Issues of Fact Prevent Summary Judgment on Claim of Successor Liability
Print Article- Posted on: Aug 26 2024
By: Jeffrey M. Haber
In Hydraulic IP Holdings, LLC v. Tan, 2024 N.Y. Slip Op. 32930(U) (Sup. Ct., N.Y. County Aug. 16, 2024 (here), the court was asked to hold certain successor entities[1] liable for the unsatisfied judgment (“Judgment”) issued by the motion court in plaintiff’s favor and against non-party Grace Apparel LLC (“Grace”). As discussed below, the motion court declined to grant summary judgment in either party’s favor, holding there were issues of fact as to whether the Successor Entities were liable under the de facto merger doctrine.
The facts in Hydraulic IP Holdings are simple. Grace failed to pay the Judgment, ceased its operations as a wholesale and private-label garment manufacturer and, according to plaintiff, continued to operate the wholesale and private-label garment manufacturing business in the names of one or both of the Successor Entities, which had the same ownership, address, employees, and assets, and which assumed Grace’s liabilities.
“The de facto merger doctrine creates an exception to the general principle that an acquiring corporation does not become responsible thereby for the pre-existing liabilities of the acquired corporation.”[2] “A de facto merger occurs where one corporation is absorbed by another, but without compliance with the statutory requirements for a merger.”[3]
Courts consider the following factors to determine whether the de facto merger doctrine applies: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation; (3) assumption by the successor of the liabilities for the continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets, and general business operation.[4] “Not all of these elements are necessary to find a de facto merger.”[5] Satisfaction of as few as two factors can suffice.[6]
“The question of whether a de facto merger exists is ‘analyzed in a flexible manner that disregards mere questions of form and asks whether, in substance, ‘it was the intent of [the successor] to absorb and continue the operation of [the predecessor].’”[7] The de facto merger doctrine is rooted in equity and exists “to ensure that a source remains to pay for the victim’s injuries.”[8]
As noted, the motion court found that there were questions of fact regarding the application of the de facto merger doctrine.
Continuity of Ownership
Continuity of ownership “exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor’s purchase of the predecessor’s assets.”[9]
The motion court found that there was a question of fact as to this prong of the analysis due to the continuous ownership by Grace’s owners and the defendant GBrands but only one owner, defendant Tan, as the owner of defendant CC Apparel.[10]
The motion court also found that there was an issue of fact as to whether there was a transfer of assets sufficient to trigger the de facto merger analysis.[11] The motion court further found that the use of the same logo by Grace and GBrands also created an issue of fact.[12]
Dissolution
It is well settled that for purposes of the de facto merger analysis, the predecessor company is not required to have been legally dissolved, if it “is shorn of its assets and has become, in essence, a shell.”[13]
The motion court found an issue of fact as to whether Grace had been legally dissolved – that is, “whether Grace … maintains its own corporate records and bank accounts,” has “conducted business and has vacated its leased space.”[14] The motion court explained that the “proffered testimony [was] inconsistent and best suited for a finder of fact.”[15]
Assumption of Liabilities for Continuation of Business
The motion court found that there was a question of fact as to this prong of the de facto merger analysis, noting “[w]hile defendants contend that no agreements were made between Grace and the successor entities, the payment of Grace’s debt by CC [Apparel] creates a question of fact, notwithstanding the remaining contentions of the defendants.”[16]
Continuity of Assets, Management and/or Business Operations
As to this prong of the analysis, the motion court held that there was a question of fact preventing the grant of summary judgment. The motion court explained that notwithstanding the existence of certain undisputed facts, because defendants claimed that plaintiff failed to satisfy the other prongs of the analysis, “the remaining factors [were] insufficient to satisfy plaintiff’s [summary judgment] burden.”[17]
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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
[1] The successor entities are: GBrands Holding, LLC (“GBrands”) and CC Apparel, LLC (“CC Apparel” and collectively with GBrands, the “Successor Entities”).
[2] Fitzgerald v. Fahnestock & Co., 286 A.D.2d 573, 574 (1st Dept. 2001).
[3] Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc., 775 F.3d 38, 42 (2d Cir. 1985).
[4] Fitzgerald, 286 A.D.2d at 574. See also Highland Crusader Offshore Partners, L.P. v. Targeted Delivery Techs. Holdings, Ltd., 184 A.D.3d 116, 126 (1st Dept. 2020).
[5] Id. at 574-575.
[6] See, e.g., Beck v. Roper Whitney, Inc., 190 F. Supp. 2d 525 (S.D.N.Y. 2001); State of N.Y. v. N. Storonske Cooperage Co., Inc., 174 B.R. 366 (N.D.N.Y. 1994).
[7] Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d 167, 176 (1st Dept. 2013) (quoting Nettis v. Levitt, 241 F.3d 186, 194 (2d Cir. 2001), overruled on other grounds, Slayton v. American Exp. Co., 460 F.3d 215 (2d Cir. 2006)).
[8] Matter of New York City Asbestos Litig., 15 A.D.3d 254, 258 (1st Dept. 2005).
[9] Id. at 256.
[10] Slip Op. at *3.
[11] Id.
[12] Id. at *3-*4.
[13] Fitzgerald, 286 A.D.2d at 575.
[14] Slip Op. at *4.
[15] Id.
[16] Id. at *5.
[17] Id. at *6.
