By Kendra Marr and Annys Shin
Washington Post Staff Writers
Thursday, September 4, 2008

When Blackstreet Capital Management affiliate SFCA purchased the assets of Simplicity for Children, a leading manufacturer of children's furniture, in April, it structured the deal so it would not assume responsibility for products already on the market.

Yet, last week, the issue of liability arose when the Consumer Product Safety Commission directed stores to pull Simplicity bassinets from their shelves after the deaths of two infants.

Blackstreet, a Bethesda private-equity fund, got involved with Simplicity when the Reading, Pa., company was in trouble. Last year, Simplicity had issued its fourth crib recall since 2005, pulling 1 million units -- the largest crib recall in U.S. history. In addition, a 4-month-old Missouri girl had died in one of its bassinets on Sept. 29, and the company was losing money.

In April, SFCA bought Simplicity's assets at auction. At the time, SFCA was aware of Simplicity's recall of 1 million cribs and voluntarily set aside resources to continue carrying it out. A May news release from Blackstreet said: "The Simplicity brand is well known for its exceptional value, innovative design and unparalleled focus on safety."

When the CPSC issued the warning about Simplicity bassinets last week, after the Aug. 21 death of a 6 1/2 -month-old girl from Kansas, the commission turned to retailers to yank bassinets off store shelves. SFCA had refused to issue a recall, saying it gained the right to sell products under the Simplicity brand but that it did not assume the liability of products already on the market, said Rick Locker, an attorney for SFCA.

John F. Banzhaf, a law professor at George Washington University, said by law the company was not required to proceed with a recall. "I'm not going to question that," he said.

Edmund Mierzwinski, consumer program director for U.S. PIRG, a public interest group, was unconvinced.

"No one wants to be liable," Mierzwinski said. "SFCA's response may or may not be correct. We're still researching."

A variety of parties are involved in the liability issue.

"There are lots of interested people who want to get to bottom of this," said Charles Kelly, a lawyer for the Kansas family whose daughter got trapped in the bassinet's metal bars and was strangled Aug. 21. Kelly said the family is planning to sue SFCA and Simplicity; as well as Wal-Mart, the distributor; and Disney, which licensed its Winnie the Pooh character for the bassinet.

Traditionally, only mergers result in one company taking on the liability of another, said Alan O. Sykes, a professor at Stanford Law School. A major benefit of buying assets is that no liabilities are incurred.

"When a company is bankrupt and sells off its old factory and stuff, the people who buy those assets in those sorts of asset sales are not liable," Sykes said.

Because these assets were purchased in a foreclosure sale, putting Simplicity out of business, SFCA "did not assume directly or indirectly liabilities associated with Simplicity," Locker said.

Questions of assets and liability have been raised for decades, and courts have ruled in different ways.

In 1991, a Maryland appeals court ruled in favor of the Nissen Corp. after a customer was injured while adjusting a treadmill made by American Tredex. Nissen had bought American's assets, under a contract excluding liability for earlier products. The court said there was no relationship between the injured customer and Nissen, as the new company bore no blame in bringing Miller and the treadmill together.

Other courts have ruled just the opposite.

After Herbert C. Ray was injured falling from a defective ladder made by a since-dissolved company, he sued Alad Corp., the manufacturer that had purchased the dissolved company's assets. In 1977, the California Supreme Court ruled that the liability for the ladder survived a change in ownership since the business retained its distinctive identity and continued to operate as it had in the past. SFCA uses the Simplicity brand, but the design of the defective bassinets was changed as of March.

"We believe that SFCA, Inc. can use these assets to build a new company that will be a leader in the baby furniture industry," Murry N. Gunty, managing partner of Blackstreet, said in a May news release. "SFCA has a strong brand and great products, both of which we plan to build on in the future."

After purchasing the assets, SFCA entered new supply, lease, invoice, banking and vendor agreements. It also took out new insurance policies and health-care plans.

"New investors and new directors brought in new money to keep this new company going," Locker said. "It was about reinvigorating the business and keeping employees working in the area. It's not a successor. It's a new company."

At this point, it is unclear how far the legal questions may be pursued.

Alan Korn, director of public policy for advocacy group Safe Kids Worldwide, said he, however, would still like to see SFCA help with the bassinet recall, in part because so many cribs -- about 900,000 -- are already in consumers' hands. Yesterday, the CPSC said 11 more retailers had agreed to recall the bassinets, including Amazon.com, Kohl's and Buy Buy Baby, bringing the total to 17.

"I would hope that the right thing is done, no matter who is in this situation, to get these dangerous products off the marketplace as fast as possible," he said.

Korn had worked closely with Nancy Baker, wife of Blackstreet adviser James A. Baker IV, on a pool safety bill that President Bush signed into law in December.

Virginia Graeme Baker, a daughter of the Bakers, died at a pool party in McLean six years ago after being pinned to the bottom of a hot tub by the suction force of the drain. Nancy Baker spent four years promoting the pool safety bill that bears her daughter's name. The law requires public pools to install drain covers that would help prevent entrapments and sets up a grant program to encourage state and local governments to adopt certain pool safety measures.