Today I want to talk about assets of a company that manufactures ladders and is owned by Bill. Another company purchased the assets of Bill’s company. The buying company assumed the obligation of Bill’s company to complete contracts with certain suppliers and customers. The buying company did not assume any liability for defective ladders manufactured and sold before the closing.
Bill’s company was dissolved. After that, Herb was injured by a defective ladder made and sold prior to the closing. Herb sued the buying company.
The California Supreme Court in 1977 said that Herb would generally have no claim against the buying company unless it had assumed the liabilities in the asset purchase agreement for the defective ladders made and sold before the closing; or in certain other circumstances not present in this case.
Nevertheless, the Court said that Herb would have no claim against Bill’s company, because it was dissolved. Furthermore, it noted that Bill’s company probably did not take out tail insurance coverage to cover post-closing products liability claims. This leaves Herb with no meaningful remedy against Bill’s company:
Thus, even if … (Herb) could obtain a judgment on his claim against the dissolved and assetless … (Bill’s company) … he would face formidable and probably insuperable obstacles in attempting to obtain satisfaction of the judgment from … (Bill).
Therefore, the Court created a new remedy for Herb by imposing liability on an asset buyer of a manufacturing business for injuries caused by products made and sold prior to the closing under what is now called the “product-line exception”:
We therefore conclude that a party which acquires a manufacturing business and continues the output of its line of products under the circumstances here presented assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired.
This California Supreme Court case is referred to as Ray v. Alad Corp., 560 P. 2d 3 (1977), and can be found at: https://scocal.stanford.edu/opinion/ray-v-alad-corp-28005
Comment. The product-line exception was first adopted by California. Some other states have adopted this exception. You will need to check the law of your state to see if it applies.
If you are in a state where it does apply, then due diligence can be your friend. You will need to check public records for litigation and judgments, seller’s records pertaining to past, existing and threatened product liability complaints, claims and disputes, as well as loss run reports from seller’s insurer.
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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