A buyer of the assets of a business will generally only be responsible for seller’s liabilities that buyer assumes in the purchase agreement. This contrasts with buying all the stock of corporate business; in which case the buyer’s acquired corporate subsidiary comes with all its liabilities.
However, under California law, a buyer of the assets of a manufacturer may be liable for claims for injuries filed after the closing, that were caused by defective products made and sold by its asset seller before the acquisition. This liability was created by the California Supreme Court decision of Ray v. Alad Corp., 19 Cal. 3d 22 (1977) and is referred to by lawyers as the “product-line exception”. In the Ray case, a buyer of the assets of a ladder manufacturer, was held responsible for injuries caused by a defective ladder that was made and sold before buyer purchased the assets.
Today we are going to talk about imposing liabilities on an asset buyer for damages caused by the negligent services of the selling company that occurred prior to the asset sale. Our story involves the purchase of the assets of a soil engineering company. We will refer to the asset purchaser as Buyer and the seller of the assets as Seller.
The facts of this story are contained in the 1999 California Court of Appeals case of Monarch Bay II v. Professional Service Industries Inc., 75 Cal. App. 4th 1213:
In the 1980s, a 450-unit luxury apartment complex was developed on the bluffs of Laguna Niguel. … (Seller) … provided soils engineering services on the project from 1986 to 1989, issuing a final compaction report and certifying the sites for the construction of three of the apartment buildings. After the buildings were built and occupied, … (Buyer) … purchased all the assets of … (Seller) …, including goodwill. … (Buyer) … assumed … (Seller’s) … equipment and building leases and hired … (Seller’s) … two shareholders and principal geotechnical professionals, Maire Thornton and Carl Schrenk, as well as the rest of its employees. Thornton and Schrenk were told to encourage … (Seller’s) … customers to do business with … (Buyer) …, and both signed a covenant not to compete for a two-year period.
In 1992, the hillside under the project gave way, damaging two buildings and forcing their evacuation. … (The owner of the apartment complex) … brought suit against all parties involved in the geological investigation and construction of the project, and named … (Buyer) … as … (Seller’s) … successor based on Ray v. Alad Corp. …
The California Court of Appeals refused to impose liability on Buyer by extending the product-line exception to the negligence of the asset seller:
The Ray court clearly intended the product line exception to be limited to the circumstances presented in that case … (claims based upon defective products) …, and we decline to extend the rationale to other circumstances … (such as claims based upon the negligence of the asset seller) …
This California Court of Appeals case can be found at: https://caselaw.findlaw.com/ca-court-of-appeal/1223778.html
Comment. An asset buyer of a service company under California law is generally not liable for the negligence of the asset seller unless the asset buyer assumes seller’s negligence in the purchase agreement.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291