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Posted: April 1, 2017

Acquiror of Judgment Debtor’s Assets Not Liable as Debtor’s Successor

On March 20, 2017, Justice Oing of the New York County Commercial Division issued a decision in Kolow v. Laidlaw & Co. (UK) Ltd., 2017 NY Slip Op. 30554(U), holding that a complaint failed to allege facts necessary to overcome the rule that the acquiror of a judgment debtor’s assets is not liable for its debts, explaining:

Generally, the rule is that a corporation which acquires the assets of another is not liable for the torts of its predecessor. A corporation, however, may be held liable for the torts of its predecessor if (1) it expressly or impliedly assumed the predecessor’s tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations.

. . .

As an initial matter, plaintiff does not appear to rely on the first exception to the successor liability rule because there is nothing in the amended complaint or the record that indicates Laidlaw expressly or impliedly assumed EKN’s liabilities. Instead, the amended complaint raises three of the four exceptions to successor liability rule — de facto merger, mere continuation, and fraud.

As for the de facto merger exception, a transaction may be deemed to fall within this exception if the following factors are present: ( 1) continuity of ownership; (2) cessation of ordinary business operations and the dissolution of the selling corporation as soon as possible after the transaction; (3) the buyer’s assumption of the liabilities ordinarily necessary for the uninterrupted continuation of the seller’s business; and (4) continuity of management, personnel, physical location, assets and general business operation. Continuity of ownership exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation, and it is an essential element of de facto merger.

Here, plaintiff does not allege that the owners or shareholders of EKN have become direct or indirect owners or shareholders in Laidlaw. Plaintiff, therefore, fails to allege that the de facto merger exception applies to this action.

The mere continuation exception also does not apply to this action because plaintiff does not allege that EKN no longer exists or. has been extinguished. In fact, the Laidlaw defendants point out that a search of the New York Secretary of State lists EKN as an ‘Active’ foreign business corporation. Plaintiff’s opposition fails to address this argument, and plaintiff merely asserts that EKN was expelled from FINRA membership in the amended complaint.

Lastly, the fraud exception is not properly pleaded. Unlike the prior complaint, there is no fraudulent conveyance claim being asserted in the amended complaint. The fraud exception is merely an application of the law of fraudulent conveyance. Here, because plaintiff does not assert a claim for fraudulent conveyance in the amended complaint, the fraud exception does not apply.

Based on the foregoing, the non-successor liability exceptions do not apply, and the successor liability claim is dismissed.

(Internal quotations and citations omitted) (emphasis added).

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