Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 19, 2015

Successor Liability Adequately Alleged Under De Facto Merger Doctrine

On August 5, 2015, Justice Kitzes of the Queens County Commercial Division issued a decision in Logan Bus Co., Inc. v. Auerbach, 2015 NY Slip Op. 31766(U), upholding a claim for successor liability.

In Logan Bus Co., one the defendants moved to dismiss the complaint on the ground that the plaintiff sought to hold the defendant liable for the pre-acquisition acts of another defendant, whose assets it had purchased pursuant to an Asset Purchase Agreement that provided: “except as expressly set forth in Section 1.7, Buyer is not assuming any liabilities or obligations of Seller, whether known, unknown, contingent or otherwise.” The court denied the motion, explaining:

As stated by the Court of Appeals in Schumacher v Richards Shear Co., 59 NY2d 239, 244-45 (1983):

It is the general rule that a corporation which acquires the assets of another is not liable for the torts of its predecessor. There are exceptions and we stated those generally recognized in Hartford Acc. & Ind. Co. v Canron, Inc. (43 NY2d 823, 825, supra). A corporation 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.

In this case, contrary to [the defendant’s] claim, the complaint adequately alleges a successor liability claim as against it under the de facto merger exception. Underlying this doctrine is the concept 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. Plaintiffs have plead the elements of a de factor merger, that is (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation as soon as possible; (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, assets and general business operations.

(Internal quotations and citations omitted).

View posts