Commercial Division Blog
Successor Company Liable Under De Facto Merger Doctrine
On January 29, 2020, the Second Department issued a decision in Bonanni v. Horizons Invs. Corp., 2020 NY Slip Op. 00563, upholding the application of the de facto merger doctrine in holding a successor entity liable, explaining:
The appellants contend that MRI Inc. is not entitled to an accounting from CINY because MRI Inc. never held a membership interest in CINY. In support of this contention, they argue that there was no de facto merger between MRI LLC and CINY and that CINY was not a successor in interest to MRI LLC. We disagree.
Generally, a corporation which acquires the assets of another is not liable for the torts of its predecessor. However, such liability may arise if the successor corporation expressly or impliedly assumed the predecessor's tort liability, there was a consolidation or merger of seller and purchaser, the purchaser corporation was a mere continuation of the seller corporation, or the transaction was entered into fraudulently to escape such obligations. Accordingly, a transaction structured as a purchase of assets may be deemed to fall within this exception as a de facto merger.
The hallmarks of a de facto merger are the continuity of ownership; cessation of ordinary business and dissolution of the predecessor as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, continuity of management, personnel, physical location, assets, and general business operation. Where the acquired corporation is shorn of its assets and becomes a shell, legal dissolution is not required to support a finding of de facto merger. In non-tort actions, continuity of ownership is the essence of a merger.
Here, in early 2012, MRI LLC's assets and employees were transferred to CINY, MRI LLC's business ceased, and CINY provided the services to the client hospitals that MRI LLC had previously performed. The equipment, assets, business operation, management, and some of the personnel remained unchanged. The forensic accountant who testified on behalf of the plaintiffs identified numerous transactions that were questionable or highly unusual, and others that were indicative of self-dealing. Most notably, MRI LLC transferred an MRI scanner to CINY at a price significantly less than its fair market value. Accordingly, the Supreme Court's conclusion that in late 2012/early 2013 there was a de facto merger between MRI LLC and CINY was supported by the record. Therefore, MRI Inc. was entitled to an accounting from CINY.
(Internal quotations and citations omitted).
As this decision explains, successor liability is the legal doctrine under which the buyer of a company's assets is responsible for claims against the seller. Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you or a client have questions regarding a situation where a company against which there is a claim has sold its assets.