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Posted: February 27, 2015

Acquiror of Corporate Assets Liable for Corporation’s Torts Under De Facto Merger Doctrine

On December 22, 2014, Justice Walker of the 8th Judicial District Commercial Division issued a decision in Precision Process, Inc. v. Smith, 2014 NY Slip Op. 33460(U), holding that the acquiror of a corporation’s assets was liable for the corporation’s debts under the de facto merger doctrine.

In Precision Process, the court granted the plaintiff summary judgment on its claim for “a declaration that defendants Craft Leasing, LLC (Craft) and CK Precision of WNY, Inc. (CKPW) (collectively, “Defendants”) are successors in interest to CK Precision, Inc. (CKP), and are therefore liable for its debts and obligations,” explaining:

As a general principle of New York law, a corporation that acquires the assets of another corporation is not liable for the latter’s torts. However, four (4) recognized exceptions exist – rendering the acquiring corporation liable – where (1) it expressly or impliedly assumed the predecessor’s tort liability (which did not occur here); (2) there was a consolidation, actual, or de facto merger of the two entities; (3) the purchasing entity was a mere continuation of the selling entity; or, (4) the transaction is entered into fraudulently to escape such selling entity’s obligations.

. . .

Defendants contend that successor liability is wholly inapplicable here, because it is solely a strict products liability doctrine that does not apply to business torts such as those at issue here. This Court disagrees. Defendants rely upon the decision in Greenlee v Sherman, a negligence action against the estate of a deceased sole proprietor who had installed a furnace that allegedly caused a fire. Plaintiffs sought to impose liability upon the company that purchased the deceased plumber’s assets. The court stated (in dicta) that it appears that the successor liability doctrine does not apply outside of the products liability area. However, the court also found that plaintiffs had failed to establish a de facto merger, or that the successor defendant was a mere continuation of the decedent’s business – implying that the doctrine may apply in a non-products liability case.

Additionally, the First Department has consistently noted that the successor liability doctrine concerns products liability and torts law but is not applicable, for example, in an action to collect on a promissory note; and that a plaintiff could state claim of mere continuation or de facto merger where a sale to a new business was in an effort to avoid liability under a lease.

(Internal quotations and citations omitted) (emphasis added). Applying this rule, the court went on to hold based on the facts that the de facto merger exception applied.

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