Opinion ID: 374817
Heading Depth: 2
Heading Rank: 4

Heading: De Facto Merger and Goodwill Liability

Text: 31 Gee argues that Tenneco's liability as a successor corporation can be further established, apart from the Plan of Reorganization, as a matter of law under applicable California decisions dealing with successorship liability in products liability actions. There appears to be no issue of fact raised, and we review here strictly on the issue whether Tenneco was entitled to judgment as a matter of law. To the extent that the judgment below may have been based upon Gee's failure to establish liability on this basis, we affirm. 32 Two recent California appellate decisions supply the applicable principles of law. In Ray v. Alad Corp., 19 Cal.3d 22, 560 P.2d 3, 136 Cal.Rptr. 574 (1977), the California Supreme Court considered the question of the liability of a successor corporation for the negligently manufactured product of its predecessor. Rawlings v. D. M. Oliver, Inc., 97 Cal.App.3d 890, 159 Cal.Rptr. 119 (1979), a California Court of Appeal decision, further amplified the doctrines set forth in Ray v. Alad Corp., supra. 33 California applies the general rule that a corporation which purchases the principal assets of another does not assume the liability of the selling corporation unless (1) there is an express or implied agreement of assumption of liability, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability. Ray v. Alad Corp., supra, 136 Cal.Rptr. at 578, 560 P.2d at 7. In Ray v. Alad Corp., the California Supreme Court created, in effect, a fifth exception to the general rule which imposes liability under certain circumstances for the manufacture of defective products. 34 The facts of Ray v. Alad Corp. are critical to its understanding. The plaintiff there was injured while using a defective ladder manufactured by the first Alad Corp. (Alad I). Prior to plaintiff's injury, Alad I had sold its inventory, equipment, trade name and goodwill to the Lighting Maintenance Corporation, which then took the name Alad Corporation (Alad II). Alad I dissolved shortly thereafter. Alad II, as a result of the transaction, acquired Alad I's plant, machinery, offices, and all other assets necessary to continue the manufacture of Alad ladders. Alad II, using essentially the same factory and office personnel, continued to manufacture the identical model of ladder which had injured the plaintiff. There was little or no indication to the general public that a different entity was manufacturing the line of ladders. 35 In determining that liability should be imposed upon Alad II for the plaintiff's injuries, the California Supreme Court focused upon three factors: (1) the destruction of plaintiff's remedies against the original manufacturer, (2) the successor's ability to assume the original manufacturer's risk-spreading role, and (3) the fairness of requiring the successor to assume responsibility for the predecessor's defective products because the burden necessarily runs with the successor's enjoyment of the predecessor's goodwill. 136 Cal.Rptr. 574, 560 P.2d 3, 9. The rationale of Ray v. Alad Corp. is consistent with California's strict liability policy of assigning responsibility for injuries arising from the manufacture of defective products to the enterprise which has received the benefit of doing business in a particular line of products, and which is in the best position to spread the cost of the injury among members of society. See generally Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 377 P.2d 897, 27 Cal.Rptr. 697 (1963). 36 The California Court of Appeal has broadened the Ray v. Alad Corp. rule of successorship liability somewhat in Rawlings v. D. M. Oliver, Inc., supra. The defendant corporation in Rawlings had purchased the assets and trade name of a corporation which had manufactured industrial kelp dryers according to the customer's specifications. Because the dryers were a more or less customized product, the predecessor had ceased to manufacture that precise line of product. When the successor purchased the predecessor's plant, it continued the same general line of business. The Rawlings court found that failure to continue manufacturing the identical product did not remove the case from the Ray v. Alad Corp. rule and imposed liability upon the successor when an employee of the customer who had purchased the dryers from the predecessor was injured while operating one on the job. The court justified successorship liability by noting the following factors: 37 Oliver bought a going business including its good will and continued that business at the same location under the same fictitious name as its predecessor. Where one takes the benefit one ordinarily should bear the burden. . . . Oliver, unlike plaintiff, was in a position to protect itself from loss by expressly providing for that risk in the bargain it made with sellers. Even now, by cross-complaining for indemnity, Oliver can transfer the economic burden to the responsible party. 38 97 Cal.App.3d 890, 901, 159 Cal.Rptr. 119, 124. It should also be noted that Rawlings came on appeal from the granting of summary judgment in favor of defendant, and that defendant's allegation that the particular product line was no longer being manufactured was not supported by the record. Id. 39 Our analysis here is again restrained by application of the clearly wrong standard to the district judge's interpretation of the law of the state in which he sits. After careful consideration of Ray v. Alad Corp. and Rawlings v. D. M. Oliver, we cannot say that the district court was clearly wrong in concluding that, under California law, Tenneco was entitled to judgment on this issue. 40 Though Rawlings makes clear that continuation of the precise product line is not an absolute prerequisite to liability under the Alad Corp. exception, it does not alter Alad's fundamental requirement that the successor receive the benefit of the continuation of the predecessor's business and goodwill. In this case, HDN received the benefit of Heyden's general goodwill, but did not receive the benefit of any accrued goodwill in any line of business related to the sale of Thorotrast. Not only had Heyden ceased the manufacture of Thorotrast and sold the right to manufacture that product to a third party, it had also sold off the entire division which manufactured related products. The district judge would not have been clearly wrong in determining that a California court would find the imposition of liability upon Tenneco fundamentally unfair under these circumstances. Our view of the ideal result in this case is irrelevant. 41 Gee has also urged that the 1963 transaction constituted a de facto merger under dicta found in Ray v. Alad Corp. In determining that Alad II's purchase of Alad I's assets and goodwill did not amount to a consolidation or merger so as to invoke that exception to the general rule of no successorship liability, the court in Alad made the following observation: 42 This exception has been invoked where one corporation takes all of another's assets without providing any consideration that could be made available to meet claims of the other's creditors . . . or where the consideration consists wholly of shares of the purchaser's stock which are promptly distributed to the seller's shareholders in conjunction with the seller's liquidation (Shannon v. Samuel Langston Company (W.D.Mich.1974), 379 F.Supp. 797, 801). 43 136 Cal.Rptr. 574, 578, 560 P.2d 3, 7. 44 According to the Recitals preceding the body of the Plan of Reorganization, the sole consideration for HDN's purchase of Heyden's assets was the delivery of shares of common stock in Tennessee Gas Transmission to Heyden for immediate distribution to the shareholders of Heyden. It would appear that the transaction falls within the de facto merger doctrine. If such is the law of California, then summary judgment was improperly granted on this point. 45 The reference in Alad Corp. to the rule in Shannon v. Samuel Langston can fairly be characterized as dicta. The rule is quoted merely to exemplify the type of showing which had been required in other jurisdictions to prove a de facto merger or consolidation. The discussion then proceeds to the adequacy of consideration involved in the Alad Corp. transaction. We have been referred to no other California cases dealing with a de facto merger and the question of stock in the purchasing corporation as sole consideration for the assets of the acquired corporation. 46 We reiterate that we overturn the district judge's interpretation of state law only if it is clearly wrong. Our interpretation of state law, were we to sit de novo, has no bearing on the disposition of this issue. 47 While the de facto merger rule cited in Alad Corp. possibly represents the majority trend, it is by no means universally accepted. See 15 Fletcher, Cyclopedia of the Law of Private Corporations § 7127 (rev. perm. ed. 1973), and cases cited therein. The rule represents a policy determination that where the shareholders of the acquired corporation receive shares in the acquiring corporation, the practical effect as if the corporations have merged, and that liability should be apportioned accordingly. 48 We heed the general principle that well-considered dicta  should be considered in determining the law of the forum state. We do not, however, find that the offhand reference to Shannon in Alad requires that we hold the district judge's contrary view to be clearly wrong. Had Alad presented us with a more thoughtful consideration of the question and a stronger indication of how a California court would lean, we might be persuaded otherwise. Keeping in mind our standard of review, however, we affirm the granting of summary judgment on this issue.