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