Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
5-10-1995
Raytech v White
Precedential or Non-Precedential:
Docket 94-1347
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"Raytech v White" (1995). 1995 Decisions. Paper 128.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 94-1347
___________
RAYTECH CORPORATION,
Appellant,
vs.
EARL WHITE; YVONNE WHITE; PASQUALE DICINTIO;
MARIE DICINTIO; LARRY BENZIE, EXECUTOR OF THE
ESTATE OF EDWARD BENZIE; EUGENE
KLINGENBERGER; MARGIE KLINGENBERGER; JOHN DOE
& ALL OTHERS SIMILARLY SITUATED;
Appellees.
CREDITORS' COMMITTEE; OREGON CLAIMANTS,
(Intervenors in District Court)
___________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 92-cv-01451)
___________
ARGUED NOVEMBER 1, 1994
BEFORE: SCIRICA, LEWIS and RONEY,* Circuit Judges.
(Filed May 10, 1995)
*
Honorable Paul H. Roney, United States Circuit Judge for
the Eleventh Circuit Court of Appeals, sitting by designation.
___________
William N. Reed (ARGUED)
Stuart G. Kruger
Watkins, Ludlam & Stennis
633 North State Street
Post Office Box 427
Jackson, MS 39205
Attorneys for Appellant
Timothy E. Eble (ARGUED)
Ness, Motley, Loadholt, Richardson & Poole
151 Meeting Street
Suite 600
Charleston, SC 29402
Attorney for Appellees, Earl White and Yvonne
White, and Eugene Klingenberger and Margie
Klingenberger
Jan D. Ginsberg
Robert E. Sweeney, Jr. & Co.
55 Public Square
1500 Illuminating Building
Cleveland, OH 44113
Attorney for Appellee, Larry Benzie, Executor
of the Estate of Edward Benzie
Robert F. Carter (ARGUED)
Donna Civitello
Carter & Civitello
One Bradley Road
Suite 301
Woodbridge, CT 06525
David M. Lesser
One Bradley Road
Suite 302
Woodbridge, CT 06525
Attorneys for Appellees, John Doe, and All
Others Similarly Situated
Michael L. Temin (ARGUED)
Wolf, Block, Schorr & Solis-Cohen
S.E. Corner 15th and Chestnut Streets
Packard Building, 12th Floor
Philadelphia, PA 19102
Attorneys for Intervenors, Creditors'
Committee
____________
OPINION OF THE COURT
____________
LEWIS, Circuit Judge.
In this case we must determine whether the appellant,
Raytech Corporation ("Raytech"), a corporate offspring of Raymark
Industries ("Raymark"), is precluded from relitigating the issue
of its successor liability for Raymark's asbestos liabilities.
We conclude that Raytech is collaterally estopped from
relitigating this issue, and will, accordingly, affirm the
district court's ruling to this effect.
I. FACTS
Beginning in the early 1970s, Raymark, known at that
time as Raybestos-Manhattan, Inc., a manufacturer of asbestos-
containing products, was named as the defendant in thousands of
personal injury complaints around the country.1 As a result of
this burgeoning asbestos litigation, Raymark suffered a severe
financial decline.2 In response to its financial woes, between
1
. By June 26, 1988, Raymark had been named as a defendant in
more than 68,000 cases.
2
. In 1981, Raymark had a net worth of $112.4 million. By
1985, the reported net worth had dropped to $3.6 million.
1982 and 1988 Raymark reorganized its corporate structure.
Pursuant to this restructuring, Raybestos-Manhattan became
Raymark Industries and Raytech, and, significantly, Raytech
obtained ownership of Raybestos-Manhattan's two historically
lucrative businesses, but without the drain of the asbestos-
related litigation.3
3
. The steps in the restructuring are described in graphic
detail by the United States District Court for the District of
Oregon in Schmoll v. ACandS, Inc., 703 F. Supp. 868, 870-71 (D.
Or. 1988). We recount these steps here. STEP 1: In 1982,
Raybestos-Manhattan changed its name to Raymark Industries and
created Raymark Corporation as a holding company for Raymark
Industries. Raymark Corporation's only asset was the stock of
Raymark Industries. In 1985 Raymark Industries' assets included
an operating division, Wet Clutch & Brake, and the stock of a
German subsidiary, Raybestos Industrie -- Products G.m.b.H.
("RIPG") STEP 2: In June 1986, Raymark Corporation created
Raytech as a wholly owned subsidiary. STEP 3: Raytech then
created Raysub as a wholly owned subsidiary. Raytech and Raysub
were created solely to carry out the merger described in STEP 4.
See Schmoll, 703 F. Supp. at 870. STEP 4: In October 1986,
Raymark Corporation merged into Raysub, with Raymark Corporation
surviving as a wholly-owned subsidiary of Raytech. In this
merger, each outstanding share of Raymark common stock was
converted into one share of Raytech stock. Raytech, designated
the "holding company," was entirely owned by the former
shareholders of Raymark Corporation. As a result of this merger,
Raytech, the parent of Raysub, became the parent of Raymark
Corporation. Raytech then owned 100 percent of the stock of
Raymark Corporation, which owned 100 percent of the stock of
Raymark Industries. STEP 5: In 1987, Raytech purchased Raymark
Industries' two most profitable assets, the Wet Clutch & Brake
Division and the stock of RIPG. Raytech purchased the Wet Clutch
& Brake Division for $76 million. Payment consisted of
approximately $15 million in cash, $10 million worth of Raytech
stock at closing with another $6 million in stock to be
transferred later, and $46 million in unsecured notes. The Wet
Clutch & Brake Division, the largest of Raymark Industries'
business operations, had significant profit potential. Raytech
purchased the RIPG stock owned by Raymark Industries for $8.2
million. This sale included a cash payment of $3.9 million, with
the balance financed by an unsecured note. Significantly, the
asbestos claims against Raymark Industries did not arise from
either the Wet Clutch & Brake Division or RIPG. See id. at 871
In 1988, Raymond Schmoll brought one of the many
asbestos-related lawsuits brought against Raymark and Raytech.
See Schmoll v. ACandS, Inc., 703 F. Supp. 868 (D. Or. 1988). Mr.
Schmoll sued Raymark and Raytech in the United States District
Court for the District of Oregon, seeking damages for injuries
allegedly caused by his inhalation of asbestos dust from products
manufactured or sold by the defendants. Schmoll and
Raymark/Raytech agreed to submit to the district court the
question whether Raytech was a successor in liability to Raymark
Industries. Following receipt of extensive briefing on the
issue, the district court found that Raytech was a successor in
liability to Raymark Industries for Raymark's production, sale
and distribution of products containing asbestos, and that
Raytech was legally responsible for Raymark's strict liability
torts. Schmoll, 703 F. Supp. at 875.
In March of 1989, Raytech filed a petition under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the District of Connecticut. Raytech then filed this
adversary proceeding seeking a declaratory judgment that it is
not liable for the asbestos-related torts of Raymark. At
Raytech's behest, the adversary proceeding was transferred to the
(..continued)
(footnotes omitted). STEP 6: In 1988, Raytech sold Raymark
Corporation, and thus Raymark Industries, to Asbestos Litigation
Management ("ALM"), a wholly-owned subsidiary of Litigation
Control Corporation ("LCC"), whose business includes claims
processing, document control and retention, and other services to
companies involved in complex litigation, for $1 million.
Asbestos Litigation Management paid $50,000 in cash and a
$950,000 unsecured promissory note for all Raymark Corporation's
assets and liabilities.
United States District Court for the District of Connecticut.
The district court sought briefing on the question of the
preclusive effect of the Schmoll decision upon Raytech's
declaratory judgment action, and concluded in light of the
arguments presented that Schmoll collaterally estopped Raytech
from relitigating the issue of its successor liability for the
asbestos-related torts of Raymark.
The case was then transferred, pursuant to 28 U.S.C.
section 1412, to the United States District Court for the Eastern
District of Pennsylvania.4 In early 1994, the district court
certified for immediate appeal the Connecticut district court's
ruling that Raytech was estopped from denying successor
liability.
II.
We review for abuse of discretion whether the district
court properly applied the doctrine of collateral estoppel.
McLendon v. Continental Can Co., 908 F.2d 1171, 1177 (3d Cir.
1990) (citing Park Lane Hosiery Co. v. Shore, 439 U.S. 322, 331
(1979)). Our standard of review is not affected by the fact that
this case involves the application of offensive collateral
estoppel.5 As the Supreme Court indicated in Park Lane Hosiery,
4
. 28 U.S.C. § 1412 provides:
A district court may transfer a case or
proceeding under title 11 to a district court
for another district, in the interest of
justice or for the convenience of the
parties.
5
. Offensive collateral estoppel occurs whenever a plaintiff
seeks to estop a defendant from relitigating an issue which the
the application of offensive collateral estoppel is also within
the discretion of the trial court. Park Lane Hosiery, 439 U.S.
at 331. Therefore, in reviewing the district court's decision to
apply offensive collateral estoppel, we are bound by the abuse of
discretion standard. Id.
Application of collateral estoppel requires
consideration of a number of factors. Traditionally, courts have
required the presence of four factors before collateral estoppel
may be applied: (1) the identical issue was previously
adjudicated; (2) the issue was actually litigated; (3) the
previous determination was necessary to the decision; and (4) the
party being precluded from relitigating the issue was fully
represented in the prior action. United Industrial Workers v.
Government of the Virgin Islands, 987 F.2d 162, 169 (3d Cir.
1993). The Supreme Court has also recognized, however, that
(..continued)
defendant previously litigated and lost against another
plaintiff. Park Lane Hosiery Co. v. Shore, 439 U.S. 322, 329
(1979). In actuality, this case involves, as did Park Lane
Hosiery, the use of offensive non-mutual collateral estoppel.
The use of offensive collateral estoppel here is said to be "non-
mutual" because Earl White and the other defendants in Raytech's
declaratory judgment action -- present or future claimants
against Raytech -- are seeking to bind Raytech to a judgment in a
previous case -- Schmoll -- to which they themselves cannot be
bound. See Id. at 327 n.7 (stating that it is a violation of due
process for a judgment to be binding on a litigant who was not a
party or a privy and therefore has never had an opportunity to be
heard (citing Blonder-Tongue Laboratories, Inc. v. University of
Illinois Foundation, 402 U.S. 313, 329 (1971))). For the sake of
simplicity we will refer to the operative concept as "offensive
collateral estoppel," though it is understood that every
reference in this opinion to "offensive collateral estoppel" is
actually a reference to "offensive non-mutual collateral
estoppel."
collateral estoppel is inappropriate if facts essential to the
earlier litigated issue have changed. Montana v. United States,
440 U.S. 147 (1979). Finally, in cases involving the offensive
use of collateral estoppel, the Supreme Court has instructed that
courts must take special care to ensure that its application does
not work unfairness to party against whom estoppel is asserted.
Of the traditional four factors relevant to collateral
estoppel, only one -- whether there is an identity of issues --
is pressed by Raytech in this appeal. Raytech also contends,
however, that facts essential to the Schmoll decision have
changed, and that the application of offensive collateral
estoppel would inflict unfairness upon it. We will address each
of these arguments in turn.
A. Identity of Issues
Raytech concedes that the only element of the four-part
collateral estoppel test at issue in this appeal is whether the
issue before the court in Schmoll is identical to the issue
raised by Raytech in its declaratory judgment action before the
district court in Connecticut. To defeat a finding of identity
of the issues for preclusion purposes, the difference in the
applicable legal standards must be "substantial." See 1B Moore's
Federal Practice ¶ .443[2] at 572 ("To avoid collateral estoppel
on the ground that the facts found in the first action have a
different legal significance in the second suit, it is necessary
to show that the difference in significance is substantial.");
accord Jim Beam Brands Co. v. Beamish & Crawford Ltd., 937 F.2d
729, 734 (2d Cir. 1991) ("Issues that may bear the same label are
nonetheless not identical if the standards governing them are
significantly different."); James Talcott, Inc. v. Allahabad
Bank, Ltd., 444 F.2d 451, 459 n.8 (5th Cir. 1971) ("There are
circumstances when the same historical factual circumstances may
be involved in the two actions, but the legal significance of the
fact differs in the two actions because different legal standards
are simultaneously applicable to it. This is a very narrow
exception to the rule with respect to identity of issues,
however, and is applicable only when there is a demonstrable
difference in the legal standards by which the facts are
evaluated."). To resolve this issue, we must, of course,
identify the precise question or questions at issue both in
Schmoll and in this case.
In Schmoll, the court faced the issue "whether Raytech
is liable as a successor for Raymark Industries' production, sale
and distribution of products containing asbestos." Schmoll, 703
F. Supp. at 869. This issue necessitated a determination of
whether the transfers of corporate assets resulting in the
formation of Raytech were designed to escape asbestos-related
liability. See Schmoll, 703 F. Supp. at 872. In its complaint
in this case, Raytech states that it seeks "a declaratory
judgment that it is not liable for the asbestos-related personal
injury claims asserted against Raymark Corporation and/or Raymark
Industries, Inc." Raytech's complaint further specifies that it
seeks a declaration that "[u]nder the applicable law, neither
Raytech nor any non-filing subsidiary is a successor in interest"
to either Raymark Corporation or Raymark Industries.
At first blush, the issues presented by the two cases
appear identical. And while we believe them to be identical in
the final analysis, we acknowledge that the question of their
identity is more difficult than it might at first seem.
In Schmoll, the court sought to determine whether under
Oregon law, Raytech was liable as a successor for Raymark's
asbestos-related liability. See Schmoll, 703 F. Supp. at 872
n.6. In this case, the district court faced the question
whether, under some undetermined "applicable law," Raytech is
liable as a successor for Raymark's asbestos-related liability.
According to Raytech, in all jurisdictions except the state of
Oregon, fraudulent conduct in connection with a corporate sale of
assets must be found before successor liability may be imposed.
Thus, Raytech contends, in Schmoll, a case decided under Oregon
law, the court did not decide the very issue presented by this
case, namely, whether the transactions creating Raytech were
carried out fraudulently in order to escape liability. "Any fair
reading of the Schmoll opinion," Raytech argues, "reveals
immediately that the Court not only did not decide the fraud
issue, it obviously did not consider fraud to be an element of
the `fraudulent transaction' exception under Oregon law."
Raytech's arguments to the contrary notwithstanding,
Oregon's law of successor liability is neither substantially nor
even demonstrably different from the law of successor liability
applicable in other jurisdictions. An examination of court's
analysis in Schmoll reveals that the issue presented and
determined in Schmoll is identical to the issue presented for
determination in this case. In Schmoll the court began its
analysis by stating that "Oregon courts reject transfers of
corporate assets designed to escape liability." Schmoll, 703 F.
Supp. at 872. The court proceeded to assess the effects of the
asset transfer involved in the creation of Raytech:
Raymark Industries had valuable assets, RIPG
and Wet Clutch & Brake. It conveyed these
assets to Raytech, which was owned by Raymark
Industries' former shareholders. This
transaction left Raymark Industries with
staggering asbestos liabilities, unprofitable
operations, unsecured notes, and stock which
could not be sold in large blocks without a
deep discount.
Present and future asbestos tort
claimants, as Raymark Industries' potential
creditors, were likewise left with little in
the transaction. The money Raytech paid for
Raymark Industries' profit-generating assets
will not adequately compensate present and
future claimants. If Raytech escapes
liability for Raymark Industries' torts,
these creditors will no longer have access to
Raymark Industries' valuable assets or to the
potential stream of profits generated by
these assets.
Schmoll, 703 F. Supp. at 873. Based largely upon these indicia
of bad intent, the court concluded that although the corporate
restructuring met the technical formalities of corporate form,
because they were "designed with the improper purpose of escaping
asbestos-related liabilities," there was "no just reason to
respect the integrity of the transactions." Id. at 874. Raymark
had made substantial profits from the production of asbestos-
containing products, and the Schmoll court was not going to let
it avoid liability by transferring its profitable assets while
leaving of itself "no more than a corporate shell unable to
satisfy its asbestos-related obligations." Id.
As already noted, Raytech has sought to distinguish
Schmoll's successor liability analysis from the successor
liability analysis required in "every other jurisdiction"
principally by pointing out Schmoll's failure to make an explicit
finding that the transactions giving rise to Raytech involved
"fraudulent" conduct. Again, according to Raytech, in every
jurisdiction but Oregon, the law requires a specific finding of
fraud before successor liability may be imposed. This simply is
not the case.6 To impose liability on the successor corporation,
the law in every jurisdiction, including Oregon, requires a
finding that the corporate transfer of assets "is for the
fraudulent purpose of escaping liability." Fletcher Cyclopedia
of the Law of Private Corporations § 7122 at 232. The word
6
. It is a "well-settled rule of corporate law [that] where
one company sells or transfers all of its assets to another, the
second entity does not become liable for the debts and
liabilities, including torts, of the transferor." Polius v.
Clark Equipment Co., 802 F.2d 75, 77 (3d Cir. 1986). This then
is the general rule of successor liability, recognized in all
jurisdictions: when a corporation purchases all or most of the
assets of another corporation, the purchasing corporation does
not assume the debts and liabilities of the selling corporation.
See 15 Fletcher Cyclopedia of the Law of Private Corporations
§ 7122 at 232. There are four widely recognized exceptions to
this general rule. The successor corporation does inherit
liability where (1) the purchaser expressly or implicitly agrees
to assume liability, (2) the purchase is a de facto consolidation
or merger, (3) the purchaser is a mere continuation of the
seller, or (4) the transfer of assets is for the "fraudulent
purpose of escaping liability." Id. The parties dispute neither
the nation-wide applicability of the general rule nor the
presence in every jurisdiction of the four exceptions.
"fraudulent," as it appears in Fletcher's Cyclopedia, the very
source cited by Raytech as setting forth the four exceptions to
successor non-liability "recognized in all jurisdictions" (see
n.6 supra), characterizes or modifies not the actual means of the
transfer of assets or the conduct undertaken in furtherance
thereof, but rather the purpose of such transfer. Under
Fletcher's articulation of the exception, transferring corporate
assets for the purpose, or with the intention, of escaping
liability is, by definition, a transfer of assets with fraudulent
purpose.
As the district court observed, implicit in Schmoll is
the finding that the transfer of corporate assets giving rise to
Raytech, undertaken for the purpose or with the intent of
escaping liability, was a transfer undertaken with fraudulent
purpose or intent. Even though the court in Schmoll omitted the
word "fraudulent" in the course of its successor liability
analysis, the indicia of improper purpose upon which the Schmoll
court largely relied are the same factors that Raytech itself
acknowledges are generally considered by courts when determining
whether a transfer of corporate assets was undertaken for the
fraudulent purpose of escaping liability. Thus, the issue
addressed and resolved by Schmoll is "in substance the same"
issue Raytech has raised in this case; accordingly, we conclude
that the collateral estoppel doctrine's identity of issues
requirement is satisfied in these circumstances. See Montana v.
United States, 440 U.S. 147, 155 (1979) (the identity of issues
requirement is fulfilled where the issues in the current case are
"in substance the same" as those previously resolved).7
B. Change in Facts Essential to Schmoll
As noted above, even if all four requirements of
collateral estoppel are met, changes in "controlling" facts, that
is, facts "essential to a judgment" will render collateral
estoppel inapplicable in a subsequent action raising the same
issues. Montana, 440 U.S. at 155, 159. Raytech contends that
facts essential to the judgment in Schmoll have changed and that
it should not be collaterally estopped from raising the successor
liability issue again in this case.
Raytech argues that central to the Schmoll court's
successor liability analysis was its view that Raymark would not
realize the full benefit of the sale to Raytech of RIPG and Wet
Clutch & Brake. Indeed, the Schmoll court observed that at the
time of the sale of these assets to Raytech, Raymark received the
7
. Entangled within its argument that Oregon law is outside
the realm of traditional successor liability law is Raytech's
argument that Schmoll was simply wrongly decided. However, we
need not dwell on this contention. Any argument that the
successor liability issue was erroneously decided in Schmoll is
wholly without relevance to our collateral estoppel inquiry. "A
judgment merely voidable because based on an erroneous view of
the law is not open to collateral attack." Federated Department
Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981). Not only is
the argument that Schmoll was wrongly decided irrelevant, it is
brought before a tribunal thousands of miles from whence it
arose. The remedy for a wrongly decided district court case from
the District of Oregon is, of course, appeal to the Ninth Circuit
and possible review by the Supreme Court. Raytech did in fact
appeal Schmoll to our sister court of appeals -- and lost. See
Schmoll v. ACandS, Inc., 977 F.2d 499 (9th Cir. 1992). Raytech
apparently did not seek Supreme Court review.
lion's share of the purchase price in the form of unsecured notes
and Raytech stock that could not be sold in large blocks without
a deep discount. See Schmoll, 703 F. Supp. at 873. According to
Raytech, the facts regarding Raytech's payment for the assets
purchased from Raymark have changed dramatically since Schmoll
was decided. Raytech argues that the evidence available now,
which was not and could not have been presented to the court in
Schmoll, establishes that all notes made payable to Raymark by
Raytech are current and all stock payments have been made in cash
in lieu of stock at Raymark's request. Raytech further notes
that of the $85.1 million Raytech agreed to pay for the assets in
question, Raytech has paid in excess of $63 million to date.
Thus, Raytech argues, with these new facts in hand, facts which
it considers "essential to the judgement" for purposes of
assessing the applicability of collateral estoppel, the court in
Schmoll would not have imposed successor liability upon it.
We begin by parsing an old, familiar source to acquire
a sense of what "essential" encompasses in this context. That
which is indispensably necessary or requisite is commonly
referred to as "essential." See Blacks Law Dictionary 490 (5th
ed. 1979). Under the generally accepted meaning of the term, a
fact may be deemed essential to a judgment where, without that
fact, the judgment would lack factual support sufficient to
sustain it. See id. ("[t]hat which is required for the continued
existence of a thing" is essential). What facts were essential
to the Schmoll decision, is, of course, the question. To answer
this question, we turn again to the Schmoll opinion.
In deciding to impose successor liability upon Raytech,
the court in Schmoll relied in part upon the presence of direct
evidence of intent to avoid liability. For example, the court
relied upon statements made by participants in the suspect
transactions indicating that the elaborate transfer of assets had
been designed specifically to effect the avoidance of liability.
Schmoll, 703 F. Supp. at 873-74. The court noted Raymark's 1985
annual report, in which the company articulated its long term
strategy:
to protect and enhance shareholder
investment, to maximize the amounts available
for deserving asbestos-injured claimants and
to limit exposure for asbestos claims only to
businesses currently threatened, thus
enabling our other businesses and any new
business opportunities to grow, unshadowed by
the cloud of asbestos liability.
Schmoll, 703 F. Supp. at 873-74. The court also noted the
statements of John Kutzler and Craig Smith, holders of various
high-level positions at both Raymark and Raytech. Mr. Kutzler
had stated that the intention of the restructuring "`was to
remove an asset through different ownership from the exposure of
the asbestos litigation.'" Id. at 874. Mr. Smith testified that
the restructuring had been designed to insulate Raytech from
Raymark's liabilities. Id.
The court also examined the overall context of the
corporate restructuring, finding that it smacked of dubious
intent.
Raymark Corporation changed from the parent
of Raymark Industries to the subsidiary of
Raytech to the subsidiary of ALM. Raytech
purchased Raymark Corporation's two valuable
assets and then sold the remainder to ALM for
$1 million. It is inconceivable that in an
arms-length corporate transaction, a buyer
would have purchased an entity [i.e., Raymark
Corporation] so lacking in assets and laden
with liabilities.
Schmoll, 703 F. Supp. at 874. The court was also deeply troubled
by the fact that Raytech was entirely owned by the former
shareholders of Raymark Industries, so that the exact same
shareholders who once owned a company, i.e., Raymark Industries,
possessing both profitable assets and staggering asbestos
liabilities, now owned a company, i.e., Raytech, possessing
profitable assets and no asbestos liability. The ownership of
ALM, the entity upon which Raytech foisted Raymark's asbestos
liabilities, also factored into the court's decision to impose
successor liability. ALM was a wholly owned subsidiary of the
Litigation Control Corporation. Craig Smith was a division
president at Raymark Corporation from 1980 to 1985. In 1985,
Smith became president and chief executive officer of Raymark.
By the time Schmoll was decided, Smith had become president and
chief executive officer of Raytech, and had established the
Litigation Control Corporation. Moreover, at the time Schmoll
was decided, Smith owned 45 percent of the shares of the
Litigation Control Corporation, with his son owning another 15
percent. This is precisely why the court doubted the bona fides
of the sale of Raymark to ALM following the purchase by Raytech
of Raymark's profitable assets. While the court also placed some
emphasis upon the facts that Raytech had passed unsecured notes
and Raytech stock of questionable value to Raymark as part of the
purchase price for RIPG and Wet Clutch & Brake, the court appears
to have been equally troubled by the fact that the restructuring
left Raymark's creditors without access to the potential stream
of profits generated by RIPG and Wet Clutch & Brake. See
Schmoll, 703 F. Supp. at 873. This latter concern would have
been warranted regardless of the value of the consideration
passed by Raytech to Raymark.
Based upon all of these considerations, the Schmoll
court imposed successor liability upon Raytech. And for the
following reasons, we believe the court would have done so even
if it had known of Raytech's continued payments of its note and
stock obligations.
First, Raytech's contention in this appeal that
"essential facts" have changed is in fact an updated version of a
similar argument it made on appeal of the Schmoll decision before
the Court of Appeals for the Ninth Circuit. In its brief filed
in the Ninth Circuit, Raytech urged (with citations to the trial
court record) that the court consider that "[a]s of the time of
trial, Raytech had paid Raymark each of the note and stock
payments required by the contracts for the purchase and sale of
GmbH and WC&B." Thus, while Raytech has paid substantially more
of its note and stock obligations since the time of the Schmoll
trial, and in that sense, certain facts have changed, it cannot
be argued that the basic fact of Raytech's payment on the notes
was unknown to the Schmoll court when it imposed successor
liability.
We also note that it was not the failure or the
inadequacy of consideration proffered by Raytech for the purchase
of Raymark's profitable assets that so deeply troubled the court
in Schmoll; instead the court viewed the transaction as rife with
improper intent, due in part to the type of consideration passed.
Whether Raytech paid on the unsecured notes or not, the notes
remained unsecured. And while the Schmoll court relied upon the
unsecured status of the notes to confirm its view that the
transaction was not an arm's-length deal, it never per se
addressed the collectibility of the notes, or the prospect of
payments being made pursuant to them. We agree with the
Committee of Unsecured Creditors of Raytech Corporation: had the
Schmoll court compared the value of the consideration paid by
Raytech to Raymark to the value of the assets transferred, and
had it found the value of the former significantly less than the
latter because of doubts as to the ability or willingness of
Raytech to honor its obligations, then Raytech's "changed
essential facts" argument might have force. Supplemental Brief
of Appellees Committee of Unsecured Creditors of Raytech
Corporation at 7. But that is not what happened. The Schmoll
court did not address the likelihood that the notes given by
Raytech would not be paid.
In light of the fact that evidence of payment on the
notes during the one year preceding the Schmoll trial was placed
before both the Schmoll court and the Ninth Circuit, coupled with
the fact that neither the district court in Schmoll nor the Ninth
Circuit on Raytech's appeal were particularly impressed by the
fact of Raytech's payments, we conclude that Raytech's evidence
of additional payments on the notes and stock obligations does
not establish a change in facts essential to the Schmoll
judgment.
C. Fairness Considerations
The Supreme Court has granted district courts "broad
discretion" to determine when a plaintiff who has met the
requisites for the application of collateral estoppel may employ
that doctrine offensively. See Park Lane Hosiery Co. v. Shore,
439 U.S. 322 (1979). In an attempt to provide general guidance
as to the exercise of that discretion, the Court explained that:
If a defendant in the first action is sued
for small or nominal damages, he [or she] may
have little incentive to defend vigorously,
particularly if future suits are not
foreseeable. Allowing offensive collateral
estoppel may also be unfair to a defendant if
the judgment relied upon as a basis for the
estoppel is itself inconsistent with one or
more previous judgments in favor of the
defendant. Still another situation where it
might be unfair to apply offensive estoppel
is where a second action affords the
defendant procedural opportunities
unavailable in the first action that could
readily cause a different result . . . . The
general rule should be that in cases where a
plaintiff could easily have joined in the
earlier action or where, either for the
reasons discussed above or for other reasons,
the application of offensive estoppel would
be unfair to a defendant, a trial judge
should not allow the use of offensive
collateral estoppel.
Id. at 330-31 (citations and footnotes omitted). A finding of
fairness to the defendant is thus a necessary premise to the
application of offensive collateral estoppel.8
In arguing that it would be unfairly penalized if
collaterally estopped from relitigating the successor liability
issue, Raytech places principal reliance, again, upon its
argument that critical facts have changed.9 As should be clear
from our prior discussion, we do not agree that facts essential
to the Schmoll decision have changed. But it is also beyond
debate that certain facts have changed. In the aftermath of the
Schmoll decision, for instance, Raytech has paid over to Raymark
considerable additional sums of money.10 The question is, do the
8
. This notion of fairness reflects the equitable nature of
issue preclusion generally. See Jack Faucett Associates v.
American Tel. & Tel., 744 F.2d 118, 125 (D.C. Cir. 1984). The
Court of Appeals for the Fifth Circuit has commented that
offensive collateral estoppel is "even a cut above [collateral
estoppel] in the scale of equitable values." Nathans v. Sun Oil
Co. (Delaware), 705 F.2d 742, 744 (5th Cir. 1983).
9
. Most of the other points Raytech makes in support of its
fairness argument are, in actuality, attempts by Raytech to
challenge the Schmoll opinion on the merits. As for Raytech's
argument that it could not have foreseen the import of the
Schmoll case at the time the case was litigated, we agree with
the district court that the record only serves to belie this
position and suggests instead that Raytech was well aware of the
stakes involved in Schmoll. The Schmoll court itself observed
that the parties submitted thousands of pages of documents and
deposition transcripts for its consideration regarding the
successor liability issue. See Schmoll, 703 F. Supp. at 869.
10
. According to Raytech, Raytech has paid Raymark over
$63 million to date for the sale of RIPG and Wet Clutch & Brake.
While we do not know how much of this money Raytech has paid
since the handing down of the Schmoll decision, we think it safe
to conjecture that Raytech has paid over to Raymark several tens
of millions of dollars since Schmoll was decided.
factual changes that have occurred render the application of
collateral estoppel unfair to Raytech? We do not think so.
In the wake of Schmoll, Raytech has had every incentive
to act in a manner so as to fortify its argument that it should
not be collaterally estopped from relitigating the issue of its
successor liability. Moreover, equitable appearances have, no
doubt, been shaded to Raytech's advantage as a result of its
continued payments on the unsecured notes. However, while we
fully understand that it would be unfortunate from Raytech's
perspective were the district court's application of collateral
estoppel allowed to stand, we fail to see how such an eventuality
might be deemed "unfair" to Raytech as that term is utilized in
Park Lane Hosiery. We have already concluded that the Schmoll
court would reach the same result were it now presented with the
issue of Raytech's successor liability, changes in facts
notwithstanding. The necessary implication of this conclusion is
that Raytech will suffer absolutely no unfairness should the
district court's application of collateral estoppel stand.
III. CONCLUSION
Having found the requisite identity of issues, and
having concluded that essential facts have not changed between
the time Schmoll was decided and the time the district court
applied the doctrine of collateral estoppel in this case, we
cannot but conclude that the district court did not abuse its
discretion in barring the relitigation of Raytech's successor
liability. We will, therefore, affirm.
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