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. (“Al-batrans” 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 *89 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.
1
See
Pl.’s Objections at 5-6; Report at pages 96-97 (citing
Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc.,
"The roje 0f a fe(jerai court sitting in diversity is to construe and apply state law as ... the state’s highest court would.”
Bull & Bear Group, Inc. v. Fuller,
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 Plaintiffs 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 Plain- -' tiff 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
EATON, United States Magistrate Judge.
TABLE OF CONTENTS
*91 I. BACKGROUND FACTS.92
II. LEGAL ANALYSIS.92
Legal Standards. to to >
Application of New York Law. CO CO td
Successor Liability.. CO CO Q
1. The Four Exceptions to the General Rule of Non-Liability. <£> CO
2. The Basis of the,.“Mere Continuation” and “De Facto Merger”
Exceptions.:. ^
3. ‘ Mere Continuation .. <sD cn
4. De Facto Merger... O oí
(a) The Traditional Definition of a De Facto Merger. *£> Oí
(b) Expanded Successor Liability in Products Liability Cases. O üt
(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?. Oi rH
(d) Adequacy of the Complaint’s Allegations as to De Facto Merger. OÍ rH rH
5. Conclusion as to Count I.:.. .■. ^ rH rH
Counts II to V. Fraudulent Conveyance. Bulk Transfer Act .. Claims on Behalf of Affiliates .:..•.. bO I> rH rH rH rH rH rH rH rH flHfaO
III. CONCLUSION AND RECOMMENDATION 118
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. 1 (“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 Al-batrans 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 Y.ork’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, Alba-trans 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 exclusivély to the question of whether Plaintiff has shown a basis for imposing liability on Albatrans for Chase Leavitt’s debt to Plaintiff. 2 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. 3
*92 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 Néw 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. 4 ¶¶ 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. 5 ¶ 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,
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 b^ the parties in support or opposition to the motion, then the motion should
*93
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.,
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,
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 Al-batrans 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.,
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.,
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 Alba-trans is a mere continuation of Chase Leavitt. PLMem. pp. 4-11. 8 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 Leav-itt.” 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.
2v 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 hable 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. 9 In such cases, the courts de *95 termined 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.,
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,
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.
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].
*96 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 disposi-tive 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. 11
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.,
Schumacher does not specifically discuss the requirements for the “de facto merger” exception. 12 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.”
*97 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).
The Second Circuit adopted
Ladjevardi-an’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.,
Accordingly, under
Arnold
(as under the rule in other jurisdictions
15
), continuity of
*98
stockholders is .required for a de facto merger under the traditional de facto merger exception.
See Shamis v. Ambassador Factors Corporation,
Amold’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 areá. 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 *99 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,
“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 “[fjactors which are indicative of a de facto merger....”).
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. 17 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. 18 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 singíe factor is determinative and that not every element *100 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.
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 Lum-bard and in the subsequent eases 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 tbe ownership requirement in the product liability area 20 ) gives any reason- why ownership continuity should be optional rather than required.-
. (c) The general recitation of the Lum-bard 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 hot 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
*101
needed” concept was first suggested in
Good v. Lackawanna Leather Company,
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.
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
.
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,
In
Menacho v. Adamson United Company,
Shannon’s list of four factors was subsequently adopted (with some variations in language) by Judge Lasker in Ladjevardi-an (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 Goet-tel’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,
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 *103 light most favorable to the plaintiffs, these allegations are sufficient to state a de facto merger claim against Máglia.
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.,
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). 23 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 *104 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 24 and courts in various other jurisdictions 25 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 3(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. 26 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,
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 Schu-macher on the related topic of “mere continuation,” and, arguably, (f) the New York Court of Appeals’ decision in Schumacher itself. 27
(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,
The leading case for the “continuity of enterprise” exception is
Turner v. Bituminous Casualty Company,
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).
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.,
The New York Court of Appeals has not adopted either the “continuity of enterprise” exception or the “product line” exception. 29 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,
*107 The First Circuit (applying New York law in a products liability case), reviewed the contrasting interpretations of Schu-macher, 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.,
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,
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 á dictum from the Court of Appeals’ opinion in
Grant-Howard Associates v. General Housewares Corp.,
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.
*109
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
).
33
See Winch v. Yates American Machine Company, Inc.,
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 *110 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,
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 Schu-macher ..'. was established by the evidence .... [Successor corporation liability is essentially a torts concept.
The broadly stated holding of
Sym-bax
— that successor liability (under the four standard exceptions stated in
Schu-macher)
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.,
Two recent New York contract cases—
Ladenburg Thalmann & Co., Inc. v. Tim’s Amusements, Inc.,
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.,
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,
The reasons for imposing expanded successor liability in the area of products liability are not germane to the claims of trade creditors. Expanded successor liar bility 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,
36
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
*112
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.”
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 fac-to 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. 37 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,
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 *113 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. 38 - 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. Leav-itt is an owner of Chase Leavitt, 39 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,
The only detailed discussion of this issue which T have found is in
National Gypsum v. Continental Brands Corp.,
While the evidence clearly shows that [the seller’s] owners have no direct equity interest in [the purchaser] there is at *114 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. 40
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,
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. 41
*115 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 Alba-trans — 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 Lawi 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.” 42 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 an<l 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.” 43 - The Complaint alleges, on information and belief, (a) that Chase Leavitt transferred assets to Alba-trans 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
*116
Creditor Law.
Starmark, Inc. v. Zaccaria,
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.,
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,
Since neither the Section 273 claim nor the Section 276 claim meets the requirements of Rule 9(b), T recommend that the motion to dismiss be granted as to Count VI. 44
*117 F . Bulk Transfer Act.
Count VII of the Complaint alleges that Defendants failéd 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)
45
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.,
The Chiarelli Affidavit states that Chase Leavitt is a service company that does not manufacture or sell products from stock, inventory or otherwise. 46 Chiarelli Aff. ¶ 3. Plaintiff does, not dispute this, either in the Krauter Declaration or in Plaintiffs brief. 47
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 spedicya d.olo. (Brnik, Slovenia), Cargo Partner Hungaria kft. (Budapest, Hungary) and Cargo Partner Spedycja Sp. z.o.o. (Raszyn, Poland).” Cplt. ¶ 1. Mr. Krauter, Plaintiffs *118 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. 100Ó7 and (c) to me at Room 1360, 500 Pearl Street. Failure to file objections within ten business days will preclude appellate '-review.
Thomas v. Am;
Nov. 21, 2001.
Notes
. Although Judge Eaton found that all four elements of a de facto merger must be plead, he concluded that when determining whether the existence of a de facto merger has been plead sufficiently it is appropriate to apply a flexible as opposed to a formulaic approach. See Report at page 99.
. Both of theses cases are cited and discussed in Judge Eaton’s Report and Recommendation. See Report at page 110.
.This is the name as stated in the Complaint. The name is stated as “Chase Leavitt (CHB), Inc.” in the Asset Purchase Agreement between Chase Leavitt and Albatrans. Exhibit B to 4/25/01 Affidavit of Giovanni Chiarelli.
. There is an additional issiie relating to the claims made by Plaintiff on behalf of its affiliates. 'Seepage 117 below.
. Rule 15(a), Fed.R.Civ.P., provides that a party may amend a complaint once as a mat
*92
ter of course at any time before a responsive pleading is served. A motion to dismiss a complaint under Rule 12 is not a responsive pleading.
Rose v. Associated Universities, Inc.,
. Paragraph 6 of the Complaint refers only to "plaintiff,” but some of the invoices in Exhibits A, B and C are in the name of its affiliates, and Plaintiff’s brief, at page 1, confirms that some of the services were provided by its affiliates.
. These total figures allegedly take into account credits for services provided by Chase Leavitt to Plaintiff and it affiliates, as reflected in attached invoices. ¶¶ 6(d), (e) and (f); Exhibits.D,.E and F.
. In any event, it appears that New York courts would find that New York substantive law governs the issue of Albatrans’ liability. Albatrans is a New York corporation with its principal place of business in New York. The Purchase Agreement, pursuant to which Alba-trans purchased the Chase Leavitt assets, states that it is to be governed by New York law. The record does not reveal any other jurisdiction with greater, or even equal, contacts to the transactions at issue.
. Schumacher, a tort (products liability) case, speaks of tort liability, but the general common-law rule it refers to also applies to liability for other debts and obligations. See Fletcher § 7122.
. The Complaint also appears to rely on the "continuity of enterprise” exception adopted by some other states for products liability cases where the new owner continues the business largely intact. See Cplt. ¶ 10, citing Fletcher § 4880 at n. 3 & 4. (Note 3 relates to . the four traditional exceptions. Note 4 is a cross reference to sections discussing the "continuity of enterprise” exception.) Plaintiff's brief does not assert that the "continuity of enterprise” exception is applicable to the case at bar. However, because this additional exception is related to New York cases expanding the "de facto merger” exception, I discuss it at pages 105-06 below in connection with de facto merger.
.
See,
e.g.,
E.I. du Pont De Nemours & Co. v. Smith, 252
F. 491, 494 (4th Cir.1918);
United States Fidelity & Guaranty Co. v. Citizens Nat. Bank,
. This requirement is strictly applied under New York law. An allegation that the seller has become a mere shell is not sufficient.
See,
e.g.,
Sweatland v. Park Corp.,
. Plaintiffs argument that Albatrans' offering an employment contract to Chase Leav-itt’s President, Allison Leavitt, is sufficient to establish continuity of ownership, Pl.Mem. p. 5, is discussed below at pages 112-13 in connection with de facto merger.
.
Schumacher
refers to the four exceptions and says: "Nothing in the record suggests liability under any of these theories. The only arguable basis upon which plaintiffs can predicate a finding of successor liability is to characterize [the purchaser] as a 'mere continuation of [the seller].”
.
McKee,
a products liability cas$,. was applying a common-law definition of "de facto merger," derived from previous New Jersey cases concerning shareholders' rights. The New Jersey Supreme Court has since overruled
McKee
with respect , to the successor liability standard to be applied in products liability cases.
See Ramirez v. Amsted Industries, Inc.,
.
Arnold,
a diversity case alleging a de facto merger between a New York corporation and its subsidiary, has been understood as applying New York law.
See State of New York v. Westwood-Squibb Pharmaceutical Co., Inc.,
. See,
e.g.,
Bud Antle, Inc. y. Eastern Foods, Inc.,
. Lumbard, although citing Arnold, used somewhat different language (taken from Phillips, Successor Liability, 58 N.Y.U.L.Rev. at 909) which, inter alia, omits the specification that payment for the acquired assets be made with shares of stock, substituting a more general "continuity of ownership.”
. There appear to be several factors which were not strictly met by the complaint in Lumbard: ownership continuity (where Judge Goettel found the allegation of a somewhat indirect continuity to be sufficient), dissolution (the seller, although allegedly reduced to a shell, had not actually dissolved) and assumption of liabilities (the opinion doesn’t indicate the extent, if any, to which the purchaser assumed the seller’s ordinary liabilities). Judge Goettel’s subsequent use of the phrase ”[e]ven if the amended complaint does not thoroughly describe every indicator of a de-facto merger,” id. at 1536, could be taken as indicating that the qualification was intended to deal with these deficiencies (although the context of the phrase also supports a contrary reading, see page 102 below).
.See page 103 below.
. Panex involved the application of the "de facto merger” test with respect to claims under CERCLA and under New York statutory and -common law. In the quoted passage, Judge Elfvin was referring in particular to other CERCLA cases applying a diluted "de facto merger” test. But Judge Elfvin’s description of the approach taken by those cases describes as well the approach taken by Lum-bard, and a number of subsequent contract and creditor cases, to the "de facto merger” exception. Judge Elfvin’s conclusion that this approach conflicts with the Second Circuit’s decision in Arnold is equally applicable to Lumbard and its progeny.
.
See Sweatland v. Park Corporation,
. Indeed, McKee found that a token payment in shares of stock was insufficient to establish the required degree of stockholder continuity. The consideration paid to the seller included some shares of the purchaser’s stock (in addition to almost $2 million in cash), but the court found that "[t]he shares paid as consideration amounted, in fact, to only a negligible part of the total purchase price. Since the overwhelming portion of the consideration was cash, there was little, if any, continuity of stockholder interest in the purchasing corporation.” Id.
. In
Old Republic,
the plaintiff alleged that Duferco USA (one of several related defendant companies named Duferco) was the seller's principal.
.
See,
e.g.,
Freeman v. Complex Computing Company,
. See pages 97-98 above.
. See footnote 15 above.
.
See,
e.g.,
McDarren
v.
Marvel Entertainment Group, Inc.,
. As discussed at page 106 below, Schu-macher appears to reject, even in the products liability area, the "continuity of enterprise” exception (which is merely the de facto merger exception without the requirement of ownership continuity).
. Courts have also applied expanded successor liability, without a requirement of ownership continuity, in the areas of hazardous waste cleanup
(see,
e.g.,
B.F. Goodrich v. Betkoski, 99
F.3d 505 (2d Cir.1996)), labor law
(see,
e.g.,
Golden State Bottling Co., Inc. v. NLRB,
. These exceptions have been rejected in most jurisdictions which have ruled on the issue. See Restatement (Third) of Torts: Product Liability § 12, Comment b (successor liability beyond the four traditional exception adopted by "a small minority of courts,” but rejected by "a substantial majority”); Id.., Re-' porters' Note, Comment b (the "overwhelming judicial rejection of the liberating rules”); Id., Reporters' Note, Comment c (listing jurisdictions which have rejected both Turner and Ray).
. In a previous Eastern District products liability case,
Diaz v. South Bend Lathe, Inc.,
. In
Grant-Howard,
the defunct predecessor and its shareholders sought a declaration that the successor was required to defend and
*108
indemnify them with respect to a product liability claim. The lower court opinion,
The Court of Appeals opinion reversed the holding as to indemnification. Distinguishing the issue of successor liability from that of indemnify, the Court of Appeals first discussed the subject of successor liability in product liability cases (in which discussion the comment quoted in Wensing occurs), and then went on to say: "All of this, however, is not relevant to the question of indemnification,” which was the issue in the case.
. While
Sweatland
is not specific as to the precise "public policy considerations” that underlie its decision, its citations in the preceding paragraph — to
Turner,
Phillips
Successor Liability,
58 N.Y.U.L.Rev. 906,
and Knapp v. North American Rockwell Corp.,
. If
Schumacher
is interpreted as rejecting the "continuity of enterprise” exception set forth in
Turner,
there is a considerable question as to the rule adopted by
Wensing
and
Sweatland.
The expanded "de facto merger" exception applied in
Wensing
and
Sweatland
is the same as
Turner’s
"continuity of enterprise” exception, which (as discussed at page 105 above) is the traditional "de facto merger” test with the requirement of ownership continuity eliminated. Indeed,
Schumacher
describes
Turner
as "based upon a balancing approach, where there has been a basic ‘continuity of the enterprise’ of the seller corporation [citing
Turner
], an expansion of the traditional merger or consolidation exceptions ...”
. Subsequently, the Third Department (without discussing
Schumacher's
ruling) adopted the "product line” exception.
Hart v. Bruno Machinery Corporation.,
.The issue of
Sweatland’s
applicability outside the tort area was not' before the court in
Nettis.
The only claim involved in the
Nettis
appeal was a tort claim for violation of New Jersey's whistle-blower protection statute. The Second Circuit considered the successor liability issue under both New Jersey and New York law. The opinion says: "In both states, when a successor firm acquires substantially all of the predecessor’s assets and carries on substantially all of the predecessor's operations, the successor may be held to have assumed its,' predecessor’s
tort liabilities....
”
. Fraudulent conveyance laws provide a remedy where the debtor has transferred its assets for inadequate consideration, or with intent to defraud creditors. Where the debtor has transferred its assets in a purported' asset sale but retains an ownership interest in the assets so transferred, relief may be obtainable under the well-established exceptions for "mere continuation” and "de facto merger.” Additionally, the bankruptcy laws providprotection against various preferences and fraudulent acts.
. Of course, if the consideration paid for the seller’s assets is inadequate or the transaction is otherwise fraudulent, the creditors would be entitled to relief under the fraud exception and/or fraudulent conveyance statutes.
.
See Ladjevardian,
. This fact is established by § 5(c) of the Purchase Agreement, and acknowledged in both parties’ briefs. Albatrans asserts that the Purchase Agreement can be considered on the motion to dismiss, as a document incorporated by reference. Alb.Mem. pp. 12-13. Since there is ho indication that Plaintiff had seen the Purchase Agreement, or that it was available to Plaintiff, I do not believe that it can be considered incorporated by reference. Nevertheless, since Plaintiff clearly will be able to allege that Ms. Leavitt is an owner of Chase Leavitt, it seems more efficient tq discuss now whether that allegation, together with the present allegation that she has been offered employment by Albatrans, would be sufficient to allege ownership continuity.
. Indeed, the Complaint does not allege Ms. Leavitt’s employment by Albatrans as showing ownership continuity. Rather, this employment is alleged as an instance of Alba-trans' using the same supervisory personnel as Chase Leavitt. • If the Complaint intends to allege that (as Plaintiff's brief asserts) such employment shows ownership continuity, such intention is obscure.
. If the submitted evidence demonstrated that the filing of an amended complaint would be futile, then considerations of efficiency would suggest that the motion for summary judgment be considered at this time. However, while the facts set forth in the affidavits and their exhibits indicate that it is unlikely that Plaintiff will be able to establish *115 a successor liability claim, I cannot say that they show that this would be impossible.
. Section 273 in full states:
Every conveyance made and every obligation incurred 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 or the obligation is incurred without a fair consideration.
. Section 276 in full states:
Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors is fraudulent as to both present and future creditors. The fraudulent nature of a conveyance may be inferred from the relationship among the parties to the transaction and the secrecy of the sale, or from inadequacy of consideration and hasty; unusual transactions.
. As with the successor liability claim (see page 114 and footnote 41 above), I do not recommend that the Court exercise its discretion to consider Albatrans' alternative motion for summary judgment. Albatrans has established that it paid some consideration, but the evidence (although providing circumstantial support) is insufficient to establish clearly that this constituted "fair consideration.” Similarly, although the evidence shows circum *117 stances indicating an absence of fraudulent intent, it is nevertheless possible that Plaintiff may be able to allege his Section 276 claim with the specificity required by Rule 9(b).
. Article 6 of the NYUCC (the Bulk Transfer Act) was repealed, effective July 1, 2001. 2001 Session Laws of N.Y., Ch. 84 § 20. Neither party's brief mentions the repeal or discusses what effect it may have. I find it unnecessary to consider such effect, since I conclude that, in any., event, the transfer of Chase Leavitt's assets to Albatrans was not covered by the Bulk Transfer Act (as in effect at the time).
. The affidavit also states, more specifically (1) that Chase Leavitt is , licensed by the U.S. Customs Service as a customs broker which provides services to importers in connection with clearing their goods through U.S. Customs, and (2) that Chase Leavitt is also a freight forwarder which provides services to importers and exporters relating to the transportation of their goods. Chiarelli Aff. ¶¶ 2-3.
.The sole contention made by Plaintiff's brief as to the Bulk Transfer claim is that the sale of the Chase Leavitt assets "was the kind of mischief envisioned by the Bulk Sales Law.” Pl.Mem. p. 13. The brief sets forth a quotation from
Committee of Unsecured Creditors of Interstate Cigar Co. v. Interstate Distribution, Inc.,