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Court Of Appeal Finds No Successor Liability Following Purchase Of Assets

Buyers of assets typically like to pick and choose the assets and liabilities that they will acquire.  In general, the law permits this.  Thus, a corporation that purchases the principal assets of another corporation, will not assume the seller’s liabilities unless:

  • there is an express or implied agreement of assumption,

  • the transaction amounts to a consolidation or merger of the two corporations,

  • the purchasing corporation is a mere continuation of the seller, or

  • the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller’s debts.

Ray v. Alad Corp., 19 Cal. 3d 22, 28 (1977).  The Supreme Court in Alad established an exception to foregoing exceptions.  Thus, a corporation that purchases the assets of a manufacturing business assumes the seller’s liabilities for a defective product when all of the following elements are established:

  • the plaintiff’s remedies against the seller are virtually destroyed by the buyer’s acquisition of the business;

  • the buyer has the ability to assume the seller’s risk-spreading role; and

  • it is fair to require the buyer to assume responsibility for the defective products as a burden necessarily attached to the seller’s goodwill, which the buyer enjoys in the continued operation of the business.

19 Cal. 3d at 31. 

In an opinion published yesterday, the Court of Appeal applied these elements to find that a buyer of the assets of a car rental business was not liable as a successor under Alad.  Hernandez v. Enterprise Rent-a-Car Co., 2019 Cal. App. LEXIS 618.  In reaching this conclusion, the Court found that the first prong of the Alad exception was not met because the seller continued to exist until it was merged into another company (not the buyer). 

The facts of this case are more complicated than the typical asset purchase transaction and those interested in the subject should read the entire opinion carefully.  Further, the Court of Appeal's opinion may not prove to be the last word.  In a lengthy dissent, Justice Jon B. Streeter, expressly invites the Supreme Court's attention "if not in this case in some future case".

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...