Legislature(2001 - 2002)
05/04/2002 09:05 AM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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
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.
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