By Kelsey A. Shaffer, Esq.
I. Successor Liability
The general rule in New York State is that an entity that acquires the assets of another is not itself liable for the predecessor’s liabilities, whether based in tort or contract.[1] While successor liability may, at times, be applied, such instances are rare and typically involve some type of continuity of business ownership and management interests between the seller and the purchaser—"as well as the transfer to the purchaser of contractual or other economically beneficial jural rights previously possessed by the seller.”[2]
There are essentially four types of circumstances where a successor entity may be found liable for its predecessor’s torts and contracts:
(1) where the buyer formally assumes a seller's debts (expressly or impliedly);
(2) where the transaction was undertaken to defraud creditors;
(3) where the buyer is a mere continuation of a seller; and
(4) where there was actually a consolidation or merger of a seller and purchaser (a de facto merger).[3]
The two most litigated are categories subsections three (3) and four (4).
A. Mere Continuation
A newly formed company may be deemed to be a “mere continuation” of a predecessor where the successor company “absorbs and continues the operation of the predecessor.”[4] Factors tending to show such a “continuation” include “the transfer of all of the predecessor company's assets, including its business location, employees, management, and good will.”[5]
With respect to this category of successor liability, courts have held that “[i]f the predecessor corporation continues to exist after the transaction, in however gossamer a form, the mere continuation exception is not applicable.”[6] A successor in interest may be considered a “mere continuation” of its predecessor, however, where: (1) all officers of a former company transferred to a new company with the same titles and roles; (2) the new company had the same business location as the previous; (3) an asset transfer occurred of substantially all of the former’s assets including goodwill, cash, cash equivalents, deposits, accounts receivable, and all inventory; and (4) the business operations remained unchanged and uninterrupted.[7]
B. De Facto Merger
With respect to a de facto merger, such a merger can result where “one corporation absorbs another, [even] without adhering to the statutory requirements for a merger.”[8] The guiding principle behind the doctrine of de facto merger is that “‘a successor that effectively takes over a company in its entirety should carry the predecessor's liabilities as a concomitant to the benefits it derives from the good will purchased’”[9]
The four hallmark elements of a de facto merger include: (1) continuity of ownership; (2) cessation of ordinary business and rapid dissolution of the acquired corporation; (3) assumption by the successor of liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets and general business operations.[10]
Unlike the mere continuation exception, formal, legal dissolution of the predecessor is not required—“so long as the acquired company is shorn of its assets and has become, in essence, a shell.”[11]
II. A Note on Successor Liability & Personal Jurisdiction in New York State
A recent opinion from New York State Court of Appeals assessed the intersection between successor liability and personal jurisdiction.[12] The Court addressed the issue in response to a certified question from the Second Circuit Court of Appeals whether, under New York law, “an entity that acquires all of another entity's liabilities and assets, but does not merge with that entity, inherits the acquired entity's status for purposes of specific personal jurisdiction?”[13]
The certified question arose in 2019 in connection with litigation against a successor to the Lebanese Canadian Bank—for damages stemming from terrorist attacks in Israel. The plaintiffs in the litigation had alleged that the bank provided extensive financial services to terrorist organizations. It was undisputed that the successor had assumed the predecessor’s liabilities.[14] What was not clear was whether New York had jurisdiction over the successor bank—on the grounds that it would have had jurisdiction over the predecessor.
According to the Court of Appeals, in determining whether a New York court may exercise personal jurisdiction over an entity’s successor, “the basic test seems to gear the (personal) jurisdiction question to whether, as a substantive matter, the successor corporation may be liable for the obligations of the predecessor.”[15] The Court held that if the successor is liable for the predecessor's obligations and the predecessor would have been subject to such jurisdiction in a suit to enforce the obligation, then the successor will be subject to personal jurisdiction.[16] Thus, “where an entity acquires all of another entity's liabilities and assets, but does not merge with that entity, it [also] inherits the acquired entity's status for purposes of specific personal jurisdiction.”[17]
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[1] See Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 244–45 (1983); Arnold Graphics Indus. v. Indep. Agent Ctr., Inc., 775 F.2d 38 (2d Cir. 1985).
[2] Hochheiser v. Alin, 59 Misc. 3d 1207(A) *9 (N.Y. Sup. Ct. 2018).
[3] See Cargo Partner AG v Albatrans, Inc., 352 F.3d 41 (2d Cir 2003); Schumacher, 59 N.Y.2d at 245.
[4] TAP Holdings, LLC v Orix Fin. Corp., 45 Misc 3d 1217(A) (NY Sup 2014); Ivory Dev., LLC v Roe, 135 AD3d 1216 (3d Dept 2016).
[5] TAP Holdings, LLC v Orix Fin. Corp., 45 Misc 3d 1217(A) *8 (NY Sup 2014); State Farm Fire & Cas. Co. v Main Bros. Oil Co., 101 AD3d 1575 (3d Dept 2012) (Emphasis Supplied).
[6] Diaz v S. Bend Lathe Inc., 707 F Supp 97, 100 (EDNY, 1989). See also, Schumacher, 59 N.Y.2d at 244–45 (Emphasis Supplied).
[7] See TAP Holdings, LLC, 45 Misc. 3d 1217(A) at *8-10.
[8] TAP Holdings, LLC, 45 Misc. 3d 1217(A) at *4; Fitzgerald v. Fahnestock & Co., 286 A.D.2d 573 (1st Dept 2001).
[9] State Farm Fire & Cas. Co., 101 A.D.3d 1575, at 1578; Winch v. Yates Am. Mach. Co., 205 A.D.2d 1001, 1002 (19940), lv. dismissed 84 N.Y.2d 1027 (1995), quoting Grant–Howard Assoc. v. General Housewares Corp., 63 N.Y.2d 291, 296 (1984).
[10] See Fitzgerald, 286 A.D.2d at 574-75; TAP Holdings, LLC, 45 Misc. 3d 1217(A) *8-10.
[11] See id.
[12] Lelchook v. Socie?te? Ge?ne?rale de Banque au Liban SAL, No. 29, 2024 WL 1661460 (N.Y. Apr. 18, 2024).
[13] Lelchook v. Socie?te? Ge?ne?rale de Banque au Liban SAL, 67 F.4th 69 (2d Cir.), certified question accepted, 39 N.Y.3d 1146 (2023), and certified question answered sub nom. Lelchook v. Socie?te? Ge?ne?rale de Banque au Liban SAL, No. 29, 2024 WL 1661460 (N.Y. Apr. 18, 2024).
[14] See Lelchook, No. 29, 2024 WL 1661460 at *1.
[15] See id. at *5.
[16] Id.
[17] Lelchook, No. 29, 2024 WL 1661460 at *5.