Explore the complexities of product liability in M&A through a real-life legal case involving the acquisition of National Car Rental. Gain insights into liability assumptions and legal outcomes.
August 27, 2019
M&A Stories
Introduction:
When acquiring a business out of bankruptcy, one often expects to do so free and clear of product liability claims under section 363(f) of the bankruptcy code.
The Case:
This case revolves around the acquisition of National Car Rental out of bankruptcy in 2003.
The Lawsuit:
Following the purchase, the buyer faced a lawsuit from a passenger involved in a 2004 collision in a 1992 Oldsmobile Cutlass. The plaintiff, now a paraplegic, claimed that the vehicle was defective. GM’s former car rental business, National Car Rental, had owned the vehicle in 1992 and sold it in 1993 to a private buyer. The National Car Rental business changed hands in 1995 and filed for bankruptcy in 2001, leading to its sale to the current buyer in 2003.
The Argument:
The plaintiff argued that the buyer assumed liability for this product under the 2003 asset purchase agreement. Additionally, they invoked California’s product line exception, stemming from the 1977 Alad case.
Legal Outcome:
The buyer, however, asserted that they did not assume liability for this specific vehicle and that the seller’s bankruptcy extinguished the plaintiff’s remedies, not the buyer’s acquisition. Both the trial court and the intermediate appellate court majority agreed with the buyer.
Comment:
This case may not be concluded yet. Justice Jon B. Streeter of the California Court of Appeals filed a dissenting opinion, challenging the majority’s conclusions. Streeter argued that the asset purchase agreement reasonably implies that the buyer assumed responsibility for unknown product liability related to National Car Rental. The dissent also noted that the buyer might still bear responsibility for the plaintiff’s product liability claim under Alad, as bankruptcy may not have eliminated successor liability for unknown claims.
Case Reference:
Hernandez v. Enterprise Rent-A-Car Company, No. A152703, Court of Appeals of California, First District, Division Four, (Filed July 8, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
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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