The opinion of the court was delivered by: LASKER
Mahin R. F. Ladjevardian and Zohreh Ladjevardi sue Laidlaw-Coggeshall, Inc., LAC, Inc., Joseph R. Lauzon and Henry B. Laidlaw, alleging securities laws violations.
Lauzon is a registered stock broker, employed successively by LAC (then known as Laidlaw, Inc.), and Laidlaw-Coggeshall which acquired the assets of LAC in April, 1973. Laidlaw was at all relevant times Lauzon's superior. Plaintiffs allege that Lauzon, who was their broker, churned their accounts, engaged in unauthorized trading, falsified statements and generally abused plaintiffs' trust. Laidlaw and the corporate defendants are alleged to have induced and participated in the fraud by improperly supervising the accounts, rewarding Lauzon for producing excessive commissions and profits and "abusing the plaintiffs' confidence."
Laidlaw-Coggeshall moves for summary judgment, urging that as a matter of law it is not liable for any wrongs committed prior to its acquisition of LAC's assets, when Laidlaw and Lauzon became its employees. It further asserts that it did nothing illegal with respect to plaintiffs' accounts during the period after the acquisition. Plaintiffs take issue with both propositions, contending that Laidlaw-Coggeshall assumed the liabilities of Laidlaw, Inc., and that independent wrongs were committed during the period it handled their accounts.
Plaintiffs opened securities accounts with the partnership known as Laidlaw & Company in 1966. In 1969, when the partnership incorporated, their accounts were automatically transferred to Laidlaw, Inc., the newly formed corporation. In 1973, Laidlaw, Inc. entered into an agreement with Coggeshall & Hicks, a brokerage firm, whereby the latter was to acquire certain assets of the former in exchange for payments to Laidlaw, Inc.
According to the terms of the agreement, Laidlaw, Inc., was to change its name to one not involving "Laidlaw" (it chose LAC) and would have no interest in any corporation using the word "Laidlaw" in its name except for a pre-existing interest in two Canadian firms. (para. 1.2 Exhibit A, Affidavit of Robert H. Clayton, July 22, 1976) Coggeshall & Hicks was thereafter to be known as Laidlaw-Coggeshall, Inc. and was to acquire, in addition to office leases, fixtures, and leasehold improvements, such employees and customer accounts of Laidlaw, Inc. as Laidlaw-Coggeshall requested. After the acquisition, certain employees of Laidlaw, Inc., notably co-defendants Henry B. Laidlaw, who was President of Laidlaw, Inc. and remains President of LAC, and Joseph Lauzon, a registered broker were retained by Laidlaw-Coggeshall. Henry Laidlaw became a Senior Vice-President, director and voting stockholder of Laidlaw-Coggeshall, and Joseph Lauzon continued to be employed as a stock broker.
Prior to the acquisition, "Mahin" and "Zohreh" were notified of the pending transaction and advised that unless they objected, their accounts would be transferred to Laidlaw-Coggeshall. The notice referred to the transaction as a "combination of the two firms" and a later memorandum confirmed the fact that the accounts had been transferred pursuant to the firms' "merger agreement dated April 13, 1973."
Early in 1973, before the acquisition, Mahin and Zohreh became dissatisfied with the services of Laidlaw, Inc., and instructed that firm to make no further purchases on their behalf except with their written authorization. They also made several demands on Laidlaw, Inc., including the delivery of Zohreh's stocks to Chase Manhattan Bank. These demands were allegedly not met. According to the plaintiffs, from September 1970 through December 1972, Laidlaw, Inc., Lauzon and Henry B. Laidlaw, "fraudulently churned and milked" their accounts by means of "unauthorized borrowings of funds and securities, churning of accounts, false and misleading representations . . . and other breaches of trust and violations of securities laws and regulations thereunder." (para. 4 Affidavit of Myron S. Isaacs, August 31, 1976) Although the churning had concededly ended by December 1972, the plaintiffs charge that the "milking continued, with Laidlaw-Coggeshall collecting all that was left in Mahin's account . . . and [substantial amounts] from Zohreh's account . . . plus $1,442 in commissions." (Plaintiffs' Memorandum in Opposition to Motion for Summary Judgment at 9) Plaintiffs seek to hold Laidlaw-Coggeshall liable for these actions which occurred between April 16, 1973 and December 31, 1973 when their associations with that firm ended.
According to plaintiffs, although LAC continued in existence after the sale, it was no more than an "inactive shell" and has now executed an Assignment for the Benefit of Creditors. (para. 2(b) Supplemental Affidavit of Myron Isaacs, September 18, 1976) They do not, however, assert that the sale was fraudulent or that LAC received inadequate consideration for its assets.
Corporate Liability for the Debts of a Predecessor
A corporation that purchases the assets of another company is not liable for the liabilities of its predecessor absent a showing that 1) it expressly or impliedly agreed to assume the liabilities; 2) there was a merger or consolidation of the two firms, or 3) the buyer is a "mere continuation" of the seller.
Kloberdanz v. Joy, 288 F. Supp. 817, 820 (D.Colo.1968), citing, 15 Fletcher, Cyclopedia of Law of Private Corporations § 7122 (1961 Rev.Vol.) In the instant case plaintiffs have failed to establish that either of the last two exceptions to the general rule of nonliability is applicable. However, on the present record it is not possible to determine whether or not Laidlaw-Coggeshall impliedly assumed liability for the debts of LAC. Such a finding can only be made after the facts have been fully developed at trial. Accordingly, for reasons set forth in detail below, Laidlaw-Coggeshall's motion for summary judgment as to its liability for the acts of its predecessor must be denied.
A successor corporation is liable for the debts of its predecessor where there is a merger or consolidation of the two firms. A merger contemplates the "absorption of one corporation by another which retains its name and corporate identity with the added capital, franchises and powers of a merged corporation." Absent compliance with statutory requirements a merger may be considered de facto. See Kloberdanz, supra. Fletcher, supra § 7041. A consolidation envisions the joining together of the two corporations so that a totally new corporation emerges and the two others cease to exist. The fact that the companies might have described their agreement as a "merger" or "consolidation" is not controlling. Metropolitan Edison Co. v. Commission of Internal Revenue, 98 F.2d 807, 809 (3d Cir. 1938), aff'd, 306 U.S. 522, 59 S. Ct. 634, 83 L. Ed. 957 (1939). Nor is the fact that the purchaser adopted part of the seller's name. See McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 264 A.2d 98 (1970), where the vendor sold its name, good will, and agreed to change its name, and the purchaser retained the vendor's vice-president, secretary and treasurer in its employ for one year following the sale. The fact that the two corporations have an identity of members or officers does not necessarily suggest that the corporations do not have a separate identity. Id., see also Owl Fumigating Corp. v. California, 24 F.2d 718 (D.Del.1928), aff'd, 30 F.2d 812 (3d Cir. 1929); Hudson Minneapolis, Inc. v. Hudson Motor Car Co., 124 F. Supp. 720 (D.Minn.1954). Rather, to find that a de facto merger has occurred there must be a continuity of the selling corporation, evidenced by the same management, personnel, assets and physical location; a continuity of stockholders, accomplished by paying for the acquired corporation with shares of stock; a dissolution of the selling corporation, and the assumption of liabilities by the purchaser. Shannon v. Samuel Langston Company, 379 F. Supp. 797 (W.D.Wis.1974). See generally, Cortland Specialty Co. v. Commissioner of Internal Revenue, 60 F.2d 937 (2d Cir. 1932).
In the case at bar there was neither a consolidation nor a merger, for LAC continued to exist after the sale and continues to be entitled to the installment payments for the assets. Moreover, the purchase of assets was not effected through the exchange of stock and the two corporations have retained separate identities, notwithstanding the fact that there is an identity of certain ...