Legislature(2001 - 2002)
05/04/2002 09:05 AM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 499-SUCCESSOR LIABILITY FOR PRODUCT LIABILITY CHAIRMAN STEVENS announced HB 499 to be up for consideration. REPRESENTATIVE ROKEBERG, sponsor, said this legislation in part overturns an Alaska Supreme Court case, at the invitation of the court that indicated they made their ruling because the Alaska Legislature never spoke on this issue - successor liability in tort cases of product liability, only. The issue before the legislature is, should the State of Alaska adopt the U.S. standard of "continuation of enterprise in successor liability tort cases," which has been dismissed by the overwhelming majority. Forty-six states expressly rejected in the current third restatement of torts which was the 1998 edition. HB 499 answers that question with a resounding 'no' by adopting the four exceptions to the general rule of successor liability, which is set forth in the third restatement of torts. This would make Alaska's law conform with the rest of the country. Section 2, (a)(4)(1),(2),(3) and (4) language are a direct quote out of the third restatement of tort, which provides that any time a successor should be liable for product liability is if you agreed to it, if there is a fraudulent conveyance, if there was a consolidation or merger and when the successor becomes a continuation of the predecessor or mirror continuation where ownership of the corporation is similar or the same as its succeeding business. The Supreme Court accepted the mirror continuation theory, but they also adopted the continuation of enterprise theory, which in his study of the issue, allows the court to do whatever they want to do in terms of applying liability. Justice Eastaugh said that he believed that the minority view could be adopted by the State of Alaska because there weren't any economic studies justifying that position otherwise. Almost all the other states in the Union rejected that theory and it's no wonder there are no economic studies. He went on to say that he felt the accumulated good will in any kind of a transaction should be adequate to cover any unforeseen future liabilities. He thought that was extraordinary. REPRESENTATIVE ROKEBERG said the retroactivity part of this bill is to an on-going court case. A Kenai District Court ruling was appealed to the Supreme Court to find out basically what the real law was in the State of Alaska and the ruling in this particular case came in the middle of the Cole Case that has been remanded back to the Kenai Superior Court. So, it becomes an issue of should the legislature insert itself in an existing on-going court case. In fact, by the Supreme Court adopting a standard or a rule that doesn't conform to the rest of country and apply it to something already happened, the Supreme Court is retroactively applying the standard. He submitted that the legislature has the same power and even the obligation to make sure the law of the land is the law of Alaska, also. Another aspect is that it's very clear that in a court case that hasn't reached its final conclusion going through the various levels of appeal, that there's no vested right to claim that there's a problem of the state getting involved with this. The final determination has not already occurred. So, it's clear in the law that unless there's a judgment that's been fully vested, that that's a property right. Statements have been made and you'll hear it that what the state is doing is an inverse condemnation. By passing this law, we'd be making a taking of this judgment. That's not true. What I find interesting as an old law school dropout is, and a student of constitutional law, is that the basic principle of that was articulated by Chief Justice John Marshal in 1801 in the Schooner Peggy Case…which said unless you had a vested right, it wasn't a taking. MR. TED PEASE of Burr, Pease and Kurtz, Counsel for Savage Arms, Inc., supported HB 499 in relation to their court case with Western Auto. This bill provides fairness and predictability [indisc.]. I think a recitation of [case between] Arms and Western Auto will make clear the unfairness of the Supreme Court's ruling and the devastating effect it has on companies like Savage Arms to purchase assets from another company and the find out they're subject to a code of liability for defective product manufactured by that other company, a liability that was unknown at the time of the sale. MR. PEASE gave the committee an outline of the relevant facts. On April 8, 1989 Kenai, a boy named Taylor was badly injured when a model 125, 22 caliber rifle malfunctioned. That gun was manufactured in 1982 by a company called Savage Industries, Inc. who had been making firearms for some time. Savage Industries sold the gun to Western Auto and sold it a purchaser in Maine in 1983 and then the gun went through a succession of owners and ended up in Kenai in the gun shop where it was purchased by the Taylor boy's father. On February 2, 1988, Savage Industries was in serious management trouble and filed for chapter 11 bankruptcy. This is before the accident ever happened. The accident occurred more than a year later. Savage Industries had gone bankrupt and had no insurance. In the meantime, following the chapter 11 filing, an international publicly traded corporation called Challenger became interested in purchasing a substantial portion of the assets of Savage and carrying on the gun manufacturing business. There is a subsidiary shop called Savage Arms, Inc. In the sale negotiated with Savage Industries and approved by the bankruptcy court, Savage Arms, Inc. purchased a large portion of the assets of Savage Industries. The assets purchase included the manufacturing plant in Massachusetts, the Savage name, the core product [indisc.], but not the model of the gun that injured the Taylor boy, and machinery. The sale concluded in November 1989 and Savage Arms thereafter manufactured and sold firearms under the Savage name and it continues to do so today. Now, at the time of the sale, no lawsuit had been filed and neither Savage Industries nor Savage Arms knew of the accident in Kenai. Over a year after that [indisc.], in December 1990, the plaintiff, Taylor, sued Savage Industries from Kenai. TAPE 02-28, SIDE B [SOME TESTIMONY WAS MISSED IN TURNING THE TAPE OVER] Western Auto is insured 100% by Allstate [indisc.] and Allstate defended Western Auto and ultimately settled with the plaintiff for $5.4 million in June 1995. Now, Allstate has brought Savage Arms into the litigation, claiming its entitled to recover the amount of its settlement with Taylor plus interest and costs, which now we're told approach $20 million and maybe more. They argue that Savage Arms was the successor in liability to Savage Industries, which was a gun manufacturer under this [indisc.] doctrine that has been almost universally rejected by those states which have considered it and which is not the law of Alaska and which has been criticized and rejected by the American Law Institute in its third restatement of torts product liability in section 12. The American Law Institute is a very prestigious group that's recognized by all the courts in the country as a leading authority on all kinds of laws. They do careful studies, collect data and come out with restatements, which the Alaska Supreme Court often sites and follows (usually). They didn't in this case. He said that none of the four generally accepted exceptions to the successor liability, which are adopted by the restatement really fit the case, making it difficult for Western Auto to recover indemnity from Savage Arms. So, Allstate urged this other discredited successor liability, called continuity of enterprise, which could make Savage Arms liable to Western Auto as a successor in liability to Savage Industries. Savage Arms was reviewed by the Alaska Supreme Court before it proceeded at Judge Link's, who stayed the proceedings, suggestion. The Supreme Court accepted the petition and on March 2001 handed down the decision that adopted the almost universally rejected and discredited doctrine of continuity enterprise and sent the case back to Judge Link for trial, which as set in Kenai for November 2002. HB 499 specifically disapproves and rejects the continuity of enterprise doctrine and makes it retroactive to apply to the pending case. There are two reasons. This is not accepted law in any state, including Alaska and it will make a more uniform standard for all companies who are in similar situations in the future. He cited a case in 1989 called Kichen v. United States that said: No person has a vested right in any rule of law entitling him to insist that it shall remain unchanged for his benefit. This is true after the suit has been filed and continues to be true until final unreveiwable judgment is obtained. MR. JIM POWELL, Attorney, said he represented Western Auto in front of Judge Link and he continues representing Allstate and underwriters who are the carriers for Western Auto and who made the ultimate payment to resolve the Kevin Taylor injury claim. He opposed HB 499 because it is special interest legislation designed to protect a group of Texas investors called Servico Partners, who before this bankruptcy controlled all the stock through their various corporations and have, since the bankruptcy, guaranteed the result to Savage Arms of any judgment, which is paying for this. They are attempting by virtue of this legislation to use the Alaska Legislature to relieve them of their obligation to pay for any liability coming out of the litigation in Kenai where Kevin Taylor was injured. He said the rifle was found, as a matter of law by Judge Link, to be defectively manufactured and fell apart in Kevin Taylor's hands, it spun like a baton and fell to the ground discharging a bullet into his temple causing him serious brain damage and substantial paralysis from the mid-chest down. Western Auto was the innocent retailer that sold the firearm without inspection and under Alaska law, retailers can't be held liable for the manufacturer's faults. When Servico Partners sold their interest to the current president of Savage Arms they guaranteed if there was a judgment of claim arising out of this incident, they would stand good for it, but now they are attempting to use the legislature to make good on its promises. Also, he said it is very rare for the legislature to pass any law that is retroactive. He thought it would raise constitutional questions and there might be a question of whether there is a taking by the state of that cause of action. 10:12 am SENATOR TORGERSON said the last statement in his memorandum states the potential liability on the part of the State of Alaska is $14.5 million and asked how he got from $5.4 to $14.5. MR. POWELL replied that it includes the cost of defense and the interest rate is 10.5% per annum. They have made settlement offers and offers of judgment to Savage for substantially less than the amount of the liability. "If we are successful in proving liability which exceeds those offers of judgment, the interest rate goes to 15.5% under the rules existing at that time." REPRESENTATIVE ROKEBERG objected to Mr. Powell's statement that this is special interest legislation. "This applies to anybody, any manufacturer." CHAIRMAN STEVENS said that the decision whether the legislature should be involved in a Supreme Court decision lies in the Judiciary Committee and it was his intent to move it there. SENATOR DAVIS moved to pass CSHB 499(JUD) with attached $0 fiscal note from committee with individual recommendations. There were no objections and it was so ordered.