BELL v. AMERICAN INTERNATIONAL INDUSTRIES INC.

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

LLOYD BELL, individually and )

as Executor of the Estate of )

Betty Whitley Bell, Deceased, )

)

Plaintiff, )

)

v. ) 1:17CV111

)

AMERICAN INTERNATIONAL )

INDUSTRIES, et al., )

)

Defendants/Third-Party )

Plaintiff, )

MEMORANDUM OPINION AND ORDER

OSTEEN, JR., District Judge

Presently before this court is a Motion for Summary

Judgment by Defendant and Third-Party Plaintiff American

International Industries Inc. (“AII” or “Defendant”). (Doc.

288.) Defendant seeks dismissal of all claims against it by

Plaintiff Lloyd Bell (“Bell” or “Plaintiff”), or, in the

alternative, partial summary judgment with regard to punitive

damages. (Id. at 2.) Defendant claims that Plaintiff “failed to

adduce evidence that Decedent Betty Bell . . . used a product

(i) for which AII is legally responsible, and/or (ii) that

caused any injury to or contributed to Mrs. Bell’s death.” (Id.)

This court agrees, and therefore need not reach the issue of

punitive damages.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Background

Hairdresser Betty Whitley Bell (“Mrs. Bell”) used Clubman

talcum powder for over thirty years, beginning in the 1970s,

(Doc. 294-6 at 5-6)1, and continuing through 2009, (Doc. 294-9 at

7-8). Mrs. Bell used the talcum powder while she was a student,

(Doc. 294-7 at 6), during her employment at hair salons, (id. at

8), and while working at her own home hair salon. (Id.)

Mrs. Bell does not allege any usage of Clubman powder outside of

North Carolina. Mrs. Bell was diagnosed with mesothelioma, (Doc.

313-16 at 16), and passed away on June 3, 2017, (Doc. 39-2 at

2).

Plaintiff Bell was substituted in this action for

Mrs. Bell after her passing. (Doc. 40 at 1.) Plaintiff brought a

claim against AII, which purchased the Clubman brand from The

Neslemur Company on August 13, 1987. (Doc. 294-3 ¶ 8.) When AII

purchased the Clubman brand from Neslemur, the Asset Purchase

Agreement explicitly provided that Neslemur would indemnify AII

1 All citations in this Memorandum Opinion and Order to

documents filed with the court refer to the page numbers located

at the bottom right-hand corner of the documents as they appear

on CM/ECF.

for Neslemur’s pre-existing liabilities. (Purchase Agreement

(Doc. 86-1) at 23.) Specifically, the Purchase Agreement states:

[T]he Seller . . . also agrees to indemnify and hold

the Purchaser harmless against any and all claims,

liabilities or obligations which may arise out of or

result from the use of any products or goods sold by

the Seller before the Closing, and against all

actions, suits, proceedings, judgments, costs and

expenses connected with any of the foregoing;

provided, however, that the Purchaser shall timely

notify the Seller . . . of any such claim and shall

permit the Seller . . . at [its] election, to

negotiate and settle such claim, and shall provide

such records and witnesses as may be necessary to

litigate such claim.

Id. at 37.

The talcum powder container Mrs. Bell used was a one-size

tin, primarily white, with a green label. (Doc. 294-6 at 9-10;

Doc. 294-3 at 111-13.) The container had a white top that turned

to release the powder. (Doc. 294-6 at 10-11.) According to her

deposition testimony, Mrs. Bell used the same powder throughout

her years as a hairdresser, as it was her preferred brand. (See

Doc. 294-7 at 8-10.) Mrs. Bell did not claim to have used any

differently packaged or labeled talcum powder during her career,

(see id.), nor did she recall the packaging ever changing, (Doc.

294-9 at 6). The last container of talc she personally used is

pictured on the record, (Doc. 294-13 at 2), and Mrs. Bell

confirmed its authenticity, (Doc. 294-9 at 9-10). However, the

talcum powder manufactured by AII after its purchase of Neslemur

was sold in green packaging, which looks noticeably different

from that belonging to Mrs. Bell. (Doc. 294-3 at 96-99; 104-06;

110-13.) Moreover, two years after AII purchased the brand, it

began selling the talc in a plastic – rather than tin -

container. (Id. ¶ 20.) Plaintiff does not contest that “[a]t no

time while AII has owned the Clubman and Pinaud brands has it

sold Clubman Talc in a white metal container.” (Id. ¶ 21.) Given

these facts, Plaintiff “limits his claims against AII to

successor liability claims for products manufactured by Neslemur

prior to the 1987 acquisition.” (Pl’s Br. in Opp’n. to Am. Int’l

Indus.’ Mot. for Summ. J. (“Pl.’s Resp.”) (Doc. 313) at 8.)

B. Procedural Background

Plaintiff filed his Complaint against AII on February 8,

2017, for claims related to its manufacture and distribution of

Clubman talcum powder, seeking damages. (Doc. 1.) He filed an

amended complaint on October 23, 2017. (Doc. 44.) Approximately

two years later, on September 11, 2019, AII moved for leave to

file a Third-Party Complaint against Neslemur, (Doc. 81), which

was granted, (Doc. 85). In its complaint, AII sought “a judgment

indemnifying AII for any settlement or compromise . . . and for

any judgment or award rendered against AII in [the suit with

Mr. Bell],” as well as “a judicial declaration that AII is . . .

entitled to indemnity[.]” (Doc. 86 at 12.)

Neslemur is a newly-reactivated Delaware company with no

headquarters or offices in North Carolina. (See Doc. 313-14 at

18.) Neslemur moved to dismiss or strike AII’s Third-Party

Complaint on December 12, 2019. (Doc. 97.) This court denied

Neslemur’s motion to dismiss AII’s third-party complaint on

November 6, 2020. (Doc. 223.) However, on March 10, 2021, this

court dismissed all claims by AII against Neslemur in this

action, based on a Delaware court’s preliminary injunction

requiring that all claims involving Neslemur be brought in that

court. (Doc. 315 at 2.)

Defendant brought this Motion for Summary Judgment, (Doc.

288), on February 5, 2021, to dismiss all claims brought against

it by Plaintiff. Plaintiff responded on March 8, 2021. (Doc.

313.) Defendant replied on March 22, 2021. (Doc. 324.)

II. ANALYSIS

Plaintiff’s claim against AII relies on the assumption that

AII is liable as a corporate successor to Neslemur. (Pl.’s Resp.

(Doc. 313) at 8.) In other words, rather than asserting that AII

itself manufactured the product that allegedly harmed Mrs. Bell,

Plaintiff argues that AII should be held responsible for the

product manufactured by Neslemur. (Id.) AII argues that summary

judgment is appropriate because it is not a corporate successor

to Neslemur as a matter of law, and Plaintiff therefore has no

viable claim against it. (Doc. 294 at 19, 23-29.)

A. Applicable State Law

The parties primarily disagree over whether North Carolina

or California law should govern the successor liability

analysis. Plaintiff argues that California law applies due to

the internal affairs doctrine, (Pl.’s Resp. (Doc. 313) at

12-13), while Defendant maintains that North Carolina

substantive law should be applied, (Doc. 324 at 3-5). Neither

party disputes that “[f]ederal courts sitting in diversity cases

in North Carolina are to apply the North Carolina choice of law

rules[.]” Stokes v. Wilson & Redding L. Firm, 72 N.C. App. 107,

112, 323 S.E.2d 470, 475 (1984); see also Klaxon Co. v. Stentor

Elec. Mfg. Co., 313 U.S. 487, 496 (1941).

North Carolina choice of law rules use the internal affairs

doctrine, which dictates that “only one State should have the

authority to regulate a corporation’s internal affairs - matters

peculiar to the relationships among or between the corporation

and its current officers, directors, and shareholders . . . .”

Bluebird Corp. v. Aubin, 188 N.C. App. 671, 680, 657 S.E.2d 55,

63 (2008). Plaintiff argues that, because California law governs

the internal operations of AII, California law should be applied

in this instance as well. (Pl.’s Resp. (Doc. 313) at 12-13.)

The internal affairs doctrine is intended to “minimize the

potential for corporations to be subjected to the ‘conflicting’

standards of different state’s laws with regard to matters of

internal corporate governance and the relationships between and

among shareholders, officers, and directors.” In Islet Scis.,

Inc. v. Brighthaven Ventures, LLC, No. 15 CVS 1638, 2017 WL

129944 (N.C. Super. Ct. Jan. 12, 2017), the North Carolina court

cited to the Restatement (Second) of Conflict of Laws as an

example of what conduct falls within the purview of the internal

affairs doctrine:

[S]teps taken in the course of the original

incorporation, the election or appointment of

directors and officers, the adoption of by-laws, the

issuance of corporate shares, preemptive rights, the

holding of directors’ and shareholders’ meetings,

methods of voting including any requirement for

cumulative voting, shareholders’ rights to examine

corporate records, charter and by-law amendments,

mergers, consolidations and reorganizations and the

reclassification of shares.

Id. at *4 (citing Restatement (Second) of Conflict of Laws § 302

cmt. a (Am. Law. Inst. 1988)). Here, the issue at hand surrounds

an asset sale and resulting tort liability. It does not affect

any “internal affairs” of the corporation – neither shareholder

relationships nor corporate governance are implicated. See First

Nat’l City Bank v. Banco Para El Comercio Exterior de Cuba, 462

U.S. 611, 621 (1983) (“[T]he law of the state of incorporation

normally determines issues relating to the internal affairs of a

corporation . . . [but] [d]ifferent conflicts principles apply

. . . where the rights of third parties external to the

corporation are at issue.”); Roselink Invs., L.L.C. v. Shenkman,

386 F. Supp. 2d 209, 225 (S.D.N.Y. 2004) (finding that tort

claims “not brought by shareholders, officers or directors . . .

[or] brought derivatively on behalf of the corporation” are not

subject to the internal affairs doctrine). Thus, under North

Carolina choice of law rules, the incorporation state is not

relevant to the applicable state law in this instance.

Setting aside the internal affairs doctrine, which does not

apply here, North Carolina choice of law rules dictate that the

law of either the forum or the situs of the claim should apply.

[M]atters affecting the substantial rights of the

parties are determined by lex loci, the law of the

situs of the claim, and remedial or procedural rights

are determined by lex fori, the law of the forum. For

actions sounding in tort, the state where the injury

occurred is considered the situs of the claim.

Boudreau v. Baughman, 322 N.C. 331, 335, 368 S.E.2d 849, 853–54

(1988). North Carolina is both the state where Plaintiff’s

injury occurred and the forum in which this case has been

brought, and this court shall apply North Carolina law.

B. Successor Liability Analysis

Plaintiff argues that AII is a legal successor to Neslemur,

and therefore should be held responsible for any alleged harm

done by Neslemur products. (Pl.’s Resp. (Doc. 313) at 8.) “Under

the general successor liability rule, a corporation which

purchases all or substantially all of the assets of another

corporation is not liable for the transferor’s liabilities.”

Joyce Farms, LLC v. Van Vooren Holdings, Inc., 232 N.C. App.

591, 596, 756 S.E.2d 355, 359 (2014) (internal citations

omitted). Under North Carolina law, there are only four

exceptions to this rule against successor liability:

(1) where there is an express or implied agreement by

the purchasing corporation to assume the debt or

liability; (2) where the transfer amounts to a de

facto merger of the two corporations; (3) where the

transfer of assets was done for the purpose of

defrauding the corporation’s creditors; or (4) where

the purchasing corporation is a mere continuation of

the selling corporation in that the purchasing

corporation has some of the same shareholders,

directors, and officers.

G.P. Publ’ns, Inc. v. Quebecor Printing-St. Paul, Inc., 125 N.C.

App. 424, 433, 481 S.E.2d 674, 679 (1997) (internal quotations

omitted). As North Carolina has not recognized the product line

exception available in California, it does not apply in this

case.

As to the first exception: the parties expressly agreed in

the Purchase Agreement not to transfer debt and liability.

(Purchase Agreement (Doc. 86-1) at 23.) Regarding the third

exception, no evidence of fraudulent intent is presented. At

issue are the second and fourth exceptions: whether there was a

de facto merger of the corporations or whether AII was a mere

continuation of Neslemur. Absent one of these circumstances, AII

is not a legal successor to Neslemur and is not responsible for

Neslemur’s potential liabilities in this case.

Though the de facto merger doctrine has never been applied

in North Carolina court, it has been acknowledged by courts in

this state. See, e.g., Lattimore & Assocs., LLC v. Steaksauce,

Inc., No. 10 CVS 14744, 2012 WL 1925729, at *11 (N.C. Super. Ct.

May 25, 2012). Application of the de facto merger exception

requires a variety of factors only partially alleged in this

case, including continued management between the two

corporations, continuity of shareholders with stock as

consideration for the purchase, and the immediate dissolution of

the seller. Id.; see also Acme Boot Co. v. Tony Lama Interstate

Retail Stores, Inc., Nos. 90–2621, 90–2630, 90–2637, 1991 WL

39457 (4th Cir. Mar. 26, 1991) (per curiam). Plaintiff points to

an affidavit from Daniel Dror, the former chairman of Neslemur,

in a prior case, which stated that “Neslemur ceased conducting

operations on the date of the asset purchase agreement” and “had

no additional income from that point forward.” (Doc. 313-5 ¶ 6.)

In Lattimore, the plaintiff similarly argued that “by purchasing

substantially all of [the prior company’s] assets, the . . .

Defendants reduced [it] to a worthless shell that ceased all

operations.” Lattimore, 2012 WL 1925729, at *9. However, this

alone was not – and is still not, in this case, even if

Plaintiff’s allegations were accepted as true - sufficient to

create a de facto merger. The other factors were not satisfied

in Lattimore: there was no evidence of an exchange of shares or

continuity of ownership. Id. None of these other factors have

even been alleged in the matter at hand, and this court will

therefore not apply the de facto merger doctrine.

More commonly applied in North Carolina courts is the “mere

continuation” exception. A purchaser may be a legal successor if

it is a “mere continuation” of the seller. For this analysis,

North Carolina courts primarily look to “continuity of

stockholders and directors between the selling and purchasing

corporation.” G.P. Publ’ns, 125 N.C. App. at 481 S.E.2d at 680.

In this case, there is no continuity between the selling and

purchasing corporations. None of the same directors or board

members were present in the purchasing corporation. (Doc. 291-4

¶ 11.) Neslemur continued to exist, though on a dramatically

smaller scale, after the sale – notably, it later sold its

remaining assets after the AII sale for $3.8 million. (Doc.

325-1 at 4.) Where there is no continuity of directors, two

separate corporations continue to exist, and the purchase was

made in good faith, North Carolina law does not deem the

purchaser a mere continuation of the seller. Atwell v. DJO,

Inc., 803 F. Supp. 2d 369, 373 (E.D.N.C. 2011).

Given that AII did not effectively merge with Neslemur, nor

is AII a mere continuation of Neslemur, Defendant is not a legal

successor to Neslemur under North Carolina law. AII therefore

cannot be found liable for products manufactured by Neslemur.

Plaintiff only brings claims via successor liability, and since

none can be found by law, Plaintiff’s claims against AII will be

dismissed.

III. CONCLUSION

For the reasons set forth above,

IT IS HEREBY ORDERED that AII’s Motion for Summary

Judgment, (Doc. 288), is GRANTED.

IT IS FURTHER ORDERED that AII’s Motion to Admit

Plaintiff’s Workers’ Compensation Claims and Supporting

Documentation as Statements Against an Opposing Party, (Doc.

321), is DENIED AS MOOT.

This the 30th day of July, 2021.

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