Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-03287/USCOURTS-cand-5_05-cv-03287-4/pdf.json

Nature of Suit Code: 365
Nature of Suit: Personal Injury - Product Liability
Cause of Action: 28:1441 Petition for Removal- Personal Injury

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

*E-FILED 6/7/06*

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

DON CALHOUN, 

Plaintiff,

 v.

NATIONAL MACHINERY LLC,

Defendant. /

NO. C 05-03287 RS

ORDER GRANTING MOTION

FOR SUMMARY JUDGMENT

I. INTRODUCTION

Plaintiff Don Calhoun was injured while operating a machine manufactured by the National

Machinery Company (“Old National”), which no longer legally existed at the time of the accident. 

In this action, Calhoun seeks to recover under a strict liability theory from National Machinery LLC

(“New National”), an entity that acquired substantially all of the assets of Old National, and that

continues to manufacture and sell the same general product lines. New National moves for summary

judgment on grounds that it did not assume liabilities of Old National under any of the principles

enunciated in Ray v. Alad Corp., 19 Cal.3d 22 (1977) and its progeny. Specifically, New National

contends that because there is no evidence that it caused the circumstances under which Old

National became insolvent, it cannot be held liable under the new exception created in Alad to the

usual rule that a successor corporation is not liable for a predecessor’s debts.

In opposition, Calhoun concedes by silence that none of the traditional exceptions to the rule

of a successor’s non-liability are present here. Calhoun argues, however, that the Alad exception

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 1 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 Calhoun lodged evidentiary objections to certain portions of the Declaration of Robert

Foster, submitted in support of defendant’s motion. In response, defendant submitted a

supplemental declaration and argument sufficient to establish an adequate foundation for the matters

declared by Foster, and the objections are overruled. As will appear, however, the Court’s analysis

does not rely on any statement in the Foster declaration to which an objection was posed, so the

issue is largely moot. In particular, Foster’s opinion as to the liquidation value of Old National’s

assets relative to its then outstanding debt is superfluous in light of the other undisputed facts

discussed herein.

2

 Calhoun asserts that Old National had shut down its operations during the holiday season in

prior years without permanent consequences. Calhoun does not dispute, however, that this shut

down occurred under the circumstances described.

2

does apply, or that there is at least a triable issue of fact in that regard. Calhoun contends that the

evidence shows that New National in a legally significant sense “caused” the destruction of any

remedies Calhoun would have had against Old National.

The law is clear that liability under the Alad exception does not exist where the successor

purchases the assets in a bankruptcy proceeding that the successor did not cause. Although there

was no actual bankruptcy proceeding here, the undisputed facts reveal that New National acquired

the assets of Old National under circumstances sufficiently similar to a bankruptcy that it cannot be

said that New National contributed to the destruction of Calhoun’s remedies against Old National. 

That being so, and no other basis for liability appearing, New National’s motion for summary

judgment will be granted.

 II. BACKGROUND1

Prior to and during 2001, Old National had been in severe financial distress for an extended

period of time. Numerous arrangements for restructuring its debts or business were explored, but in

December of 2001, a group of secured creditors declared that Old National was in default on over

$33 million in loans. The creditors froze Old National’s credit line. As a result, Old National

essentially ceased operating, although it maintained a “skeleton crew” to collect accounts receivable

and to secure the real property.2 Although Old National subsequently received a cash infusion

through additional loans that allowed it to fill parts order from existing stock, Old National never

resumed manufacturing or sales of new machinery, and it was in no position to do so as a result of its

insolvency and the actions taken by the secured creditors.

In February of 2002 an entity called NMC Acquisition, LLC. acquired Old National’s

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 2 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

existing debt of $33 million-plus for $19 million. All of the $19 million went to Old National’s

secured creditors; none of it went to Old National itself or to its controlling shareholder. The

individuals behind NMC Acquisition apparently included members of the Kalnow family, which had

been involved in ownership or management of Old National since the turn of the last century. There

is no dispute, however, that members of the Kalnow family did not own a controlling interest in Old

National as of 2001.

NMC Acquisition foreclosed on Old National’s debt by public sale held on February 26,

2002. NMC Acquisition was the sole bidder at the sale, offering $16 million of the debt it held. 

NMC Acquisition subsequently transferred the assets of Old National to New National, a whollyowned subsidiary of NMC Acquisition.

III. LEGAL STANDARDS

Summary judgment is proper “if the pleadings and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that the moving

party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The purpose of summary

judgment “is to isolate and dispose of factually unsupported claims or defenses.” Celotex v. Catrett,

477 U.S. 317, 323-324 (1986).

The moving party “always bears the initial responsibility of informing the district court of the

basis for its motion, and identifying those portions of ‘the pleadings and admissions on file, together

with the affidavits, if any’ which it believes demonstrate the absence of a genuine issue of material

fact.” Id. at 323. If it meets this burden, the moving party is then entitled to judgment as a matter of

law when the non-moving party fails to make a sufficient showing on an essential element of his

case with respect to which he bears the burden of proof at trial. Id. at 322-23.

The non-moving party “must set forth specific facts showing that there is a genuine issue for

trial.” Fed. R. Civ. P. 56(e). The non-moving party cannot defeat the moving party’s properly

supported motion for summary judgment simply by alleging some factual dispute between the

parties. To preclude the entry of summary judgment, the non-moving party must bring forth

material facts, i.e., “facts that might affect the outcome of the suit under the governing law . . . .

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 3 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

Factual disputes that are irrelevant or unnecessary will not be counted.” Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 247-48 (1986). The opposing party “must do more than simply show that there

is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio,

475 U.S. 574, 588 (1986).

The court must draw all reasonable inferences in favor of the non-moving party, including

questions of credibility and of the weight to be accorded particular evidence. Masson v. New Yorker

Magazine, Inc., 111 S.Ct. 2419, 2434-35 (1991) (citing Anderson, 477 U.S. at 255); Matsushita

Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 588 (1986); T.W. Elec. Service v. Pacific Elec.

Contractors, 809 F.2d 626, 630 (9th Cir. 1987). It is the court’s responsibility “to determine

whether the ‘specific facts’ set forth by the nonmoving party, coupled with undisputed background

or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor

based on that evidence.” T.W. Elec. Service, 809 F.2d at 631. “[S]ummary judgment will not lie if

the dispute about a material fact is ‘genuine,’ that is, if the evidence is such that a reasonable jury

could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248. However, “[w]here the

record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there

is no ‘genuine issue for trial.’” Matsushita, 475 U.S. at 587.

IV. DISCUSSION

Prior to the decision in Alad, the general rule was well established that where a successor

corporation purchased the assets of a predecessor, the purchaser would not be held to have assumed

the seller’s liabilities unless “(1) there [was] an express or implied agreement of assumption, (2) the

transaction amount[ed] to a consolidation or merger of the two corporations, (3) the purchasing

corporation [was] a mere continuation of the seller, or (4) the transfer of assets to the purchaser

[was] for the fraudulent purpose of escaping liability for the seller’s debts.” Alad, 19 Cal.3d at 28. 

In its moving papers, New National establishes that none of these traditional exceptions apply here,

and Calhoun does not argue to the contrary in its opposition. Accordingly, the only issue is whether

the “new” exception announced by the Alad court to the general rule of non-liability is available to

Calhoun under the circumstances here.

The “new” exception of Alad allows a plaintiff to pursue a tort claim of strict liability against

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 4 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

a successor manufacturer where justified by “(1) the virtual destruction of the plaintiff's remedies

against the original manufacturer caused by the successor’s acquisition of the business, (2) the

successor’s ability to assume the original manufacturer’s risk-spreading role, and (3) the fairness of

requiring the successor to assume a responsibility for defective products that was a burden

necessarily attached to the original manufacturer’s good will being enjoyed by the successor in the

continued operation of the business.”Id. at 31. In creating this exception, the Alad court emphasized

the “‘paramount policy to be promoted by the rule [of strict liability] is the protection of otherwise

defenseless victims of manufacturing defects and the spreading throughout society of the cost of

compensating them.’” Id. (quoting Price v. Shell Oil Co. 2 Cal.3d 245, 251 (1970), emphasis added

by Alad court.)

Here, with one important exception, all of the factors considered by the Alad court appear to

be present–New National is continuing to trade on the goodwill of Old National; only New National

is in a position to bear the risks created by the products that were sold to create that goodwill; and

even though New National is not a “mere continuation” of Old National in a legal sense, it presents

itself to the public very much as the legacy of Old National’s century-old business. Nevertheless,

one distinction between this case and Alad is critical; Old National was insolvent before New

National (or NMC Acquisition) came into existence and acquired its assets. Thus, New National

argues, the destruction of remedies against Old National was not caused by anything New National

did in acquiring the assets, but by Old National’s pre-existing failure to be in a position to continue

operating as a going concern.

“A causal element has been firmly established in California jurisprudence in the

interpretation of Alad by the Courts of Appeal.” Stewart v. Telex Communications, Inc., 1

Cal.App.4th 190, 198 (1991). Even though “this causation requirement is not a strict one, and

sufficient causation will be found as long as the successor played some role in curtailing or

destroying plaintiff's remedies,” id., the law appears settled that a bankruptcy is sufficient to break

the chain of causation, absent a showing of subterfuge. Id. at 200. In such cases, not only is it

apparent that the loss of a plaintiff’s remedies resulted from the bankruptcy rather from conduct by

the successor, permitting the Alad exception would give the plaintiff “a ‘windfall defendant’ who

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 5 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

would not otherwise be available” and put the plaintiff in a better position than he or she was prior

to the acquisition. Id.

In this case, of course, Old National never entered actual bankruptcy proceedings. The

circumstances of Old National’s insolvency, however, are not in material dispute. Calhoun cannot

show that he still had any meaningful remedy against Old National prior to the acquisition. 

Although Calhoun argues that Stewart and similar cases are distinguishable on the grounds that no

actual bankruptcy proceedings were held here, neither logic nor good policy would support a rule

that protects successors who purchase assets in bankruptcy proceedings but not parties who acquire

assets in regularly-conducted public foreclosure sales without resort to court intervention. In either

situation, of course, a successor who has played some role in causing or creating the financial

difficulties of the original company will not automatically be entitled to take the assets without

incurring potential liability under the Alad exception. See, e.g. Kaminski v. Western McArthur Co.,

175 Cal.App.3d 445 (1985) (finding Alad liability where successor had exercised operational control

over predecessor during period business was failing.) Calhoun has not shown, however, any

evidence that such circumstances existed here.

Finally, Calhoun offers a more nuanced distinction suggesting that regardless of whether the

asset purchase occurred inside or outside the context of an actual bankruptcy, the critical inquiry is

the identity of the party that brings about the ultimate disposal of the assets--and that the underlying

insolvency, and the causes of that insolvency, are largely or wholly irrelevant. Thus, Calhoun

concedes that if Old National’s original creditors had foreclosed and caused the public sale at which

New National, a third party, had been the successful bidder, there would be no basis for liability

even though there was no bankruptcy proceeding. Nevertheless, Calhoun argues, because it was

New National, not the original lenders, that actually foreclosed, responsibility for “causing” the

destruction of plaintiff’s remedies can be reasonably ascribed to New National.

As Calhoun recognizes, this argument turns on a premise that despite Old National’s

undisputed insolvency, Calhoun retained a legally significant chance of obtaining a collectible

judgment against it until the asset sale was consummated. The parties have cited no cases, and the

Court has discovered none, with sufficiently similar facts or with sufficient discussion of what

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 6 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

constitutes the destruction of a plaintiff’s remedies to provide clear guidance as to what the result

should be here.

In the abstract, Calhoun has a valid point: mere insolvency does not necessarily mean that a

company will be forever judgment-proof; had the asset sale not gone forward, there was at least a

theoretical possibility that Calhoun could have someday enforced a monetary judgment against Old

National. For that reason, it would be unwise to create a bright-line rule that there is no liability

under Alad once the successor proves that the original company became insolvent for reasons

unrelated to any conduct of the successor.

Nevertheless, deeming the insolvency of a company wholly irrelevant to the analysis would

also be unjustified. While an asset sale might sometimes be seen as the final nail in the coffin, that

does not mean that there is always a meaningful possibility of recovery before that nail is driven. A

rule of law that relied on the theoretical possibility, however remote or unlikely, that a company

might emerge from insolvency, without consideration of the actual circumstances, would more often

than not create a “windfall defendant.”

Here, the facts regarding the nature and severity of Old National’s insolvency are undisputed. 

Calhoun has not shown, and cannot show, that there are any facts suggesting that he had any

meaningful chance of recovering against Old National prior to the asset sale, or that such a chance

would have arisen had the asset sale not gone forward. Rather, Calhoun seeks to create a legal

presumption that his remedies were not fully and finally destroyed until New National forced the

foreclosure sale. Such a presumption, however, would ignore reality and create a windfall defendant

out of a party that indisputably did not cause Old National’s insolvency. 

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 7 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT 

C 05-03287 RS 

8

V. CONCLUSION

For the reasons set forth above, and based on the entire record herein, defendant’s motion for

summary judgment is granted.

IT IS SO ORDERED.

Dated: June 7, 2006 

RICHARD SEEBORG

United States Magistrate Judge

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 8 of 9
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT 

C 05-03287 RS 

9

THIS IS TO CERTIFY THAT NOTICE OF THIS ORDER HAS BEEN GIVEN TO:

John P. Cardosi jcardosi@diemerwhitman.com

Sharon Lynn Hightower shightower@eakdl.com,

Daniel E Morrison dmorrison@sachnoff.com, aprice@sachnoff.com; wbrown@sachnoff.com

Jeffrey B. Whitt jwhitt@sachnoff.com

Counsel are responsible for distributing copies of this document to co-counsel who have not

registered for e-filing under the Court's CM/ECF program. 

Dated: June 7, 2006 Chambers of Judge Richard Seeborg

By: /s/ BAK 

Case 5:05-cv-03287-RS Document 48 Filed 06/07/06 Page 9 of 9