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SUCCESSOR LIABILITY - DON'T FORGET TO ASK A CRUCIAL QUESTION

– By Robert Gerhardt

Damaged tire

In these tumultuous days of mergers and acquisitions, and the bankruptcies that often follow them, it is important to understand the history of the company when you are defending a product manufacturer.

A recent case involved a plaintiff who was injured when an aftermarket wheel assembly failed at highway speed. The remains of the wheel are shown in the photo. Our initial discovery failed to determine the original Taiwanese manufacturer. In California, this typically results in passing liability onto those in the chain of commerce, pursuant to principles of strict liability.

While defending our client, a distributor of aftermarket motorcycle parts and accessories, we met with the CEO to prepare him for a deposition. During the meeting, he casually stated, "you were told that we were forced through bankruptcy several years ago, weren't you?" Actually, we weren't told about the bankruptcy, and that fact made a significant difference in this case.

In California, a company that acquires the assets of "Bankrupt Corporation" does not generally acquire the liabilities of the corporation if the asset purchase agreement excludes liability for products sold or manufactured before the purchase (Ray v. Alad Corp. (1977 19 Cal.3d 22, 28)). Typically, purchase agreements contain language defining what liabilities they are willing to assume and contain provisions that they will honor product returns, replacement or repairs of products sold prior to the specific closing date, but specifically excluding any claims for property damage, injury or death.

There are specific exceptions to the general rule. Typically, in limited factual circumstances, there is an express or implied agreement of assumption, where the transaction amounts to a consolidation or merger of two corporations or if the purchasing corporation is a merger continuation of the seller. Finally, the purchaser may be subject to liability if it can be shown that the transfer of the assets was made for the fraudulent purpose of the seller escaping liability for its debts.

In this case, the client's letterhead proudly proclaimed its "50th Anniversary" in selling the finest aftermarket parts to a particular brand of motorcycle enthusiast. The company had fallen victim to the merger and acquisition mania of the 1990s and was subsequently involved in the spectacular meltdown that immediately followed and was dragged through bankruptcy. In the interim, the assets, including the good name and 50-year reputation of the retailer, were acquired by a new conglomerate.

It was later determined that the failed part was sold by the former company to a retailer in Florida, who kept it on his shelf until it was sold several years later to the claimant. Fortunately, sufficient time remained to establish the absence of successor liability to the client by way of summary judgment. The injured plaintiff agreed to dismiss his claim for a waiver of cost and pursue the unfortunate out of state retailer.