Legislature(2001 - 2002)

05/04/2002 09:05 AM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                                                              
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                                                              
     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                                                                         
     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                                                              
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.                                                                                            

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