Quemetco Inc. v. Pacific Automobile Insurance

24 Cal. App. 4th 494, 29 Cal. Rptr. 2d 627

• Court: California Court of Appeal
• Decided: April 26, 1994
• Docket: B071013
• Status: Published

Opinions

Opinion

WOODS (Fred), J.

Plaintiff appeals from a summary judgment entered in favor of defendant insurance companies, ruling that they did not have to provide insurance coverage to plaintiff in two underlying lawsuits. We affirm.

Factual and Procedural Synopsis

I. Factual History¹

Except for Continental Insurance Company, which is alleged to be a successor in interest to New Zealand Insurance Company and Phoenix Assurance Company of New York, respondents are insurance companies which issued several general liability insurance policies to Western Lead Products Company (Western Lead), a California corporation, for various periods during which Western Lead shipped sulfuric acid waste and battery electrolytes to the Stringfellow acid pits.

In May 1970, Western Lead changed its name to Quemetco, Inc. (Old Quemetco), a California corporation. In December 1970, pursuant to a written agreement, Old Quemetco sold all of its assets to St. Joe Mineral Corporation (St. Joe), a New York Corporation, and Q Acquisition Corporation (Q Acquisition), a Delaware corporation, a wholly owned subsidiary of St. Joe.

Q Acquisition subsequently changed its name to Quemetco Inc. (New Quemetco), a Delaware corporation. In October 1972, St. Joe sold 100 percent of New Quemetco’s shares to RSR, Inc., an unaffiliated Texas corporation.

Old Quemetco, after the sale of its assets to New Quemetco, changed its name to Q & R Liquidating Corporation, a California corporation, distributed all remaining assets to it shareholders and thereafter wound up and was dissolved in January 1971.

II. Procedural History

Appellant New Quemetco filed a declaratory relief action against 12 insurers who insured it, or its predecessor in interest, from 1956 through 1982. The action sought to determine the insurance coverage available to appellant for two underlying lawsuits—United States v. Stringfellow (No. CV83-2501JMI (MCX)), a federal case then pending in the United States District Court for the Central District of California, and Penny Newman et al. v. Stringfellow (No. 165994MF), a Riverside County Superior Court state case.

Seven of the insurers issued policies naming New Quemetco as the insured. However, the policies issued by respondents were issued to Western Lead/Old Quemetco.

The underlying cases deal with the deposit of hazardous waste material at the Stringfellow acid pits located near Glen Avon in Riverside County. The Stringfellow site received hazardous waste from 1956 through 1972. String-fellow records showed that Western Lead shipped waste to the site in 1957 and again in 1960 through 1964. No hazardous waste deposits were made by Western Lead after the asset sale to Q Acquisition in December 1970.

The federal case was filed under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and sought damages for environmental exposure as well as cleanup costs. The state case was an action by 5,000 individual plaintiffs for personal injury and property damages allegedly caused by the hazardous waste material deposited at the Stringfellow site.²

On June 4, 1987, the district court granted a motion for partial summary judgment, holding that appellant and 14 other defendants were jointly and severally liable under CERCLA for, among other things, state and federal government response costs, future response costs and damage to natural resources. Appellant’s liability under CERCLA is based solely on successor liability for the acts of its predecessor in interest (Western Lead)—acts occurring between 1956 and 1970.

In this action, Transportation Insurance Company and Continental Casualty Corporation, other defendant insurers, filed a cross-complaint for declaratory relief, subrogation, indemnity and contribution against Western Lead, Old Quemetco and other respondents. Old Quemetco requested respondents to provide a defense to the cross-complaint under the insurance policies issued by respondents.

Respondents filed, or joined in filing, motions for summary judgment on the basis that since the named insured on their policies was Western Lead, not appellant, they had no obligation to defend or indemnify appellant in the underlying lawsuits. There was a set of stipulated facts.

The court granted the motions, and judgment was entered against appellant and in favor of respondents.'

Appellant filed a timely notice of appeal.

Discussion

I. Standard of Review

The trial court granted summary judgment in favor of respondents who had issued several general liability insurance policies to appellant’s predecessor in interest—Western Lead/Old Quemetco. As appellant was not a named insured on those policies, it argued below that those insurance policies had been transferred to it either when Old Quemetco sold all of its assets to New Quemetco or by operation of law.

The court ruled that although there was a triable issue as to whether the insurance policies were transferred by the sale, there was no effective assignment of the policies because the policies had valid consent clauses and respondents had not consented to assignments of their policies to appellant, a transfer of the insurance benefits would result in an increased risk to the insurers, and the policies did not transfer as a matter of law.

We conduct an independent review of the trial court’s determinations of these questions of law. (Stratton v. First Nat. Life Ins. Co. (1989) 210 Cal.App.3d 1071, 1083 [258 Cal.Rptr. 721].)

II. Transfer by Operation of Law

Citing Northern Ins. Co. of New York v. Allied Mut. Ins. (9th Cir. 1992) 955 F.2d 1353, appellant contends that the benefits of the policies issued to Old Quemetco passed to it as a matter of law. In Northern, the court concluded that the benefits of an insurance policy, including the right to a defense, issued to a predecessor corporation transferred by operation of law to the successor corporation when it purchased substantially all the predecessor’s assets. (Id., at p. 1358.)

Northern was based on a products liability action in which parents sought to recover damages for injury to their child allegedly caused by a defective product. There was an asset purchase agreement under which the predecessor agreed to indemnify the successor from any products liability arising from presale activities. The trial court found that the right to indemnity arising from the predecessor’s policy transferred together with the potential liability, i.e., the right to indemnity followed the liability rather than the policy itself. (955 F.2d at p. 1357.) In Northern, the action was pursued against only the successor corporation.

The Northern court looked to the rule of product-line successor liability enunciated in Ray v. Alad Corp. (1977) 19 Cal.3d 22 [136 Cal.Rptr. 574, 560 P.2d 3]³ under which a purchaser of substantially all the assets of a firm assumes, with some limitations, the obligations for product liability claims arising from the selling firm’s presale actions irrespective of any clauses to the contrary in the asset purchase agreement. (Northern Ins. Co. of New York v. Allied Mut. Ins., supra, 955 F.2d 1353,1358.) Thus, the court held that the insurance benefits passed as a matter of law because the liability passed as a matter of law.

Respondents argue that Northern is not applicable as it did not discuss two California cases—Oliver Machinery Co. v. United States Fid. & Guar. Co. (1986) 187 Cal.App.3d 1510 [232 Cal.Rptr. 691] and Peñasquitos, Inc. v. Superior Court (1991) 53 Cal.3d 1180 [283 Cal.Rptr. 135, 812 P.2d 154], Neither case addressed the issue of whether the benefits of an insurance policy issued to a predecessor corporation would inure to the successor corporation. However, while these cases are not directly on point, we can glean some guidance from their reasoning.

In Oliver, the court, which was faced with the issue of whether the insurance policy of the successor corporation covered injuries caused by a machine manufactured by the predecessor corporation so as to obligate the insurer to defend an additional insured (the distributor) on the policy, concluded that under the terms of the policy, the machine was not one of the “ ‘named insured’s products,’ ” and no defense was necessary. (187 Cal,App.3d at pp. 1516, 1519.)

The court referred to the same rule of successor liability cited by the court in Northern. In declining to extend the narrow exception for successor liability to insurance coverage for sellers of products which were manufactured by a predecessor corporation, the court reasoned that coverage was a question of contract interpretation and that the duty to defend was based on the subject insurance contract. (187 Cal.App.3d at p. 1517.)

The court noted: “In successor liability cases ... the person injured is not in a contractual relationship with the manufacturer and generally cannot protect himself or herself from the eventuality of injury from a product manufactured by a predecessor company. Here the distributor Oliver was a party to the insurance contract and could have purchased independent insurance for its liability for products it sold which were manufactured by the predecessor company or could have amended the policy in question to cover liability for those'products.” (187 Cal.App.3d at pp. 1517-1518.)

Thus, although Oliver dealt with a successor’s policy as opposed to a predecessor’s policy, the court refused to extend the rule for determining liability to the issue of insurance coverage, instead preferring to look to the contract itself to resolve the issue of coverage.

In Peñasquitos, the court addressed the issue of whether homeowners might bring a suit for construction defects against corporations that had graded the lots and built the homes, when the corporations had dissolved prior to the homeowner’s discovery of the construction defects. The court held that parties are permitted “to bring suit against dissolved corporations for damages that occur or are discovered after dissolution.” (Peñasquitos, Inc. v. Superior Court, supra, 53 Cal.3d 1180, 1183.)

Noting that bringing suit against a dissolved corporation on a postdissolution claim would often be a pointless exercise because the corporation would have no assets with which to satisfy a judgment against it, the court stated that: “Plaintiffs will be likely to assert postdissolution causes of action only if there is a prospect of recovery from the dissolved corporation’s litigation insurer, from undistributed assets, or from assets of the corporation discovered after dissolution.” (53 Cal.3d at p. 1191.)

The court concluded that: “. . . if the corporation has liability insurance coverage, its dissolution provides no reason to excuse the insurer from defending the action and indemnifying those injured by the predissolution activities of its insured, just as a corporation’s insolvency or bankruptcy does not release its insurer from payment for damages the corporation has caused.” (53 Cal.3d at p. 1192.) Thus, the court imposed on the insurer a duty to defend the predecessor even though it had been dissolved.

Appellant cites a number of cases in which other state courts reached a similar conclusion to Northern with respect to the obligations of an insurer when the predecessor’s insurance policy was transferred to a surviving corporation in a merger. (E.g., Brunswick Corp. v. St. Paul Fire & Marine Ins. Co. (E.D.Pa. 1981) 509 F.Supp. 750, 751; Aetna Life & Cas. v. United Pac. Rel. Ins. (Utah 1978) 580 P.2d 230, 232.)

However, the cases cited by appellant applied state corporation law regarding mergers, and appellant is not a surviving corporation of a merger. The sale of the assets here did not amount to a merger, which is an exception to the general rule against imposing liability on the successor only when one corporation takes all of the other’s assets without providing any consideration that could be made available to meet the claims of the other’s creditors. (See Ray v. Alad Corp., supra, 19 Cal.3d 22, 28.)

In this case, appellant was found to be liable for hazardous waste cleanup costs based on an act passed after it purchased Old Quemetco’s assets. Thus, unlike the situation in Northern, no liability passed as a matter of law at the time of the asset sale as no such liability existed at that time.

The underlying actions here are not product liability actions. Moreover, appellant purchased its own insurance to cover the damages assessed against it in the CERCLA action. Accordingly we conclude that the product-line successor-liability rule should not be applied to transfer the insurance policy from Old Quemetco to New Quemetco as a matter of law.

III. Transfer by Sale

Appellant contends that there was a clear intent to transfer all assets, including the expired insurance policies, in the provisions of the sale agreement. The court found that there was a triable issue of fact as to whether there was such an intent, but even if the policies were assigned, the assignment was not effective because clauses in the policies required the consent of the insurer to such an assignment, respondents had not consented to such assignments, and such assignments would increase the insurers’ risk.

Appellant argues that consent was not necessary because its only liability in the underlying suit was based upon a successor in interest liability, which in turn, was based upon actions taken by respondents’ named insured between 1956 and 1970, and since the actions had nothing to do with the successor corporation, the consent clauses should not be given effect.

Appellant cites Ocean Accident & Guar. Corp. v. Southwestern B. Tel. Co. (8th Cir. 1939) 100 F.2d 441 [122 A.L.R. 133] for the proposition that an agreement of sale may be effective to assign an insurance policy notwithstanding the lack of consent by the insurer. Ocean Accident was an action for personal injuries occurring during the predecessor’s tenure.

Also citing Ocean Accident, the Northern court reasoned that the rationale for honoring no-assignment clauses vanished when liability arose from presale action since the risk characteristics of the insured determined whether the insurer would provide coverage and at what cost, and, therefore, the characteristics of the successor were of little importance as the insurer still covered only the risk it evaluated when it wrote the policy. (Northern Ins. Co. of New York v. Allied Mut. Ins., supra, 955 F.2d 1353, 1358.)

In a similar vein, California courts have stated: “The policy by its own terms, insofar as it involved the substitution of one insured for another, was not assignable without the consent of the insurer. Any purported assignment of such a policy without consent is ineffective. [Citations.] On the other hand, it is settled that the right to recover thereon, after loss has occurred, is assignable without company consent. [Citations.] The former situation involves the obligation of the insurance company to indemnify a particular person against loss; the selection of its indemnitee properly is a matter of its own choice. The latter situation involves only the payment of a claim founded upon a loss against which the policy indemnifies, and the designation of a payee of such claims properly is a matter left solely to the discretion of the indemnitee, viz., the insured.” (Italics added.) (Greco v. Oregon Mut. Fire Ins. Co. (1961) 191 Cal.App.2d 674, 682 [12 Cal.Rptr. 802].)

In Greco, the court concluded that the proceeds of a fire insurance policy issued to the seller of property destroyed by fire prior to the closing of escrow had been assigned to the buyer. (191 Cal.App.2d at pp. 682-683.) The court reasoned that: “The accrued right to collect the proceeds of the fire insurance policy is a chose in action, and an effective assignment thereof may be expressed orally as well as in writing [citations]; may be the product of inference; and where the parties to a transaction involving such a policy by their conduct indicate an intention to transfer such proceeds, the court will imply an assignment thereof.” (Id., at p. 683.)

In this case, at the time of the asset sale, there could have been no assignment of the proceeds of the policies as there was no loss or injury or accrued right to collect the proceeds in existence. The cleanup damages were not assessed until 1987, long after the 1970 sale.

Moreover, as recognized in Greco, the policies, as opposed to the proceeds, were not assignable without respondents’ consent. To hold that the policies were assignable without respondents’ consent would leave Old Quemetco without any insurance to cover any potential liability assessed against it.

The purpose of consent provisions is “ ‘to prevent an increase of risk and hazard of loss by a change of ownership without the knowledge of the insurer.’ ” (University of Judaism v. Transamerica Ins. Co. (1976) 61 Cal.App.3d 937, 941 [132 Cal.Rptr. 907].) In the instant case, both Old Quemetco and New Quemetco assert coverage under respondents’ policies. Thus, unless the consent clauses are enforced, respondents would be faced with the increased risk of having to defend two corporations. Therefore, the consent clauses are valid and enforceable. (1 Witkin, Summary of Cal. Law (3d ed. 1985) Contracts, § 926, p. 827.)

Appellant argues that any potential double defense or indemnity is illusory as only it was held to be jointly and severally liable for the damages in the CERCLA action and the only requested defense from Old Quemetco was in this declaratory relief action. However, Old Quemetco is entitled to a defense and may have a defense to the claim of indemnity. (E.g., in the federal case, the district court ruled that there was a factual question as to whether or not New Quemetco had assumed any liabilities arising in the future as the result of Old Quemetco’s actions.)

Thus, we conclude that the policies were not effectively transferred by the asset sale because respondents did not consent to the assignments.

Disposition

The judgment is affirmed. Respondents to recover costs on appeal.

Lillie, P. J., concurred.

1 Some facts in this synopsis are based on statements in briefs and are given for background purposes only. (See DeRose v. Carswell (1987) 196 Cal.App.3d 1011, 1019, fn. 3 [242 Cal.Rptr. 368].)

2 According to appellant, the state action has been settled with respect to appellant, and there no longer are any issues of defense and indemnity between it and respondents. Respondents do not argue that the type of damages assessed against appellant in the CERCLA action are not covered by their policies or that their policies do not cover the relevant dates.

3 In Ray v. Alad Corp., supra, 19 Cal.3d 22, 34, the Supreme Court determined that the plaintiff’s claim, based on strict liability, constituted a special exception to the general rule against imposition upon a successor corporation of its predecessor’s liability. Other exceptions to the mle against imposing liability are (1) 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. (Id., at p. 28.)