Hernandez v. Enterprise Rent-a-Car Co., 2019 Cal. App. LEXIS 618
In Hernandez v. Enterprise Rent-a-Car Co., the California Court of Appeal, First Appellate District, affirmed the trial court’s grant of summary judgment in favor of defendant, Enterprise Rent-a-Car, holding that Enterprise, as asset purchaser, was not liable as successor-in-interest (through two separate acquisition transactions, one non-bankruptcy and the other through bankruptcy) to a rental car company that had leased and then sold a vehicle subsequently involved in a catastrophic accident.
In 2004, then 11-year old Janine Hernandez (“Hernandez”) was injured when the 1992 Oldsmobile in which she was a passenger was involved in a head-on collision with another automobile. In 2012, Hernandez sued Enterprise Rent-a-Car and its affiliates (collectively, “Enterprise”) to recover damages resulting from the accident, alleging a single cause of action for strict product liability on a successor liability theory. In 2017, the trial court granted Enterprise summary judgment on both the product liability and successor liability claims. The California Court of Appeal, First Appellate District (the “Court of Appeal”), affirmed the trial court’s decision on the ground of successor liability (and then declined to reach the product liability issue).
Hernandez alleged that the 1992 Oldsmobile involved in the 2004 accident was defective because it was not designed to be crashworthy. The Oldsmobile was manufactured by General Motors Corporation (“GM”). From May 1992 until February 1993, a rental car company called National Rental Car Systems (“NCRS”) used the Oldsmobile in its car rental business. In February 1993, NCRS sold the Oldsmobile to a private party. The Oldsmobile was resold in several more private sales and was privately owned when the 2004 accident occurred.
In 1995, NCRS sold the assets of its rental car business to NCR Acquisition. In 1996, NCRS (and its remaining non-car rental businesses) merged with GM. NCR Acquisition changed its name to National Car Rental Systems (“New NCRS”). In 2001, New NCRS declared bankruptcy. In 2003, an affiliate of Cerberus Capital Management L.P. (“Cerberus”) purchased the assets of New NCRS pursuant to a bankruptcy-court approved asset purchase agreement. The Court of Appeal’s decision does not describe how Enterprise acquired an interest in the New NCRS assets, but Enterprise, in its summary judgment motion, did not dispute Hernandez’s allegation that Enterprise was a joint owner of the assets acquired by Cerberus in 2003.
Hernandez claimed that NCRS would have been strictly liable for her damages because NCRS placed the Oldsmobile “into the stream of commerce,” and that Enterprise was strictly liable as a successor-in-interest of NCRS. The Court of Appeal held that the successor liability theory failed at the stages of both the asset sale from NCRS to New NCRS and the bankruptcy asset sale from New NCRS to Cerberus.
Under California law, when a corporation purchases the principal assets of another corporation, the purchaser generally does not assume the seller’s liabilities unless (1) there is an express or implied agreement of assumption, (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 for the seller’s debts. However, in Ray v. Alad Corp., 19 Cal.3d 22, 28 (1977) (“Alad”), the California Supreme Court carved out an exception that applies only in product liability cases. 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: (i) the plaintiff’s remedies against the seller are virtually destroyed by the purchaser’s acquisition of the business; (ii) the purchaser has the ability to assume the seller’s risk-spreading role; and (iii) it is fair to require the purchaser to assume responsibility for the defective products as a burden necessarily attached to the seller’s goodwill, which the purchaser enjoys in the continued operation of the business.
Analyzing the 1995 asset sale to New NCRS, the Court of Appeal held that Hernandez’s claims failed the first prong of the Alad test. After the asset sale, NCRS continued to exist as a viable corporate entity under a different name until it merged with GM in 1996. GM, as surviving corporation of the 1996 GM-NCRS merger, succeeded to NCRS’s liabilities. Thus, the asset sale did not destroy or diminish Hernandez’s remedies against NCRS.
Although its analysis of the 1995 asset sale sufficiently disposed of the case, the Court of Appeal nevertheless proceeded to analyze Cerberus’s 2003 asset purchase from New NCRS’s bankruptcy estate. The Court of Appeal, following several California cases, held that the first prong of Alad was not satisfied where the successor corporation bought assets from the bankruptcy estate and the purchaser did not cause the bankruptcy and there was no evidence that bankruptcy was a subterfuge to avoid the holding of Alad. The Court of Appeal held that the bankruptcy exception to Alad applied to the 2003 bankruptcy sale of New NCRS’s assets to Cerberus.
Hernandez argued that the 2003 bankruptcy sale of New NCRS’s assets did not eliminate successor liability based upon claims, such as her 2004 accident, that had not arisen at the time of the sale. The Court of Appeal rejected this argument. While a federal bankruptcy court lacked jurisdiction over claims unknown and unidentified at the time of the bankruptcy, federal bankruptcy law did not affect the California-law rule that successor liability under Alad does not reach a purchaser who purchases assets out of a bankruptcy estate.
In a lengthy dissent, Justice Jon B. Streeter held that the product liability and successor liability questions both deserved the attention of the California Supreme Court, “if not in this case in some future case.”
Article courtesy of David Simonds (Hogan Lovells) and Edward McNeilly (Skagit Law Group).