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CARGO PARTNER AG v. ALBATRANS INC.

United States District Court, Southern District of New York


March 13, 2002

CARGO PARTNER AG, PLAINTIFF,
V.
ALBATRANS INC., ET AL., DEFENDANTS.

The opinion of the court was delivered by: Batts, District Judge.

  ADOPTION OF REPORT AND RECOMMENDATION

On November 21, 2001, Magistrate Judge Douglas F. Eaton issued a Report and Recommendation recommending that this Court grant the Albatrans, Inc. ("Albatrans" or "Defendant") Motion to Dismiss Counts I-VI of the Plaintiffs Complaint. See 28 U.S.C. § 636(b)(1)(C). With respect to these Counts Magistrate Judge Eaton noted that the Plaintiff could, without applying for leave of court, amend its Complaint as a matter of course. See Report at page 91, n. 3. (explaining that a motion to dismiss is not a responsive pleading pursuant to Rule 15 of the Federal Rules of Civil Procedure). Magistrate Judge Eaton also recommended that this Court grant Summary Judgment in favor of Albatrans on Count VII of the Complaint, The Court is in receipt of Plaintiffs Objections to Magistrate Judge Eaton's Report and Recommendation as well as the Defendant's Response thereto. Plaintiff submitted a Reply in violation of this Court's Individual Rules that will not be considered by this Court.

28 U.S.C. § 636(b)(1)(C) requires the Court to make a "de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made." After conducting a de novo review, the Court may accept, reject, or modify, in whole or in part, the findings or recommendations made by the Magistrate. 28 U.S.C. § 636(b)(1)(C).

Plaintiff commenced this civil action to recover money allegedly owed to it by Defendants Albatrans and Chase, Leavitt (Custom House Brokers), Inc. ("Chase, Leavitt") for services that Plaintiff allegedly provided to Chase, Leavitt. The facts in this matter are sufficiently set forth in Magistrate Judge Eaton's Report and Recommendation and will not be repeated here.

At the outset the Court notes that Plaintiff does not object to the recommendation that this Court grant the Albatrans Motion for Summary Judgment on Count VII. See Pl.'s Objections at 2, n. 2 (withdrawing Count VII). Plaintiff does object, however, to the recommended dismissal of Counts I-VI. Plaintiff argues (1) that Magistrate Judge Eaton incorrectly interpreted the requirements for pleading the existence of a de facto merger, (2) that Judge Eaton failed to address the possibility that the asset purchase at issue in this case was designed to evade federal law, (3) that Judge Eaton ignored the procedural posture of the cases cited in that section of the Report that recommends the dismissal of Counts I-V, and (4) that Count VI should not be dismissed since disputed issues of material fact exist with respect to whether the Albatrans and Chase Leavitt transaction was in fact fraudulent.

The Court has conducted a de novo review of the portions of the Report and Recommendation to which Plaintiff has objected and finds no error. Nevertheless, the Court finds it necessary to address the Plaintiffs first objection in some detail. Plaintiff argues that Judge Eaton erroneously concluded that in order to plead the existence of a de facto merger there must be a continuity of the selling corporation (evidenced by the same management, personnel, assets and physical location), a continuity of stock holders, a dissolution of the selling corporation, and the assumption of liabilities by the purchaser.*fn1 See Pl's Objections at 5-6; Report at pages 96-97 (citing Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc., 775 F.2d 38, 42 (2d Cir. 1985) as adopting the definition of de facto merger set forth in Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F. Supp. 834, 839 (S.D.N.Y. 1977)). Further, the Plaintiff argues that even if the Second Circuit's decision in Arnold did imply that all four factors are required in order to plead a de facto merger, any such holding would not be binding upon courts of this Circuit if New York State courts have ruled to the contrary, as Plaintiff argues that they have. See Pl.'s Objections at 6. The Plaintiff relies principally on two decisions from the New York Appellate Divisions, Ladenburg Thalmann & Co., Inc. v. Tim's Amusements, Inc., 275 A.D.2d 243, 712 N.Y.S.2d 526 (N.Y.App.Div. 2000) and Fitzgerald v. Fahnestock & Co., Inc., 286 A.D.2d 573, 730 N.Y.S.2d 70 (N.Y.App.Div. 2001). According to Plaintiff, the existence of these two decisions alone demonstrates that Judge Eaton erred in his conclusion that all of the above-mentioned requirements of a de facto merger must be pled in contract actions.*fn2 See Pl.'s Objections at 8. Plaintiff overstates the importance of these Appellate Division cases.

"The role of a federal court sitting in diversity is to construe and apply state law as . . . the state's highest court would." Bull & Bear Group, Inc. v. Fuller, 786 F. Supp. 388, 390 (S.D.N.Y. 1992) (quoting City of Johnstown v. Bankers Standard Insurance Co., 877 F.2d 1146, 1153 (2d Cir. 1989) (internal quotations omitted)). In determining the law of the State of New York "`[w]here, the law . . . is uncertain or ambiguous, [federal courts must] carefully predict how the highest court of the state would resolve the uncertainty or ambiguity.'" Elliott Associates, L.P. v. Banco de la Nacion, 194 F.3d 363, 370 (2d Cir. 1999) (quoting Bank of New York v. Amoco Oil Co., 35 F.3d 643, 650 (2d Cir. 1994)). Although the best indicators of how it would decide are often the decisions of lower state courts, a federal court is free to consider all of the resources to which the highest court of the state could look, including decisions in other jurisdictions on the same or analogous issues. Id. (citations and quotations omitted); see also Cowen & Co. v. Tecnoconsult Holdings Ltd., No. 96 Civ. 3748, 1996 WL 391884, at *4 n. 3 (S.D.N.Y. July 11, 1996) ("Although [a district court] may look to lower court decisions for guidance on questions of state law, [it] is bound only by decisions by the New York Court of Appeals and the Court of Appeals for the Second Circuit."); see generally Harris v. Joint Plumbing Industry Board, 474 F. Supp. 1284, 1287 n. 4 (S.D.N.Y. 1979) (stating that "when the highest court of the state has not spoken, the decision of an intermediate state court is an important `datum' to be considered in construing state law." (citing Commissioner v. Estate of Bosch, 387 U.S. 456, 477, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967))); Banks v. Yokemick, 144 F. Supp.2d 272, 285 (S.D.N.Y. 2001) (noting that "[t]hough no settled doctrine has been articulated in the Second Circuit to guide the district court treatment of state court dictum, other circuits have declared firmly that federal courts interpreting state law must give appropriate consideration to any clear expressions of intent concerning the application of state statutes by the state's highest court[ ], even if such statements may be deemed dicta" (citing Union Pacific R.R. Co. v. Reilly Indus., Inc., 215 F.3d 830, 840 (8th Cir. 2000))).

While it is true that the New York Appellate cases, cited by Plaintiff in his Objections merit consideration and are indeed an important "datum" to be considered, these cases are not binding on this Court. After conducting a de novo review of the Plaintiff's first objection this Court agrees with Judge Eaton's careful, thoughtful, and thorough analysis in which he concludes that the "the New York Court of Appeals . . . would apply the traditional `de facto merger' exception in cases involving the claims of trade creditors, and would not adopt a definition of `de facto merger' which omitted the requirement of ownership continuity.". See Report at page 112.

Accordingly, it is hereby

ORDERED AND ADJUDGED as follows:

(1) The Report and Recommendation of Magistrate Judge Eaton be and the same hereby is approved, ratified and adopted in its entirety.

(2) Plaintiff shall file its Amended Complaint, if any, no later than 45 days from the date of this Order. Failure to do so shall constitute a waiver of that right. In the event that Plaintiff chooses to file an Amended Complaint, Defendants named therein shall either move or answer within 30 days from the date that the Amended Complaint is filed with the Court.

(3) Since this Court has Granted the Albatrans Motion for Summary Judgment with respect to Count VII of the Complaint, and since the Plaintiff seeks to withdraw that Count, Plaintiff is precluded from alleging the same cause of action contained in Court VII of the Plaintiffs original Complaint.

(4) Any Amended Complaint must also set forth adequately what events took place in the State of New York such that the Southern District of New York is the appropriate venue for this civil action. Further, the Amended Complaint should also allege facts sufficient to establish that this Court has personal jurisdiction over each named Defendant.

SO ORDERED

REPORT AND RECOMMENDATION TO JUDGE BATTS

Plaintiff Cargo Partner AG brings this diversity action on behalf of itself and four affiliates to recover amounts due for services provided to defendant Chase, Leavitt (Custom House Brokers), Inc.*fn1 ("Chase Leavitt"). Plaintiff seeks recovery from Chase Leavitt and also from defendant Albatrans, Inc., which subsequently purchased most of Chase Leavitt's assets. The seven-count Complaint alleges that Albatrans is liable on the grounds of (1) successor liability (Count I, and also Counts II to V which are dependent on Count I), (2) fraudulent conveyance under New York's Debtor and Creditor Law, §§ 273, 276 and 278 (Count VI), and (3) failure to comply with New York's Bulk Transfer Act, NYUCC §§ 6-101 et seq. (Count VII).

Albatrans has moved to dismiss the Complaint as against it pursuant to Rule 12(b)(6), Fed.R.Civ.P. Alternatively, Albatrans requests the Court to treat this motion as one for summary judgment. Both parties have submitted affidavits.

The issues raised on this motion relate almost exclusively to the question of whether Plaintiff has shown a basis for imposing liability on Albatrans for Chase Leavitt's debt to Plaintiff.*fn2 The validity of Plaintiffs claims against Chase Leavitt is not at issue on the present motion.

I recommend that the motion to dismiss be granted with respect to the claims alleging successor liability (Counts I to V) and fraudulent conveyance (Count VI). Pursuant to Rule 15(a), Fed.R.Civ.P., Plaintiff may file an amended complaint as a matter of course.*fn3

I recommend that the motion for summary judgment be granted with respect to the Bulk Transfer claim (Count VII).

I. BACKGROUND FACTS

This section sets forth the background facts alleged in the Complaint. Factual allegations relating specifically to the individual Counts will be set forth in the discussion of those Counts. Citations, unless otherwise identified, are to paragraphs of the Complaint.

1. Plaintiff, a common carrier for hire, is an Austrian stock company, with its principal place of business in Austria. ¶ 1.

2. Defendant Chase Leavitt is a Maine corporation with offices and registered agent in Portland, Maine. Upon information and belief, at all relevant times, it transacted business and/or was and is doing business within the jurisdiction of our Court. ¶ 3.

3. Defendant Albatrans is a New York corporation with its principal place of business in Jamaica, New York. ¶ 2.

4. Chase Leavitt retained Plaintiff to provide freight forwarding services. ¶ 6. Plaintiff and it affiliates provided such services to Chase Leavitt at various times from November 5, 1999 through February 6, 2001, as reflected in attached invoices.*fn4 ¶¶ 6(a), (b) and (c); Exhibits A, B, and C. Remaining unpaid are the sums of $234,800.93 plus 6,511.50 Austrian schillings.*fn5 ¶ 7.

5. Upon information and belief, on or about February 7, 2001, Chase Leavitt transferred all or substantially all of its assets to Albatrans. ¶ 8.

II. LEGAL ANALYSIS

Albatrans has moved to dismiss the Complaint as against it or, in the alternative, for summary judgment.

A. Legal Standards.

With respect to a motion to dismiss under Rule 12(b)(6), the Court must accept as true all factual allegations set forth in the Complaint, and must read the Complaint liberally, drawing all reasonable inferences in Plaintiffs favor. Charles W. v. Maul, 214 F.3d 350, 356 (2d Cir. 2000). The court may dismiss the Complaint only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 4546, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

With respect to any claim based on allegations of fraud, the allegations must meet the specificity requirements of Rule 9(b), Fed.R.Civ.P.

If, with respect to any Count, the Court moves beyond the Complaint (and documents incorporated therein by reference) to consider the affidavits and exhibits submitted by the parties in support or opposition to the motion, then the motion should be treated as a motion for summary judgment in accordance with Rules 12(c) and 56, Fed.R.Civ.P. Groover v. West Coast Shipping Co., Inc., 479 F. Supp. 950 (S.D.N.Y. 1979) (Sweet, J.).

A motion for summary judgment under Rule 56 should be granted only if "there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Rule 56(c). The court is required to examine the pleadings and the affidavits in the light most favorable to the party opposing the motion. Poller v. Columbia Broadcasting System, 368 U.S. 464, 473, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962). The court must resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought. Gallo v. Prudential Residential Services, Limited Partnership, 22 F.3d 1219, 1223 (2d Cir. 1994).

In support of its motion, Albatrans submitted an Affidavit of Giovanni Chiarelli, its Managing Director ("Chiarelli Aff."). The Asset Purchase Agreement (the "Purchase Agreement") pursuant to which Albatrans purchased the assets of Chase Leavitt is attached as Exhibit B to the Chiarelli affidavit. Plaintiff submitted an opposing Declaration of Stefan Krauter, Plaintiffs Chairman ("Krauter Decl."), and Albatrans then submitted a Reply Affidavit of Mr. Chiarelli ("Chiarelli Reply Aff.").

B. Application of New York Law.

In a diversity case, the court must apply the choice of law rules of the forum state — in this case New York — to determine which state's substantive law governs the issues. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). However, where the parties have agreed to the application of the forum law, their consent concludes the choice of law inquiry. American Fuel Corp. v. Utah Energy Development Co., 122 F.3d 130, 134 (2d Cir. 1997). In the case at bar, both parties have briefed the issues under New York law and thereby have consented to the application of the law of the forum state. Thompson Kernaghan & Co. v. Global Intellicom, Inc., 1999 WL 717250, * 2 (S.D.N.Y. 1999) (Cote, J.).*fn6

C. Successor Liability.

Count I of the Complaint, which is against Albatrans only, seeks a declaration that Albatrans has "successor liability" for Chase Leavitt's debt to Plaintiff.

1. The Four Exceptions to the General Rule of Non-Liability. The general common-law rule is that a corporation that merely purchases the assets of another corporation is not liable for the seller's debts and liabilities. Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 244-45, 464 N.Y.S.2d 437, 440, 451 N.E.2d 195 (1983), citing 19 C.J.S. Corporations § 1380 and 15 Fletcher Cyclopedia of the Law of Private Corporations § 7122 (rev. ed.).*fn7 (Fletcher, perm. ed. rev. vol. 1999, is hereinafter referred to as "Fletcher"). There are four well-established exceptions. The purchaser is liable for the obligations of the seller if (1) the purchaser expressly or impliedly agrees to assume such obligations, or (2) there was a consolidation or merger of the seller and the purchaser, or (3) the purchaser is a mere continuation of the seller, or (4) the transaction is entered into fraudulently in order to escape liability for such obligations. Schumacher, 59 N.Y.2d at 245, 464 N.Y.S.2d at 440, 451 N.E.2d 195.

Plaintiff contends that Albatrans has successor liability on the grounds (i) that there was a de facto merger of Chase Leavitt and Albatrans, and (ii) that Albatrans is a mere continuation of Chase Leavitt. Pl.Mem. pp. 4-11.*fn8 Count I of the Complaint alleges (on information and belief) the following facts as the basis for such successor liability:

(a) Albatrans purchased all or substantially all of Chase Leavitt's assets. ¶ 8.

(b) There has been substantial continuity of Chase Leavitt's business operations following the transfer; telephones are answered "Albatrans Chase Leavitt." Albatrans continues to pursue the same, or substantially the same, business formerly pursued by Chase Leavitt, with the same, or substantially the same, premises, work force, and supervisory personnel; Albatrans has given a five-year employment contract to Alison Leavitt, the President of Chase Leavitt. ¶ 10.

For the reasons stated below, I conclude that Complaint's allegations are insufficient to state a claim for successor liability under any of the exceptions.

2. The Basis of the "Mere Continuation" and "De Facto Merger" Exceptions. The general rule (that the purchaser of a corporation's assets does not become liable for the seller's obligations) reflects the principle that liabilities adhere to the corporate entity. In a merger or corporate reorganization, the corporate identity of the predecessor is absorbed by the surviving corporation; the predecessor's shareholders maintain their interest in the seller's assets through their ownership of the surviving corporation's stock, and the survivor becomes liable for the predecessor's liabilities. In a bona fide asset sale, the seller maintains its own corporate identity; the seller's shareholders do not retain an interest in the transferred assets, and the seller's creditors must continue to look to the seller (and the consideration it received) to satisfy their claims.

The "mere continuation" and "de facto merger" exceptions originated in cases where the seller's shareholders retained their interest in the transferred assets through an ownership interest in the purchasing corporation, while freeing the assets from the claims of the seller's creditors by disguising the transaction as an asset sale.*fn9 In such cases, the courts determined that the form of the transaction did not accurately portray its substance, and they imposed successor liability upon the purchaser.

Judge Gertner, in National Gypsum Company v. Continental Brands Corp., 895 F. Supp. 328, 336-338 (D.Mass. 1995), reviewing numerous cases where courts found a "mere continuation" or "de facto merger," summarized them by stating that "courts would scrutinize corporate asset transfers to determine whether they permitted shareholders to retain the benefits of their ownership interest while leaving creditors without a remedy." Id. at 337.

3. Mere Continuation. The "mere continuation" exception refers to a continuation of the selling corporation in a different form, and not merely to a continuation of the seller's business. It applies where a purported asset sale is in effect a form of corporate reorganization. Schumacher, 59 N.Y.2d at 245, 464 N.Y.S.2d at 440, 451 N.E.2d 195, citing Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F. Supp. 834, 839 (S.D.N.Y. 1977), and McKee v. Harris-Seybold Company, 109 N.J. Super. 555, 264 A.2d 98 (Law Div. 1970), affd., 118 N.J. Super. 480, 288 A.2d 585 (App.Div. 1972).

In Ladjevardian, Judge Lasker said:

For this exception to come into operation "the purchasing corporation must represent merely a `new hat' for the seller." McKee v. Harris-Seybold Co., supra. That is, it is not simply the business of the original corporation which continues, but the corporate entity itself. National Dairy Products v. Borden, 363 F. Supp. 978 (D.Wis. 1973). A continuation envisions a common identity of directors, stockholders and the existence of only one corporation at the completion of the transfer. Kloberdanz [v. Joy Manufacturing Co., 288 F. Supp. 817 (D.Colo. 1968)]. What it accomplishes is something in the nature of a corporate reorganization, rather than a mere sale.

431 F. Supp. at 839 (emphasis added). Accord, Graham v. James, 144 F.3d 229, 240 (2d Cir. 1998). In Schumacher, the New York Court of Appeals made clear that this requires actual dissolution of the seller, stating:

The exception refers to corporate reorganization, however, where only one corporation survives the transaction; the predecessor corporation must be extinguished. . . . Since [the seller] survived the instant purchase agreement as a distinct, albeit meager, entity, the Appellate Division properly concluded that [the purchaser] cannot be considered a mere continuation of [the seller].

59 N.Y.2d at 244, 464 N.Y.S.2d at 440, 451 N.E.2d 195.*fn10

The Complaint does not allege that Chase Leavitt has dissolved, or that it is to be dissolved as part of the transaction. Accordingly, the Complaint fails to allege facts sufficient to support a finding of successor liability under the "mere continuation" exception as defined by New York law.

Since the absence of an allegation as to the dissolution of Chase Leavitt is dispositive with respect to the "mere continuation" basis for successor liability, it is unnecessary to consider the Complaint's lack of an allegation that Albatrans has the same, or even any of the same, shareholders or directors as Chase Leavitt.*fn11

4. De Facto Merger. The answer with respect to de facto merger is less clear. The Complaint alleges a transaction in which the seller's business was transferred virtually intact, but without any of the seller's shareholders having an ownership interest in the purchaser. A complaint alleging only that the purchaser has continued the seller's business is insufficient to meet the traditional requirements for a de facto merger. (See section (a) below.) However, New York courts have, in recent years, expanded the "de facto merger" exception in products liability cases, holding that a de facto merger could be found even where there was no ownership continuity. (See section (b) below.) Subsequent cases have not clearly ruled on whether this expanded definition of "de facto merger" is applicable beyond the tort area. (See section (c) below.)

Thus, the essential question in the case at bar is whether the expanded "de facto merger" exception applied in products liability cases — permitting a de facto merger to be found in the complete absence of ownership continuity — is applicable outside the tort area. In order to answer this question, it will be helpful to review the definition of "de facto merger" as traditionally applied under New York law, and the basis for the expansion of successor liability in the products liability area.

(a) The Traditional Definition of a De Facto Merger. "A de facto merger occurs where one corporation is absorbed by another, but without compliance with the statutory requirements for a merger." Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc., 775 F.2d 38, 42 (2d Cir. 1985) (citing Ladjevardian). See also Bowers v. Andrew Weir Shipping, Limited, 27 F.3d 800, 806 (2d Cir. 1994), where the Second Circuit said: "It is quite clear that a de facto merger is no different conceptually from an ordinary merger, except for the fact that there has not been `compliance with the statutory requirements for a merger' [quoting Arnold]."

Schumacher does not specifically discuss the requirements for the "de facto merger" exception.*fn12 However, its citation of Ladjevardian (S.D.N.Y. 1977) and McKee (Superior Court of New Jersey, Law Div. 1970) with respect to the definition of a "mere continuation" suggests that we should also look to those cases for a definition of "de facto merger."

In Ladjevardian, Judge Lasker listed four requirements for finding a de facto merger:

[T]o 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.Mich. 1974) [applying New Jersey law as set forth in McKee in 1970]. See generally, Cortland Specialty Co. v. Commissioner of Internal Revenue, 60 F.2d 937 (2d Cir. 1932).

431 F. Supp. at 839 (emphasis added). This passage, which requires that all four of these factors be present, clearly means that a "continuity of stockholders" is necessary to find a de facto merger. McKee (which was, indirectly, the source of Ladjevardian's requirements) specified the same four factors as the key elements of a de facto merger. 109 N.J. Super. at 56567, 264 A.2d at 104.*fn13 See page 100 below.

The Second Circuit adopted Ladjevardian's statement of the elements (including continuity of stockholders) that "must" be present for a de facto merger. Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc., 775 F.2d 38, 42 (2d Cir. 1985) (quoting the above passage from Ladjevardian).*fn14 Arnold's further holding that "there is no requirement that all of the events that are necessary to a finding of de facto merger occur at the same time," 775 F.2d at 42 (emphasis added), repeats the point that all four elements are required. The Second Circuit reiterated this point in In re Augie/Restivo Baking Company, Ltd., 860 F.2d 515, 519-20 (2d Cir. 1988), stating: "In Ladjevardian [full citation omitted], the prerequisites for a de facto merger were summarized. . . . Several of these requirements are unfulfilled in the instant case."

Accordingly, under Arnold (as under the rule in other jurisdictions*fn15), continuity of stockholders is required for a de facto merger under the traditional de facto merger exception. See Shamis v. Ambassador Factors Corporation, 34 F. Supp.2d 879, 898 (S.D.N.Y. 1999) (Sweet, J., applying New York law in a trade creditor case) (quoting Arnold's requirements and holding that "the continuity of stockholders required for a finding of a de facto merger is not present here"); McGillicuddy v. Laidlaw, Adams & Peck, Inc., 1995 WL 1081307, *11 (S.D.N.Y.) (Grubin, M.J., applying New York law in a judgment debtor case) (quoting the same requirements, citing Ladjevardian, and holding that "most importantly, there was no `continuity of stockholders' between [the seller] and [the purchaser]."); State of New York v. Westwood-Squibb Pharmaceutical Co., Inc., 981 F. Supp. 768, 787-88 (W.D.N.Y. 1997) (Curtin, J.) (stating the Arnold factors and adding: "The Arnold Graphics court also ruled that all of these factors `must' be satisfied."); Town of Oyster Bay v. Occidental Chemical Corporation, 987 F. Supp. 182, 205 (E.D.N.Y. 1997) (Block, J.) ("Courts have not been willing to overlook the identity of shareholders requirement and have consistently refused to find that a de facto merger has taken place without such a showing."); State of New York v. Panex Industries, Inc., 1996 WL 378172, *8 (W.D.N.Y. June 24, 1996) (Elfvin, J.) ("The United States Court of Appeals for the Second Circuit has consistently ruled that all of these factors `must' be satisfied," citing Arnold, and holding that the "lack of continuity of ownership compels this Court to find that no de facto merger occurred").

Arnold's holding, that continuity of stockholders is required under the traditional "de facto merger" exception, is binding on the courts of this circuit applying New York law, unless the New York courts rule to the contrary. As discussed in sections 3(b) and 3(c) below, New York intermediate courts have expanded the "de facto merger" exception in products liability cases, and there is a question as to whether this expanded de facto merger exception is applicable outside the tort area. Before I proceed to that discussion, there are two issues, relating to the district courts' application of the rule in Arnold, which merit attention.

The first issue is whether the prerequisites specified in Arnold must be strictly applied. The Second Circuit has not ruled on this point. Since the "de facto merger" exception is intended to look at the substance, rather than the form, of the transaction, it seems that a degree of flexibility in the application of Arnold's requirements is appropriate where a factor is present in substance (although not in the specific form stated in Arnold). For example, Arnold calls for a dissolution of the seller, but it seems reasonably sufficient if the seller has become an empty shell even though not dissolved. For a second example, Arnold calls for continuity of stockholders accomplished through payment in shares of stock, but it seems reasonably sufficient if (even though payment was not made in stock) the seller's shareholders are also shareholders of the purchaser. Whether the seller's owners acquire their ownership interest in the purchaser through payment in shares of stock or through other means, there exists in either case the essential inequity (which was the original basis of the "de facto merger" exception) that the seller's owners retain their interest in the transferred assets while cutting off the higher-priority interest of the seller's creditors.

Most courts applying the Arnold factors have followed this flexible (rather than formulaic) approach to determining whether a required factor is present in a particular case. This flexibility is, I believe, not in conflict with Arnold, but rather represents a reasonable interpretation of Arnold in accord with the purpose of the "de facto merger" exception.

The second issue, however, involves what appears to be a direct conflict with Arnold's holding that the four factors are required. Starting with Lumbard v. Maglia, 621 F. Supp. 1529 (S.D.N.Y. 1985), there are a number of cases which state that not all of the factors are necessary to find that a de facto merger has occurred. In Lumbard, decided one month after Arnold, Judge Goettel, after reciting the four Arnold elements,*fn16 went on to say:

"Not all of these factors are needed to demonstrate a merger; rather, these factors are only indicators that tend to show a de facto merger." Menacho v. Adamson United Co., 420 F. Supp. 128, 133 (D.N.J. 1976). See also 15 Fletcher, supra, § 7165.5 at 339 (describing these as "[f]actors which are indicative of a de facto merger. . . .").

621 F. Supp. at 1535.

It is possible to interpret this statement as referring to the factors in the strict form specified in Arnold, and as meaning merely that all of the factors are not required to be present in that strict form so long as they are present in substance.*fn17 As so interpreted, the statement can be viewed as merely incorporating a reasonable flexibility in the application of Arnold's requirements, and therefore as not being contrary to Arnold.

But the more obvious interpretation is that a complete absence of ownership continuity (or of one of the other factors) does not preclude a finding of de facto merger. Subsequent cases repeating Lumbard's statement appear to give it this meaning.*fn18 That this conflicts with Arnold's holding, and therefore is not the law in the Second Circuit, seems to have gone unnoticed by the courts in these cases. I have found only one case which mentions this discrepancy. In State of New York v. Panex Industries, Inc., Judge Elfvin said:

Many recent district court decisions have held that no single factor is determinative and that not every element need be satisfied in order to find that a de facto merger has occurred; other courts have held that continuity of ownership has traditionally been viewed as a key or essential factor under the de facto merger doctrine. . . . The United States Court of Appeals for the Second Circuit has consistently ruled that all of these factors "must" be satisfied. . . . Arnold Graphics Indus. v. Independent Agent Ctr. While other courts in this Circuit and similarly bound by the same precedents have chosen to evaluate the factors cumulatively and appraise the totality of the circumstances . . . this Court concludes that this Circuit's rule requires the presence of all four elements to sustain a finding of a de facto merger.

1996 WL 378172 at *8.*fn19

The controlling decision in Arnold, which forecloses the qualification that not all of the factors are, needed, should obviate a need for further discussion of this issue. However, in view of the fact that the Lumbard statement has been repeatedly cited as applicable law, I believe that it is worthwhile to ask (a) where this statement came from, (b) what reason (if any) is offered to justify this departure from Arnold's requirements, and (c) how the statement has been applied in Lumbard and in the subsequent cases repeating the statement. The answers, in brief, are:

(a) It is a misapplication of a statement, taken out of context, from cases under New Jersey law.

(b) None. Neither Lumbard nor any of the cases repeating Lumbard's statement acknowledges the departure from Arnold's requirements or (with the exception of two cases omitting the ownership requirement in the product liability area*fn20) gives any reason why ownership continuity should be optional rather than required.

(c) The general recitation of the Lumbard statement implies that the absence of ownership continuity could be outweighed by the presence of other factors, and the de facto merger analysis in Lumbard, and in a few of the subsequent cases, can be read as holding that ownership continuity is not required. However, neither Lumbard nor any of the subsequent cases repeating the statement (except the two products liability cases) actually finds a de facto merger in the absence of ownership continuity, or specifically holds that ownership continuity is not required.

The following pages explain these answers in greater detail.

As to the source of the Lumbard statement, the "not all of these factors are needed" concept was first suggested in Good v. Lackawanna Leather Company, 96 N.J. Super. 439, 233 A.2d 201 (1967) (shareholders' rights), which was not referring to the four factors listed in Ladjevardian, Arnold and Lumbard. Rather, Good was referring to a list of seven factors which a previous New Jersey case, Applestein v. United Board & Carton Corp., 60 N.J. Super. 333, 342, 159 A.2d 146 (Ch.Div. 1960), aff'd 33 N.J. 72, 161 A.2d 474 (1960), had noted as being present in the corporate plan at issue. Applestein had said that those seven factors comprised "every factor present in a corporate merger," and had found that the plan was a de facto merger, but did not suggest that all seven factors were required. The opinion in Good says:

Although every element found by the court in Applestein may not be essential in determining the existence of a[d]e facto merger, there are certain key elements existing therein which are not present in the case at bar. Significantly, there has been no exchange or transfer of shares between Good Bros. and Lackawanna. A consolidation or merger always involves a transfer of the assets and business of one corporation to another in exchange for its securities.

96 N.J. Super. at 452, 233 A.2d at 208 (emphasis added).

McKee, which reviewed a number of de facto merger cases from New Jersey (including Good and Applestein) and other jurisdictions, correctly read Good's language as referring to the seven factors listed in Applestein. 109 N.J. Super. at 564-65, 264 A.2d at 103. McKee's finding of no de facto merger was based on the absence of the same key elements (including ownership continuity) that were lacking in Good. 109 N.J. Super. at 565-67, 264 A.2d at 104 (1970). Under McKee's standard, stockholder continuity is required for a de facto merger.*fn21 See 109 N.J. Super. at 563-66, 264 A.2d at 103-104; see also Ramirez v. Amsted Industries, Inc., 86 N.J. 332, 342, 431 A.2d 811, 816 (1981) (discussing McKee's requirements).

The key elements of a de facto merger, as determined by McKee, were subsequently arranged in a formal list by a federal court, applying New Jersey law, in Shannon v. Samuel Langston Company, 379 F. Supp. 797, 801 (W.D.Mich. 1974). Shannon listed four key factors — continuity of ownership, dissolution of the seller, and the seller's assumption of liabilities (the three key factors found absent in Good and McKee) and also the purchaser's continuation of the seller's business (a factor present in Good and McKee). While Shannon does not specifically identify these as requirements (describing them as "characteristics of a de facto merger, as distinguished from an ordinary purchase and sale of assets"), the opinion recognizes that an absence of ownership continuity is crucially important under the McKee criteria. The court in Shannon (finding all four elements to be present) held that there was a de facto merger, and distinguished the contrary result in McKee by saying: "Most importantly, McKee, supra, involved a situation in which the purchasing corporation paid for the assets principally in cash, so that the stockholders of the seller never became a part of the purchasing corporation." Id. Shannon did not mention the Good/McKee qualification that not all of Applestein's factors were necessary (which was presumably taken care of by the reduction of Applestein's seven-factor list to the four factors listed in Shannon).

In Menacho v. Adamson United Company, 420 F. Supp. 128 (D.N.J. 1976), the court adopted Shannon's list of four factors, and then went on to state: "Not all of these factors are needed to demonstrate a merger; rather, these factors are only indicators that tend to show a de facto merger," citing Good. 420 F. Supp. at 133. By applying Good's statement (rephrased to eliminate Good's reference to Applestein's list of seven factors) to Shannon's list of four factors, Menacho changed the statement's meaning. However, it is clear that Menacho was not holding that the factor of ownership continuity is dispensable. Menacho states that "[e]ven the sale of the corporate business is liability free provided ownership and management have not remained the same" (id. at 133), and it refers to stockholder continuity as "a prime ingredient in the McKee criteria for a de facto merger" (id. at 136). Lack of ownership was the major basis for Menacho's holding that there was no de facto merger; the court also noted the absence of liquidation of the seller, but stated that this "though a factor, is not dispositive," a limitation that was not stated with respect to the absence of ownership continuity. Id. at 134.

Shannon's list of four factors was subsequently adopted (with some variations in language) by Judge Lasker in Ladjevardian (1977, citing `Shannon) and' by the Second Circuit in Arnold (1985, quoting Ladjevardian). As discussed at page 97 above, Ladjevardian and Arnold require that all four factors be present. Neither Ladjevardian nor Arnold cites Menacho.

Thus, neither Good, McKee, Shannon, Menacho, Ladjevardian nor Arnold suggests that ownership continuity is not a required factor.

In Lumbard, decided a month after Arnold, Judge Goettel imported into New York law the statement that "not all of these factors are needed to demonstrate a merger," citing the New Jersey decision in Menacho. Lumbard, like Menacho, states this qualification in conjunction with the four Shannon/Ladjevardian/Arnold factors, and also, like Menacho, simply sets forth the statement without discussing any reason why all four factors should not be necessary. The Lumbard opinion, although citing Arnold with respect to the (somewhat rephrased) list of factors, does not acknowledge that Arnold requires that all four factors be present.

As to precisely what the Lumbard statement was intended to mean, Judge Goettel's actual holding as to continuity of ownership was:

The amended complaint's allegation that [the seller's owners] engaged [one owner's] brother . . . to assume nominal ownership of [the purchaser] is sufficient, at this stage, to plead continuity of ownership.

Lumbard, 621 F. Supp. at 1536. Later on the same page, the opinion says:

Even if the amended complaint does not thoroughly describe every indicator of a de facto merger, it clearly describes the wholesale transformation of one company, Carla, into another, Maglia. The amended complaint alleges that Maglia continued the enterprise of Carla with the same employees, assets, and management. It further states that these transactions reduced Carla to a "shell." Amended Complaint ¶ 20. Viewed in a light most favorable to the plaintiffs, these allegations are sufficient to state a de facto merger claim against Maglia.

621 F. Supp. at 1536. Judge Goettel's conclusion that a de facto merger claim was adequately stated can be read as including the ownership-continuity allegation which he described, earlier on the same page, as sufficient. See Widerman v. Mayflower Transit, 1997 WL 539684 (E.D.Pa.), in which there was no continuity of ownership (as well as problems with some of the other factors). The Widerman opinion states:

The Lumbard court . . . concluded that the [ownership] continuity requirement was satisfied for the purposes of resisting a motion to dismiss by plaintiffs allegation that the predecessor corporation principals had arranged for the brother of one of the principals to assume nominal ownership of the successor corporation. Id. at 1536. No such continuity of ownership has been shown in the instant case. Thus, Lumbard is inapposite.

Id. at *6 n. 3.

On the other hand, Lumbard's highlighting of two allegations — as to business continuity and as to the seller's being reduced to a corporate shell — can be taken as meaning that those two allegations by themselves (without ownership continuity) would be sufficient to show a de facto merger. Several courts (as well as West's headnote writer) have apparently read Lumbard as so holding. It does not seem that this reading has actually changed the result in these cases (with the possible exception of the two products liability cases referred to in footnote 20 above). In two creditor cases — Old Republic Insurance Company v. Hansa World Cargo Service, Inc., 51 F. Supp.2d 457, 477 (S.D.N.Y. 1999) (Edelstein, J.), and Kessenich v. Raynor, 120 F. Supp.2d 242, 255-56 (E.D.N.Y. 2000) (Garaufis, J.) — a de facto merger claim was upheld against a motion to dismiss. In each case, the court's discussion of de facto merger appears to suggest that allegations as to business continuity are sufficient to state a de facto merger claim. But in each of these two cases (as in Lumbard), allegations of ownership continuity are mentioned elsewhere in the opinion, so the apparent suggestion was not necessary to the court's decision.*fn22

A number of other contract and creditor cases have recited the statement that not all of the factors are needed (or words to similar effect).*fn23 In these other cases, the discussion of de facto merger includes the factor of ownership continuity, and thus these cases do not give the same appearance as Old Republic and Kessenich (and, arguably, Lumbard) of ruling that ownership continuity (in particular) is not required. None of these other cases finds a de facto merger where ownership continuity is absent, but their statement that not all of the factors are required (and sometimes other language in the opinions as well) can be read as contemplating a possibility that ownership continuity might not be required in some circumstances.

A number of district courts within the Second Circuit*fn24 and courts in various other jurisdictions*fn25 have recognized that ownership continuity is a requirement for the traditional "de facto merger" exception. Indeed, as discussed in the following section 3(b), the requirement of ownership continuity in the traditional definitions of "de facto merger" and "mere continuation" was the very reason why courts considered it necessary to develop new exceptions (or expand the traditional ones) in order to serve the policy objectives of strict products liability. However, in the cases which eliminated ownership continuity as a requirement in the products liability area (or in hazardous waste cleanup or the other areas mentioned in section 8(b)), the courts have discussed (usually at length) the specific policy reasons justifying the omission of the ownership continuity requirement. By contrast, Lumbard, Old Republic and Kessenich (and the other cases repeating Lumbard's statement) give no reason why the requirement of ownership continuity (or any of the other three factors) should be omitted in contract and creditor cases.

Some cases have found a de facto merger despite minor departures from the strict requirements.*fn26 However, my research discloses no case (in New York or other jurisdictions) in which a court has found a de facto merger without at least some degree of ownership continuity — except in the area of products liability (and the other tort areas mentioned in section 3(b), below) where some courts have justified new or expanded exceptions on special policy grounds. Outside of those areas, it appears that, in, practice, ownership continuity has been essential to the finding of a de facto merger.

The requirement of ownership continuity does not exalt form over substance. The fact that the seller's owners retain their interest in the supposedly sold assets (through their ownership interest in the purchaser) is the "substance" which makes the transaction inequitable. There is nothing inherently wrong in a company's selling its business, or in the purchaser continuing the operation of that business. "When one company purchases all the assets of another, it is to be expected that the purchasing corporation will continue the operations of the former, but this does not by itself render the purchaser liable for the obligations of the former." McKee, 109 N.J. Super. at 570, 264 A.2d at 107. The de facto merger exception is "a judge-made device for avoiding patent injustice which might befall a party simply because a merger has been called something else." Philadelphia Electric Company v. Hercules, Inc., 762 F.2d 303, 312 (3d Cir. 1985) (citation omitted). When a transaction, by calling itself an asset sale rather than a merger, attempts to retain the shareholders' interest while cutting off the creditors' claims, the resulting "patent injustice" calls for application of the de facto merger exception. If the transaction defrauds the seller's creditors, but there is no ownership continuity, it would appear not appear to be an instance where "a merger is called something else," but rather a transaction which, although not a merger, is a fraud. In such cases, it is not necessary to distort the "de facto merger" exception; successor liability would be more appropriately imposed under the fraud exception.

A holding that "not all of these factors are needed" — and that ownership continuity is optional, rather than required — would, in addition to conflicting with the Second Circuit's decision in Arnold, also be in conflict with (a) the cases under New Jersey law from which the statement was taken, (b) the original basis of the de facto merger exception (i.e., the inequity of the seller's shareholders retaining their interest in the transferred assets while cutting off the higher-priority claims of creditors), (c) numerous holdings, by courts within the Second Circuit and in various other jurisdictions, stating that a de facto merger requires ownership continuity, (d) the courts' actual practice, which appears to be that a de facto merger is never found without ownership continuity, except in the area of products liability and other tort cases, (e) Ladjevardian and McKee, the two cases cited with approval by Schumacher on the related topic of "mere continuation," and, arguably, (f) the New York Court of Appeals' decision in Schumacher itself.*fn27

(b) Expanded Successor Liability in Products Liability Cases. The traditional successor liability rule, designed for obligations that are primarily financial in nature, has been said to work well in the corporate contractual world in which it was developed. Polius v. Clark Equipment Company, 802 F.2d 75, 78 (3rd Cir. 1986) (citing Phillips, Successor Liability, 58 N.Y.U.L.Rev. at 909). However, following the adoption of strict products liability, some courts concluded that the traditional rule (with its emphasis on corporate form and continuous ownership) did not adequately serve the policies underlying strict products liability and, on this basis, imposed an expanded successor liability in products liability cases.*fn28

The leading case for the "continuity of enterprise" exception is Turner v. Bituminous Casualty Company, 397 Mich. 406, 244 N.W.2d 873 (1976), in which the Michigan Supreme Court wrote a long, reasoned opinion which makes very clear that the court is dealing only with products liability. The court said (a) that the public policy behind strict products liability is that "the enterprise, the going concern," ought to bear the liability for the damage done by its defective products, (b) that distinctions between types of corporate transfers are totally unmeaningful to the person injured by a defective product, and (c) that, in products liability cases, courts should disregard the distinction between a de facto merger and an asset sale. 397 Mich. at 416-24, 244 N.W.2d at 877-81.

Turner, after reviewing the four factors traditionally required for a de facto merger, established a different test for products liability cases. The test includes three of those factors: (a) continuity of management, personnel, physical location, assets and general business operation business (designated as the most important factor), (b) the seller ceasing ordinary business operations and liquidating as soon as possible, and (c) the purchaser assuming the obligations necessary for the uninterrupted continuation of normal business operations. For products liability cases, Turner excludes the remaining factor (continuity of shareholders). 397 Mich. at 429-30, 244 N.W.2d at 883.

One year later, the California Supreme Court similarly eliminated the requirement of ownership continuity in products liability cases, stating that "the paramount policy to be promoted by [strict products liability] is the protection of otherwise defenseless victims of manufacturing defects and the spreading through society of the cost of compensating them," and that "[t]he manufacturing entity's responsibility to the victims of defective products it has placed in circulation cannot be hostage to the niceties which distinguish a sale of assets from a merger." Ray v. Alad Corp., 19 Cal.3d 22, 31, 560 P.2d 3, 9, 136 Cal.Rptr. 574, 579 (1977). Ray, taking a somewhat different approach than Turner, focused on whether the purchaser continued to manufacture the same products (the "product line" exception).

The New York Court of Appeals has not adopted either the "continuity of enterprise" exception or the "product line" exception.*fn29 In Schumacher (a products liability case), the Court of Appeals rejected the plaintiffs contention that successor liability could be imposed based upon either Turner's "continuity of enterprise" exception or Ray's "product line" exception, stating:

We do not adopt the rule of either case [Turner or Ray] but note that both are factually distinguishable in any event.

Schumacher, 59 N.Y.2d at 245, 464 N.Y.S.2d at 440, 451 N.E.2d 195 (1983). This appears to be a rejection of the Turner and Ray exceptions, and several courts have so held. See City of New York v. Charles Pfizer & Company, Inc., 260 A.D.2d 174, 176, 688 N.Y.S.2d 23, 25 (1st Dept. 1999); Radziul v. Hooper, Inc., 125 Misc.2d 362, 479 N.Y.S.2d 324 (N.Y.Sup. 1984); Parra v. Production Machine Company, 611 F. Supp. 221, 223 n. 2 (E.D.N.Y. 1985) (McLaughlin, J.); Abrahamsen v. Laurel Gardens Limited Partnership, 276 N.J. Super. 199, 211, 647 A.2d 869, 876 (Law Div. 1993). However, one New York trial judge interpreted Schumacher as holding only that consideration of the two exceptions was not justified on the facts before it, implicitly leaving open the question of whether New York courts could adopt Turner or Ray on appropriate facts. Salvati v. Blaw-Knox Food & Chemical Equipment, Inc. 130 Misc.2d 626, 497 N.Y.S.2d 242 (N.Y.Sup. 1985).

The First Circuit (applying New York law in a products liability case), reviewed the contrasting interpretations of Schumacher, and said:

Were we pressed to decide which is the proper construction of [Schumacher's] language, we would conclude from our experience in writing and reading judicial opinions and our knowledge of common strategies of judicial decision-making and their articulation that the [New York] Court of Appeals, by the sentence in question, rejected the holdings of Turner and [Ray] and, in the alternative, put the issue to rest by pointing out that even if they were to be applied in Schumacher, they would not yield the result sought by the plaintiffs.

Santa Maria v. Owens-Illinois, Inc.,
808 F.2d 848, 858 n. 11 (1st Cir. 1986).

However, two New York Appellate Division decisions in products liability cases (while bypassing the question of whether Turner's "continuity of enterprise" exception is foreclosed by Schumacher) achieved the same result as the "continuity of enterprise" exception by expanding the "de facto merger" exception to permit a de facto merger to be found in the absence of ownership continuity. Wensing v. Paris Industries-New York, 158 A.D.2d 164, 558 N.Y.S.2d 692 (3d Dept. 1990); Sweatland v. Park Corporation, 181 A.D.2d 243, 587 N.Y.S.2d 54 (4th Dept. 1992).*fn30

In Wensing, the Third Department, ruling as to de facto merger on a motion to dismiss, held — on the basis of information in the record that the purchaser acquired not just fixed assets, but also all intangible assets (such as good will, patents, customer lists, phone numbers and the seller's prior name) — that the plaintiff should have an opportunity to conduct discovery "on the extent of [the purchaser's] activities following the asset acquisition." There is no mention here of the other three de facto merger factors (continuity of ownership, dissolution of predecessor and assumption of liabilities). The opinion appears to hold that continuation of the business is the dispositive factor with respect to de facto merger in a products liability case.

Wensing contains no acknowledgment that it is departing from the traditional requirements for finding a de facto merger. The legal basis for its ruling is not elaborated. The opinion merely quotes a dictum from the Court of Appeals' opinion in Grant-Howard Associates v. General Housewares Corp., 63 N.Y.2d 291, 296, 482 N.Y.S.2d 225, 227, 472 N.E.2d 1 (1984), to the effect that the de facto merger and mere continuation exceptions "are based on the concept that a successor that effectively takes over a company in its entirety should carry the predecessor's liabilities as a concomitant to the benefits it derives from the good will purchased." 158 A.D.2d at 167, 558 N.Y.S.2d at 694. It may appear at first reading that the quoted dictum indicates approval of imposing successor liability simply on the basis that the purchaser acquired the business in its entirety (without regard to ownership continuity). But the facts in the case, and the context in which the comment was made, show that the Court of Appeals did not intend to rule on this issue.*fn31 First, in Grant-Howard there was ownership continuity — the assets were paid for with shares of the purchaser's stock — and the three other traditional "de facto merger" factors were also fully present. Second, the issue before the Court of Appeals was not the standard to be applied in finding a de facto merger, but rather whether, given that successor liability had been established, the successor was obligated to indemnify the seller despite a contrary provision in the indemnity agreement. Third, in the paragraph containing the quoted comment, the Court of Appeals was merely describing products liability policy arguments that were referred to (but not relied upon) in the lower court's opinion, and the Court of Appeals states that the entire paragraph is irrelevant to the issue before the court. In addition, there is the fact that the Court of Appeals, having apparently rejected the Turner and Ray exceptions just a year previously in Schumacher, would be unlikely to choose this exceedingly indirect method of overruling or clarifying its Schumacher decision.

Two years after Wensing, the Fourth Department provided a somewhat more reasoned opinion in Sweatland, which also concerned a motion to dismiss. Although there was no continuity of ownership, the court held that the plaintiff had raised an issue of material fact as to whether the transaction constituted a de facto merger, citing Wensing. Sweatland observes that the considerations underlying the corporate law doctrine of de facto merger are not relevant in the context of tort liability, and states:

Public 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 [citing Ladjevardian], those factors alone should not be determinative.

181 A.D.2d at 246, 587 N.Y.S.2d at 56.*fn32 Although Sweatland held that a case-by-case analysis of the weight and impact of the factors is required, the opinion, like that in Wensing, mentions only facts relating to continuation of the seller's business (the acquisition of good will, customer lists and other intangibles, and the use of the seller's trade name).

New York courts in subsequent products liability cases have similarly applied a de facto merger test apparently based solely on the degree to which the successor continues the seller's business (variously citing Wensing, Sweatland, and/or Grant-Howard).*fn33 See Winch v. Yates American Machine Company, Inc., 205 A.D.2d 1001, 613 N.Y.S.2d 980 (3d Dept. 1994);*fn34 City of New York v. Charles Pfizer & Company, Inc., 260 A.D.2d 174, 688 N.Y.S.2d 23 (1st Dept. 1999); City of New York v. Aaer Sprayed Insulations, Inc., 281 A.D.2d 228, 722 N.Y.S.2d 20 (1st Dept. 2001). Sweatland has also been applied in a tort case outside the area of strict products liability. See Nettis v. Levitt, 241 F.3d 186 (2d Cir. 2001) (per curiam).*fn35

Neither Wensing nor Sweatland suggests that its broad definition of de facto merger ought to apply outside the tort area.

(c) In a Contract Case Brought by a Trade Creditor, Should the "De Facto Merger" Exception Be Broadened to Include a Transfer with No Continuity of Ownership? With this background, we reach, at last, the central question in the case at bar: Does the broad definition of "de facto merger" (in particular, its elimination of the requirement of shareholder continuity), which intermediate New York courts have developed in the area of products liability, apply to a contract case brought by a trade creditor? A negative answer is suggested by a review of recent New York cases that consider the question of successor liability outside the tort area.

The First Department's decision in Symbax v. Bingaman, 219 A.D.2d 552, 631 N.Y.S.2d 829 (1st Dept. 1995), reversed the lower court's imposition of successor liability with respect to a promissory note of the predecessor. The court stated:

As plaintiff correctly concedes, the doctrine of successor corporation tort liability is not a valid basis for holding [the transferee] liable here; it is an extension of products liability and torts law (Grant-Howard Assoc. v. Gen. Housewares, 63 N.Y.2d 291, 296, 482 N.Y.S.2d 225, 472 N.E.2d 1) and is not applicable in an action to collect on a. promissory note. In any event, none of the criteria for such liability as spelled out in Schumacher . . . was established by the evidence. . . . [S]uccessor corporation liability is essentially a torts concept.

219 A.D.2d at 552-53, 631 N.Y.S.2d at 83031. See also Martorano v. Herman Miller, Inc., 255 A.D.2d 367, 680 N.Y.S.2d 20 (2d Dept. 1998) (holding that successor liability based on de facto merger is relevant to products liability tort law but is inapplicable in an action to collect on a promissory note, citing Symbax).

The broadly stated holding of Symbax — that successor liability (under the four standard exceptions stated in Schumacher) applies only to tort cases — is, I believe, erroneous. Although Schumacher (a products liability case) spoke of tort liability, it was stating a common-law rule of successor liability. This common-law rule, with its traditional "de facto merger" exception, has long been applied to creditor and contract claims. See, e.g., Ruedy v. Toledo Factories Co., 61 Ohio App. 21, 29, 22 N.E.2d 293, 296 (1939) (note creditor); Arnold, 775 F.2d 38 (2d Cir. 1985) (judgment creditor); Lumbard, 621 F. Supp. 1529 (S.D.N.Y. 1985) (trade creditor); Glynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265, 271-72 (D.N.J. 1994) (rejecting argument that the successor liability exceptions do not apply to commercial debt, and citing cases). However, despite its overstatement, Symbax can fairly be read as rejecting, outside of the tort area, successor liability theories that were specifically developed for products liability cases. Thus, it suggests that the expanded "de facto merger" exception developed in Sweatland for products liability cases should not apply to non-tort cases.

Two recent New York contract cases — Ladenburg Thalmann & Co., Inc. v. Tim's Amusements, Inc., 275 A.D.2d 243, 712 N.Y.S.2d 526 (1st Dept. 2000), and Fitzgerald v. Fahnestock & Co., Inc., 286 A.D.2d 573, 730 N.Y.S.2d 70 (1st Dept. 2001) — have (contrary to Symbax's overly broad statement limiting successor liability to the tort area) applied the "de facto merger" exception in determining that the complaint was sufficient to withstand a motion to dismiss. In both Ladenburg and Fitzgerald there was continuity of ownership, and thus neither court was called upon to consider whether Sweatland's holding that a de facto merger can be found in the absence of ownership continuity, "at least in the context of tort liability," 181 A.D.2d at 246, 587 N.Y.S.2d at 56, should be applicable to contract claims. Ladenburg cites Sweatland in connection with its finding that the plaintiffs "inartful pleadings intimate that a de facto merger was effected," but the court's preceding summary of the plaintiffs allegations includes the allegation that the corporation owning 72 percent of the purchaser also owned 20 percent of the seller. 275 A.D.2d at 248, 712 N.Y.S.2d at 530. Fitzgerald appears to be looking primarily at the business continuity factors in its discussion of de facto merger (citing Sweatland, Wensing and the dictum from Grant-Howard). But, in its statement of the allegations on which the court based its conclusion that the allegations were sufficient to survive a motion to dismiss, Fitzgerald recites the allegation that the successor had acquired (prior to the transfer of assets) all of the predecessor's stock. 730 N.Y.S.2d at 72. Thus, neither Ladenburg nor Fitzgerald holds that a claim which lacks the element of ownership continuity is sufficient to state a de facto merger claim.

In sum, New York courts have not yet ruled on whether Sweatland's expanded "de facto merger" exception applies in a contract case. A number of courts in other jurisdictions have held that the expanded exceptions developed in products liability cases do not apply to contract and creditor claims. See Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451-1458 n. 1 (11th Cir. 1985) (trade creditor) ("Some courts, applying the de facto merger doctrine to products liability cases, have modified the requirements for finding a de facto merger. . . . Since the modification was carved out for products liability cases, it has no application here."); Glynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265, 272 (D.N.J. 1994) (breach of contract) ("It was because the traditional common law categories were considered too narrow in the strict products liability and labor law areas that the New Jersey courts, among others, have created broader exceptions in those areas. [Citations omitted.] But the traditional exceptions continue to be applicable to various other areas, including claims for commercial debt. . . ."); Welco Industries, Inc. v. Applied Companies, 67 Ohio St.3d 344, 348, 617 N.E.2d 1129, 1133 (Ohio Supreme Court 1993) (breach of contract) ("However valid the justifications for expanding the liability of successor corporations in products liability cases, those justifications do not apply here.").

The concept that doctrines developed specifically for products liability cases are inapplicable to contract cases was recognized, in a different context, by the New York Court of Appeals. In ruling on a statute of limitations issue in products liability cases, the Court of Appeals stated: "In these cases now before us we are concerned only with claims based on [strict products liability]. What we say here, therefore, should not be understood as in any way referring to the liability of a manufacturer of a defective product under familiar but different doctrines of the law of contracts. . . ." Victorson v. Bock Laundry Machine Company, 37 N.Y.2d 395, 401, 373 N.Y.S.2d 39, 41, 335 N.E.2d 275 (1975).

The reasons for imposing expanded successor liability in the area of products liability are not germane to the claims of trade creditors. Expanded successor liability in products liability cases was based on the underlying policy of ensuring that there is a responsible source to pay for the victim's injuries. While various laws protect creditors against fraud and other inequitable actions by the debtor,*fn36 there is no general policy of ensuring trade creditors against the risk that the company to which they extend credit may be unable to pay its debts. As Judge Gertner stated in National Gypsum, "[s]uch insolvencies are the bread and butter of the bankruptcy courts and, while unfortunate, are the inevitable casualties of a competitive market economy." 895 F. Supp. at 334.

The creditors of an insolvent debtor can seldom expect to be paid in full. Such creditors have a right to demand that a sale of the debtor's assets will not decrease the amount available to pay creditors. But imposing successor liability (on the de facto merger theory) on a purchaser who continues the seller's business would not merely give an insolvent seller's creditors what they could have obtained in the absence of such sale. Rather, it would (assuming that the purchaser is solvent) give the creditors a windfall by increasing the funds available compared to what would have been available if no sale had taken place.*fn37 It is difficult to see any equitable basis for giving creditors this bonus. See Restatement (Third) of Torts: Product Liability § 12, Comment b (1997) (discussing this issue as an argument against imposing expanded successor liability in products liability cases).

Such windfalls to creditors would appear to be a problem primarily in the short run. If successor liability were to be imposed on a purchaser who buys substantially all of the seller's assets, there would be few, if any, purchasers willing to buy (as a whole) the assets of an insolvent debtor (since the purchaser would thereby become liable for obligations exceeding the value of the assets). Therefore, in the long run, it seems there would not be many occasions for imposing successor liability (and for providing the potential windfall to the seller's creditors) in such circumstances.

The long-run problem would appear to be that the imposition of such successor liability might have the undesirable result of less money being available to the seller's creditors. Ordinarily, one would expect that the seller's business would bring a higher price if sold as a going concern rather than at the liquidation value of the assets. See National Gypsum, 895 F. Supp. at 335; Turner, 397 Mich. at 428, 244 N.W.2d at 883. The imposition of expanded successor liability would make it difficult (if not impossible) for an insolvent company to sell its business as a going concern, and hence insolvent companies would likely be forced to dispose of their assets piecemeal at a lower price. See Polius v. Clark Equipment Company, 802 F.2d 75, 83 (3rd Cir. 1986); Restatement (Third) of Torts: Product Liability § 12, Comment b, and Reporters' Note, Comment b.

For the various reasons expressed above, I believe that the New York Court of Appeals (regardless of what it might hold in strict products liability or other tort cases) would apply the traditional "de facto merger" exception in cases involving the claims of trade creditors, and would not adopt a definition of "de facto merger" which omitted the requirement of ownership continuity.

(d) Adequacy of the Complaint's Allegations as to De Facto Merger. In the case at bar, the Complaint sets out facts sufficient to allege one factor considered in determining whether there has been a de facto merger (the factor of continuity of business operations). But the Complaint fails to allege any of the other three factors. It does not allege that any of the owners of Chase Leavitt are also owners of Albatrans; it alleges only that Albatrans has given a five-year employment contract to Alison Leavitt, Chase Leavitt's president. Cplt. ¶ 10(v). A purchaser's employment of one or more of the seller's officers is not sufficient to show continuity of ownership.*fn38 The Complaint also fails to allege that Chase Leavitt has dissolved (or is to be dissolved as part of the transaction), or that Albatrans assumed any liabilities of Chase Leavitt.

As stated above, I believe that the New York Court of Appeals would hold that some degree of continuity of ownership is required to find a de facto merger in a case involving trade creditors. However, even if ownership continuity is not a requirement, and is merely one of four factors to be weighed, I find that the Complaint's allegations, satisfying only one of the four factors, are insufficient to state a basis for a de facto merger.

Even if the Court were to take into consideration the fact (not alleged in the Complaint, but undisputed) that Ms. Leavitt is an owner of Chase Leavitt,*fn39 the Complaint does not allege that she is also a shareholder of Albatrans. Plaintiff argues that Albatrans' employment of Ms. Leavitt establishes continuity of ownership, Pl.Mem. p. 5, but cites no authority in support of this argument. Albatrans' contrary contention — that the terms of Ms. Leavitt's employment are, as a matter of law, irrelevant to Plaintiffs de facto merger claim — is similarly unsupported by citation to authority.

Indeed, there appear to be very few cases where the only basis for asserting ownership continuity is the purchaser's employment of one or more of the seller's owners. In Freeman v. Complex Computing Company, 931 F. Supp. 1115, 1120, 1122 (S.D.N.Y. 1996), aff'd in part, vacated in part on other grounds, 119 F.3d 1044 (2d Cir. 1997), Judge Kaplan held that, although the effective owner of the seller was employed by the purchaser, there was no continuity of ownership and no de facto merger.

The only detailed discussion of this issue which I have found is in National Gypsum v. Continental Brands Corp., 895 F. Supp. 328 (D.Mass. 1995), where Judge Gertner, applying the traditional "de facto merger" exception under Massachusetts law, provided a cogent explanation of the circumstances in which the terms of such employment might amount to the equivalent of an equity interest. Judge Gertner stated:

While the evidence clearly shows that [the seller's] owners have no direct equity interest in [the purchaser] there is at least some suggestion that they may be more than mere employees of [the purchaser]. . . . [T]here is no indication as to what financial interest [the seller's] shareholders have in [the purchaser's] future profits. The answer to this question is crucial since it will permit the Court to determine whether [the seller's] shareholders have, in any sense, retained a share in what was valuable in their, former company while avoiding any payment to products liability claimants.

Id. at 341. I find Judge Gertner's analysis to be persuasive.

In the case at bar, there is no allegation that Ms. Leavitt is anything more than a "mere employee," nor is there any basis in the Complaint's allegations for inferring that she is more than a "mere employee." Thus, I conclude that, even if the fact of Ms. Leavitt's ownership in Chase Leavitt were to be considered, the allegation as to her prospective employment by Albatrans is insufficient to allege ownership continuity.*fn40

5. Conclusion as to Count I. As discussed above, Count I fails to allege a basis for successor liability under either the "mere continuation" exception or the "de facto merger" exception. Nor does Count I allege a basis for successor liability under either of the two other exceptions: (a) if the purchaser expressly or impliedly agreed to assume such debt, or (b) if the transaction was entered into fraudulently in order to escape liability for such debt. There is no allegation of an express or implied assumption of liability by Albatrans. As to the fraud exception, which is "merely an application of the law of fraudulent conveyances" — Grand Laboratories, Inc. v. Midcon Labs of Iowa, 32 F.3d 1277, 1281 (8th Cir. 1994); Chaveriat v. Williams Pipe Line Co., 11 F.3d 1420, 1426 (7th Cir. 1993); Fletcher § 7125 — although Count I does not allege fraud, Count VI alleges an intent to hinder, delay or defraud creditors. However, as discussed at pages 115-16 below, that allegation fails to meet the requirements of Rule 9(b).

Since the Complaint fails to allege a basis for successor liability under any of the four exceptions to the general rule of non-liability, it fails to state a claim on which relief can be granted. I recommend that the motion to dismiss be granted as to Count I. As noted above at page 91, footnote 3, Plaintiff does not require leave from the Court in order to file an amended complaint.

Since I conclude that Count I should be dismissed, it is not necessary to reach Albatrans' alternative motion for summary judgment. Although the Court has discretion to consider the affidavits and exhibits submitted by the parties and to convert the motion for dismissal into a motion for summary judgment, I do not recommend that the Court do so. It appears preferable to see first whether Plaintiff files an amended complaint and whether, if Plaintiff does so, the amended complaint adequately alleges a basis for successor liability.*fn41

D. Counts II to V.

Counts II to V seek recovery from "the defendants" on four grounds: services rendered at the behest of "the defendants," services rendered upon the promise of "the defendants" to pay the reasonable price for the same, an amount due from "the defendants," and an account stated between Plaintiff and "the defendants." Each of these counts re-alleges the Count I allegations relating to successor liability.

The factual allegations of the Complaint and the attached invoices make clear that it was only Chase Leavitt — and not Albatrans — which requested, promised to pay for, and was invoiced for these services. The Complaint does not allege any independent basis, apart from the alleged successor liability under Count I, for imposing liability on Albatrans.

With respect to Albatrans, Counts II to V are wholly dependent on Count I, and therefore I recommend that Counts II to V be dismissed as to Albatrans.

E. Fraudulent Conveyance.

Count VI of the Complaint asserts fraudulent conveyance claims under Sections 273 and 276 of the New York Debtor and Creditor Law. Cplt. ¶ 30.

Section 273 provides that a conveyance made "by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to actual intent if the conveyance is made . . . without a fair consideration."*fn42 The Complaint alleges, on information and belief, (a) that Chase Leavitt transferred assets to Albatrans on or about February 7, 2001, (b) that Chase Leavitt was insolvent at the time of the conveyance or was rendered insolvent by reason thereof and has since so remained, and (c) that the transfer was made for inadequate consideration. Cplt. ¶¶ 8, 25, 27. The Complaint does not allege any facts on which Plaintiffs belief is based.

Section 276 provides that a conveyance made "with actual intent . . . to hinder, delay, or defraud either present or future creditors is fraudulent as to both present and future creditors."*fn43 The Complaint alleges, on information and belief, (a) that Chase Leavitt transferred assets to Albatrans on or about February 7, 2001, (b) that the transfer was made in order to defraud plaintiff of monies justly due, and (c) that the transfer was made by Chase, Leavitt and received by Albatrans with the actual intent to hinder, delay or defraud either present or future creditors, particularly Plaintiff. Cplt. ¶¶ 8, 26, 29. The Complaint does not allege any facts on which Plaintiffs belief is based.

Albatrans contends that these allegations do not allege fraud with particularity as required by Rule 9(b), Fed.R.Civ.P.

The particularity requirements of Rule 9(b) apply to claims asserted under Sections 273 and 276 of the Debtor and Creditor Law. Starmark, Inc. v. Zaccaria, 1992 WL 209288 at *2 (S.D.N.Y.) (Keenan, J.); Lumbard v. Maglia, Inc., 621 F. Supp. 1529, 1538 (S.D.N.Y. 1985) (Goettel, J.).

Rule 9(b) provides "In all averments of fraud . . . the circumstances constituting the fraud . . . shall be stated with particularity." In general, allegations of fraud based on information and belief do not satisfy the requirements of Rule 9(b). There is an exception as to matters peculiarly within the knowledge of the opposing party. As to such matters, allegations may be made on information and belief, but the allegations must be accompanied by a statement of the facts on which the belief is founded. Stern v. Leucadia Nat. Corp., 844 F.2d 997, 1003 (2nd Cir. 1988); DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2nd Cir. 1987); Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir. 1986); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975); Segal v. Gordon, 467 F.2d 602, 608 (2d Cir. 1972). While a plaintiff "need not demonstrate in his complaint that what he believes to be true is in fact true," he must present facts that "show that his belief is not without foundation, that it is belief rather than irresponsible speculation." Morgan v. Prudential Group, Inc., 81 F.R.D. 418, 423 (S.D.N.Y. 1978) (Lasker, J.).

The Complaint's allegations in Count VI are made entirely on information and belief. The matters alleged — intent to defraud, inadequate consideration, and Chase Leavitt's insolvency — are matters peculiarly within the knowledge of Defendants, and so do not fall under the general prohibition against fraud allegations based on information and belief. However, the Complaint does not state any facts upon which Plaintiffs belief is founded, and therefore Count VI fails to meet the requirements of Rule 9(b).

In addition, the Section 276 claim fails to meet the specificity requirements of Rule 9(b) in another respect. Section 276 covers conveyances made "with actual intent" to hinder, delay or defraud creditors. The Second Circuit has held that "allegations of violating DCL § 276 must plead the requisite mental state with particularity." Atlanta Shipping Corporation, Inc. v. Chemical Bank, 818 F.2d 240, 251 (1987). With respect to allegations of fraudulent intent, the Second Circuit has held that scienter need not be alleged with great specificity, and that conclusory allegations of scienter are sufficient if supported by facts giving rise to a strong inference of fraudulent intent. IUE AFL — CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1057 (2d Cir. 1993); Ouaknine v. MacFarlane, 897 F.2d 75, 79-80 (2d Cir. 1990); Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988); Connecticut National Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987). The Complaint does not allege any facts to support its conclusory allegation of fraudulent intent, and thus the Section 276 claim fails to meet the requirements of Rule 9(b) in this respect as well.

Since neither the Section 273 claim nor the Section 276 claim meets the requirements of Rule 9(b), I recommend that the motion to dismiss be granted as to Count VI.*fn44

F. Bulk Transfer Act.

Count VII of the Complaint alleges that Defendants failed to comply with the provisions of New York's Bulk Transfer Act, NYUCC §§ 6-101 et seq.

Albatrans contends that the Chiarelli Affidavit and the Purchase Agreement establish that the Bulk Transfer Act did not apply to the transfer of the Chase Leavitt assets. Alb.Mem. p. 21. I agree.

The Bulk Transfer Act (as in effect at the time of the transfer)*fn45 stated that it covered only enterprises "whose principal business is the sale or rental of merchandise from stock, including those who manufacture what they sell and restaurants or other food dispensing establishments." [Former] NYUCC § 6-102(3). "The businesses covered . . . do not include . . . professional services, nor [various specified service businesses] and the like whose principal business is the sale not of merchandise but of services." Official Comment to § 6-102, ¶ 2. See Tops Appliance City, Inc. v. Ronald G. Tepper, Inc., 1999 WL 1256250, *4 (S.D.N.Y. Dec. 22, 1999) (Ellis, M.J.). The Tops defendant, whose business was developing customized computer software and related services, sold some hardware as part of its services, but "it was essentially a professional service not covered by the Act." Id.

The Chiarelli Affidavit states that Chase Leavitt is a service company that does not manufacture or sell products from stock, inventory or otherwise.*fn46 Chiarelli Aff. ¶ 3. Plaintiff does not dispute this, either in the Krauter Declaration or in Plaintiff's brief.*fn47

I conclude that Albatrans has established that it is entitled to summary judgment on Count VII, on the ground that the Bulk Transfer Act did not apply to Chase Leavitt.

G. Claims on Behalf of Affiliates.

The Complaint states that Plaintiff "is suing on its own behalf and on behalf of Cargo Partner, CR SRO (Praha, Czech Republic), Cargo Partner spedicija d.o.o. (Brnik, Slovenia), Cargo Partner Hungaria kft. (Budapest, Hungary) and Cargo Partner Spedycja Sp. z.o.o. (Raszyn, Poland)." Cplt. ¶ 1. Mr. Krauter, Plaintiff's sole owner, states that he is also the sole owner, either directly or through his ownership of Plaintiff, of these other four companies. Krauter Decl. ¶ 1. Albatrans contends that the claims asserted by Plaintiff on behalf of these subsidiary or affiliated companies must be dismissed. Alb. Reply Mem. p. 1, n. 1.

Since I recommend that Counts I to VI be dismissed under Rules 12(b)(6) and 9(b), and that summary judgment be granted as to Count VII, it is unnecessary to rule on this additional contention. Nevertheless, Plaintiff, if it intends to file an amended complaint, should note Rule 17(a), Fed.R.Civ.P., which provides that every action shall be prosecuted in the name of the real party in interest. Any amended complaint asserting claims on behalf of these companies should either include these companies as additional plaintiffs or provide facts establishing that Plaintiff may, under Rule 17(a), bring this action on their behalf

III. CONCLUSION AND RECOMMENDATION.

I conclude that Count I fails to state a basis for imposing successor liability upon Albatrans. Counts II to V are wholly dependent on Count I insofar as they seek to impose liability on Albatrans. Accordingly, I recommend that Count I be dismissed, and that Counts II to V be dismissed as to Albatrans.

I conclude that Count VI fails to meet the requirements of Rule 9(b). Accordingly, I recommend that Count VI be dismissed.

With respect to Count VII, I conclude that Albatrans has established that it is entitled to judgment as a matter of law. Accordingly, I recommend that summary judgment be granted in favor of Albatrans as to Count VII.

Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, any party may object to any part of this recommendation within ten business days by filing written objections with the Clerk of the U.S. District Court and mailing copies (a) to the opposing party, (b) to the Hon. Deborah A. Batts, U.S.D.J. at Room 2510, 500 Pearl Street, New York, N.Y. 10007 and (c) to me at Room 1360, 500 Pearl Street. Failure to file objections within ten business days will preclude appellate review. Thomas v. Arn, 474 U.S. 140, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985); Wesolek v. Canadair Ltd., 838 F.2d 55, 58 (2d Cir. 1988). Any request for an extension of time must be addressed to the District Judge.

Nov. 21, 2001.


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