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Hernandez v. Enterprise Rent-A-Car Company of San Francisco

California Court of Appeals, First District, Fourth Division

July 8, 2019

JANINE HERNANDEZ, Plaintiff and Appellant,
v.
ENTERPRISE RENT-A-CAR COMPANY OF SAN FRANCISCO et al., Defendants and Respondents.

          San Mateo County Superior Court Super. Ct. No. CIV518068 Hon. Richard H. DuBois, Trial Judge.

          Counsel for Appellant: Law Offices of Carcione, Cattermole, Dolinski, Stucky, Markowitz & Carcione, Joseph W. Carcione, Jr., Aaron B. Markowitz and Joshua S. Markowitz for Appellant

          Counsel for Respondents: Crowell & Moring, Douglas W. Sullivan and Rebecca M. Suarez; Yukevich Cavanaugh, James. J. Yukevich and Delmar S. Thomas for Respondents

          TUCHER, J.

         In 2004, Janine Hernandez was a passenger in a 1992 Oldsmobile Cutlass that was involved in a head-on collision with another car. Hernandez, who was 11 years old at the time, was seriously injured. In 2012, she filed this action against Enterprise Rent-A-Car and its affiliates (Enterprise) to recover damages resulting from the car accident, alleging a single cause of action for strict products liability. In 2017, the trial court granted Enterprise summary judgment. Because Enterprise did not succeed to whatever liability for this accident a different car rental company might have had, we affirm.

         FACTUAL AND PROCEDURAL BACKGROUND

         Hernandez contends the 1992 Oldsmobile Cutlass involved in her 2004 accident was defective because it was not designed to be crashworthy. Specifically, she alleges that the Oldsmobile did not provide adequate protection to children riding in the back seat when the vehicle was involved in a frontal collision. Hernandez does not here attempt to hold the product manufacturer liable for this alleged defect. Instead, she contends that a rental car company called National Car Rental Systems (NCRS) would have been strictly liable for her damages because NCRS placed the Oldsmobile “into the stream of commerce, ” and that Enterprise is strictly liable as a successor in interest of NCRS.

         Although Hernandez filed this action in 2012, the case was stayed for several years while she litigated an identical legal claim against other alleged affiliates of NCRS in San Joaquin County. Following a defense judgment in the San Joaquin County case, Hernandez amended her pleading in this case, filing her operative second amended complaint on March 17, 2016.

         In April 2017, Enterprise moved for summary judgment. The motion was supported by evidence establishing the following facts about the ownership history of the Oldsmobile involved in Hernandez's accident: The car was manufactured by General Motors Corporation. From May 1992 until February 1993, NCRS used the Oldsmobile in its car rental business. On February 26, 1993, NCRS transferred ownership of the Oldsmobile to a married couple (the S. family). The Oldsmobile was transferred to another private party in 2000 and again in February 2004.

         The summary judgment evidence also established the following facts about NCRS: In 1995, NCRS sold the assets of its rental car business to NCR Acquisition. NCRS then changed its name to GM National Holding Co. and in 1996 merged with General Motors Corporation. Meanwhile, NCR Acquisition changed its name to National Car Rental Systems (New NCRS). In 2001, New NCRS declared bankruptcy. In 2003, Cerberus Capital Management L.P. purchased the assets of New NCRS pursuant to an “Asset Purchase Agreement” that was approved by the bankruptcy court.

         According to Hernandez's complaint, Enterprise is a joint owner of the assets of the NCRS rental car business that were purchased by Cerberus in 2003. Enterprise did not dispute this allegation in its summary judgment motion.

         In July 2017, the trial court granted Enterprise summary judgment, finding that Hernandez could not hold Enterprise strictly liable for damages allegedly caused by the defective Oldsmobile for two reasons. First, as a lessor of the vehicle, the original NCRS was strictly liable for a lessee's damages resulting from a product defect, but its exposure to strict liability ended when it sold the Oldsmobile to the S. family as a used car. Second, even if NCRS retained strict liability for the defective Oldsmobile, that liability cannot be traced to Enterprise.

         DISCUSSION

         Summary judgment may be granted “if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c); Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850 (Aguilar).) “We review a trial court's grant of summary judgment de novo. [Citation.] ‘[T]he party moving for summary judgment bears an initial burden of production to make a prima facie showing of the nonexistence of any triable issue of material fact; if he carries his burden of production, he causes a shift, and the opposing party is then subjected to a burden of production of his own to make a prima facie showing of the existence of a triable issue of material fact.' ” (Casey v. Perini Corp. (2012) 206 Cal.App.4th 1222, 1228.)

         Hernandez contends that summary judgment of her case must be reversed because there are triable issues regarding (1) NCRS's strict liability for alleged defects in the Oldsmobile, and (2) Enterprise's liability as a successor of NCRS. We question whether Enterprise has established, as a matter of law, that NCRS was not strictly liable for defects in the 1992 Oldsmobile after it sold the vehicle. However, we need not resolve those difficult issues because the summary judgment evidence establishes no triable issue on the second ground upon which summary judgment was granted, regarding Enterprise's liability as a successor of the original NCRS.

         Even if NCRS would have been strictly liable for a defect in the 1992 Oldsmobile, Hernandez has to establish that Enterprise acquired successor liability for the alleged defect. Hernandez argues she can make this showing by establishing that (1) New NCRS became strictly liable for the product defect in the Oldsmobile when it acquired the assets of NCRS, and then (2) the Cerberus entities became strictly liable for that defect when they purchased the assets of New NCRS out of bankruptcy. We conclude this successor liability theory fails as a matter of law on both of these points.

         I. Successor Liability Principles

         Under generally accepted rules, when a corporation purchases the principal assets of another corporation, “the purchaser 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.” (Ray v. Alad Corp. (1977) 19 Cal.3d 22, 28 (Alad).)

         In Alad, the Supreme Court carved out an exception to these traditional rules by establishing a three-prong test for plaintiffs in product liability cases to hold a successor to a manufacturer strictly liable for the plaintiff's injuries. (Alad, supra, 19 Cal.3d at pp. 30-31.) Under the Alad test, 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: (1) the plaintiff's remedies against the seller are virtually destroyed by the purchaser's acquisition of the business; (2) the purchaser has the ability to assume the seller's risk-spreading role; and (3) 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. (Ibid.)

         Though originally applied to a product manufacturer, the Alad test is now used to determine successor liability for other entities that participated in the production and distribution of a defective product. (Kaminski v. Western MacArthur Co. (1985) 175 Cal.App.3d 445, 453-454 (Kaminski); Phillips v. Cooper Laboratories (1989) 215 Cal.App.3d 1648, 1654 (Phillips).) Given the policies underlying strict liability, “[w]hen a distributor or retailer acquires a corporation and takes advantage of its goodwill and other corporate assets and facilities to inject the predecessor's product line into the stream of commerce, it continues ‘the overall producing and marketing enterprise that should bear the cost of injuries resulting from defective products.' ” (Kaminski at p. 456.) Courts applying this test have emphasized that the successor does not have to cause the destruction of the plaintiff's remedies before it will be held liable, as long as there is a causal connection between the successor's acquisition and the unavailability of the predecessor as a potential defendant. (Stewart v. Telex Communications, Inc. (1991) 1 Cal.App.4th 190, 198-199 (Stewart); Kaminski, supra, 175 Cal.App.3d at p. 458.)

         II. Analysis of Asset Sale to New NCRS

         The summary judgment evidence shows that after NCRS sold its principal assets to New NCRS in 1995, NCRS continued to exist as a legal entity under a different name until it merged with General Motors in 1996. Thus, the asset sale did not destroy or diminish Hernandez's remedies against NCRS. If NCRS was strictly liable for the allegedly defective 1992 Oldsmobile, that liability was assumed by General Motors, not by New NCRS.

         Evidence establishing these facts includes documents pertaining to the 1995 sale of the assets of NCRS to New NCRS, which were produced during a demurrer proceeding and are included in Appellant's Appendix.[1] Excerpts from a Form 10-K/A and a Form 8-K that General Motors filed with the Securities and Exchange Commission (SEC) describe a sale of substantially all of the operating assets of its subsidiary NCRS, a transfer of “certain liabilities” to the entity that later became New NCRS, and the retention of responsibility by General Motors for the sale and liquidation of NCRS's remaining assets and considerable liabilities that were not sold to New NCRS. The record also documents the name change of NCRS and its merger into General Motors in 1996. In light of this evidence, Hernandez conceded during discovery and during the summary judgment proceeding that, after NCRS sold its car rental business and changed its name to GM National Holding Co., it merged with General Motors.

         As a result of this two-part transaction, well-settled principles of successor liability establish General Motors as the corporation that succeeds to NCRS's strict liability for defective products. General Motors succeeds to NCRS's liabilities because when a corporation merges with its subsidiary, the surviving corporation succeeds to the erstwhile subsidiary's liabilities, even if the operating assets of the subsidiary have been transferred elsewhere. (Petrini v. Mohasco Corp. (1996) 61 Cal.App.4th 1091, 1098 (Petrini).) For example, in Petrini defendant Mohasco Corporation owned a wholly-owned subsidiary that made floor tiles containing asbestos. (Id. at p. 1093.) Deciding to liquidate this subsidiary, Mohasco caused its floor tile business to be sold to unrelated third parties. (Ibid.) When little more than a corporate shell remained of the subsidiary, Mohasco merged with it, becoming responsible for its liabilities. (Id. at pp. 1093, 1098.) As our colleagues in Division Two explained, “The surviving corporation under a statutory merger is responsible for the liabilities of the merged corporation under both common law and statute, ” including liabilities unknown at the time of the merger such as Mr. Petrini's later-manifesting mesothelioma. (Id. at pp. 1098-1099.) Here, General Motors stands in the same position as did Mohasco; having sold off the operating business of its NCRS subsidiary and then merging with what remained of NCRS, General Motors succeeds to NCRS's liabilities, including any strict liability for Hernandez's accident.

         Because General Motors succeeds to NCRS's liabilities, New NCRS does not. This is a straight-forward application of Alad, which requires, as its first condition for imposing successor liability on the purchaser of a product line, a “virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business.” (Alad, supra, 19 Cal.3d at p. 31.) The first prong of the Alad test is not met here, where New NCRS's acquisition of the car rental business did nothing to destroy or impair plaintiff's remedies against the original NCRS. The transfer of assets to New NCRS did not prevent Hernandez from seeking recourse against General Motors, so Alad's special rule for successor liability in product-line cases does not impose liability on New NCRS. (See Phillips, supra, 215 Cal.App.3d 1648; Kline v. Johns-Manville (9th Cir. 1984) 745 F.2d 1217 (Kline).)

         The facts of Phillips are somewhat convoluted but offer an instructive parallel. Ms. Phillips and her husband attempted to sue a company (Cooper Laboratories, Inc.) that succeeded to the liabilities of a company (SMP-NY) that had purchased, for adequate consideration, a fertility drug distribution business from E.S. Miller Laboratories, Inc. (Miller). (Phillips, supra, 215 Cal.App.3d at pp. 1652, 1655.) Miller and SMP-NY were both subsidiaries of Nestle, and after Miller sold the drug distribution business to SMP-NY, Miller continued as a profitable subsidiary, running warehouse operations for a decade until Nestle dissolved it. (Id. at p. 1658.) When plaintiffs sought to hold Cooper strictly liable for injuries allegedly suffered as a result of Ms. Phillips having ingested Miller's fertility drug, they failed. Cooper was not liable under Alad because the transfer of the drug distribution business from Miller to SMP-NY did not cause “ ‘the virtual destruction of the [Phillipses'] remedies against' ” Miller. (Id. at p. 1657.) Miller had “continued as a separate viable corporate entity” and in the ensuing decade “was more profitable as a warehouse operation than it had been as a pharmaceutical operation.” (Id. at p. 1658.) So, here, NCRS continued as a viable corporate entity after the sale of its car rental business, until its assets and liabilities were assumed by merger with General Motors. Nothing about the sale of its assets to New NCRS inhibited, let alone destroyed, Hernandez's remedies against NCRS, as she could have proceeded against NCRS or, after the merger, against General Motors for years after the sale to New NCRS.

         Our dissenting colleague discounts evidence tracing successor liability for NCRS to General Motors, positing that corporate successorship liability may fall simultaneously on two companies if both have a sufficient relationship to the predecessor corporation. (Dissent, p. 17.) We think this theory is inconsistent with the first requirement of Alad, that one who buys the assets and continues the operations of a business will be strictly liable for previously-sold products only if the purchaser's acquisition effectively destroyed the plaintiff's remedies against the seller. (Alad, supra, 19 Cal.3d at pp. 30-31.) The evidence that General Motors's spin-off of NCRS's car rental business did not impair Hernandez's remedies against NCRS is therefore dispositive of her effort to hold the unrelated acquiring company liable for her accident.

         The Kaminski case on which the dissent relies is not to the contrary. The Kaminskis alleged injury as a result of asbestos supplied by, among others, a defunct corporation called Western Asbestos, and they sued in place of Western Asbestos a corporation named Western MacArthur that was carrying on Western Asbestos's business. (Kaminski, supra, 175 Cal.App.3d at pp. 451, 455.) Kaminski held that Western MacArthur was liable as a successor corporation because Western MacArthur's parent had used its “financial and managerial control” over Western Asbestos to “cause it to dissolve, ” thereby “extinguish[ing] the Kaminskis' remedies against Western [Asbestos].” (Id. at pp. 458-454.) These facts satisfied the “virtual destruction of plaintiff's remedies” prong of Alad, notwithstanding that the Kaminskis could (and did) also sue and settle with the other defendants who they alleged had manufactured or distributed asbestos that caused their harm. (Id. at pp. 450, 459.) “The presence of another legitimate target defendant” in a case alleging joint and several liability against multiple tortfeasors “does not defeat successor liability” under Alad, the Kaminski court held. (Id. at p. 459.) But Kaminski is distinguishable from Hernandez's case, where nobody relies on the existence of jointly and severally liable co-defendants to argue against successor liability for New NCRS. Here, unlike in Kaminski, the predecessor corporation did not dissolve but was merged into a successor, so that plaintiff's remedies against NCRS were not extinguished in the transaction.

         Hernandez herself has never argued that NCRS transferred liability for the Oldsmobile to more than one entity. To the contrary, she insists that New NCRS rather than General Motors acquired NCRS's strict liability for defects in the 1992 Oldsmobile, but she makes this argument without relying on the Alad test. Instead, Hernandez argues that summary judgment should not have been granted because Enterprise failed to discredit theories of successor liability pleaded in her complaint, which relied on traditional exceptions to the general rule of successor non-liability.

         The complaint alleges that Enterprise assumed strict liability for Hernandez's injuries because Enterprise “continued the business of NCRS, ” “merged with NCRS, ” and/or “assumed the liabilities of NCRS.” These legal theories are not fleshed out by any allegations of material fact, however, and Hernandez has abandoned any allegation that Enterprise or New NCRS merged with NCRS. She argues on appeal that (1) New NCRS was a mere continuation of Old NCRS, and (2) New NCRS expressly assumed the liabilities of Old NCRS. We reject both arguments.

         Hernandez's theory that New NCRS succeeded to NCRS's liabilities as a mere continuation of the prior company relies on the undisputed evidence that New NCRS continued to operate NCRS's rental car business after acquiring its assets. But more is required. To establish that an acquiring corporation is a mere continuation of the seller, a plaintiff must “demonstrate ‘(1) no adequate consideration was given for the predecessor corporation's assets and made available for meeting the claims of its unsecured creditors; [or] (2) one or more persons were officers directors, or stockholders of both corporations.' ” (CenterPoint Energy, Inc. v. Superior Court (2007) 157 Cal.App.4th 1101, 1121.) “[E]ven when the same persons are officers or directors of the two corporations, liability is not imposed on the acquiring corporation when recourse to the debtor corporation is available and the two corporations have separate identities.” (Beatrice Co. v. State Bd. of Equalization (1993) 6 Cal.4th 767, 778.)

         Here, the record establishes that recourse to NCRS and then its merger partner remained available, and the selling and acquiring companies were separate entities. According to General Motors's and New NCRS's SEC filings, New NCRS paid approximately $1.5 billion to acquire the assets of NCRS, a sum much larger than the net liabilities NCRS retained. More importantly, General Motors became responsible for the assets and liabilities not sold to New NCRS, and then merged with NCRS after the sale. Hernandez has neither alleged facts in her complaint nor introduced evidence in opposition to the motion for summary judgment that would create an issue of material fact as to either the corporate separateness of NCRS and New NCRS, or the adequacy of the resources available for meeting claims against NCRS after the sale of its operating assets to New NCRS.

         As for Hernandez's theory of express assumption, she has admitted in an interrogatory response that she does not have documentary evidence that New NCRS expressly assumed liability from NCRS for accidents such as hers. The same interrogatory response baldly asserts, without support or explanation, that Enterprise does have such documents, but the response goes on to admit that Hernandez sought the documents in discovery without success. For good measure, counsel for Enterprise represented to this Court at oral argument that his client does not have the transaction documents that show what liabilities New NCRS acquired along with the assets it purchased from NCRS. Hernandez's unsupported allegation that Enterprise has evidence that it insists it does not have does not detract from the force of her admission that, after pursuing relevant discovery, she still lacks evidence to establish that New NCRS expressly assumed NCRS's liability for this accident. A defendant satisfies its summary judgment burden by producing evidence of this kind of admission. (Aguilar, supra, 25 Cal.4th at p. 855.)

         Enterprise having carried its initial burden of producing evidence that New NCRS did not assume the liabilities of NCRS after it acquired the rental car business, the burden shifted to Hernandez to show a triable issue of material fact regarding the alleged successor liability of New NCRS. (Aguilar, supra, 25 Cal.4th at p. 853.) She did not carry that burden. This failure alone justifies affirming the trial court's grant of summary judgment, but we nevertheless turn to the second part of Hernandez's successor liability theory, purporting to trace strict liability from New NCRS to Enterprise.

         III. Analysis of Cerberus's Purchase Out of Bankruptcy Estate

         The summary judgment evidence shows that New NCRS went into bankruptcy in 2001 and that the Cerberus entities purchased assets from the New NCRS bankruptcy estate in 2003 pursuant to an agreement that was approved by the bankruptcy court. This evidence supports Enterprise's argument that it did not assume the alleged strict liability of New NCRS for a product defect in the 1992 Oldsmobile by acquiring the rental car business from New NCRS. If Hernandez's remedies against New NCRS were destroyed, that destruction was not caused by Cerberus's acquisition of the assets, but by the fact that New NCRS went into bankruptcy. (See Stewart, supra, 1 Cal.App.4th at pp. 196-200 [first element of Alad missing where successor corporation buys assets out of bankruptcy estate]; Nelson v. Tiffany Industries, Inc. (9th Cir. 1985) 778 F.2d 533, 537-538 [same]; Kline, supra, 745 F.2d at pp. 1219-1220 [Alad test not satisfied when asset sale was unrelated to subsequent bankruptcy].)

         The Stewart case illustrates the significance of a predecessor company's bankruptcy for successor liability under Alad. Stewart was horribly burned while installing an allegedly defective antenna manufactured, designed, and distributed by a company called Hy-Gain Electronics Corp. (Hy-Gain). (Stewart, supra, 1 Cal.App.4th at pp. 192-193.) By the time of the accident, Hy-Gain “had long since declared bankruptcy and gone out of business.” (Id. at p. 192.) The bankruptcy trustee had sold essentially all of Hy-Gain's assets-manufacturing facilities and equipment, inventory, designs, blueprints, patents, trademarks, customer lists, sales orders, and so on-to defendant Telex Communication's Inc. (Telex), which then continued to operate the antenna business and to sell the same model of antenna under the same trade name as the antenna that later injured Stewart. (Id. at pp. 193-195.) The Stewart court recognized that “the sole distinction between Alad and the present case is that ‘Telex purchased Hy-Gain assets through the intermediary of the bankruptcy courts[] rather than directly,' ” but it nonetheless held that Telex was not liable as Hy-Gain's successor. (Id. at pp. 196, 200.) It explained that without some showing that Telex played a role in causing the voluntary bankruptcy of Hy-Gain, or that the bankruptcy “was a mere subterfuge to avoid the holding of Alad, [] summary judgment was properly granted, as the Alad exception was inapplicable to Telex.” (Id. at p. 200.)

         Here, New NCRS's bankruptcy preceded by two years the sale of assets to the Cerberus entities, and there is no evidence that any successor to New NCRS's business line played a role in curtailing or destroying Hernandez's remedies against New NCRS. (Compare Kaminski, supra, 175 Cal.App.3d 445.) Thus, under the well-established rule of Stewart, the Alad exception to the general rule against successor liability does not apply to the transfer of assets from New NCRS to Cerberus.

         Hernandez contends there is a triable issue of material fact regarding the successor liability of Cerberus because, when the Cerberus entities purchased New NCRS's assets in 2003, they expressly assumed liability for product ...


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