Ray v. Alad Corp.
19 Cal. 3d 22, 136 Cal. Rptr. 574, 560 P.2d 3 (1977)
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Rule of Law:
A successor corporation that acquires a manufacturing business and continues the output of its product line assumes strict tort liability for defects in units of the same product line previously manufactured by the predecessor, particularly when the acquisition has destroyed the plaintiff's remedies against the predecessor.
Facts:
- Alad Corporation ('Alad I') was a manufacturer of ladders known for its quality products.
- On July 1, 1968, Alad I sold its tangible assets, trade name, inventory, and goodwill to Lighting Maintenance Corporation for cash consideration in excess of $207,000.
- Lighting Maintenance Corporation formed a new corporation, 'Alad Corporation' ('Alad II'), and transferred all the purchased assets to it.
- Alad II continued to manufacture the same line of ladders under the 'Alad' name, using the same plant, equipment, personnel, and customer lists as Alad I.
- There was no outward indication to customers or the public of any change in the ownership of the business.
- Pursuant to the sale agreement, Alad I dissolved its corporate existence on August 30, 1968, distributing its assets to its shareholders.
- On March 24, 1969, the plaintiff was injured when he fell from a defective ladder that had been manufactured by the now-dissolved Alad I.
Procedural Posture:
- The plaintiff filed a complaint in the trial court against Alad II and others for damages resulting from a fall from a defective ladder.
- Alad II moved for summary judgment, arguing it could not be held liable because it had not manufactured the ladder in question.
- The trial court granted summary judgment in favor of Alad II.
- The plaintiff, as appellant, appealed the trial court's grant of summary judgment.
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Issue:
Does a successor corporation that purchases the principal assets of a predecessor in a cash transaction assume strict tort liability for injuries caused by a defective product manufactured by the predecessor, when the successor continues to manufacture the same product line under the predecessor's name and the predecessor dissolves after the sale?
Opinions:
Majority - Wright, J.
Yes, a successor corporation assumes strict tort liability for its predecessor's defective products under these circumstances. The court established a 'product line' exception to the general rule of successor non-liability. The traditional rule, which insulates a corporation purchasing assets from the seller's liabilities, is outweighed by the policies underlying strict tort liability. The court's reasoning rests on a three-part justification: (1) The successor's acquisition of the business caused the virtual destruction of the plaintiff's remedies against the original manufacturer, Alad I, which had dissolved. (2) The successor, Alad II, has the ability to assume the original manufacturer's risk-spreading role, as it can gauge the risk of injury and distribute the cost among current purchasers. (3) It is fair to require the successor to assume this responsibility because it benefits from the predecessor's goodwill and reputation by continuing the same product line and holding itself out as the same enterprise.
Analysis:
This decision established the 'product line exception,' a significant departure from traditional corporate law rules on successor liability. It prioritizes the public policy goals of strict products liability—victim compensation and risk spreading—over the corporate law principle of free transferability of assets. The ruling expanded the scope of liability for companies acquiring manufacturing assets, forcing them to account for potential tort claims arising from products they did not manufacture. This precedent significantly impacts corporate acquisitions, requiring buyers to conduct more thorough due diligence and potentially secure insurance or adjust the purchase price to cover the risk of inheriting product liability.
