In addition, the court stated that its conclusion was strengthened by policy considerations surrounding bankruptcy. Id. "Allowing Plaintiff to pursue a claim against a company that purchases assets of a bankrupt entity would not only discourage such sales but also allow Plaintiff's low-priority unsecured claim to rise above claims of other creditors." Id. (citation omitted).
Despite its findings on successor liability, however, the court held that on a motion to dismiss it could "not decide issues of fact such as that presented by the Old Ladder employee affidavit," namely the identity of the company that manufactured the ladder. Id. at 500. Accordingly, the court denied the motion to dismiss and granted plaintiff's request to take discovery on this issue, after which the Werner defendants could move for summary judgment if deemed appropriate at that time. Id.
Another 2011 decision further demonstrates that the question of successor liability may be ripe for determination at the dispositive motion stage. See Merino v. Beverage Plus Am., No. 10 Civ. 0706, 2011 WL 3739030 (S.D.N.Y. April 12, 2011) (Ellis, Mag. J.). There, a number of employees of a beverage distributor sought damages and injunctive relief for alleged violations of federal and state wage and hour labor laws. Id. at *1.
The court had previously entered a default judgment against defendants SMC USA, Beverage Plus America, and Grand Beverage. Id. In addition to class certification, plaintiffs now sought summary judgment against individual defendants, brothers Yun S. Cho and Yun C. Cho (the Chos), on corporate "veil piercing" and successor liability theories. Id.
After granting class certification and piercing the corporate veil between SMC USA and Yun S. Cho as well as between the Chos and Grand Beverage, the court turned to the issue of successor liability. The record established that Yun S. Cho owned SMC USA, which operated Beverage Plus, plaintiffs' employer. Id. Roughly one month after the filing of the lawsuit, Yun S. Cho and SMC USA transferred Beverage Plus to Yun C. Cho and Grand Beverage, a company he owned, for no money. Id. Other than the name and ownership change, however, the Beverage Plus business remained "substantially the same" and continued under Yun S. Cho's management. Id.
On these facts, the court readily determined that Yun C. Cho and Grand Beverage were liable as successors of Yun S. Cho and SMC USA. Id. at *7. "Here, Plaintiffs have established that Grand Beverage Corporation is a mere continuation of SMC USA Corporation, or, in other words, that the corporation has gone through 'a mere change in form without a significant change in substance.'" Id. (citation omitted). In addition, the court observed that plaintiffs "have also shown that the transfer of the Beverage Plus business from SMC USA Corporation to Grand Beverage Corporation was entered into at least in part to avoid Defendants' potential obligations in this lawsuit," implicitly invoking the fraud exception to the general rule against successor liability. Id.
Refusal to Adopt New Theories
Finally, in our previous article, "Determining Successor Liability," we noted the decision of the New York Court of Appeals in Semenetz v. Sherling & Walden, 7 N.Y.3d 194 (2006), which refused to create a fifth exception to the general rule against successor liability by rejecting the so-called "product line" exception in cases of strict products liability. Recent decisions, including that of the Eastern District of New York in Doktor discussed above, continue to rely on Semenetz in confining the analysis of successor liability under New York law to the four traditional exceptions to the general rule. 762 F. Supp. 2d at 499 (any argument "in favor of imposing successor liability based upon the continued marketing of a predecessor's defective product…is foreclosed by…Semenetz").
Absent legislation to the contrary, it does not appear that New York courts will deviate from the four established exceptions any time soon. See, e.g., Ortiz v. Green Bull, No. 10-CV-3747, 2011 WL 5554522, at *6-8 (E.D.N.Y. Nov. 14, 2011) (finding that Semenetz suggests that the Court of Appeals would also refuse to adopt a "continuity of enterprise" exception to the general rule, which would considerably enlarge successor liability by effectively eliminating the "continuity of ownership" requirement of the de facto merger exception).
While New York recognizes successor liability, how that doctrine plays out in any given case will ultimately turn on the theory advanced and facts presented to the trial judge. Although it may be possible for defendants to challenge unsupported claims on the pleadings via a motion to dismiss, in other cases discovery may be necessary before the judge will be in a position to consider a motion for summary judgment on this important issue. At the very onset of a litigation involving successor liability, the parties should be focused on the factual underpinning, or lack thereof, for a claim. As shown in some of the recent decisions discussed above, if liability cannot properly be extended to the defendant "successor" entity, the plaintiff may be left without a remedy, regardless of how meritorious the claim may otherwise be.
Steven F. Napolitano is a partner in the complex mass torts and insurance litigation group at Skadden, Arps, Slate, Meagher & Flom, and Peter D. Luneau is an associate in that group. Sarah Rosenbluth, a summer associate, assisted in the preparation of this article.