560 P.2d 3 (Cal. 1977)
On July 1, 1968, Alad I sold its stock in trade, fixtures, equipment, trade name, inventory, goodwill, and interest in the real property used for manufacturing to Lighting Maintenance Corporation for cash consideration in excess of $207,000 plus interest.1 The sale agreement required Alad I to dissolve its corporate existence as soon as practical and included separate agreements by Alad I's principal stockholders not to compete for 42 months and to provide consulting services.2 The transaction transferred the manufacturing plant, machinery, offices, raw materials, semi-finished goods, and finished goods but excluded Alad I's cash, receivables, unexpired insurance, and prepaid expenses, with Lighting assuming only liability for materials previously ordered and uncompleted customer orders.3
On August 30, 1968, Alad I filed a certificate of winding up and dissolution declaring that its known debts and liabilities had been paid and its known assets distributed to shareholders.4 Lighting formed Stem Ladder Company, which amended its articles to become Alad II and received all purchased assets in exchange for its stock.5 Alad II resumed ladder manufacturing operations after a one-week inventory closure, retaining the same factory personnel and extrusion plans, while using the Alad name, customer lists, and sales representatives without notifying customers of any ownership change.6
On March 24, 1969, plaintiff Ray fell from a defective ladder manufactured by Alad I while working in a UCLA laundry room for his contracting employer.7 Ray filed suit naming Alad II as a Doe defendant alleged to have manufactured the ladder.8 Ray also named the Regents of the University of California as defendants based on their ownership and control of the premises and ladder.9
The trial court granted summary judgment to Alad II after considering declarations with exhibits, deposition excerpts, and answers to interrogatories that established the ladder was an old model produced by Alad I.10 Ray appealed the judgment to the Supreme Court of California.11
Whether a corporation that acquires the assets of a manufacturing business and continues producing the same line of products under the same name assumes strict tort liability for defects in products previously manufactured by the predecessor?12
A corporation purchasing the principal assets of another 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.13 An exception to this general rule arises for claims of strict tort liability for defective products.14 When the successor acquires the manufacturing business and continues the output of its product line, liability is justified by three considerations. The first is the virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business. The second is the successor's ability to assume the original manufacturer's risk-spreading role. The third is the fairness of requiring the successor to assume a responsibility for defective products that was a burden necessarily attached to the original manufacturer's good will being enjoyed by the successor in the continued operation of the business.15
Yes. None of the four traditional grounds for successor liability applied to Alad II.16 The purchase was for adequate cash consideration in excess of $207,000, the transaction was not a merger or consolidation, Alad II shared no officers or stockholders with Alad I, and the sale was not motivated by any fraudulent purpose to escape liability.17
Nevertheless, the policies underlying strict tort liability for defective products require Alad II to assume liability for defects in ladders previously manufactured by Alad I.18 Alad I's dissolution two months after the asset sale and more than six months before Ray's injury destroyed any practical remedy against the original manufacturer.19 No provision had been made for unknown future claims, and products liability insurance would not cover post-dissolution accidents.20 Alad II acquired the plant, machinery, designs, personnel, and consulting services that gave it the same capacity as Alad I to estimate risks of injury from prior ladders and to spread the costs of those risks among purchasers of new Alad products.21 Alad II also acquired Alad I's trade name, goodwill, and customer lists, continued the identical product line, and held itself out to the public as the same enterprise, thereby enjoying the benefit of Alad I's established reputation while the corresponding burden of liability for defects in previously manufactured units properly attaches to that goodwill.22
Alad II therefore assumes strict tort liability for defects in products previously manufactured by Alad I under the circumstances presented.23