Commercial Division Recognizes Successor Liability as Separate Cause of Action, Not Just a Theory of Liability
January 14, 2021
“Successor liability”, is it a theory or distinct claim or cause of action?
In a recent decision, Justice Sherwood analyzed the applicability of successor liability as a distinct cause of action, rather than merely a theory of liability in New York. In Meyer v Blue Sky Alternative Investments LLC, plaintiff Meyer moved to amend his complaint to add a new party, RBP Partners, LLC as successor to defendant Blue Sky Alternative Investments, LLC and to assert a new claim of successor liability against defendant RBP.
To demonstrate the merits of the successor liability claim, plaintiff argued that RBP is a “mere continuation” of Blue Sky, whereby all of Blue Sky’s assets had been stripped and transferred to RBP and although RBP is not owned by exactly the same individuals as Blue Sky, Plaintiff believed that he would be able to show a continuity of ownership after discovery.
In opposition, RBP argued that successor liability is not a cognizable claim under New York law, but merely a theory for imposing liability on a defendant based on a predecessor’s conduct and that plaintiff failed to allege a transaction between Blue Sky and RBP such as a stock or asset purchase agreement which, defendant argued, is a requisite predicate for its successor liability claim. Further, RBP opposed the allegation of successor liability by arguing that Blue Sky still exists, RBP and Blue Sky did not share corporate officers or directors, and there was no proof of any transfer of assets from Blue Sky to RBP or continuation of the same business.
In New York, the general rule is that a purchaser of the assets of another corporation is not liable for the seller’s liabilities. However, this rule is not without exceptions.
In a previous blog post I wrote about the exceptions to this general rule and analyzed that a purchaser can be held liable for liabilities of the seller in the following circumstances: (1) the buyer 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 (Marcum LLP v Fazio, Mannuzza, Roche, Tankel, Lapilusa, LLC). In Marcum, the Court analyzed whether a purchaser could be held liable for a seller’s liabilities under a theory of successor liability, not a separate cause of action. Ultimately, the Court in Marcum found that, based on the parties’ Business Combination Agreement, the purchaser corporation only assumed liability for seller’s liabilities arising in the ordinary course of business and did not impose liability for seller’s litigations.
The Court considers a successor a “mere continuation” of its predecessor (under the third exception to the general rule) where:
(i) all of substantially all assets of the predecessor are transferred to the successor corporation;
(ii) only one corporation exists after the transfer,
(iii) assumption of an identical or nearly identical name,
(iv) retention of the same corporate officers or directors, and
(v) continuation of the same business
(Miot v Miot).
Here, the Court acknowledged the legitimacy of successor liability as a separate cause of action rather than a mere theory of liability and found that plaintiff’s proposed complaint successfully stated a claim of successor liability against RBP under a theory that RBP is a “mere continuation” of Blue Sky where plaintiff specifically alleged that Blue Sky ceased to exist and had its assets stripped and transferred to RBP, Blue Sky’s principals have become principals and corporate officers of RBP, RBP is located in the same building and office suite as Blue Sky, and RBP invests in the same sectors as Blue Sky.
Importantly, the Court also rejected RBP’s argument that plaintiff is required to allege a transaction between the successor and predecessor corporation as a necessary predicate to a finding of successor liability.
Ultimately, the Court’s decision further reinforces that “successor liability” as a separate and distinct cause of action, rather than a mere theory of liability, is here to stay (at least in New York County) as long as plaintiffs can meet their burden with respect to the “mere continuation” theory.