RAY v. ALAD CORPORATION

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Court of Appeal, Second District, Division 5, California.

Herbert C. RAY, Plaintiff and Appellant, v. ALAD CORPORATION, a California Corporation, Defendant, Cross-Defendant, Cross-Complainant and Respondent.

Civ. 45888.

Decided: February 26, 1976

Silver & McWilliams and Lawrence Weitzer, Wilmington, for plaintiff and appellant. Yusim, Cassidy, Stein, Hanger & Olson and Robert E. Levine, Beverly Hills, for defendant and respondent.

‘California has pioneered in the development and extension of the theory that manufacturers are strictly liable in tort for injuries to persons caused by defects in their products.’ (Pike v. Frank G. Hough Co., 2 Cal.3d 465, 474, 85 Cal.Rptr. 629, 635, 467 P.2d 229, 235.) We approach this case in the spirit of that pronouncement.

Plaintiff Herbert C. Ray appeals from a judgment in favor of defendant Alad Corporation, entered after the trial court granted defendant's motion for summary judgment.1

FACTS

The facts relevant to this appeal are not disputed.

In March 1969, plaintiff was injured while working at UCLA, allegedly because of a defective ladder. The ladder had been manufactured, probably in 1952, by the first Alad Corporation—hereinafter ‘Alad I’ and not a party to this dispute. It was sold to UCLA probable that same year.2

Alad I, chiefly a family corporation run by William Hambly since about 1949, was in the ‘speciality ladder business,’ and had a known trade name as a manufacturer of ladders for commercial and industrial uses. Its offices and plant were at all times in Pomona, California.

In June 1968, Gunther Schiff and several others formed the Stern Ladder Company ‘to have a vehicle’ to assume the name of the Alad Corporation (Alad I). At the time Schiff was an officer of the Lighting Maintenance Corporation, a firm in which Fred Stern was president. In August Alad I was dissolved as a corporation after certifying to the Secretary of State that all ‘known debts and liabilities have been actually paid’ and that its assets had been distributed to its shareholders (Corp.Code, § 5200). On August 29, the name of the Stern Ladder Company was changed to Alad Corporation (‘Alad II’). Stern and Schiff, officers of Lighting Maintenance Company, were also officers of Alad II.

Meantime, on July 1, 1988, Alad I and the Lighting Maintenance Company had entered into an agreement. The relevant provisions of the agreement are as follows:

First, Alad I would be dissolved and Lighting Maintenance Company would form a corporation under the name Alad Corporation (Alad II). Second, Alad II would fill and complete orders accepted but not yet filled by Alad I. Third, Alad II acquired from Alad I all of its ‘manufacturing assets,’ its real estate, plant and offices, equipment and machinery, inventory and good will. Finally, Alad II agreed to hold Alad I ‘harmles from any damage or liability resulting from its failure to fill said orders, or perform said work, including any liability for defective work or materials or failure to fill said orders on time.’ Hambly agreed not to compete with Alad II.

The question of Alad II's responsibility for defective ladders produced by Alad I was never discussed because Alad I ‘built such a fantastic product.’ Hence the agreement provided for no other assumption of the liabilities of Alad I.3

Alad I was considered ‘the top quality manufacturer of ladders,’ and since Alad II believed that Alad I ‘had a good name and produced a good quality ladder’ Alad II continued to produce the same type of ladder. Except for about a week to take inventory, there was no interruption in the production of the ladders and other products at the Pomona plant.

For esthetic reasons, the corporate image was changed through new letterhead and forms, as well as by a new logo. The change was not intended to call attention to purchasers of the ladders that they were buying from a different manufacturer.

Fred Stern agreed that it was his intention to ‘continue doing business at the same old stand using the same old name.’ Alad II did, indeed, do just that. It took over the plant and offices used by Alad I, used the same personnel, the same dye records and extrusion plans; it sold ladders under the same trade name, solicited Alad I's customers and used the same manufacturers' representatives.

William Hambly, the former owner of Alad I, stayed on with Alad II for about six months, apparently, at least in part, because no one connected with the Stern Ladder Company or the Lighting Maintenance Corporation had any experience in the manufacture, design or distribution of ladders.

DISCUSSION

The trial court, in granting defendant's motion for summary judgment, stated: ‘Alad II did not assume the unspecified liabilities of Alad I and further . . . Alad II was not a mere continuation or reincarnation of the old corporation but a new organization, resulting from a purchase based on substantial consideration of the assets and trade-name of the old corporation.’4

These observations focus on the wrong problem. This case has nothing to do with the interpretation of the contract between Alad I and Alad II; nor does it hinge on the technical differences between a sale of assets (Corp.Code, § 3900, et seq.), merger, consolidation (Corp.Code, § 4100, et seq.) and the many other ways by which ownership of the Alad manufacturing enterprise could have been transferred from Hambly to Stern and his associates.5

The issue is, rather one of tort law: does a manufacturer's responsibility for its defective products survive a change in ownership, where the manufacturing business, as such, maintains its identity and continues to operate as before ‘at the same old stand.’ We hold that the rationale of Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 63–64, 27 Cal.Rptr. 697, 377 P.2d 897, compels an affirmative answer, whatever means to transfer control the parties may have chosen. We further hold that our ruling is so clearly dictated by Greenman that it may properly be applied in this case, which involves the transfer of control over a California manufacturer, effected more than five years after Greenman was decided. (See Connor v. Great Western Sav. & Loan Assn., 69 Cal.2d 850, 868–869, 73 Cal.Rptr. 369, 447 P.2d 609.)6

Greenman said: ‘The purpose of [manufacturers' strict] liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves.’ (Ibid., 59 Cal.2d at p. 63, 27 Cal.Rptr. at p. 701, 377 P.2d at p. 901.) Greenman itself did not ‘recanvass the reasons for imposing strict liability on the manufacturer’ (ibid. at p. 63, 27 Cal.Rptr. at p. 701, 377 P.2d at p. 901), but referred us to preceding authorities. A synthesis of these reveals that most of the reasons referred to favor a rule which makes strict liability run with the manufacturing business as such, rather than the particular legal entity which happens to control it at the precise moment when the defective product is placed on the market. None points the other way.

First: Viewing strict liability as providing an incentive to manufacturers to improve defective products. it is the entity which continues to place the product on the market, rather than the one that has ceased to do so, which must be kept on its toes.

Second: Even more obviously it is the entity which continues to carry the business which can best distribute the individual and social costs of injuries to the public—principally, of course, by insurance. (Escola v. Coca Cola Bottling Co., 24 Cal.2d 453, 462, 150 P.2d 436 [Traynor, J., concurring]; Prosser, Strict Liability to the Consumer, 69 Yale L.J. 1099, 1120–1121.) Whether a former manufacturer carries insurance at the time of an accident is quite fortuitous—depending, one supposes, on whether it continues in business at all and does not—like Alad I—dissolve.7 On the other hand, if the trial court in this case is correct, no amount of insurance carried by Alad II could possibly benefit plaintiff.

It follows that Alad II, having assumed Alad I's preeminent position in the ladder industry and being the entity which continues to make and market Alad ladders, must assume the liability for defects in the product of the enterprise whose good will it purchased and legitimately exploits. This responsibility toward the public cannot be made to depend on the financial, business or tax considerations—perfectly valid in their spheres—which caused the affected parties to choose one method of transferring ownership over another. The manufacturing entity's responsibility to the victims of defective products it has placed in circulation cannot be hostage to the niceties which distinguish a sale of assets from a merger.8

Two persuasive federal Court of Appeals cases support our holding. In Cyr v. B. Offen & Co., Inc. (1st Cir. 1974) 501 F.2d 1145, a worker was injured by a defective printing press and sued the successor company—which, incidentally, in buying the original company had specifically not assumed ‘liability for costs incurred in tort.’ (501 F.2d at p. 1151.) In holding the successor company liable, the court concluded:

‘. . . The very existence of strict liability for manufacturers implies a basic judgment that the hazards of predicting and insuring for risk from defective products are better borne by the manufacturer than by the consumer. . . . The successor [company] knows the product, is as able to calculate the risk of defects as the predecessor, is in position to insure therefor and reflect such cost in sale negotiations, and is the only entity capable of improving the quality of the product.’ (501 F.2d at p. 1154.) In Knapp v. North American Rockwell Corp. (3d Cir. 1974) 506 F.2d 361, in which one company either merged with or sold all of its assets to a successor corporation (506 F.2d at pp. 362, 368), the court ruled that ‘questions of an injured party's right to seek recovery are to be resolved by an analysis of public policy considerations rather than by a mere procrustean application of formalities, . . .’ (Ibid. at p. 369.)

Two California decisions on which defendant relies are easily distinguished on their facts if we focus on the rationale of our holding: That this case involves a 1968 change of ownership of a California manufacturer, effected several years after the doctrine of manufacturers' strict liability became firmly embedded in our law in 1963. Schwartz v. McGrqaw-Edison Co., 14 Cal.App.3d 767, 92 Cal.Rptr. 776, is distinguishable on several grounds, chiefly, however, on considerations of fairness: the case involved a 1961 purchase of the assets of a Texas manufacturer. Texas, however, did not embrace the doctrine of manufacturers' strict liability until 1967. (McKisson v. Sales Affiliates, Inc., (Tex. 1967) 416 S.W.2d 787, 789.)9 Even less in point is Ortiz v. South Bend Lathe, 46 Cal.App.3d 842, 120 Cal.Rptr. 556, which involved a 1962 sale of an Indiana factory to the defendant's parent corporation. At the time Indiana had not even accepted MacPherson v. Buick Motor Co. (1916) 217 N.Y. 382, 111 N.E. 1050.10

Even so, Justice Fleming authored a persuasive dissent, the key passage of which is, in fact, our holding: ‘Product liability today has become an integral part of a manufacturing business, and the liability attaches to the business like fleas to a dog, where it remains imbedded regardless of changes in ownership of the business. So long as the business retains its distinctive identity and character and continues to be operated as it has in the past, defective product liability adheres to the business and remains there until discharged by bankruptcy or comparable judicial act.’ (46 Cal.App.3d at p. 851, 120 Cal.Rptr. at p. 561.)

The judgment is reversed.

FOOTNOTES

1.  Plaintiff originally filed a complaint for personal injuries against the Regents of the University of California. The Regents cross-complained against defendant Alad Corporation for indemnity. Defendant Alad then cross-complained against the Regents. At some point, plaintiff, who had inadvertently sued the Howard Manufacturing Company, dismissed the complaint against that defendant and served a summons and complaint on defendant Alad. Defendant Regents and defendant Alad stipulated that the Regents would be bound by this decision.

2.  The age of the ladder is irrelevant to the legal issue before us, which would be the same if the ladder had been sold a week before defendant acquired the relevant assets of Alad I. This does not mean, of course, that defenses based on age or obsolescence cannot be asserted at the proper time. (See Balido v. Improved Machinery, Inc., 29 Cal.App.3d 633, 641–644, 105 Cal.Rptr. 890.)

3.  The statements of the involved individuals—Hambly, Hess, Schiff, and Stern—are contained in declarations and/or depositions.

4.  The court obviously referred to the general rule limiting the liability of a corporation for the debts of another whose assets it has purchased, to certain specific situations. (Pierce v. Riverside Mtg. Securities Co., 25 Cal.App.2d 248, 254–255, 77 P.2d 226.)

5.  This case would not be here if Lighting Maintenance, Stern, or Stern Ladder Company had simply purchased all of the stock of Alad I and used that corporation's charter to carry on the same manufacturing enterprise. Apparently this method of transferring ownership was not feasible. Alad I had some assets not necessary for making ladders and Stern ‘didn't have enough money to buy all the stock existing, outstanding shares of stock, and as a result he purchased certain real property, machinery, equipment, et cetera, . . .’

6.  This case obviously does not present the question whether plaintiff has or had a cause of action against Alad I. Nor does it involve any issue concerning rights of indemnity, express or implied, between Alad I and Alad II.

7.  Although the result we reach is dramatized by the fact that, for practical purposes, tort remedies against dissolved corporations simply do not exist, we stress that the reasons for holding that the cause of action runs against the manufacturing business as such do not depend on whether or not former owners of the business can respond in damages.

8.  That the precise manner in which control of one business passes into the hands of new owners may be irrelevant for certain purposes is well illustrated by the line of cases starting with Wiley & Sons v. Livingston, 376 U.S. 543, 84 S.Ct. 909, 11 L.Ed.2d 898, holding that a successor employer may be bound by the provisions of a collective bargaining agreement between a union and a predecessor. (See, also, Howard Johnson Co. v. Hotel Employees, 417 U.S. 249, 94 S.Ct. 2236, 41 L.Ed.2d 46; Golden State Bottling Co. v. NLRB, 414 U.S. 168, 94 S.Ct. 414, 38 L.Ed.2d 388; NLRB v. Burns Security Services, 406 U.S. 272, 92 S.Ct. 1571, 32 L.Ed.2d 61. Cf. Local Joint Executive Bd. of Hotel and Restaurant, etc., Union v. 3539 Century, Inc., 47 Cal.App.3d 821, 121 Cal.Rptr. 40.)

9.  As the court noted at the outset of its opinion: ‘It is appropriate to note that the doctrine of the manufacturer's strict liability in tort was first announced in California in the case of Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 27 Cal.Rptr. 697, 377 P.2d 897, decided by the Supreme Court on January 24, 1963. The contract of sale whereby McGraw acquired title to a portion of the assets of Thompson was made a little over a year and one month prior to the adoption of the rule of strict liability by the Supreme Court. It could hardly be argued as a fact that the contract of sale was executed by the parties in contemplation of a rule of law which did not exist in this state at the time of the execution of the contract.’ (14 Cal.App.3d at p. 780, 92 Cal.Rptr. at p. 783.)

10.  It did so two years later in J.I. Case Company v. Sandefur (1964) 245 Ind. 213, 197 N.E.2d 519, 522–523. The doctrine of manufacturers strict liability, as embodied in section 402A of the Restatement of Torts 2d was not absorbed into Indiana law until 1970. (Cornette v. Searjeant Metal Products, Inc., (1970) 147 Ind.App. 46, 258 N.E.2d 652, 656.)

KAUS, Presiding Justice.

STEPHENS, J., concurs. ASHBY, J., concurs in the result.