New York Court of Appeals Holds That The Doctrine of Successor Jurisdiction Applies In a Transaction That Is Less Than a Merger

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Posted on: Apr 22 2024

The doctrine of successor jurisdiction provides that when two entities merge, the successor entity inherits the merged entity’s jurisdictional status for purposes of specific jurisdiction (i.e., personal jurisdiction). Thus, if the merged entity was subject to jurisdiction in a particular forum, then the successor would also be subject to the court’s jurisdiction, regardless of whether the successor entity would otherwise be subject to the court’s jurisdiction.

The foregoing principle seems simple enough. However, what happens when the transaction at issue is not a merger but rather a purchase of the other entity’s assets and liabilities? Does the successor jurisdiction doctrine still apply? In Lelchook v. Société Générale de Banque au Liban SAL, 2024 N.Y. Slip Op. 02081 (Apr. 18, 2024) (here), the New York Court of Appeals answered the question in the affirmative.

Lelchock arose from two certified questions coming from United States Court of Appeals for the Second Circuit. The first question asked, “Under New York law, does an entity that acquires all of another entity’s liabilities and assets, but does not merge with that entity, inherit the acquired entity’s status for purposes of specific personal jurisdiction?”¹ The second question asked, “In what circumstances will the acquiring entity be subject to specific personal jurisdiction in New York?”² In an opinion written by Judge Caitlin J. Halligan,³ the Court answered the first question affirmatively and declined to reach the second as unnecessary.⁴

The plaintiffs in Lelchock are 21 United States citizens who were harmed, and the estate and family members of a U.S. citizen who was killed, in rocket attacks perpetrated in 2006 by the Hizbollah terrorist organization in Israel. Plaintiffs alleged that in the years leading up to the attacks, the Lebanese Canadian Bank (“LCB”) provided extensive financial services to Hizbollah, including millions of dollars in wire transfers that LCB facilitated through a New York-based correspondent bank.

In separate litigation commenced in 2008, many of the plaintiffs sued LCB for its alleged assistance to Hizbollah.⁵ In response to two certified questions, the Court held that the pleadings established the transaction of business in New York with a sufficient “nexus” or “relationship” to give rise to personal jurisdiction over LCB under CPLR 302, New York’s long-arm statute,⁶ and the Second Circuit subsequently held that exercising jurisdiction over LCB comported with due process.⁷ Years later, the Second Circuit also held that the plaintiffs’ complaint in that case adequately stated an aiding-and-abetting claim against LCB under the Anti-Terrorism Act of 1990 (“ATA”) (18 USC § 2331 et seq.), as amended in 2016 by the Justice Against Sponsors of Terrorism Act (“JASTA”) (18 USC § 2333(d)(2)).⁸

During the pendency of the foregoing actions, in February 2011, the United States Department of Treasury designated LCB a “primary money laundering concern”.⁹

In June 2011, LCB and respondent Société Générale de Banque au Liban SAL (“SGBL”), a private company incorporated in Lebanon with headquarters in Beirut, executed a purchase agreement that, according to plaintiffs, expressly provided that, in exchange for a $580 million payment to LCB, “the Seller [LCB] shall transfer, convey, and assign … to the Purchaser [SGBL], and the Purchaser shall receive and assume from the Seller, all of the Seller’s Assets and Liabilities.”

In 2019, plaintiffs brought claims against SGBL, as LCB’s successor, in the United States District Court for the Eastern District of New York for damages stemming from the 2006 attacks.¹⁰ Plaintiffs alleged that SGBL inherited LCB’s jurisdictional status and was subject to personal jurisdiction in New York because it “assumed and bears successor liability for LCB’s liability to the plaintiffs” by virtue of the June 2011 transaction between LCB and SGBL, and that although LCB continued to exist at least for the purpose of defending litigation, it was insolvent.¹¹ SGBL contended that under New York law, a theory of inherited jurisdiction may not be invoked to permit imputation of LCB’s jurisdictional contacts to SGBL.¹²

The district court dismissed the action for lack of personal jurisdiction over SGBL.¹³ The court reasoned that, based upon its reading of several Appellate Division and federal court decisions, it could only impute jurisdictional status in the event of a merger, not an acquisition of all assets and liabilities.¹⁴

On appeal, the Second Circuit determined that New York courts had not addressed whether successor jurisdiction lies when “a successor acquires all of a predecessor’s assets and liabilities, but did not do so through either a statutory merger or a transaction that meets established standards for a de facto merger.”¹⁵ Accordingly, the Second Circuit certified the two questions noted above, and reserved consideration of whether exercising personal jurisdiction over SGBL under a successor jurisdiction theory would comport with constitutional due process. The Court of Appeals accepted the certified questions.¹⁶

Beginning with the first question – whether under New York law, an entity may inherit another entity’s specific personal jurisdiction status when it acquires all of that entity’s liabilities and assets but does not merge with the entity – the Court held that it does.

The Court noted that since the Second Circuit had already found that LCB was subject to specific personal jurisdiction under CPLR 302 for claims “materially identical” to those raised in Lelchock,¹⁷ it would “proceed on the assumption that the predecessor entity here, LCB, [was] subject to specific personal jurisdiction in New York.”¹⁸

The Court rejected SGBL’s argument that plaintiffs had to establish that SGBL independently had contacts sufficient to satisfy CPLR 302, wholly apart from LCB’s contacts with New York.¹⁹ The Court explained that SGBL’s argument “would be so if plaintiffs sought to exercise personal jurisdiction based on SGBL’s own conduct, but,” said the Court, “plaintiffs’ theory of successor jurisdiction relie[d] instead on the imputation of a predecessor entity’s contacts.”²⁰ The Court reasoned that if it “credit[ed] that theory, LCB’s jurisdictional contacts would become SGBL’s jurisdictional contacts for purposes of the long-arm statute, and requiring a showing that SGBL itself had sufficient contacts would render this proposition irrelevant.”²¹ “For this reason,” concluded the Court, “courts that have accepted successor jurisdiction have taken the view that only the contacts of the predecessor, not the successor, must satisfy the long-arm statute.”²²

The Court next turned to the “question of whether the jurisdictional status of a predecessor entity may be imputed to a successor who acquires all assets and liabilities.”²³ The noted that “CPLR 302 does not resolve the question, contrary to what SGBL contends.”²⁴ The Court explained that “[h]owever helpful canons of statutory construction might generally be, the text of the long-arm statute cannot bear the weight SGBL places on it.”²⁵ The observed that SGBL had not shown that the legislature “even contemplated theories of successor jurisdiction, let alone meant to preclude it in a sale of all assets and liabilities.”²⁶

Turning to precedent within the State, the Court noted that, although other courts had ruled on the issue, it had not done so.²⁷ The Court turned to the separate but related question of successor liability for guidance. “Although liability and jurisdiction are distinct legal concepts,” said the Court, “the principles animating one may inform the other.”²⁸ In that instance, the Court identified four exceptions to the general rule that a purchaser of assets is not liable for the seller’s torts: when “(1) [a corporation] 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.”²⁹ The Court reasoned that the foregoing “considerations [were] helpful touchstones in considering successor jurisdiction.”³⁰ Thus, applied to jurisdiction, the Court said that the “[r]elevant factors include the impact of our rule on parties to a potential acquisition, whether imputing jurisdiction fairly reflects the reasonable assumptions and expectations of the parties to such transactions, whether doing so induces responsible parties to internalize responsibility for risks they create, and the impact of imputing jurisdiction on those injured by a predecessor’s acts.”³¹

“Those factors tip in favor of allowing successor jurisdiction where a successor purchases all assets and liabilities,” said the Court.³² This is especially so, noted the Court, because “[s]ophisticated corporate entities such as SGBL will undoubtedly engage in robust due diligence before agreeing to acquire all assets and liabilities of another entity. In doing so, they should understand where jurisdiction over such liabilities may lie and the potential cost if ultimately found liable, and will presumably negotiate a purchase price that is discounted by that prospect.”³³

The Court found that the “history of this case indicates that SGBL, as the successor, would have been on notice when it made this acquisition of LCB’s potential exposure in New York in connection with the terrorist attacks.”³⁴ The Court explained that LCB’s support for Hizbollah and its designation as a primary money laundering concern by the U.S. Department of Treasury before SGBL agreed to assume LCB’s liabilities, in addition to the Licci litigation, which involved allegations nearly identical to those in Lelchock, should have put SGBL on notice that in acquiring LCB’s assets and liabilities in 2011, it would be subject to successor jurisdiction.³⁵

“A contrary rule would give rise to unfortunate incentives,” said the Court:³⁶

Allowing a successor to acquire all assets and liabilities, but escape jurisdiction in a forum where its predecessor would have been answerable for those liabilities, would allow those assets to be shielded from direct claims for those liabilities in that forum. As the Second Circuit put it, a predecessor could “decouple … its assets from its enforceable liabilities, for value.” Injured parties would be left to directly sue the successor in a forum that may well be less favorable, with respect to both the likely outcome and available mechanisms to enforce a judgment. As a consequence, the value of plaintiffs’ claims would likely be reduced, perhaps by a significant amount, leaving the injured parties to absorb those costs themselves. That, in turn, would compromise the objective of having a “responsible source” available to absorb the risk of liability and compensate injured parties.³⁷

Finally, the Court rejected SGBL’s “catch me if you can” response to concerns a plaintiff would not be able to collect on a judgment following a purchase of assets and liabilities transaction:

Additionally, while a predecessor’s assets should be available to satisfy a judgment against it prior to a sale of all assets and liabilities, that may no longer be true afterwards, depending on the terms of the deal. That risk appears to be borne out here: although plaintiffs allege that LCB had substantial assets in 2010, LCB stated in 2017 that it was “defunct, insolvent, and unable to pay any judgment rendered against it”. SGBL’s response to this concern—that plaintiffs can sue SGBL or pursue its assets in other jurisdictions—encourages “catch me if you can” gamesmanship, to the detriment of New York plaintiffs.³⁸

In conclusion, the Court found that there was “no good reason to require plaintiffs to take an indirect and uncertain path to recompense where a predecessor entity allegedly caused harm, subjecting it to jurisdiction in New York, and then agreed to an acquisition of all of its assets and liabilities by a successor, who in turn reaps the benefits of the predecessor’s business in New York while evading jurisdiction here.”³⁹

“Accordingly, the first certified question should be answered in the affirmative and the second question not answered as unnecessary.”⁴⁰

Takeaway

As noted above, the Court held that successor jurisdiction applies to the purchase of assets and liabilities. It should not be forgotten, however, that the rule announced by the Court should be judged against the following factors: the impact of applying successor jurisdiction on parties to a potential acquisition, whether imputing jurisdiction fairly reflects the reasonable assumptions and expectations of the parties to such transactions, whether doing so induces responsible parties to internalize responsibility for risks they create, and the impact of imputing jurisdiction on those injured by a predecessor’s acts. It will be interesting to see how the lower courts will apply Lelchock – that is, will the courts consider the foregoing factors or apply the holding without such a consideration.

Footnotes

67 F.4th 69, 71-72 (2d Cir. 2023).
Id. at 72.
Chief Judge Wilson and Judges Rivera, Garcia, Singas, Cannataro and Troutman concurred.
Slip Op. at *1.
See Licci v. Lebanese Canadian Bank, SAL, 673 F.3d 50, 55 (2d Cir. 2012).
Licci v. Lebanese Canadian Bank, 20 N.Y.3d 327 (2012).
Licci v. Lebanese Canadian Bank, SAL, 732 F.3d 161, 165 (2d Cir. 2013).
See Kaplan v. Lebanese Canadian Bank, SAL, 999 F.3d 842, 847-848, 864 (2d Cir. 2021).
67 F.4th at 72.
Id. at 74.
Id. at 72, 74.
See 2021 WL 4931845, at *2 (E.D.N.Y. 2021).
Id. at *2-*3.
Id. at *2.
67 F.4th at 81.
39 N.Y.3d 1146 (2023).
67 F.4th, at 74; see also Licci, 732 F.3d at 168-174.
Slip Op. at *1.
Id.
Id.
Id. at *1-*2.
Id. at *2 (citing cases).
Id.
Id. SGBL argued that CPLR 302 expressly provides that an agent’s acts may give rise to personal jurisdiction, and that successor jurisdiction is available only where the successor and predecessor are “one and the same” because they are alter egos, or via a merger or corporate reorganization. Applying the principle of expressio unius est exclusio alterius (or “the expression of one thing is the exclusion of the other”), SGBL contended that CPLR 302 precludes successor jurisdiction in all other circumstances.
Id.
Id.
Id. (citing, inter alia, Gronich & Co., Inc. v. Simon Prop. Grp., Inc., 180 A.D.3d 541, 542 (1st Dept. 2020) (determining without explanation that a merger imputes successor jurisdiction, but “merely acquir[ing] the assets of the predecessor company” does not) (citing U.S. Bank N.A. v. Bank of Am. N.A., 916 F.3d 143, 156-158 (2d Cir. 2019)); Semenetz v. Sherling & Walden, Inc., 21 A.D.3d 1138, 1140-1141 (3d Dept. 2005) (broadly stating that “in certain circumstances a successor corporation may inherit its predecessor’s jurisdictional status,” but finding no such jurisdiction on “the facts of the subject case” (internal quotation marks omitted)); BRG Corp. v. Chevron U.S.A., Inc., 163 A.D.3d 1495, 1496 (4th Dept. 2018) (confirming issue of successor jurisdiction is “novel and unsettled”); Applied Hydro—Pneumatics v. Bauer Mfg., 68 A.D.2d 42, 46 (1979) (holding that successor corporation’s nunc pro tunc ratification and adoption of its predecessor’s acts in New York yields personal jurisdiction over the successor without discussing imputation)).
Id. (citation omitted).
Id. at *2-*3 (citations omitted).
Id. at *3.
Id.
Id.
Id. (citations omitted).
Id.
Id. at *3-*4.
Id. at *4
Id. (citations omitted).
Id. (citation omitted).
Id. (citation omitted).
Id.

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.