Darrel Franklin v. USX Corp.
87 Cal. App. 4th 615, 2001 Cal. Daily Op. Serv. 1813, 105 Cal.Rptr.2d 11 (2001)
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Rule of Law:
A purchasing corporation in an asset acquisition is generally not liable for the selling corporation's prior tort liabilities under theories of express/implied assumption, de facto merger, or mere continuation, especially when adequate cash consideration was paid. The product line successor exception is strictly limited to claims for strict product liability and does not extend to general torts like negligence or premises liability.
Facts:
- During World War II (1942-1945), Jeannette Franklin's parents worked at the Western Pipe & Steel Shipyard (WPS) in South San Francisco, which built ships using asbestos-containing materials.
- Jeannette Franklin, a child at the time, alleged she was exposed to asbestos-containing dust carried home on her parents' clothing and in their car.
- In 1996, Jeannette Franklin was diagnosed with peritoneal mesothelioma, an asbestos-caused cancer.
- In December 1945, Consolidated Steel Corporation of California (Con Cal) purchased all the assets of WPS for over $6.2 million in cash and agreed to assume all WPS's liabilities.
- On August 31, 1948, Con Cal sold a significant portion of its business assets (transfer assets) to Consolidated Western Steel Corporation of Delaware (Con Del), a subsidiary of U.S. Steel, for over $17 million in cash and additional consideration.
- The purchase agreement between Con Cal and Con Del explicitly stated that the buyer would not become liable for any of the seller's debts, obligations, or liabilities of any nature whatsoever, except for specific, enumerated business-related obligations.
- Con Del later merged into U.S. Steel, which subsequently changed its name to USX Corporation.
- After the sale to Con Del, Con Cal changed its name to Consolidated Liquidating Corporation and dissolved on February 29, 1952.
Procedural Posture:
- Jeannette Franklin and Darrel Franklin filed an action for personal injury, premises liability, and loss of consortium against several defendants, including USX Corporation, in trial court.
- The parties stipulated that the issue of successor liability would be decided by the trial court based on an agreed statement of stipulated and disputed facts and a documentary record, without testimony.
- The trial court found that in 1945, Con Cal had assumed all liabilities of WPS, and further concluded that USX was the successor in interest to Con Cal, making USX responsible for WPS's liabilities, including contingent tort liabilities.
- The trial court held that USX was liable under four theories: (1) express or implied assumption of liabilities, (2) de facto merger, (3) mere continuation, and (4) product line successor.
- In a bifurcated proceeding following the trial court's successor liability determination, a jury decided the issues of liability and damages, returning a verdict against USX in excess of $5 million.
- USX appealed the trial court’s conclusion that it was the successor in interest to WPS and also appealed the jury verdict.
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Issue:
Does a purchasing corporation (USX) become liable as a successor in interest for a selling corporation's (Con Cal/WPS) prior tort liabilities, such as those arising from asbestos exposure, under theories of express or implied assumption, de facto merger, mere continuation, or the product line successor exception, when the purchase involved adequate cash consideration and the claim is not for strict product liability?
Opinions:
Majority - Walker, J.
No, USX is not liable as a successor in interest to WPS under any of the asserted theories. The court reversed the trial court's finding of successor liability. First, USX did not expressly or impliedly assume Con Cal/WPS's tort liabilities. The purchase agreement between Con Cal and USX was clear and unambiguous, explicitly stating that USX would not assume 'any of the debts, obligations, liabilities, undertakings, agreements or commitments of the Sellers of any nature whatsoever,' except for specifically enumerated business-related obligations, none of which covered prior contingent tort liabilities. The agreement was an integrated document, meaning its terms could not be varied by extrinsic evidence. Even if extrinsic evidence (such as letters to third parties or the Navy contract) were considered, it did not support an intention for USX to assume such liabilities. Second, the transactions did not constitute a de facto merger or a mere continuation. The crucial factor in both these theories is whether adequate cash consideration was paid for the predecessor corporation’s assets. USX paid over $17 million in cash for Con Cal's assets, which was undisputedly adequate. This ensured that adequate means were available to satisfy claims against Con Cal at the time of its dissolution. While a common officer (Alden Roach) existed between Con Cal and the successor entities, the presence of adequate consideration prevents the application of these exceptions, as case law consistently requires inadequate consideration. Finally, the product line successor theory, established in Ray v. Alad, does not apply to general tort claims like those for asbestos exposure (personal injury and premises liability). The Ray v. Alad exception is strictly limited to claims for strict product liability, a policy choice designed to protect predictability in corporate transactions and prevent erosion of the general rule of successor non-liability. Expanding this exception beyond its intended scope would contradict established precedent and policy.
Analysis:
This case significantly clarifies and reinforces the traditional rules of corporate successor liability in California, particularly regarding the importance of adequate cash consideration in asset purchases. It underscores that express contractual provisions against liability assumption will be upheld when clear and unambiguous, and that courts will strictly limit the Ray v. Alad product line successor exception to strict product liability claims, refusing to expand it to general torts. This decision provides critical predictability for businesses engaging in asset acquisitions, reducing uncertainty regarding future undisclosed liabilities and influencing how acquisition agreements are structured and interpreted. It highlights the judiciary's deference to established corporate law principles to foster economic stability.
