Ray v. Alad Corp.

• Decision Date: 24 February 1977
• Citation: 19 Cal.3d 22,560 P.2d 3,136 Cal.Rptr. 574
• Court: California Supreme Court
• Parties: , 560 P.2d 3 Herbert C. RAY, Plaintiff and Appellant, v. ALAD CORPORATION, Defendant and Respondent. L.A. 30613

Page 574

136 Cal.Rptr. 574

19 Cal.3d 22, 560 P.2d 3

Herbert C. RAY, Plaintiff and Appellant, v. ALAD CORPORATION, Defendant and Respondent.

L.A. 30613.

Supreme Court of California

Feb. 24, 1977.

Rehearing Denied March 31, 1977.

Silver & McWilliams, Thomas G. Stolpman, Wilmington, for plaintiff and appellant.

Robert E. Cartwright, San Francisco, Edward I. Pollock, Los Angeles, Leroy Hersh, David B. Baum, San Francisco, Stephen I. Zetterberg, Claremont, Robert G. Beloud, Upland, Ned Good, Los Angeles, Arne Werchick, San Francisco, Sanford M. Gage, Beverly Hills, Roger H. Hedrick, Daly City, Leonard Sacks, Encino, and Joseph Posner, Los Angeles, as amici curiae on behalf of plaintiff and appellant.

Yusim, Cassidy, Stein, Hanger & Olson and Robert E. Levine, Beverly Hills, for defendant and respondent.

Bell, Dunlavey & Rosenberg and James Dunlavey, Oakland, as amici curiae on behalf of defendant and respondent.

WRIGHT, Associate Justice. ^*

Claiming damages for injury from a defective ladder, plaintiff asserts strict tort liability against defendant Alad Corporation (Alad II) which neither manufactured nor sold the ladder but prior to plaintiff's injury succeeded to the business of the ladder's manufacturer, the now dissolved 'Alad Corporation' (Alad I), through a purchase of Alad I's assets for an adequate cash consideration. Upon acquiring Alad I's plant, equipment, inventory, trade name, and good will, Alad II continued to manufacture the same line of ladders under the 'Alad' name, using the same equipment, designs, and personnel, and soliciting Alad I's customers through the same sales representatives with no outward indication of any change in the ownership of the business. The trial court entered summary judgment for Alad II and plaintiff appeals.

Apart from tort liability for defective products, the hereinafter discussed rules of law applicable to Alad II's acquisition of this manufacturing business imposed no liability upon it for Alad I's obligations other than certain contractual liabilities that were expressly assumed. This insulation from its predecessor's liabilities of a corporation acquiring business assets has the undoubted advantage of promoting the free availability and transferability of capital. However, this advantage is outweighed under the narrow circumstances here presented by considerations favoring continued protection for injured users of defective products. As will be explained, these considerations include (1) the nonavailability to plaintiff of any adequate remedy against Alad I as a result of Alad I's liquidation prior to plaintiff's injury, (2) the availability to Alad II of the knowledge necessary for gauging the risks of injury from previously manufactured ladders together with the opportunity to provide for meeting the cost arising from those risks by spreading it among current purchasers of the product line and (3) the fact that the good will transferred to and enjoyed by Alad II could not have been enjoyed by Alad I without the burden of liability for defects in ladders sold under its aegis. Accordingly we have concluded that the instant claim of strict tort liability presents an exception to the general rule against imposition upon a successor corporation of its predecessor's liabilities and that the summary judgment should be reversed.

Plaintiff alleges in his complaint that on March 24, 1969, he fell from a defective ladder in the laundry room of the University of California at Los Angeles while working for the contracting company by which he was employed. The complaint was served on Alad II as a 'Doe' defendant alleged to have manufactured the ladder. (See Code Civ.Proc., § 474.) ¹ The Regents of the University of California (Regents) were named and served as a defendant on the basis of their ownership and control not only of the laundry room but of the ladder itself.

In granting summary judgment to Alad II, ² the trial court considered not only the supporting and opposing declarations of witnesses with attached exhibits but also excerpts from depositions and answers to interrogatories. (See Code Civ.Proc., § 437c.) It is undisputed that the ladder involved in the accident was not made by Alad II and there was testimony that the ladder was an 'old' model manufactured by Alad I. Hence the principal issue addressed by the parties' submissions on the motion for summary judgment was the presence or absence of any factual basis for imposing any liability of Alad I as manufacturer of the ladder upon Alad II as successor to Alad I's manufacturing business.

Prior to the sale of its principal business assets, Alad I was in 'the specialty ladder business' and was known among commercial and industrial users of ladders as a 'top quality manufacturer' of that product. On July 1, 1968, Alad I sold to Lighting Maintenance Corporation (Lighting) its 'stock in trade, fixtures, equipment, trade name, inventory and goodwill' and its interest in the real property used for its manufacturing activities. The sale did not include Alad I's cash, receivables, unexpired insurance, or prepaid expenses. As part of the sale transaction Alad I agreed 'to dissolve its corporate existence as soon as practical and (to) assist and cooperate with Lighting in the organization of a new corporation to be formed by Lighting under the name 'ALAD CORPORATION. " Concurrently with the sale the principal stockholders of Alad I, Mr. and Mrs. William S. Hambly, agreed for a separate consideration not to compete with the purchased business for 42 months and to render nonexclusive consulting services during that period. By separate agreement Mr. Hambly was employed as a salaried consultant for the initial five months. There was ultimately paid to Alad I and the Hamblys 'total cash consideration in excess of $207,000.00 plus interest for the assets and goodwill of ALAD (I).'

The only provisions in the sale agreement for any assumption of Alad I's liabilities by Lighting were that Lighting would (1) accept and pay for materials previously ordered by Alad I in the regular course of its business and (2) fill uncompleted orders taken by Alad I in the regular course of its business and hold Alad I harmless from any damages or liability resulting from failure to do so. The possibility of Lighting's or Alad II's being held liable for defects in products manufactured or sold by Alad I was not specifically discussed nor was any provision expressly made therefor.

On July 2, 1968, the day after acquiring Alad I's assets, Lighting filed and thereafter published a certificate of transacting business under the fictitious name of 'Alad Co.' (See former Civ.Code, § 2466.) Meanwhile Lighting's representatives had formed a new corporation under the name of 'Stern Ladder Company.' On August 30, 1968, there was filed with the Secretary of State (1) a certificate of winding up and dissolution of 'Alad Corporation' (Alad I) and (2) a certificated of amendment to the articles of Stern Ladder Company changing its name to 'Alad Corporation' (Alad II). The dissolution certificate declared that Alad I 'has been completely wound up . . . (its) known debts and liabilities have been actually paid . . . (and its) known assets have been distributed to the shareholders.' (See Corp.Code, former § 5200, now § 1905, subd. (a).) In due course Lighting transferred all the assets it had purchased from Alad I to Alad II in exchange for all of Alad II's outstanding stock. ³

The tangible assets acquired by Lighting included Alad I's manufacturing plant, machinery, offices, office fixtures and equipment, and inventory of raw materials, semifinished goods, and finished goods. These assets were used to continue the manufacturing operations without interruption except for the closing of the plant for about a week 'for inventory.' The factory personnel remained the same, and identical 'extrusion plans' were used for producing the aluminum components of the ladders. The employee of Lighting designated as the enterprise's general manager as well as the other previous employees of Lighting were all without experience in the manufacture of ladders. The former general manager of Alad I, Mr. Hambly, remained with the business as a paid consultant for about six months after the takeover.

The 'Alad' name was used for all ladders produced after the change of management. Besides the name, Lighting and Alad II acquired Alad I's lists of customers, whom they solicited, and continued to employ the salesman and manufacturer's representatives who had sold ladders for Alad I. Aside from a redesign of the logo, or corporate emblem, on the letterheads and labels, there was no indication on any of the printed materials to indicate that a new company was manufacturing Alad ladders, and the manufacturer's representatives were not instructed to notify customers of the change.

Our discussion of the law starts with the rule ordinarily applied to the determination of whether a corporation purchasing the principal assets of another corporation assumes the other's liabilities. As typically formulated the rule states that the purchaser does not assume the seller's liabilities unless (1) there is an express or implied agreement of assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller's debts. (See Ortiz v. South Bend Lathe (1975) 46 Cal.App.3d 842, 846, 120 Cal.Rptr. 556; Schwartz v. McGraw-Edison Co. (1971) 14 Cal.App.3d 767, 780--781, 92 Cal.Rptr. 776; Pierce v. Riverside Mtg. Securities Co. (1938) 25 Cal.App.2d 248, 255, 77 P.2d 226; Golden State Bottling Co. v. NLRB (1973) 414 U.S. 168, 182 fn.5, 94 S.Ct. 414, 38 L.Ed.2d 388; Kloberdanz v. Joy Mfg. Co. (D.Colo.1968) 288 F.Supp. 817, 820 (applying California law); 15 Fletcher, Cyclopedia...