Opinion ID: 795405
Heading Depth: 4
Heading Rank: 2

Heading: New York De Facto Merger Doctrine

Text: 31 In Cargo Partner AG v. Albatrans, Inc., we held that the New York Court of Appeals would require a showing of continuity of ownership to establish the existence of a de facto merger in a contract case. 352 F.3d at 46. In that case, we considered whether the defendant, Albatrans, could be liable for the debts of the former Chase-Leavitt Company, a shipping company whose assets Albatrans had bought. Id. at 43. Cargo Partner did not allege that there was any continuity of ownership between Chase-Leavitt and Albatrans. Id. at 46. Instead, it argued that New York applies a flexible analysis that does not necessarily require proof of each of the four factors to establish a de facto merger. Id. We concluded that we did not need to determine whether all four factors must be present for there to be a de facto merger because [w]hichever test applies, we are confident that the doctrine of de facto merger in New York does not make a corporation that purchases assets liable for the seller's contract debts absent continuity of ownership. Id. As we explained, continuity of ownership is the essence of a merger and is what helps us distinguish a merger from an asset sale. Id. at 47. That is, the nature of an asset sale is that the seller's ownership interest in the entity is given up in exchange for consideration. Id. Because there was no proof of continuity of ownership, the asset purchase was not `a merger ... called something else.' Id. (quoting Cargo Partner AG v. Albatrans, Inc., 207 F.Supp.2d 86, 104 (S.D.N.Y.2002) (alteration in original)). 32 Cargo Partner explicitly limited its holding to contract cases, id. at 46, and is therefore not binding here. Nevertheless, its reasoning applies equally in cases involving tort claims or other claims by involuntary creditors. The continuity-of-ownership element is designed to identify situations where the shareholders of a seller corporation retain some ownership interest in their assets after cleansing those assets of liability. Gen. Battery, 423 F.3d at 306. This factor serves the same purpose in tort cases, i.e., it distinguishes an asset purchase from a de facto merger. 3 Accordingly, several New York courts have held in tort cases that, because continuity of ownership is the essence of a merger, a de facto merger will not be found in the absence of this element. See, e.g., In re New York City Asbestos Litig., 789 N.Y.S.2d at 487; Buja v. KCI Konecranes, Int'l Plc, 12 Misc.3d 859, 815 N.Y.S.2d 412, 415-16 (N.Y. Sup.Ct., 2006). 33 The State argues that this reasoning is not applicable here and that, at least in tort actions, intermediate New York courts have issued conflicting decisions. It contends that these cases suggest that the Court of Appeals might adopt a more flexible test. The State first points to City of New York v. AAER Sprayed Insulations, Inc., 281 A.D.2d 228, 722 N.Y.S.2d 20 (1st Dep't 2001), a case in which, it claims, the First Department found the existence of a de facto merger in the absence of continuity of ownership. In that case, Basic Corporation and Kelley Island entered into an asset purchase agreement whereby Basic bought Kelley Island's building materials product line and the factories used to produce them. Id. at 20-21. The opinion does not indicate whether there was continuity of ownership, but the State asserts in its brief in this case that the parties in AAER Sprayed Insulations conceded a lack of continuity of ownership. Nevertheless, the court found the allegation of successor liability sufficient to survive summary judgment because, [a]t a minimum, there was a cessation of Kelley Island's ordinary business coupled with a continuation by Basic of the purchased business at the same physical location, and with the same assets, general business operation, and many of the same personnel. Id. at 21. 34 Even assuming that there was no evidence of continuity of ownership in that case, AAER Sprayed Insulations does not indicate a change in the law. The opinion itself is not explicit about whether there was proof of continuity of ownership, and the court discussed only Basic's objection on appeal that there could be no de facto merger because Basic did not buy all of Kelley Island's assets. See id. Moreover, even if the First Department had adopted the view that a de facto merger could exist in the absence of continuity of ownership, it has since rejected this view. In its recent decision in In re New York City Asbestos Litigation, a tort case, the First Department recognized the flexibility of the de facto merger standard, but explicitly held that continuity of ownership is the touchstone of the concept. As it explained, continuity of ownership is the essence of a merger and thus a necessary predicate to a finding of a de facto merger. 789 N.Y.S.2d at 487; see also Subramani v. Bruno Mach. Corp., 289 A.D.2d 167, 736 N.Y.S.2d 315, 316 (1st Dep't 2001) (finding no de facto merger in a tort action in the absence of continuity of ownership); accord Kretzmer v. Firesafe Prods. Corp., 24 A.D.3d 158, 805 N.Y.S.2d 340, 341 (1st Dep't 2005) (stating that a showing of continuity of ownership is required in contract actions). 35 The State next points to the Fourth Department's decision in Sweatland, in which the court considered whether defendant Park Corporation was the successor-in-interest to Bertsch & Company, the manufacturer of the industrial machine that caused the plaintiff's injury. 587 N.Y.S.2d at 55. After filing for bankruptcy protection, Bertsch entered into an asset purchase agreement with Park Corporation whereby Park Corporation bought its tangible assets, the sole and exclusive right to use the trade name Bertsch, all customer lists, and all other files relating to the business. Id. The opinion does not indicate, however, whether Park Corporation bought the assets for cash or stock. Thus, there is no indication whether there was continuity of ownership between the two companies. In concluding that an issue of fact remained as to whether the transaction was a de facto merger, the court listed the four traditional factors but noted that [n]ot all of these factors are needed to demonstrate a merger; rather, these factors are only indicators that tend to show a de facto merger. Id. at 56 (internal quotation marks omitted; alteration in original). It noted further that [p]ublic policy considerations dictate that, at least in the context of tort liability, courts have flexibility in determining whether a transaction constitutes a de facto merger. While factors such as shareholder and management continuity will be evidence that a de facto merger has occurred, those factors alone should not be determinative. Id. (citation omitted). The court therefore concluded that the trial court had not erred in denying defendant's motion for summary judgement and that plaintiff should be allowed to conduct further discovery to determine whether the transaction constituted a de facto merger. Id. at 55. 36 Although some cases have cited Sweatland for the proposition that all four factors need not be present to establish a de facto merger, see, e.g., AT & S Transp., 803 N.Y.S.2d at 120, Fitzgerald, 730 N.Y.S.2d at 70, no New York court has applied it to hold explicitly that a de facto merger may be found in the absence of evidence of continuity of ownership. 4 Moreover, although its statement that a court has the flexibility to find a de facto merger in the absence of continuity of ownership appears, at first glance, absolute, the court simply held that the plaintiff should be allowed further discovery to determine whether there had been a de facto merger. 37 Even if Sweatland could be read to permit a finding of a de facto merger in the absence of continuity of ownership, its rationale for departing from the traditional common-law rule has been undermined by the recent decision of the New York Court of Appeals in Semenetz v. Sherling & Walden, Inc., 7 N.Y.3d 194 (2006). In that case, defendant S & W Edger Works, Inc. (Edger Works), an Alabama company, sold a band sawmill to Semenetz Lumber Mill, Inc. in 1998. Id. at 196. On July 26, 1999, Sean Semenetz, an infant, was injured when his right hand and fingers got caught between a sprocket and chain apparatus in the sawmill. Id. at 197. In October 2000, Edger Works sold most of its assets, including real property, good will, trade names and inventory to Sawmills and Edgers, Inc. (Sawmills) for $300,000. Id. The purchase agreement explicitly specified that the purchasing company assumed none of the seller company's liability, except with respect to sawmills that had been ordered but not delivered. Id. Edger Works then changed its name to Sherling & Walden, Inc. Sawmills, the purchasing company, began manufacturing sawmills in the same plant that Edger Works had used and retained some of Edger Works' former employees. Id. It also began to advertise itself as formerly S & W Edger Works. Id. 38 In 2002, Semenetz brought suit on behalf of her infant son against Sawmills, Edger Works, and Sherling & Walden. Id. Sawmills, which was also an Alabama company, answered the complaint by asserting that the New York court lacked personal jurisdiction over it. It later moved for summary judgment on this ground. Id. Because there was personal jurisdiction over Edger Works, which had sold and shipped the offending sawmill to Semenetz Lumber in 1998, the question was whether Sawmills could be liable for Edger Works' allegedly tortious conduct. Id. at 198. 39 Semenetz argued that Sawmills was liable pursuant to the product line theory of successor liability, which is not part of the traditional common law but which Semenetz asked the Court of Appeals to adopt. Under the product line theory, a corporation that buys another's product line and continues production of that line can be liable for an injury caused by that product even if it was produced by the predecessor corporation. The California Supreme Court first adopted the product line theory in Ray v. Alad Corp., 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3 (1977). The Ray court concluded that this theory of successor liability was appropriate because `a party which acquires a manufacturing business and continues the output of its line of product under the circumstances here presented assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired.' Semenetz, 7 N.Y.3d at 199 (quoting Ray, 136 Cal.Rptr. 574, 560 P.2d at 11). 40 The New York Court of Appeals rejected this approach to successor liability. Considering one of the rationales given by the California Supreme Court in Ray — that the sale of assets and dissolution of the original company destroys the products-liability plaintiffs' remedies — the court concluded that this was merely a statement of the problem and therefore not sufficient to justify a change in the law. Id. at 200. The court further observed that the `product line' exception threatens `economic annihilation for small businesses' and could deter small businesses from purchasing on-going businesses. Id. at 200-01 (quoting Bernard v. Kee Mfg. Co., Inc., 409 So.2d 1047, 1049 (Fla.1982)). The court also concluded that extending liability to the corporate successor places responsibility for a defective product on a party that did not put that product into the stream of commerce and is thus inconsistent with the justification for strict products liability. Id. at 201. In consequence, the court found that adoption of the `product line' exception would mark `a radical change from existing law implicating complex economic considerations better left to be addressed by the Legislature.' Id. (quoting City of New York v. Pfizer, 260 A.D.2d 174, 688 N.Y.S.2d 23, 25 (1st Dep't 1999)). 41 Although Semenetz concerned a different theory of successor liability, it clearly suggests that the New York Court of Appeals will not eviscerate traditional common-law norms of successor liability in tort cases. That is, it suggests that the court does not find the public policy considerations at issue in tort cases sufficient to justify the departure from the common-law standards that would be necessary to find the existence of a de facto merger in the absence of any evidence of continuing ownership. 5 Accordingly, because we find that New York would not depart from the traditional common law to find a de facto merger in the absence of any evidence of continuity of ownership, we are not presented with an exceptional circumstance that would require certification of this question to the New York Court of Appeals. McGrath, 356 F.3d at 250. 42 In sum, the State has failed to point to any evidence of continuity of ownership and therefore has failed to raise an issue of fact that NSI is liable as Serv-All's corporate successor. This failure is fatal to both the State's CERCLA and common-law claims.