Henkel Corp. v. Hartford Accident & Indemnity Co.

62 P.3d 69, 129 Cal. Rptr. 2d 828, 29 Cal. 4th 934

• Court: California Supreme Court
• Decided: February 5, 2003
• Docket: S098242
• Status: Published

Opinions

Opinion

KENNARD, J.

Through a series of agreements, plaintiff Henkel Corporation (Henkel) acquired the metallic chemical product line of Amchem Products, Inc. (Amchem No. I), ¹ and assumed all related liabilities. The question here is whether Henkel also acquired the benefits of the insurance policies issued by defendants to Amchem No. 1 to cover lawsuits based on injuries sustained during the policy period.

Finding no specific language in the agreements assigning policies or policy benefits to Henkel or its predecessor, and no document in which defendant insurers consented to any assignment, the trial court entered summary judgment for defendants. The Court of Appeal reversed. It reasoned that in the absence of explicit language disclaiming any assignment, the right to insurance benefits passed to Henkel as a matter of law without need for consent from the insurers.

We conclude that under the circumstances of this case any assignment of benefits does require the consent of the insurers, and therefore reverse the judgment of the Court of Appeal.

I. Summary of the Corporate Transactions

Amchem No. 1, a Pennsylvania coloration, had two distinct product lines: agricultural chemicals and metallic chemicals. The metallic chemicals, which help paint adhere to metal, were sold to car and airplane manufacturers, including Lockheed. Defendants insured both of Amchem No. l’s product lines.

In 1977, Union Carbide Corporation acquired Amchem No. 1 by stock purchase and merger. In 1979, Amchem No. 1, now a Union Carbide subsidiary, created a new corporation, also known as Amchem Products, Inc., but a Delaware corporation (Amchem No. 2). By resolution of its board of directors, Amchem No. 1 transferred “all of its right, title and interest. . . in and to its domestic assets utilized in its metalworking business” to Amchem No 2.

2 The board of directors of newly created Amchem No. 2 accepted the transfer from Amchem No. 1 of the “assets, liabilities and goodwill utilized in its metalworking chemical activities.” This transaction was a contract: the resolution of Amchem No. 1 ’s board of directors was an offer (see Dow v. River Farms Co. (1952) 110 Cal.App.2d 403 [243 P.2d 95]; Hoge v. Lava Cap Gold Mining Corp. (1942) 55 Cal.App.2d 176 [130 P.2d 470]) and the resolution of Amchem No. 2’s board of directors explicitly accepted that offer. Although the 1979 contract referred to “assets” and “liabilities,” it did not specify what assets were transferred to Amchem No. 2, or what liabilities were assumed.

After the 1979 contract, Amchem No. 1 (agricultural products) and Am-chem No. 2 (metallic chemicals) were separate subsidiaries of Union Carbide. In 1980, however, Union Carbide sold all of the stock of Amchem No. 2 to plaintiff Henkel. By acquiring the stock of Amchem No. 2, Henkel acquired all of its assets and liabilities. After Henkel purchased Amchem No. 2, these two corporations merged. In 1986, Union Carbide sold Amchem No. 1 to Rhone Poulenc, Inc.; these two companies merged in 1992. Thus, it is undisputed that Henkel has succeeded to all of the rights and obligations of Amchem No. 2, and Rhone Poulenc (now known as Aventis CropScience USA, Inc.) has succeeded to all of the rights and obligations of Amchem No. 1.

II. Background of This Litigation

In 1989, current and former Lockheed employees filed suit against Henkel and “Amchem Products, Inc.,” without distinguishing between Amchem No. 1 (in 1989 a Rhone Poulenc subsidiary) and Amchem No. 2 (which by 1989 had merged into Henkel). The suit alleged injuries arising from exposure to metallic chemicals during the period between 1959 and 1976. Henkel tendered its defense to defendant insurers, whose policies had insured Amchem No. 1 during portions of this period, and to Henkel’s own insurers. All refused coverage.

In 1992, the Lockheed plaintiffs served their complaint on Rhone Poulenc, named as “Amchem Products, Inc.” Rhone Poulenc moved to quash service. The Lockheed plaintiffs stipulated to the trial court’s granting Rhone Poulenc’s motion to quash. The stipulation states that the Lockheed plaintiffs “have been presented with documents establishing that Henkel Corporation is answerable for the liabilities of Amchem Products, Inc. alleged in the Lockheed Consolidated Cases. Accordingly, plaintiffs have no interest in asserting their claims against [Rhone Poulenc].”

In 1995, Henkel settled its suit with the Lockheed plaintiffs for $7.65 million. Defendants³ refused to contribute to the settlement. Henkel then filed this action for declaratory relief against defendants and Henkel’s own insurers. Defendants had Rhone Poulenc added as a necessary party.

In 1998, plaintiff Henkel, defendants, and Rhone Poulenc each filed motions for summary judgment. Because defendants had issued their insurance policies to Amchem No. 1—which no longer existed as an independent entity—the trial court’s first concern was to decide which party represented Amchem No. 1. The trial court ruled that Rhone Poulenc, not Henkel, was the corporate successor of Amchem No. 1 and was therefore the entity entitled to the protection of the liability policies defendant insurers had issued to Amchem No. 1.

Amchem No. 2 had assumed all the liabilities of Amchem No. 1 relating to the metallic chemical product line. Plaintiff Henkel then purchased all the stock of Amchem No. 2, which made Henkel responsible for all Amchem No. 2’s liabilities, including those inherited from Amchem No. 1. Henkel therefore argued in the trial court that even though it was not the corporate successor to Amchem No. 1, because it was responsible for Amchem No. 1 ’s liabilities relating to metallic chemicals as a matter of law, it should be entitled to the benefits of Amchem No. l’s liability insurance.

The trial court rejected Henkel’s argument. It found Henkel responsible for Amchem No. l’s torts, not as a matter of law, but because Henkel had voluntarily assumed that liability. The trial court also rejected Henkel’s contention that the 1979 contract, under which Amchem No. 2 acquired the assets and liabilities of Amchem No. l’s metallic chemical business, assigned to Amchem No. 2 the benefits of insurance coverage for those liabilities. Moreover, the court ruled that any such assignment would be void without defendant insurers’ consent. The trial court therefore entered summary judgment against Henkel.

The Court of Appeal reversed. Quoting Northern Ins. Co. of New York v. Allied Mut. Ins. (9th Cir. 1992) 955 F.2d 1353, 1357 (Northern Insurance), it held: The “ ‘right to indemnity followed the liability rather than the policy itself. As a result, even though the parties did not assign [the predecessor’s insurance] policy in the agreement, the right to indemnity under the policy transferred to [the successor corporation] by operation of law.’ ” (Italics omitted.) We granted petitions for review by Rhone Poulenc and defendants.

III. Henkel’s Liability for Injuries Caused by Amchem No. 1 Arises from Contract and Was Not Imposed by Operation of Law

Plaintiff Henkel here renews the argument made in the trial court that when it bought the metallic chemical product business (Amchem No. 2) from Union Carbide in 1980 it incurred liability as a matter of law for injuries caused by those products when they were being manufactured and distributed by Amchem No. 1. Because liability was imposed upon it as a matter of law, Henkel argues it should receive the benefits of Amchem No. l’s liability polices as a matter of law. (See Northern Insurance, supra, 955 F.2d at p. 1357.) Defendant insurers contend that the Ninth Circuit Court of Appeals’ 1992 decision in Northern Insurance was wrong, and that later California cases show that under California law product line tort liability does not include any right to the insurance coverage for the tort. (See General Accident Ins. Co. v. Superior Court (1997) 55 Cal.App.4th 1444 [64 Cal.Rptr.2d 781] (General Accident); Quemetco Inc. v. Pacific Automobile Ins. Co. (1994) 24 Cal.App.4th 494, 499-501 [29 Cal.Rptr.2d 627] (Quemetco).) We need not resolve this conflict, because the record shows that Henkel’s liability was not imposed involuntarily by law but assumed voluntarily by contract.

Henkel’s argument why it should be entitled to Amchem No. l’s insurance protection as a matter of law depends on a showing that Henkel’s tort liability was imposed upon it by law. Henkel has failed to make that showing. As we explain, there are three situations in which a buyer of corporate assets may be liable for the torts of its predecessor, notwithstanding the purchaser’s failure to assume liability by contract, but Henkel does not show that this case falls within any of these categories.

First, the buyer of corporate assets may be liable as a corporate successor if “[1] the transaction amounts to a consolidation or merger of the two corporations, [2] the purchasing corporation is a mere continuation of the seller, or [3] 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 [136 Cal.Rptr. 574, 560 P.2d 3]; Beatrice Co. v. State Bd. of Equalization (1993) 6 Cal.4th 767, 778 [25 Cal.Rptr.2d 438, 863 P.2d 683].) None of these circumstances is present here: Amchem No. 2 did not acquire Amchem No. l’s metallic chemical business by consolidation or merger. Amchem No. 2 was not a “mere continuation” of Amchem No. 1, because that doctrine does not apply “when recourse to the debtor corporation is available and the two corporations have separate identities.” (Beatrice Co. v. State Bd. of Equalization, supra, 6 Cal.4th at p. 778.) And there is no evidence that Amchem No. 1 sold its metallic chemical business to Amchem No. 2 to defraud its creditors.

Second, a company that acquires another company’s product line may be liable for injuries caused by its predecessor’s defective products, if certain conditions are met. One condition is “the virtual destruction of the plaintiffs remedies against the original manufacturer caused by the successor’s acquisition of the business.” (Ray v. Alad Corp., supra, 19 Cal.3d at p. 31.) That condition is not met here, because Amchem No. 1 continued to exist after its 1979 sale of the metallic chemical business to Amchem No. 2. Rhone Poulenc, as the 1986 corporate successor of Amchem No. 1, can respond in damages to any product defects suit based on toxic exposure occurring before the 1979 creation of Amchem No. 2. Moreover, even if Amchem No. 1 had dissolved after it transferred its metallic chemical operation to Am-chem No. 2, it could still be sued to permit a plaintiff to assert a claim against Amchem No. l’s liability policies. (Penasquitos, Inc. v. Superior Court (1991) 53 Cal.3d 1180 [283 Cal.Rptr. 135, 812 P.2d 154].) And there are no grounds for claiming that Amchem No. 1 was destroyed by the 1979 sale of its metallic chemical business to Amchem No. 2. (See Chaknova v. Wilbur-Ellis Co. (1999) 69 Cal.App.4th 962, 971 [81 Cal.Rptr.2d 871].)

Third, some statutes, notably the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9601 et seq.) (CERCLA), impose liability upon successor corporations without regard to contract. (SmithKline Beecham Corp. v. Rohm and Haas Co. (3d Cir. 1996) 89 F.3d 154, 163.) No such statute applies to this case.

Thus, Henkel, the buyer of Amchem No. 2, is not liable by operation of law for injuries caused by defective products marketed by Amchem No. 1. Amchem No. 2, however, assumed by contract the liabilities of Amchem No. 1 relating to the metallic chemical business. When Henkel later bought all the stock of Amchem No. 2, that transaction did not change the status of Amchem No. 2 as a legal entity, so Amchem No. 2 continued to be responsible for those liabilities. The later merger of Henkel and Amchem No. 2 left Henkel, as the surviving coiporation, responsible for the liabilities of Amchem No. 2, and through it those of Amchem No. 1 relating to the metallic chemical product line.

Amchem No. 2 also acquired the assets of Amchem No. 1 relating to the metallic chemical business, and it continued to own those assets after Henkel acquired all of Amchem No. 2’s stock. (See National American Ins. Co. v. Jamison Agency, Inc. (8th Cir. 1974) 501 F.2d 1125, 1127.) Henkel later acquired the assets of Amchem No. 2 by merger. Henkel’s rights to any insurance policy benefits, therefore, are those of Amchem No. 2, and depend on the terms of the 1979 contract by which Amchem No. 2 acquired the assets of Amchem No. 1.

Three Court of Appeal decisions, although distinguishable from the case here on other grounds, confirm that the rights of a successor corporation in a case such as this depend upon contract. Oliver Machinery Co. v. United States Fid. & Guar. Co. (1986) 187 Cal.App.3d 1510 [232 Cal.Rptr. 691] (Oliver) involved the reverse situation in which the distributor for a predecessor sought to take advantage of its successor’s insurance policy. The Court of Appeal in that case rejected the argument that the insurance policy should be construed to make coverage coextensive with liability under Ray v. Alad Corp., supra, 19 Cal.3d 22; applying established principles for construing insurance policies, it concluded that the policy did not cover the distributor’s claim. Quemetco, supra, 24 Cal.App.4th 494, which involved liability under CERCLA, relied on Oliver to hold that the right of a successor company to the benefits of its predecessor’s policy likewise turned on the interpretation of the contract. Similarly, General Accident, supra, 55 Cal.App.4th at page 1454, which involved product line liability under Ray v. Alad Corp., supra, 19 Cal.3d 22, agreed that the successor’s right to its predecessor’s insurance policy depended on contract.

Plaintiff Henkel questions here whether the Court of Appeal decisions in Quemetco and General Accident were correct insofar as they refused to allow a successor to claim rights under its predecessor’s liability policies even though liability had been imposed on the successor not through contract, but by operation of law. We perceive no conflict, however, in authority or principle over the rule that when liability is assumed by contract, the successor’s rights are defined and limited by that contract.

IV. Any Assignment of the Benefits at Issue Is Ineffective Because the Insurers Did Not Consent

Whether or not Amchem No. 1 assigned any benefits under the liability policies to Amchem No. 2, any such assignment would be invalid because it lacked the insurer’s consent. Analysis of this issue must begin with the language of the policies themselves, and in this case there is no dispute that each of the policies contained clauses providing that there could be no “[assignment of interest under this policy” without the insurer’s consent endorsed on the policy. Such clauses are generally valid and enforceable. (See Bergson v. Builders’ Ins. Co. (1869) 38 Cal. 541, 545; Greco v. Oregon Mut. Fire Ins. Co. (1961) 191 Cal.App.2d 674, 682 [12 Cal.Rptr. 802].)

Plaintiff Henkel does not claim that any insurer has executed a consent to assignment, but argues on two grounds that under the circumstances here an assignment does not require insurer consent. The first ground, that coverage should follow liability when the liability is transferred by operation of law, fails because, as we explained earlier, Henkel did not acquire the liabilities of Amchem No. 1 by operation of law, but assumed those liabilities by contract. Henkel’s second ground for arguing that insurer consent is not required is that under an occurrence-based liability policy (see Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 689 [42 Cal.Rptr.2d 324, 913 P.2d 878]), policy benefits can be assigned without consent once the event giving rise to liability has occurred.

“It is established that a provision in a contract or a rule of law against assignment does not preclude the assignment of money due or to become due under the contract [citations] or of money damages for the breach of the contract.” (Trubowitch v. Riverbank Canning Co. (1947) 30 Cal.2d 335, 339-340 [182 P.2d 182].) Cases and commentators have applied this principle to the assignment of benefits under an insurance policy. (See Westoil Terminals Co. v. Harbor Ins. Co. (1999) 73 Cal.App.4th 634, 641 [86 Cal.Rptr.2d 636]; Quemetco, supra, 24 Cal.App.4th at p. 502; Greco v. Oregon Mut. Fire Ins. Co., supra, 191 Cal.App.2d at p. 682; Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2002) ¶ 7.431, p. 7A-114.) But even if we apply the principle to liability policies, it does not bar defendants from enforcing their restrictions on assignment in the case here.

In 1979, when Amchem No. 2 assumed the liabilities of Amchem No. 1, the duty of defendant insurers to defend and indemnify Amchem No. 1 from the claims of the Lockheed plaintiffs had not become an assignable chose in action. Those claims had not been reduced to a sum of money due or to become due under the policy. Defendants had not breached any duty to defend or indemnify Amchem No. 1, so Amchem No. 1 could not assign any cause of action for breach of such duty. (Cf. Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 661-662 [328 P.2d 198, 68 A.L.R.2d 883], which upholds an assignment for wrongful failure to settle a claim.) Consequently, Amchem No. 1 could not assign the right to defense and indemnity against such claims without the insurers’ consent.

Nonetheless, Henkel contends we should permit assignment of claims such as those brought by the Lockheed plaintiffs without insurer consent, because the assignment would not place an additional risk (or burden) on the insurer that it did not bargain to assume. According to Henkel, in this case there is no additional risk because the injury occurred before the assignment and the assignment does not affect either liability or policy limits. (Northern Insurance, supra, 955 F.2d at p. 1358.) Even assuming enforcement of the no consent clause requires a showing of additional burden or risk on the insurer, Henkel cannot prevail. An additional burden may arise whenever the predecessor corporation still exists or can be revived (see Penasquitos, Inc. v. Superior Court, supra, 53 Cal.3d 1180), because of the ubiquitous potential for disputes over the existence and scope of the assignment. If both assignor and assignee were to claim the right to defense, the insurer might effectively be forced to undertake the burden of defending both parties. In view of the potential for such increased burdens, it is reasonable to uphold the insurer’s contractual right to accept or reject an assignment.

Recognizing this problem, Henkel argues that under the peculiar facts of this case the insurers face no such dual burden. Henkel points out that when the Lockheed plaintiffs’ lawsuit against Rhone Poulenc was dismissed, Henkel, the buyer of Amchem No. 2, was the only remaining entity facing potential liability for toxic injuries to Lockheed employees caused by the metallic chemical products of Amchem No. 1.

Nevertheless, if the Lockheed plaintiffs had refused to dismiss their suit against Rhone Poulenc, defendants would have faced the dilemma whether to defend Rhone Poulenc, Henkel, or both. The Lockheed plaintiffs’ decision to proceed only against Henkel, the buyer of Amchem No. 2, and not against both Henkel and Rhone Poulenc, should not affect Henkel’s right, if any, to the coverage benefits of Amchem No. l’s liability insurance policies. Those rights arise from and were fixed by contract—the 1979 contract by which Amchem No. 2 acquired the metallic chemical business from Amchem No. 1, the 1980 contract in which Henkel acquired the metallic chemical business by purchasing Amchem No. 2, and the insurance policies, including their “no assignment” provisions—and those rights do not rise or fall on the tactical decisions of tort plaintiffs.

In sum, Henkel does not demonstrate entitlement to the benefits of the liability policies at issue. This case is not analogous to those circumstances under which an assignment without the insurer’s consent has been upheld: (1) when at the time of the assignment the benefit has been reduced to a claim for money due or to become due, or (2) when at the time of the assignment the insurer has breached a duty to the insured, and the assignment is of a cause of action to recover damages for that breach. The assignment in this case does not fall within either category.

V. Henkel Has Not Shown That It Is Entitled to Reimbursement Because It Defended and Settled a Claim Against Amchem No. I

Plaintiff Henkel argues that even if it did not acquire the insurance benefits at issue here by assignment, it is nevertheless entitled to reimbursement of defense and settlement costs connected to the Lockheed litigation. Henkel claims that having defended and settled the Lockheed case on behalf of “Amchem Products, Inc.,” it is entitled to the protection of the Amchem Products’ insurance coverage retained by Union Carbide. Henkel’s argument confuses Amchem No. 1 and Amchem No. 2. As the corporate successor of Amchem No. 2, Henkel could defend and settle on behalf of that entity, but such action would entitle it only to the policy benefits acquired by Amchem No. 2. Henkel is not the corporate successor to Amchem No. 1, and therefore had no right to settle or defend a suit against Amchem No. 1 without the latter’s consent.

Disposition

The judgment of the Court of Appeal is reversed.

George, C. J., Baxter, J., Werdegar, J., Brown, J., and Ortega, J.,* concurred.

1 Following the lead of the Court of Appeal, we distinguish between the two corporations named Amchem Products, Inc., by referring to the Pennsylvania corporation as Amchem No. 1 and the Delaware corporation as Amchem No. 2.

2 At the same time, Amchem No. 1 changed its name to Union Carbide Agricultural Products Company, Inc., reflecting that its product line was now limited to agricultural products. For convenience, we will continue to refer to the company as Amchem No. 1.

3 “Defendants” refers to those Amchem No. 1 insurers who are parties to this appeal. The term does not include the Henkel insurers that were defendants in the trial court but are not parties to this appeal.

Associate Justice of the Court of Appeal, Second Appellate District, Division One, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.