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March 13, 2002


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


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


(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.



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).


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.

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 ...

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