Defendants appeal from an order of the Supreme Court, New York County (Charles E. Ramos, J.), entered April 12, 2012, which denied their motions to dismiss the eighth cause of action in the second amended complaint for failure to state a claim and on the ground of res judicata.
Crowell & Moring LLP, New York (Edwin M. Baum, Daniel D. Edelman and Elizabeth A. Figueira of counsel), for Orix Finance Corp., Maps CLO Fund I, LLC, Maps CLO Fund II, Ltd., Wells Fargo Bank, N.A., Union Bank of California, N.A., CIT Lending Services Corporation, Bank Midwest, N.A., Brown Brothers Harriman & Co., Prudential Insurance Company of America, OFS Funding, LLC, OFSI Fund III, Ltd., and CIT CLO I Ltd., appellants.
Fulbright & Jaworski L.L.P., Los Angeles, CA (Robert E. Darbs of the bar of the State of California, admitted pro hac vice, of counsel), and Fulbright & Jaworski L.L.P., New York (James H. Neale of counsel), for Tap Automotive Holdings, LLC, appellant.
Friedman & Wittenstein P.C., New York (Stuart I. Friedman, Ivan Kline and Ashwini Jayaratnam of counsel), for respondent.
Angela M. Mazzarelli, J.P., David B. Saxe, Karla Moskowitz, Sallie Manzanet-Daniels, JJ.
The defendants in this action, other than defendant Tap Automotive Holdings, LLP, are a group of lenders  (the Senior Lenders) that extended loans, primarily via a "Senior Secured Credit Facility, " to nonparty Tap Operating Company, LLC (Tap), in connection with Tap's acquisition of an automotive company. The arrangement provided, among other things, for the Senior Lenders to take a security interest in substantially all of Tap's assets. In addition, plaintiff Tap Holdings, LLC (Holdings) granted to the Senior Lenders a security interest in 100% of its Tap membership units. Holdings is alleged to own 100% of Tap and made a substantial investment in the acquisition. Holdings is in turn substantially owned by the three "Irving Place Capital" plaintiffs as well as plaintiff The BSC Employee Fund VII, L.P. (collectively IPC). In addition to the credit facility and the equity investments, the acquisition was financed by Tap's issuance of senior subordinated notes, the rights under which have been assigned to plaintiff IPC Manager II, LLC (Manager). Manager is the only plaintiff seeking relief under the eighth cause of action at issue herein.
Plaintiffs allege that Tap never defaulted on its payments to the Senior Lenders, but that it did violate certain "technical" covenants. Instead of declaring Tap in breach of the entire arrangement based on those violations, the Senior Lenders and Tap entered into a series of forbearance agreements pursuant to which, in exchange for additional equity infusions by IPC, the former agreed not to exercise their rights to seek payment of the full loan amount or to enforce their security interests. At the expiration of the final forbearance agreement, however, the Senior Lenders refused to enter into a new one, leading to Tap's defaulting on certain obligations related to the automotive business and to the Senior Lenders' alleged refusal to permit Tap to make payments to holders of the subordinated notes. The Senior Lenders did agree, as a condition of avoiding default under the credit facility, to enter into a "Participation Agreement" with IPC. Pursuant to that agreement, IPC guaranteed $7 million of Tap's obligations to the Senior Lenders on a "last out" basis, meaning that any loans still outstanding and owing to the Senior Lenders under the credit facility would have to be paid, up to $7 million, before IPC would receive any payments for their contributions to Tap. Following that arrangement, the Senior Lenders granted additional forbearance periods while the parties attempted to restructure the financing. However, negotiations failed to bear fruit, and the Senior Lenders refused a final forbearance. Instead, it is alleged that the Senior Lenders exercised their security interests in Holdings' membership units in Tap, terminating Holdings' voting rights and replacing the entire board of Tap, save one person. Tap and Holdings advised the Senior Lenders that their actions were ineffective under both Delaware law and Tap's operating agreement because Holdings, as sole member, did not have any presently exercisable right to remove the members of Tap's board, and the Senior Lenders could have no greater rights than Tap Holdings. It is further alleged that, in response, the Senior Lenders simply amended Tap's operating agreement to allow for the removal of members of the board at any time, with or without cause, removal of all existing board members except the one the Senior Lenders had elected to keep, and to specifically allow the appointment of two new members.
A few months later, citing Tap's defaults under the credit facility, the Senior Lenders accelerated payment of $7 million in loans, triggering IPC's obligation under the Participation Agreement. After IPC made the payment, the Senior Lenders withdrew the acceleration and Tap continued in business. Plaintiffs allege that Tap's financial condition improved dramatically thereafter. Nevertheless, under the constructive control of the Senior Lenders, Tap entered into a "Foreclosure Agreement" with the Senior Lenders which provided that (1) Tap would transfer all its assets (and those of its subsidiaries) to a newly formed entity, controlled by the Senior Lenders, to be named defendant Tap Automotive Holdings, LLC (New Tap); (2) New Tap would assume all liabilities either incurred by Tap in the ordinary course of business or specifically agreed to in the Foreclosure Agreement; (3) New Tap would employ all employees of Tap on substantially similar terms; and (4) New Tap would fund the wind-up and dissolution of Tap. Pursuant to this arrangement, New Tap acquired Tap's assets for $66 million, via Tap's issuance of a new note. This amount covered the Senior Lenders' outstanding loans (minus the $7 million owed to IPC by reason of their loan purchase pursuant to the Participation Agreement), and left nothing for the holders of Tap's subordinated debt or equity. Indeed, at the time of the transaction, Tap still carried approximately $38 million worth of subordinated indebtedness, including interest. New Tap did not assume responsibility for the subordinated notes. However, as alleged by plaintiffs, New Tap was no different than Tap, using the same trade names, physical assets and website. Further, Tap executives assumed the same positions with New Tap, and received equity in New Tap equivalent to or in excess of their equity in Tap, which they held through Tap Holdings.
Plaintiffs demanded that Tap bring claims against the Senior Lenders for rendering Tap insolvent, but the demand was refused. Accordingly, plaintiffs themselves commenced this action, naming Tap as a nominal defendant, and seeking to recover on the subordinated notes and the participation interests, and to have the transferred assets returned to Tap. Tap moved to dismiss the claims against it, and the court granted the motion, finding that plaintiffs had no standing to assert derivative claims on behalf of Tap and that plaintiffs failed to show that Tap's refusal to institute litigation was unjustified.
Plaintiffs then filed a second amended complaint, which did not name Tap, but which included the eighth cause of action at issue on this appeal. That cause of action alleged that, after the transfer of Tap's assets to New Tap, "New Tap's management, personnel, physical location, good will, web domain, phone number, and general business operation, etc. were (and remain) all the same." It further asserted that: (1) the transaction "was specifically structured with the intention to shear Tap of its assets while leaving it with its liability to the Subordinated Noteholders, even though the Tap business continued as a going concern in a seamless manner"; (2) "New Tap has engaged in a defacto merger with Tap, and exists as a mere continuation of Tap and its subsidiaries"; (3) "Senior Lenders formed New Tap solely for the purpose of receiving the assets and business of Tap"; and (4) "[a]s a result, New Tap, as the successor to Tap, and the Senior Lenders, as New Tap's alter ego, are each jointly and severally liable for all obligations and amounts owed by Tap and its subsidiaries to the Subordinated Noteholders on the Subordinated Notes."
Both New Tap and the Senior Lenders moved to dismiss the eighth cause of action, arguing that it was precluded by the doctrine of res judicata and waiver, and by Manager's failure to adequately plead alter ego and successor liability claims. The res judicata defense was based on New Tap's position that the successor liability claim against it depended on a finding that Tap was liable on the subordinated notes, which they argued had been decided on the merits by Tap's dismissal from the action. They argued further that Manager's failure to raise successor liability in the earlier complaints precluded them from raising it in the new complaint. The Senior Lenders also relied on a provision in a subordination agreement which provided that
"the holders of Subordinated Indebtedness waive any right to... challenge the appropriateness of any action the Senior Agent and Senior [Lenders] take with respect to the Senior Debt and hereby consent to the Senior Agent and Senior [Lenders] exercising or not ...