Contact us with your California corporate & securities law questions (949) 353-6347 or Contact us here

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".

Share on:

Mergers & Acquisitions

ANY QUESTIONS REGARDING CALIFORNIA CORPORATE AND SECURITIES LAW? CONTACT US DIRECTLY

We offer expert advice with the intricacies of California law.

Our years of experience and expertise allow us to help clients navigate the business laws in California.

CONTACT US

Get the latest news and analysis about California Corporate & Securities law. Subscribe to our newsletter today!

We respect your email privacy

ABOUT OUR AUTHOR

30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
Partner at Allen Matkins
(949) 353-6328
 Contact me
Learn More About Keith

RECOGNITION

NationalLawReview

badge-author-large

nominee-badge

Get the latest news and analysis about California Corporate & Securities law. Subscribe to our newsletter today!

We respect your email privacy

CATEGORIES

see all

YOUTUBE

FACEBOOK