 2006. (Id. 118:11-18.) When ExitFlex USA was formed in 2007, its shares were 90
percent owned by ExitFlex SA and 10 percent by Medvecky. (Id. 118:19-119:8.)
B.
Transition to ExitFlex USA
In his deposition, Medvecky explained that the transition from JP Flexibles to
ExitFlex USA occurred after JP Flexibles lost several employees in 2005, including
J.P. Fatzer, and that sometime in the next year, ExitFlex SA bought the shares of
J.P. Fatzer from his estate and became a 90% shareholder. (Medvecky Dep. 12:1-18.)
With only two shareholders left
then – there was a business decision with the two shareholders together,
what we want to do, and we decided to form a new corporation. I sought
out a lawyer and we had a contract written up and we had an asset
purchase. We didn’t assume any liabilities of J.P. Flexibles, and then [o]n
April 1st, 2007, ExitFlex USA started business.
(Id. 12:20-13:3.)
ExitFlex USA, which had been incorporated in New Jersey on
February 27, 2007, (Medvecky Aff. Docket No. 150 ¶ 3; see also id., Ex. B) purchased
all of J.P. Flexibles’ assets on April 1, 2007, pursuant to an “Asset Purchase Agreement,”
under which ExitFlex USA did not assume any liabilities of JP Flexibles. (Id. ¶¶ 4-5; see
also id., Ex. C.) The Asset Purchase Agreement included the following section:
No Assumption of Liabilities. Except as set forth in Sections 1.1(e), 1.1(f),
and 1.1(g), Buyer is acquiring the Assets hereunder without any assumption
of Seller’s debts, obligations, liabilities, accounts payable, or commitments
. . . . Seller shall pay and discharge . . . . [a]ll obligations and liabilities of
Seller whether arising before or after the Closing Date for contractual
obligations in connection with products and services sold, distributed or
provided by Seller, including liabilities for personal injury . . . based on
product liability claims . . . .
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(Id., Ex. C ¶ 1.3 (formatting omitted).) JP Flexibles was dissolved as a corporation on
January 7, 2008. (Id. ¶ 2; see also id., Ex. A.) During the period of overlap when both
entities existed, ExitFlex USA took over sales on April 1, 2007 and, according to
Medvecky, “J.P. Flexibles continued collecting the bills, paying their – all their
obligations, collecting all the receivables that were owed to them and then by
December 31 [2007] they dissolved.”
(Id. 13:14-21.)
All of the employees from
JP Flexibles became employees of ExitFlex USA as of April 1, 2007 (there were two at
the time)2, and ExitFlex USA performed the account-collecting services and other closing
work for JP Flexibles. (Id. 14:8-24.)
Medvecky testified that there was no “difference in the product line between
J.P. Flexibles and ExitFlex USA,” and that it was “always ExitFlex SA’s products for
both companies.” (Id. 14:25-15:7.) He also testified that ExitFlex USA’s business
operation has been “substantially the same” as JP Flexibles; it is also the exclusive
distributor of ExitFlex SA products in the United States.
(Id. 10:21-11:3.)
Like
JP Flexibles, ExitFlex SA products are the only products ExitFlex USA distributes. (Id.
11:18-21.)
When asked if Marcel Leisi was ever affiliated with ExitFlex USA in any
capacity, Medvecky stated that “[ExitFlex SA] w[as] a stockholder in the company and
he in turn owned that company. So yes,” and answered “[c]orrect” to the follow-up
2
The other employee was named Lucien, and at the time of the deposition Medvecky,
Lucien, and one other person named Wantoul Basil were the only employees of ExitFlex USA
besides independent sales representatives. (Medvecky Dep. at 128:13-129:4-15.)
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question of whether “[Leisi] owned ExitFlex SA, which is still as we sit here today the
majority stockholder of ExitFlex USA, correct?” (Id. 116:15-23.)
C.
ExitFlex USA Now
A letter from Medvecky to counsel in this case states that after May 4, 2009, all
hose production for ExitFlex USA stopped and that “Exit [SA] and ExitFlex [SA] still
exist but the production is limited to spray tips and swivels. . . . Today, Marcel Leisi is
retired. He is in his mid-eighties and in very poor health. The events of 2009 and 2010
were unavoidable and not of his choosing. He was forced out of his own company. I am
hopeful that Marcel will not have to be involved with this case.” (J.P. Flexibles &
ExitFlex USA’s Resp. to Pl.’s Interrogs. at 6.) On May 4, 2009, eighty percent of
Exit SA shares were transferred to Polyhose India Private Ltd., with another twenty
percent remaining with Leisi. (Id. at 7.) On December 13, 2010, ExitFlex SA announced
that Leisi had transferred complete ownership of the “ExitFlex Group” to Polyhose. (Id.
at 8.)
D.
Clarification of JP Flexibles’ and ExitFlex USA’s Ownership
Although Medvecky stated at several points in his deposition that ExitFlex SA (the
manufacturer) had an ownership interest in JP Flexibles and ExitFlex USA, he later filed
an affidavit seeking to correct that testimony and instead affied that Exit SA in fact held
the ownership interest he had previously attributed to ExitFlex SA. He first did so in an
affidavit submitted with a surreply to Yanez’s reply brief on his motion to change venue.
(Aff. of Joseph Medvecky re: Surreply ¶ 7, Feb. 20, 2013, Docket No. 116 (“During my
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deposition taken on August 9, 2012 I unintentionally confused the two Swiss
corporations while discussing ownership of J.P. Flexibles, Inc. and did not notice my
mistake until asked to prepare an affidavit for this Sur-Reply.”).) He also did so in a later
affidavit in support of JP Flexibles’ motion for summary judgment before the Court, in
which he states: “At all times relevant to this case, Exit SA was the sole shareholder of
ExitFlex SA. At no time has ExitFlex SA, the entity that manufactures the Graco hose,
owned any part of J.P. Flexibles, Inc.” and that “[a]ny prior confusion as to the name of
the Swiss corporation owning shares in J.P. Flexibles, Inc. was inadvertent on my part
and corrected by me, through counsel, as soon as the mistake in prior testimony was
realized.” (Medvecky Aff. Docket No. 155 ¶¶ 15-17.)
III.
THE HOSE
The hose in this case, ExitFlex SA part number WE24, was a quarter-inch hose
rated up to 8,000 psi. (Medvecky Dep. 18:17-22.) Graco purchased the hose because it
had developed paint spray system pumps that went up to 8,000 psi and needed hoses that
could handle that same level of pressure. (Id. 21:3-11.) Graco purchased the hose to use
in such a high pressure paint spray system, which it sold to Midway and Midway
installed at DMI. Angela Redlund-Spieker, a product safety and compliance engineer
with Graco (Second Aff. of Scott M. Rusert, Ex. M (Dep. of Angela Redlund-Spieker
(“Redlund-Spieker Dep.”)) at 10:20-25, Feb. 26, 2014, Docket No. 177), explained that
Graco makes fluid-handling equipment, which includes pumps and paint sprayers
(Redlund-Spieker Dep. 12:15-22.) She explained that Graco sells its products through its
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distributor channels, selling to distributors and then the distributors go to the end users
and sell the products to them directly, but it does not sell directly to end users. (Id.
14:16-25.) Redlund-Spieker explained that Graco would sell the whole package of a
spray system to a distributor such as Midway. (Id. 17:22-18:8.) The paint system in
question was a new product line released by Graco around 2002 or 2003. (Id. 18:1819:6.)
Before this system, Graco had not purchased high-pressure hoses through
JP Flexibles before, but had purchased them from other companies – including hoses with
ratings from 5,000 to 10,000 psi. (Id. 20:3-16.) She explained her understanding of the
process used to select the whip hoses for the high-pressure systems:
[T]he typical process for something like that would be is GRACO, we
understand what our pressure rating is of our equipment, and we understand
what type of diameter we want for that, and we know the type of material
that we are – common material to be pumped through this hose. So that
gets us to our understanding of a pressure for a hose, a material
compatibility for the hose and a diameter for it. And once we know that,
we work with our purchasing department and they start looking at all of our
hose suppliers to try to see if there is a hose that already exists out there that
would work for our application. And if they identify a hose that one of our
hose suppliers says is a good option for us, we usually get our hose
suppliers any certifications or approvals that they have on their hose prior
to that. Once we get it into GRACO, we do some verification or audit
testing, usually involves a burst test and then we test it out. And if it meets
all of our needs, then we would go ahead and use that hose.
(Id. 24:11-25:9.) She explained that the hose from JP Flexibles would have needed to
meet their pressure requirements and burst pressure requirements: that it has “gone
through some type of impulse testing that our suppliers put it through” and that it works
physically. (Id. 26:13-27:2.) She explained that Graco expects the supplier to do the
impulse testing, but that Graco also has the capacity to do impulse testing at its own
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facilities, although its “preference is to always get that from our supplier.” (Id. 30:1924.) Her staff did not recall Graco actually completing any testing for this hose, but
rather recalled only looking at a summary sheet of testing done. (Id. 34:24-35:13.) She
explained that this testing is done “to get some baseline ideas and verify that that concept
will work for us.” (Id. 35:19-36:3.) She also discussed a product qualification test that
was done on the hose in August 2002, which tested to see if the hose could handle the
pressure that Graco intended to use in its design, and stated that the hose had a rating of
8,000 psi, which was higher than their systems requirement of 7,250 psi. (Id. 38:639:13.) She also reviewed records of ExitFlex SA certificates as to pressure ratings of the
hose. (Id. 44:1-16.)
At some point after Medvecky sent Graco a sample of the hose in July 2001 (Aff.
of Scott M. Rusert, Ex. B, Jan. 27, 2014, Docket No. 159), Graco requested that
JP Flexibles imprint several pieces of information onto the metal ferrule at the end of the
hose (Medvecky Dep. 41:17-23.) Medvecky asked ExitFlex SA about it and, according
to Medvecky, “they came up with this . . . I.D. ring which you could put whatever
information permanently on the hose to identify it after it’s been used.” (Id. 41:24-42:6.)
Medvecky sent Graco a sample of a hose with the identification ring (“ID ring”) as “our
alternative to printing the information on the ferrule itself, which has a very limited print
area,” and suggested that the ID ring “be supplied on one end only, due to the fact that the
hose is a relatively short length.” (Rusert Aff., Ex. D.) Graco also asked Medvecky if its
own warning label could replace the ExitFlex SA warning label on the hose, which
ExitFlex SA agreed to do. (Id., Ex. F; Medvecky Dep. 45:18-46:6.)
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Graco’s first purchase order for the WE24 hose was May 31, 2002, and
January 23, 2006 was the last date Graco purchased the WE24 hose from JP Flexibles.
(Medvecky Dep. 51:4-52:2, 64:10-15.)
The last shipment of WE24 hoses from
JP Flexibles to Graco was in March 2006. (Id. 80:6-81:2.)
IV.
PROCEDURAL HISTORY
After his injury on November 10, 2006, Yanez filed this action on November 1,
2010, in Cass County court in Fargo, North Dakota; Graco and Midway removed to the
United States District Court for the District of North Dakota. (Notice of Removal,
Dec. 2, 2010, Docket No. 1; id., Ex. A.) Once in federal court, Yanez amended his
complaint. (Am. Compl., July 6, 2011, Docket No. 27.) ExitFlex USA and JP Flexibles
then simultaneously moved to dismiss for lack of personal jurisdiction and moved for
summary judgment. (Mot. to Dismiss, Dec. 11, 2012, Docket No. 86; Mot. for Summ. J.,
Dec. 11, 2012, Docket No. 90.) Yanez filed a motion to transfer venue to the District
Court in Minnesota in the alternative to dismissing for lack of personal jurisdiction.
(Mot. to Change Venue in the Alternative, Jan. 10, 2013, Docket No. 99.) After the
parties briefed all of the motions, Judge Ralph R. Erickson held a hearing on the
jurisdiction, change of venue, and summary judgment motions on August 1, 2013.
(Minute Entry, Aug. 1, 2013, Docket No. 131.) On August 16, 2013, Judge Erickson
issued an order concluding that the District of North Dakota lacked personal jurisdiction
over JP Flexibles and, instead of dismissing for lack of jurisdiction, transferred venue to
the District of Minnesota; the order declined to reach the summary judgment issues.
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(Order, Aug. 16, 2013, Docket No. 132.) The case was then transferred to this District on
August 16, 2013, and beginning on January 15, 2014, the defendants re-filed motions for
summary judgment. (See Docket Nos. 133, 148, 153, 157.) These summary judgment
motions are now before the Court.
ANALYSIS
I.
STANDARD OF REVIEW
Summary judgment is appropriate where there are no genuine issues of material
fact and the moving party can demonstrate that it is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(a). A fact is material if it might affect the outcome of the suit,
and a dispute is genuine if the evidence is such that it could lead a reasonable jury to
return a verdict for either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). A court considering a motion for summary judgment must view the facts in the
light most favorable to the non-moving party and give that party the benefit of all
reasonable inferences to be drawn from those facts. Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986).
Summary judgment is appropriate if the
nonmoving party “fails to make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the burden of
proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
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II.
PRODUCTS LIABILITY UNDER NORTH DAKOTA LAW
The parties agree that North Dakota law governs this action. 3 North Dakota has
enacted a statute which has replaced the common law on certain issues in the realm of
products liability under North Dakota law. See Bornsen v. Pragotrade, LLC, 804 N.W.2d
55, 60 (N.D. 2011) (“The Legislature has informed us that the North Dakota Century
Code establishes the law of this state respecting the subjects to which it relates,” such that
“there is no common law in any case in which the law is declared by the code”
(alterations and internal quotations omitted)). In enacting the statute, the legislature
explained that “it has become increasingly evident that there are still serious problems
with the current civil justice system,” and that “[a]s a result, there is an urgent need for
additional legislation to establish clear and predictable rules with respect to certain
matters relating to products liability actions.” N.D. Cent. Code § 28-01.3-07, subd. 2.
3
Because this case was transferred to this district from the District of North Dakota for
lack of personal jurisdiction, it is the Court’s opinion that the law of this forum should apply,
rather than the law of the forum in which jurisdiction was not proper. See Eggleton v. Plasser &
Theurer Exp. Von Bahnbaumaschinen Gesellschaft, MBH, 495 F.3d 582, 588 (8th Cir. 2007)
(joining other circuits in concluding that law of transferee forum should apply when the
transferor court lacks personal jurisdiction, reasoning that to apply the law of the transferor
forum would be unfair to defendants because they would “be made to suffer the choice-of-law
consequences of a plaintiff’s mistake in choosing such a forum to file his lawsuit”). However,
all defendants – including JP Flexibles, for which there is not personal jurisdiction in North
Dakota – have based the entirety of their arguments and briefing upon North Dakota law. Upon
a direct question from the Court during oral argument, counsel for JP Flexibles stated that it
believes the law of North Dakota should apply. Thus, given that the purpose of the rule
espoused in Eggleton is to protect defendants over whom the transferor forum does not have
jurisdiction and that defendant here – JP Flexibles – has affirmatively consented to the
application of North Dakota law, the Court will not disturb the parties’ unanimous preference for
North Dakota law.
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One of the matters addressed by the statute is the liability of nonmanufacturing sellers,
which the statute delineates as follows:
1. In any products liability action maintained against a seller of a product
who did not manufacture the product, the seller shall upon answering or
otherwise pleading file an affidavit certifying the correct identity of the
manufacturer of the product allegedly causing the personal injury, death,
or damage to property.
2. After the plaintiff has filed a complaint against the manufacturer and the
manufacturer has or is required to have answered or otherwise pleaded,
the court shall order the dismissal of the claim against the certifying
seller, unless the plaintiff can show any of the following:
a. That the certifying seller exercised some significant control over
the design or manufacture of the product, or provided
instructions or warnings to the manufacturer relative to the
alleged defect in the product which caused the personal injury,
death, or damage to property.
b. That the certifying seller had actual knowledge of the defect in
the product which caused the personal injury, death, or damage
to property.
c. That the certifying seller created the defect in the product which
caused the personal injury, death, or damage to property.
3. The plaintiff may at any time prior to the beginning of the trial move to
vacate the order of dismissal and reinstate the certifying seller if the
plaintiff can show any of the following:
a. That the applicable statute of limitation bars a product liability
action against the manufacturer of the product allegedly causing
the injury, death, or damage.
b. That the identity of the manufacturer given to the plaintiff by the
certifying defendant was incorrect.
N.D. Cent. Code § 28-01.3-04. The statute defines a “manufacturer” as
a person or entity who designs, assembles, fabricates, produces, constructs,
or otherwise prepares a product or a component part of a product prior to
the sale of the product to a user or consumer. The term includes any seller
of a product who is owned in whole or significant part by the manufacturer
or who owns, in whole or significant part, the manufacturer.
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Id. § 28-01.3-01, subd. 1. In answering a certified question as to whether the common
law “apparent manufacturer” doctrine applied in North Dakota, the North Dakota
Supreme Court has held that this statutory scheme evidenced a clear intent by the
legislature to replace the common law such that it left “no room for us to recognize – or
. . . ‘adopt’ – the common law or the Restatement theory of ‘apparent manufacturer’
liability.” Bornsen, 804 N.W.2d at 61. The court observed that
[t]he specificity included in the Legislature’s adoption of N.D.C.C. ch. 28–
01.3 indicates to us the clear message that it intended to restrict, rather than
expand, the availability of product liability actions as a remedy for personal
injury, death or property damage arising out of use of defective products.
One means utilized by the Legislature to carry out its intent was to define
who is a “manufacturer,” to define who is a “seller” and then to sharply
curtail liability of a “nonmanufacturing seller.”
Id.
The North Dakota Supreme Court has elsewhere instructed that “[t]he primary
objective in interpreting a statute is to determine the intent of the legislature by first
looking at the language of the statute” and giving the words in the statute “their plain,
ordinary, and commonly understood meaning.” Sorenson v. Felton, 793 N.W.2d 799,
801 (N.D. 2011) (internal quotations omitted).
III.
JP FLEXIBLES’ MOTION FOR SUMMARY JUDGMENT
JP Flexibles moves for summary judgment, arguing that it cannot be held liable for
Yanez’s injury because it did not manufacture the hose and cannot be held liable as a
nonmanufacturing seller under North Dakota statute. Yanez makes several arguments in
opposition to JP Flexibles’ motion: that JP Flexibles is not entitled to dismissal under the
nonmanufacturing seller section of the statute, that the facts of JP Flexibles’ ownership
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are disputed because of Medvecky’s inconsistent deposition testimony and affidavit or
that JP Flexibles should be estopped from denying ownership by ExitFlex SA, and that
JP Flexibles is a manufacturer under the North Dakota statute’s definition because it is
owned in significant part by the manufacturer.
The Court concludes that a reasonable jury could find that JP Flexibles falls within
the definition of manufacturer under the statute because, when it sold WE24 hoses to
Graco, it was owned in “significant part” by Exit SA. See N.D. Cent. Code § 28-01.3-01,
subd. 1. The Court bases this conclusion on determinations that (1) undisputed facts
indicate that ExitFlex SA (the actual manufacturer) was wholly owned and
indistinguishable from Exit SA (which had an ownership interest in JP Flexibles), such
that Exit SA’s ownership interest in JP Flexibles is fairly treated as ownership by the
manufacturer for the purposes of the statute, and (2) a reasonable jury could find that Exit
SA’s ownership of JP Flexibles at the relevant time period was “significant.”4
A.
Treating Exit SA as the Manufacturer
Although he stated in his deposition that ExitFlex SA held an ownership interest in
JP Flexibles before its dissolution, Medvecky’s corrective affidavit and accompanying
4
The Court declines to base its denial of JP Flexibles’ motion for summary judgment on
Yanez’s interpretation of the nonmanufacturing seller section of the statute. As explained below
with regard to Graco and Midway, it is not clear how that section should apply here, given that
JP Flexibles did not certify the identity of the manufacturer in an affidavit and that Yanez has not
filed a complaint against ExitFlex SA. Instead, the Court bases its denial of JP Flexibles’ motion
for summary judgment on a determination that a reasonable jury could conclude that it is a
manufacturer under the statute.
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stock certificates demonstrate that the relevant interest was actually held by Exit SA.
Yanez argues that this confusion creates a dispute of fact – both because there is a
contradiction between the deposition testimony and the affidavit and because that
contradiction calls into question Medvecky’s credibility on the issue. Even if this does
amount to a fact dispute, 5 the Court declines to deny JP Flexibles’ motion on this ground.
Rather, the Court concludes that Exit SA can be treated as the manufacturer for the
purposes of the North Dakota statute, so it does not matter whether JP Flexibles was
owned in part by ExitFlex SA or Exit SA.
The North Dakota Century Code includes in its definition of manufacturer “any
seller of a product who is owned in whole or significant part by the manufacturer.” N.D.
Cent. Code § 28-01.3-01, subd. 1. This section would preclude a seller from escaping
liability where it is controlled by or essentially the same entity as the manufacturer. This
5
The cases Yanez cites for this proposition do not clearly establish that Medvecky’s
conflicting deposition testimony and affidavit give rise to a fact dispute precluding summary
judgment. Yanez cites cases in which a plaintiff’s contradicting affidavit and deposition
testimony did not, under the circumstances, create an issue of material fact precluding summary
judgment for the defendant, see, e.g., City of St. Joseph, Mo. v. Sw. Bell Tel., 439 F.3d 468, 47576 (8th Cir. 2006); Garnac Grain Co. v. Blackley, 932 F.2d 1563, 1568 (8th Cir. 1991), and a case
in which the plaintiff’s testimony at trial contradicted earlier deposition testimony and the Eighth
Circuit concluded that, because there was an explanation for the discrepancy and it did not
appear to be a “ruse designed to raise an issue of fact,” the district court did not err in denying
the defendant’s motion for judgment notwithstanding the verdict after trial on the grounds that
the deposition testimony established that defendants should win as a matter of law, Kim v.
Ingersoll Rand Co., 921 F.2d 197, 198-99 (8th Cir. 1990). None of these cases directly support
what Yanez seeks here: the first two involve a plaintiff seeking denial of summary judgment on
account of potentially self-generated disputes of facts and the latter involves a post-trial motion,
not whether summary judgment should be granted. Furthermore, none of the cases involved a
corrective affidavit with documentary proof that the prior deposition testimony had been
mistaken, as Medvecky provided here in the form of stock certificates. Thus, the Court declines
to deny JP Flexibles’ motion for summary judgment on this ground.
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suggests that the legislature intended to prevent entities from escaping liability by
creating artificial divides in an operation through distinct corporate forms. Here, where
the record indicates that ExitFlex SA and Exit SA are, in essence, the same entity, this
legislative intent as evidenced by the text of the statute suggests that the Court should
treat them as such for the purposes of determining liability under the statute.
Although ExitFlex SA and Exit SA appear to technically be separate entities, all
evidence in the record indicates that they were essentially indistinguishable.
First,
Medvecky, the president of the company that sold exclusively products manufactured by
ExitFlex SA (and therefore reasonably expected to be familiar with the circumstances),
confused the two in his deposition and repeatedly stated that ExitFlex SA had an
ownership interest in JP Flexibles when it was actually Exit SA. Second, Exit SA
appears to have been the sole shareholder of ExitFlex SA (Medvecky Aff. Docket
No. 155 ¶¶ 5, 15), although Medvecky also represented in the interrogatories that the
same person – Marcel Leisi, owned 100% of the shares in Exit SA and ExitFlex SA, and
was the Managing Director and the sole member of the Board of Directors of both
entities (J.P. Flexibles & ExitFlex USA’s Resp. to Pl.’s Interrogs. at 2). Thus, either
Exit SA wholly owned ExitFlex SA, or both were wholly owned by the same individual,
and this, second, instance of Medvecky’s inability to distinguish the corporate forms of
the Swiss companies further evidences the lack of any significant difference between
ExitFlex SA and Exit SA.
Under such circumstances the Court concludes that the North Dakota legislature
would have intended Exit SA to fall within the definition of manufacturer because it is
- 18 -
entirely indistinguishable from the manufacturer, ExitFlex SA. In addition to the strong
indication from the text of the statute that otherwise indistinguishable entities should not
escape liability because they have artificially differentiated their roles, the North Dakota
Supreme Court has indicated in other contexts that sole ownership or control of one entity
by another entity permits the entities to be treated the same. Cf. Littlefield v. Union State
Bank, Hazen, N.D., 500 N.W.2d 881, 885 (N.D. 1993) (“In the context of res judicata, the
plaintiffs’ sole ownership of the corporation and complete control of its affairs
constituted a sufficient common interest to place them in privity with the corporation.”);
see also Emp’rs Reinsurance Corp. v. Landmark, 547 N.W.2d 527, 536 (N.D. 1996)
(observing that “[w]hen one person owns a controlling interest in the corporation and
dominates the corporation’s actions, his acts are the corporation’s acts” and holding that
an insurance company was owned a duty of indemnity and defense from its reinsurer,
despite one of its two owners’ concealment of the claim for several years, because the
employee/owner’s “control over and ownership of [the insurance company] was not so
substantial as to require imputation” (internal quotation marks omitted)). The Court
therefore concludes that Exit SA may be treated as the manufacturer for the purposes of
products liability under the statute because it is, in essence, the same entity as ExitFlex
SA.
If Exit SA is a manufacturer under the statute, then its ownership of JP Flexibles is
relevant for the purposes of determining whether JP Flexibles falls within the definition
of manufacturer under the statute: if Exit SA’s ownership of JP Flexibles was in
“significant part,” then JP Flexibles, too, falls within the definition of manufacturer under
- 19 -
the statute. This conclusion – that Exit SA can be treated as the manufacturer and its
ownership of JP Flexibles, if significant, can extend the reach of the definition to include
JP Flexibles – is consistent with the legislative intent of North Dakota’s products liability
statute.
Although the North Dakota Supreme Court observed in Bornsen that the
legislature “intended to restrict, rather than expand, the availability of product liability
actions,” the court explained further that it did so by setting out a definition of
manufacturer.
804 N.W.2d at 61.
The statute’s definition of manufacturer clearly
indicates that the legislature intended that sellers not escape liability when they are too
closely wound up with the manufacturing entity – either by owning it or being owned by
it.
To not treat Exit SA as the manufacturer here, including for the purposes of
determining whether JP Flexibles can be liable as a manufacturer, would permit a
manufacturer to set up a shell company to create one degree of separation between it and
a seller such that the seller would be insulated from liability despite its ties to the
manufacturer. The Court concludes that treating Exit SA as the manufacturer for the
purposes of determining whether JP Flexibles is owned in significant part by the
manufacturer is consistent with the intent of the statute and will treat Exit SA as the
manufacturer for the purposes of determining liability.6
6
To the extent that in reaching this conclusion the Court is addressing “a novel or
unresolved issue of state law,” the Court concludes that this is its best prediction of “how the
state supreme court would resolve the issue.” Burks v. Abbott Labs., 917 F. Supp. 2d 902, 914
(D. Minn. 2013).
- 20 -
B.
Whether Exit SA’s Ownership Was Significant
The Court must next consider whether a reasonable jury could conclude that
JP Flexibles was owned in “significant part” by Exit SA such that JP Flexibles can be
considered a manufacturer under the statute. N.D. Cent. Code § 28-01.3-01, subd. 1.
The parties agree and the Court’s research confirms that the North Dakota Supreme Court
has not elaborated on the meaning of “significant” in the context of this statute. Thus, the
Court will attempt to “predict how the [North Dakota] supreme court would resolve the
issue,” Burks v. Abbott Labs., 917 F. Supp. 2d 902, 914 (D. Minn. 2013), “using
decisions from other jurisdictions as aids,” see Midwest Oilseeds, Inc. v. Limagrain
Genetics Corp., 387 F.3d 705, 715 (8th Cir. 2004).
The North Dakota Supreme Court has instructed that courts should seek to give
“meaning and effect to every word, phrase, and sentence” in a statute. State ex rel. Dep’t
of Human Servs., Child Support Enforcement Div. v. N.D. Ins. Reserve Fund, 822
N.W.2d 38, 41 (N.D. 2012). In order to determine what amount of ownership triggers
manufacturer liability under the statute, the Court begins by examining the rationale for
including in the definition of manufacturer those entities owned by or owning the
manufacturer. Typically, courts look to ownership for determining liability because
ownership can be a measure of the degree of control and that control can serve as a
justification for liability. See, e.g., Baker v. Raymond Int’l, Inc., 656 F.2d 173, 180-81
(5th Cir. 1981) (“Ownership of a controlling interest in a corporation entitles the
controlling stockholder to exercise the normal incidents of stock ownership, such as the
right to choose directors and set general policies, without forfeiting the protection of
- 21 -
limited liability,” but “[t]o justify the extraordinary step of holding the dominant party
liable, the jury must find that this control amounts to total domination of the subservient
corporation” (internal quotations omitted); Japan Petroleum Co. (Nigeria) Ltd. v.
Ashland Oil, Inc., 456 F. Supp. 831, 840-41 (D. Del. 1978) (“Whether an agency
relationship exists between a parent corporation and its subsidiary is normally a question
of fact. The central factual issue is control,” and stock ownership is one of many factors
courts should look to for determining amount of control (footnote and internal citation
omitted)).
Courts in other jurisdictions have concluded that the actual percent ownership of a
corporation is not dispositive, but rather part of a more comprehensive inquiry into the
degree of control that an owner exerts over the corporation or other shareholders. See,
e.g., Hollis v. Hill, 232 F.3d 460, 466 n.16 (5th Cir. 2000) (“[O]ther jurisdictions have
agreed that the question of minority versus majority should not focus on mechanical
mathematical calculations, but instead, [t]he question is whether they have the power to
work their will on others.” (internal quotations omitted)); Sharkey v. Emery (In re
Sharkey), 272 B.R. 574, 583 (Bankr. D.N.J. 2001) (“[T]he extent of a plaintiff’s interest
in a corporation, even if it is over 50% ownership of the corporate shares, does not
preclude designation as a ‘minority shareholder’ within the meaning of the [New Jersey
statute authorizing courts to take remedial action to protect minority shareholders]. . . .
The statute aims to protect shareholders from the abusive exercise of power, and focuses
on the relative power and ability of one side to oppress another, rather than on the
percentage of stock ownership.”); Stringer v. Car Data Sys., Inc., 816 P.2d 677, 679
- 22 -
(Or. Ct. App. 1991) (“The question is whether a given shareholder or small number of
shareholders has the requisite power to dictate or dominate corporate decisions . . . .”),
opinion modified on other grounds on reconsideration, 821 P.2d 418, aff’d, 841 P.2d
1183 (Or. 1992). The Court will therefore look to the degree of control or influence
Exit SA had within JP Flexibles, considering the percent ownership and other indicia of
control, to determine whether, based on the facts presented in the record, a reasonable
jury could find that Exit SA’s ownership of JP Flexibles was “significant” for the
purposes of liability under the statute.
Before considering the degree of control, the Court must first address an initial
dispute over what the relevant time period is for determining ownership. The time period
matters because in July 2006, after the last shipment of the WE24 hose from JP Flexibles
to Graco but before Yanez’s injury, Exit SA’s ownership share of JP Flexibles increased
from twenty percent to ninety percent when it acquired J.P. Fatzer’s share from his estate.
Yanez argues that the time of injury is the relevant period while JP Flexibles argues that
the relevant period is limited to when JP Flexibles was actually distributing the hose in
question, which ended with its last shipment to Graco in March 2006. Given that under
North Dakota strict products liability, a plaintiff must show that any defect “‘existed
when the product left the manufacturer,’” Reiss v. Komatsu Am. Corp., 735 F. Supp. 2d
1125, 1136 (D.N.D. 2010) (quoting Endresen v. Scheels Hardware & Sports Shop, Inc.,
560 N.W.2d 225, 229 (N.D. 1997)), the Court concludes that the relevant period is that in
which the hose in question could have been sold and delivered to Graco by JP Flexibles,
which is through March 2006.
- 23 -
In March 2006, Exit SA officially owned twenty percent of the shares of
JP Flexibles. The Court need not conclude, though, whether a jury could find that this
twenty percent ownership alone could amount to “significant” ownership, because there
are several other facts here that are relevant to this question. First, in March 2006,
Exit SA was one of three owners, the other two being the president of JP Flexibles,
Medvecky, and J.P. Fatzer’s estate. A reasonable jury could conclude that, compared to
these other two owners, Exit SA practically was in the best position to exert control over
the company, especially given that the estate likely did not exert much substantive
control. Furthermore, as the Court concluded above, it was the manufacturer of the
products that constituted the entirety of JP Flexibles’ business and could ostensibly
choose to end JP Flexibles’ source of all of its business at any time. Cf. Kahn v. Lynch
Commc’n Sys., Inc., 638 A.2d 1110, 1114 (Del. 1994) (observing that “a shareholder who
owns less than 50% of a corporation’s outstanding stocks” can be a “controlling
shareholder” if it actually controls corporation conduct and holding that minority
shareholder was a “controlling shareholder,” despite owning less than fifty percent
because it had enough power to overrule an action that others on the board seemingly
favored simply by vetoing the action). Second, the founder of JP Flexibles who had been
a majority owner, J.P. Fatzer, had recently passed away.
A reasonable jury could
conclude that this left a vacuum of control which Exit SA anticipated to fill. Within
several months of March 2006, in July 2006, Exit SA officially purchased J.P. Fatzer’s
seventy percent share of JP Flexibles. (Medvecky Dep. 118:7-18.)
- 24 -
The record is somewhat sparse with regard to other possible indicia of control,
such as evidence from board meetings or other correspondence indicating the extent to
which Exit SA exerted control over JP Flexibles such that its ownership could be
considered “significant” under the statute. However, based on the facts present here –
owning twenty percent of the shares with the only shareholder with a larger share being
an estate, the anticipation of taking over the estates’ shares and becoming a ninety
percent owner, and the fact that the long-time president and majority shareholder had
recently passed away, the Court concludes that on the record presented, a reasonable jury
could conclude that Exit SA’s ownership of JP Flexibles was significant such that
JP Flexibles falls within the definition of manufacturer under the statute. The Court will
therefore deny JP Flexibles’ motion for summary judgment.
IV.
EXITFLEX USA’S MOTION FOR SUMMARY JUDGMENT
ExitFlex USA also moves for summary judgment, arguing that it cannot be held
liable as a manufacturer or nonmanufacturing seller because it did not exist when
Yanez’s injury occurred and it cannot be held liable as a successor corporation to
JP Flexibles.
The parties’ dispute over ExitFlex USA’s motion centers on whether
ExitFlex USA can be held liable under a theory of corporate successor liability under
North Dakota law.
A.
Successor Liability Under North Dakota Law
The North Dakota Supreme Court has recognized that “[t]he long-established
general rule is that a corporation which purchases the assets of another corporation does
- 25 -
not succeed to the liabilities of the selling corporation,” unless one of the “four wellrecognized exceptions to the general rule” applies.
Downtowner, Inc. v. Acrometal
Prods., Inc., 347 N.W.2d 118, 121 (N.D. 1984). The exceptions include:
1. Where there is an express or implied agreement to assume the
transferor’s liabilities;
2. Where the transaction amounts to a consolidation or merger of the two
corporations;
3. Where the transferee corporation is merely a continuation of the
transferor corporation; []
4. [Where] [t]he transaction is an attempt to defraud the creditors of the
corporation[,]
[or] . . . “where some of the elements of a purchaser in good faith are
absent.
Id. (citing Leannais v. Cincinnati, Inc., 565 F.2d 437 (7th Cir. 1977); Cyr v. B. Offen &
Co., 501 F.2d 1145 (1st Cir. 1974)).
In Downtowner, the North Dakota Supreme Court rejected the “product line”
theory of liability and held that a successor corporation, Acrometal, could not be held
strictly liable for damage to the plaintiffs’ property which was allegedly caused by a
product produced by Acrometal’s predecessor corporation, Weather-Rite, which
Acrometal had acquired after Weather-Rite suffered financial problems and went into
receivership. Id. at 120, 123. The court observed that
Acrometal neither manufactured the allegedly defective product nor did it
participate in any way in the chain of sale. Were we to impose liability on
Acrometal in this circumstance it would be liability without duty; thereby
removing strict liability from the realm of tort. This we refuse to do. If
Acrometal is to be held liable, it must be because Weather-Rite’s potential
liabilities were assumed with the purchase of assets. Such a finding would
require a significant change in corporate law. We would have to hold that
the policies of strict liability justify a finding that, though a corporation has
- 26 -
dissolved, potential liability should not dissolve with it and that a purchaser
of the assets of the dissolved corporation should assume that liability.
Id. at 123. The court thus rejected plaintiffs’ arguments that failure to hold a successor
corporation such as Acrometal liable was against public policy. Id. at 123-25.
In another case, the North Dakota Supreme Court found that a successor
corporation could not be held liable where “the clear language of the NSP–Rochester
asset purchase agreement did not require Rochester to assume any debts, liabilities, or
obligations relating to post-retirement health benefits of the telephone business’s retirees,
and the [plaintiffs] have not provided any evidence to raise a factual dispute that a
separate contractual agreement exists between them and Minot Telephone, allegedly
created the day they retired.” Benson v. SRT Commc’ns, Inc., 813 N.W.2d 552, 561
(N.D. 2012).
B.
ExitFlex USA
Applying these principles here, and predicting how the North Dakota Supreme
Court would approach the facts of this case, the Court concludes that ExitFlex USA may
be held liable as a successor corporation to JP Flexibles because a reasonable jury could
conclude that it falls into the third exception – that ExitFlex USA is a “mere
continuation” of JP Flexibles. Downtowner, 347 N.W.2d at 121; see also Axtmann v.
Chillemi, 740 N.W.2d 838, 855 (N.D. 2007) (Kapsner, J., concurring in part and
dissenting in part) (“The successor corporation will be liable for the debts of the selling
company when it is a mere continuation of the selling company.”). There are five factors
to consider in determining whether an entity is a ‘mere continuation’:
- 27 -
(1) transfer of corporate assets (2) for less than adequate consideration
(3) to another corporation which continued the business operation of the
transferor (4) when both corporations had at least one common officer or
director who was in fact instrumental in the transfer . . . and (5) the transfer
rendered the transferor incapable of paying its creditors’ claims because it
was dissolved in either fact or law.
Axtmann, 740 N.W.2d at 855 (alteration in original). A reasonable jury could conclude
that at least four of the factors are present here.
With regard to the first and third factors, there was a transfer of corporate assets
from JP Flexibles to ExitFlex USA, and upon the transfer ExitFlex USA continued the
exact same business operation as JP Flexibles (and even provided the support for closing
down JP Flexibles). With regard to the fourth and fifth factors, both corporations had
exactly the same shareholders and all employees transferred from JP Flexibles to
ExitFlex USA, and, by design of the Asset Purchase Agreement, the transfer rendered
JP Flexibles incapable of paying creditors – it sold all of its assets to ExitFlex USA but
agreed to assume none of its liabilities.
Based on an analysis of these factors, a
reasonable jury could conclude that ExitFlex USA was a “mere continuation” of
JP Flexibles. Cf. McClellan v. Northridge Park Townhome Owners Ass’n, Inc., 107 Cal.
Rptr. 2d 702, 706-07 (Ct. App. 2001) (“[I]f a corporation organizes another corporation
with practically the same shareholders and directors, transfers all the assets but does not
pay all the first corporation’s debts, and continues to carry on the same business, the
separate entities may be disregarded and the new corporation held liable for the
obligations of the old.” (internal quotations omitted)); Hamaker v. Kenwel-Jackson
Mach., Inc., 387 N.W.2d 515, 518 (S.D. 1986) (“[t]he key element of a ‘continuation’ is a
- 28 -
commonality of the officers, directors, and stockholders in the predecessor and successor
corporations.” (citing Leannais, 565 F.2d at 439-40)).7
Although the North Dakota Supreme Court has little precedent beyond
Downtowner addressing successor liability, there are two important distinctions that
support the Court’s conclusion that ExitFlex USA is a successor to JP Flexibles and liable
for its debts. First, the predecessor corporation in Downtowner was in receivership, and
the court found it to be significant that “under the facts of this case, Acrometal was not
responsible for the destruction of the plaintiffs’ remedy, where Weather-Rite had been
threatened with foreclosure and was in receivership.” Downtowner, 347 N.W.2d at 123
(emphasis added). This suggests that the court would have found it to weigh in favor of
successor liability if the succeeding corporation held some responsibility for the
7
The Eighth Circuit has also implied assumption of obligations into a successor
relationship under North Dakota law under the second exception to the general rule of no
successor liability – ‘de facto merger’ – which it held is present where:
(1) There is a continuation of the enterprise of the seller corporation, so that there
is a 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 liabilities and obligations of the
seller ordinarily necessary for the uninterrupted continuation of normal business
operations of the seller corporation.
Keller v. Clark Equip. Co., 715 F.2d 1280, 1291 (8th Cir. 1983). Under these factors, a
reasonable jury could similarly conclude that JP Flexibles and ExitFlex USA have a successor
relationship.
- 29 -
dissolution of the predecessor corporation (and therefore plaintiff’s access to relief). In
contrast, JP Flexibles did not dissolve because of financial problems, rather, Medvecky
stated that he and another employee decided to end JP Flexibles and start ExitFlex USA
as a “business decision.”8
Second, Downtowner involved injury to property, not a
personal injury like Yanez’s, and the court recognized that product line successor liability
is less warranted in the context of injury to property than in the context of bodily injury,
as with Yanez’s alleged injury here:
[c]losely related to this “justification” [for successor liability] is the concern
expressed by many courts that a plaintiff is unable to protect himself from
injury caused by defective products. The vast majority of cases cited by the
appellants [finding successor liability] involve bodily injury. It has,
however, been held that where the injury complained of is to property, the
expansion of the “mere continuation” exception and the adoption of the
“product line” exception is unwarranted.
Id. at 123 n.3 (citing State ex rel. Donahue v. Perkins & Will Architects, Inc., 413 N.E.2d
29 (Ill. 1980); Fletcher Cyclopedia of the Law of Private Corporations § 7123 (Supp.)).
Thus, Downtowner does not require the Court to conclude that the ‘mere continuation’
8
At oral argument, counsel for JP Flexibles and ExitFlex USA elaborated on this
testimony, stating that part of the reason for ending JP Flexibles and starting ExitFlex USA was
to protect J.P. Fatzer’s estate from further liability. This is precisely one of the reasons –
transferring assets to escape liability for debts – that have led courts to hold successor
corporations liable. See, e.g., Downtowner, 347 N.W.2d at 121 (listing an exception for no
successor liability as when “[t]he transaction is an attempt to defraud the creditors of the
corporation”). Although not in the record, the Court concludes that it is fair to consider this
piece of information at this stage, both because, based on counsel’s representation, it seems
likely that something to that extent could be presented at trial, and because, where the record
otherwise includes no explanation for the change, a reasonable jury could fairly reach the
conclusion that the change was motivated by a desire to avoid liabilities.
- 30 -
exception to successor liability does not apply to ExitFlex USA given the circumstances
here.
The arrangement here includes one fact that ExitFlex USA argues weighs against
successor liability, even more strongly than in Downtowner – the express disclaimer in
the Asset Purchase Agreement that ExitFlex USA did not assume JP Flexibles’ liabilities.
The successor in Downtowner had not expressly declined to assume all liabilities as the
Asset Purchase Agreement states here. But the Asset Purchase Agreement does not
preclude the conclusion that ExitFlex USA was a mere continuation of JP Flexibles such
that it could assume JP Flexibles’ liabilities. As the Court in Downtowner observed,
“[t]he traditional rule of corporate nonliability was developed in response to the need to
protect a bona fide purchaser from the unassumed debt liability of its predecessor.”
Downtowner, 347 N.W.2d at 121. A reasonable jury could conclude that ExitFlex USA
was not a bona fide purchaser here in need of protection – beyond the identical owners,
employees, and business operations, Medvecky was the person who signed the Asset
Purchase Agreement for both ExitFlex USA and JP Flexibles. Given that the record
contains no explanation for the transition from JP Flexibles to ExitFlex USA, a
reasonable jury could further conclude that the exculpatory liability clauses in the Asset
Purchase Agreement were actually aimed at avoiding any further liabilities for
JP Flexibles. Under such circumstances, a conclusion that ExitFlex USA was a mere
continuation of JP Flexibles could reasonably outweigh any explicit agreement
disclaiming liabilities, where such agreement could be found to be part of a scheme to
avoid liability.
- 31 -
Thus, given that the ‘mere continuation’ factors support successor liability here
and in light of these suggestions from the North Dakota Supreme, the Court concludes
that successor liability for ExitFlex USA is not barred as a matter of North Dakota law.
Rather, viewing the facts in a light most favorable to Yanez, the Court concludes that a
reasonable jury could find that ExitFlex USA was a mere continuation of JP Flexibles
and therefore liable as a successor corporation. Cf. Turner v. Bituminous Cas. Co., 244
N.W.2d 873, 884 (Mich. 1976) (reversing grant of summary judgment where facts
viewed in a light most favorable to nonmoving party made out prima facie case of
successor liability).
V.
GRACO AND MIDWAY’S MOTION FOR SUMMARY JUDGMENT
Graco and Midway also jointly move for summary judgment, arguing that they are
not manufacturers under the statute.
Yanez makes several arguments in support of
Graco’s and Midway’s liability. First, he argues that Graco and Midway cannot be
dismissed as nonmanufacturing sellers under the statute because they did not meet the
requirements Yanez believes the statute imposes upon nonmanufacturing sellers. Second,
Yanez argues Graco is a manufacturer because Graco sought to have ExitFlex SA add the
ID ring to the hose. Third, Yanez argues that Graco manufactured the entire paint system
and chose to include the hose in that paint system and that the paint system caused
Yanez’s injuries. The Court concludes that there are no genuine issues of material fact
such that a reasonable jury could conclude that Graco or Midway are liable for Yanez’s
- 32 -
injuries on account of their involvement in the distribution of the hose, its accompanying
ID ring, and the paint system.
A.
Dismissal as a Nonmanufacturing Seller
Yanez argues Graco and Midway cannot be dismissed as nonmanufacturing sellers
under the statute because they did not submit an affidavit certifying the identity of the
manufacturer and because the manufacturer has not been added to the complaint. The
statute provides that in an action against a nonmanufacturing seller, “the seller shall upon
answering or otherwise pleading file an affidavit certifying the correct identity of the
manufacturer of the product allegedly causing the [injury].” N.D. Cent. Code § 28-01.304, subd. 1. The next subdivision provides that “[a]fter the plaintiff has filed a complaint
against the manufacturer and the manufacturer has or is required to have answered or
otherwise pleaded, the court shall order the dismissal of the claim against the certifying
seller . . . .”. Id., subd. 2. Subdivision 3 lists several exceptions to dismissal under which
a plaintiff may vacate a dismissal under subdivision 2. Id., subd. 3. Yanez argues, in
essence, that the statute makes an affidavit certifying the manufacturer’s identity and the
inclusion of the manufacturer as a defendant in the case prerequisites to a court’s
determination that a seller cannot be held liable.
There are several difficulties in applying this statute in these circumstances. First,
the defendants do not appear to have complied with subdivision 1, which requires them to
submit an affidavit certifying the identity of the manufacturer. Second, Yanez has not
filed a complaint against ExitFlex SA, the apparent manufacturer, such that the statute
- 33 -
would even appear to require the Court to dismiss Graco and Midway. Finally, assuming
that dismissal would be proper, Yanez does not appear to fit into any of the exceptions to
dismissal.
The parties point to further problems with applying the statute in this
situation: it does not provide a deadline for the affidavit identifying the manufacturer and
does not account for a plaintiff’s delay in joining a manufacturer that has been identified.
Defendants argue that this leaves open the possibility that a plaintiff could intentionally
delay joining the true manufacturer in order to prevent dismissal of a seller, even though
the seller has done everything that is required of it under the statute. See N.D. Cent.
Code § 28-01.3-04, subd. 3 (permitting plaintiff to move to reinstate a seller if plaintiff
can show “[t]hat the applicable statute of limitation bars a product liability action against
the manufacturer”). Here, it was Yanez’s choice to not file a complaint against ExitFlex
SA because it did not anticipate the Court having personal jurisdiction over the entity,
even though it discovered the identity of ExitFlex SA as the manufacturer within the
statute of limitations. (Lillehaug Aff. ¶ 2.)
Given these difficulties, the Court declines to dismiss Graco and Midway on the
basis of the statute. Based on the plain text of the statute, it appears that the Court is not
required to “order the dismissal of the claim against the certifying seller” because Yanez
has not yet “filed a complaint against the manufacturer.” N.D. Cent. Code § 28-01.3-04,
subd. 2. However, to rely on that plain text implicates the concerns raised by Graco and
Midway of holding nonmanufacturing sellers captive to the filing proclivities of a feetdragging plaintiff. On the other hand, the statute provides no mechanism for a plaintiff to
avoid dismissal of a nonmanufacturing seller if filing a complaint against the
- 34 -
manufacturer would be futile because of jurisdictional issues. Given the lack of clarity or
explanation in the statute and decisions interpreting it, the Court will leave these issues to
the legislature and courts of North Dakota. Because, as explained below, the Court
concludes that Graco and Midway are entitled to summary judgment on the merits of
Yanez’s claims, the Court finds no unfairness in not relying on this statute as a basis for
dismissing the claims against them.9
B.
Liability for Graco as a Manufacturer
Yanez argues that Graco may be held liable under the statute because of its
involvement in placing the ID ring on the hose and because it designed the entire paint
system.
Yanez points to the portion of the definition of manufacturer stating a
manufacturer means an entity who “designs, . . . produces, . . . or otherwise prepares a
product or a component part of a product,” N.D. Cent. Code § 28-01.3-01, subd. 1, to
argue that Graco may be held liable under the statute. The Court concludes that the
evidence in the record would not permit a reasonable jury to find that Graco’s
9
With regard to the affidavit certifying who the manufacturer is, Graco’s counsel
represented at oral argument that it did not file such an affidavit immediately because the
manufacturer could not be determined until after destructive testing because the hose was
covered with paint. (See Stipulation Regarding Mot. for Order Permitting Destructive Testing,
Dec. 9, 2011, Docket No. 60 (giving the parties until February 15, 2012 to discover who
manufactured the hose).) Yanez agreed to a process for discovering the true manufacturer and
discovered who the manufacturer was within the statute of limitations. (See id.; Lillehaug Aff.
¶ 2.) However, it is not clear whether the certifying affidavit is a prerequisite to dismissal under
the statute. Because the Court declines to rest its ruling on Graco and Midway’s summary
judgment motion on the statute, the Court need not address the significance of the circumstances
surrounding the identification of the manufacturer to Yanez.
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involvement with the ID ring on the hose or design of the paint system renders it liable
under this definition.10
1.
ID Ring
Yanez argues that Graco’s ID ring played a role in contributing to the failure
which caused Yanez’s injury. He points to the affidavit of his expert, Lester Engel, in
which Engel states that “[t]he incident hose has failed in an area adjacent to the end of the
hose fitting on the gun end. This end also has an identification band 1.3 inches from the
end of the fitting.” (Aff. of Lester B. Engel, Ex. A. (“Engel Report”) at 4, Feb. 13, 2014,
Docket No. 171.) Engel also stated that
an inadequate wire braid design . . . is combined with the use of
identification marking tags which are crimped tightly onto the hose close to
the end of the fitting. . . . The application of a tight fitting identification
band a short distance from the end of the fitting on the hose further
compromises the structural integrity of the wire braiding. The tight
identification band restricts the distribution of the strain in the hose during
bending. When bending occurs at the fitting end of the hose with the
identification band in place, all of the bending occurs in the 1.3-inch length
of hose between the end of the fitting and the identification band. With the
present wire braid design, this bending results in the observed bulging of
the wire braid at the end of the fitting. With the bulging, structural integrity
of the hose is compromised and a premature leak develops.
(Engel Report at 5.) These statements provide a sufficient basis upon which a reasonable
jury could conclude that the ID ring caused Yanez’s injury, but they do not offer an
10
To the extent that Yanez also argues that Graco falls within one of the exceptions to
nonliability for nonmanufacturing sellers, such as when the nonmanufacturing seller “exercised
some significant control over the design or manufacture of the product,” or “created the defect in
the product which caused the personal injury,” N.D. Cent. Code § 28-01.3-04, subd. 2(a), (c), the
Court concludes, for the reasons explained in this section, that none of these exceptions apply.
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opinion as to Graco’s involvement in the design, manufacture, or addition of the ID ring
so as to bring it within the scope of potentially liable defendants under the statute.
Evidence of Graco’s involvement indicates that Graco requested that certain pieces of
information be printed on the metal ferrule at the end of the hose, but that ExitFlex SA
found that to be too difficult, and instead ExitFlex SA proposed to print the information
on a metal ring that would encircle the hose. Medvecky proposed this to Graco in a
letter, and Graco agreed to the arrangement.
(See Rusert Aff., Ex. D (letter from
Medvecky to Graco stating that a sample of the ID ring “that we are proposing to supply
on the WE24 hose” was enclosed and that the ID ring “is our alternative to printing the
information on the ferrule itself”).) Thus, Graco’s involvement was limited to approving
an alternate proposal submitted by the manufacturer in light of practical limitations and
capabilities as identified by the manufacturer.
This is distinct from circumstances in which the North Dakota Supreme Court has
recognized that an intermediary seller may be liable for injury caused by a product; in
those cases the intermediary seller has actually made the alteration or modification,
rather than simply requesting a slight addition and relying upon the manufacturer’s
proposal for how to incorporate that into the original design. See Oanes v. Westgo, Inc.,
476 N.W.2d 248, 251 (N.D. 1991); Witthauer v. Burkhart Roentgen, Inc., 467 N.W.2d
439, 440-41 (N.D. 1991). Thus, because Graco did not manufacture the ID ring or build
it into the hose, it cannot be said that Graco “design[ed],” “produce[d],” or “prepare[d]”
the product. See N.D. Cent. Code §§ 28-01.3-01, subd. 1. Graco was neither responsible
for the design of the ID ring nor for gauging its effect on the structural integrity of the
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hose – Graco did not instruct ExitFlex SA to use an ID ring as a method of including the
additional information Graco sought to add to the hose. The Court thus concludes that,
based on plain reading of the statute, a reasonable jury could not find that this
involvement amounts to “design[ing],” “produc[ing],” or “prepar[ing]” the hose. See id.
2.
Paint System and Testing
Yanez also argues that Graco can be held liable under the statute for preparing and
designing the paint system and for the decision to include this hose in the paint system
after conducting extensive testing. Graco objects that Yanez failed to allege any defect in
the paint system in his complaint and that any claim based on the paint system should be
dismissed. The Court finds that the complaint adequately incorporates the paint system
into its allegations of the defects causing Yanez’s injuries. (See, e.g., Am. Compl. ¶¶ 8,
11, 16-18, 25, 30, 33-34.) But although Yanez incorporated some allegations about the
paint system into his complaint, he has failed to present any evidence that the paint
system, rather the hose, was defective or caused his injuries.
When asked at oral
argument what evidence supports his claim based on the paint system, he pointed to no
evidence but instead explained that this theory of liability is based on Graco’s decision to
use the WE24 hose in its paint system. But Yanez has not presented any evidence that
the choice to use that model of hose – with its pressure rating, length, and materials – was
a defective design choice that caused his injury. Rather, his expert opines that the hose
itself was defective and caused his injury. There is no evidence in the record that it was
the hose’s placement in the paint system that gave rise to the injury.
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Relatedly, Yanez argues that the fact that Graco performed tests on the hose
renders it liable as a manufacturer under the statute. Yanez refers to Redlund-Spieker’s
testimony in support of this argument, but she testified that in determining whether the
hose would be a good fit in one of its paint systems, her staff reviewed the testing that
had been done by the manufacturer. (Redlund-Spieker Dep. at 34:40-35:13; 35:19-36:3;
44:1-16.) Graco did one product qualification test on its own to see if the hose could
handle the pressure that the paint system would require. (Id. at 38:6-39:13). This kind of
testing – for whether a given product would work for a specific function – does not open
Graco up to liability under the statute for a defect in the hose itself. No reasonable jury
could conclude that Graco designed, produced, or prepared the hose or any defect in it by
reviewing testing that had been done by ExitFlex SA or by observing whether the hose
would fit within the paint system.
The Court therefore concludes that no reasonable jury could conclude that Graco’s
involvement with the ID ring or selecting the hose to be part of a paint system rendered it
a manufacturer. The Court thus concludes that Graco and Midway’s motion for summary
judgment must be granted. No reasonable jury could find that Graco was a manufacturer
of the hose.
This case will be placed on the Court’s next available trial calendar.
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ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1.
ExitFlex USA, Inc.’s motion for summary judgment [Docket No. 148] is
DENIED.
2.
J.P. Flexibles, Inc.’s motion for summary judgment [Docket No. 153] is
DENIED.
3.
Graco, Inc.’s and Midway Industrial Supply Co. Inc.’s motion for summary
judgment [Docket No. 157] is GRANTED.
DATED: September 8, 2014
at Minneapolis, Minnesota.
____s/
____
JOHN R. TUNHEIM
United States District Judge
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