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Fitzgerald v. Fahnestock Co.

Appellate Division of the Supreme Court of New York, First Department
Sep 6, 2001
286 A.D.2d 573 (N.Y. App. Div. 2001)

Summary

holding that the de facto merger doctrine is applicable to breach-of-contract actions

Summary of this case from City of Syracuse v. Loomis Armored US, LLC

Opinion

September 6, 2001.

Order, Supreme Court, New York County (Barbara Kapnick, J.), entered June 29, 2000, which granted defendant's motion to dismiss based on documentary evidence and for failure to state a cause of action, unanimously reversed, on the law, without costs, the motion denied, and the complaint reinstated.

David G. Liston, for plaintiff-appellant.

Robert H. Pees, for defendant-respondent.

Before: Sullivan, P.J., Nardelli, Ellerin, Buckley, Marlow, JJ.


This case involves the issue of whether an acquiring corporation may become responsible for the pre-existing liabilities of an acquired corporation through application of the de facto merger doctrine.

Plaintiff obtained an arbitration award and judgment for severance pay against his former corporate employer. He was initially unable to enforce the judgment as that corporation had sold all its assets in return for a percentage of the future revenues of another corporation, Vantage Securities. By the time plaintiff had set aside that transfer as fraudulent under Debtor and Creditor Law § 278(1)(a), served Vantage with a garnishment and obtained a further judgment, he discovered that all of Vantage's assets had been transferred to defendant Fahnestock Co., Inc., rendering Vantage unable to satisfy his judgment.

This action was thereafter commenced alleging that defendant had merged with Vantage, rendering it responsible for Vantage's liabilities, including his judgment. On defendant's motion, the IAS court held that the de facto merger doctrine was inapplicable: (1) since Vantage had never been legally dissolved; (2) the matter herein involved contract breach rather than tort; (3) the documentary evidence of defendant's purchase of all shares of Vantage revealed no mention of the transfer of any of Vantage's assets to defendant; and (4) defendant was obligated under its stock purchase contract to cause Vantage to continue operations for some period of time after the stock sale.

The de facto merger doctrine creates an exception to the general principle that an acquiring corporation does not become responsible thereby for the pre-existing liabilities of the acquired corporation. This doctrine is applied when the acquiring corporation has not purchased another corporation merely for the purpose of holding it as a subsidiary, but rather has effectively merged with the acquired corporation. The hallmarks of a de facto merger include: continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, continuity of management, personnel, physical location, assets and general business operation (Sweatland v. Park Corp, 181 A.D.2d 243, 245-246).

Not all of these elements are necessary to find a de facto merger. Courts will look to whether the acquiring corporation was seeking to obtain for itself intangible assets such as good will, trademarks, patents, customer lists and the right to use the acquired corporation's name (see, Wensing v. Paris Indus., 158 A.D.2d 164). The concept upon which this doctrine is based is "that a successor that effectively takes over a company in its entirety should carry the predecessor's liabilities as a concomitant to the benefits it derives from the good will purchased" (Grant-Howard Assoc. v. General Housewares Corp., 63 N.Y.2d 291, 296).

While a stock purchase agreement alone is insufficient to establish a merger (see, Irving Bank Corp. v. Bank of New York Co., 140 Misc.2d 363, 367), the documents here submitted by defendant only establish that it bought the stock, not that it did not then proceed to merge Vantage's assets with its own. The IAS court erred in holding that there could be no de facto merger where the subsidiary is not legally dissolved. So long as the acquired corporation is shorn of its assets and has become, in essence, a shell, legal dissolution is not necessary before a finding of a de facto merger will be made (see, e.g., Ladenburg Thalmann Co. v. Tim's Amusements, 275 A.D.2d 243, 248; Sweatland v. Park, supra; 5th 46th Co. v. Dusenberry, Ruriani Kornhauser, Inc., 57 A.D.2d 791).

The IAS court erred when it limited the de facto merger doctrine to tort actions since it has been squarely held applicable in breach of contract actions (Ladenburg Thalmann Co., v. Tim's Amusements, supra). Plaintiff has alleged that: defendant acquired all of Vantage's stock; shortly after acquisition Vantage ceased issuance of its own annual audited financial report; instead, defendant subsequently included such information in defendant's annual report; Vantage's trading, compliance, legal and management departments were subsumed into defendant's; the NASD registration of Vantage's employees was transferred in bulk to defendant; and, Vantage withdrew its membership from the NYSE and surrendered its broker dealer number for purposes of trading and thereafter conducted trades under the defendant's broker dealer number.

Such allegations, if subsequently proven, would demonstrate that defendant rendered Vantage incapable of doing business except through defendant, i.e. that defendant had rendered Vantage a mere "shell" and that a de facto merger had been accomplished. Taking the complaint as a whole, it appears that plaintiff has set forth sufficient allegations to survive a motion to dismiss.

THIS CONSTITUTES THE DECISION AND ORDER OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.


Summaries of

Fitzgerald v. Fahnestock Co.

Appellate Division of the Supreme Court of New York, First Department
Sep 6, 2001
286 A.D.2d 573 (N.Y. App. Div. 2001)

holding that the de facto merger doctrine is applicable to breach-of-contract actions

Summary of this case from City of Syracuse v. Loomis Armored US, LLC

holding that the de facto merger doctrine is applicable to breach-of-contract actions

Summary of this case from Consolidated Risk Svc. v. Autom. Dlr. WC Self Ins. TR

In Fitzgerald, the court denied a motion to dismiss a claim relying on the de facto merger doctrine for liability, in which the buying corporation owned all of the selling corporation's stock when the seller's assets were transferred to it. 286 A.D.2d at 575, 730 N.Y.S.2d at 72.

Summary of this case from Cargo Partner AG v. Albatrans, Inc.

listing four hallmarks of de facto merger and not including unfairness to creditors

Summary of this case from Ambac Assurance Corp. v. Countrywide Home Loans, Inc.

In Fitzgerald v Fahnestock (286 AD2d at 575), the First Department stated that "[t]he IAS court erred in holding that there could be no de facto merger where the subsidiary is not legally dissolved.

Summary of this case from Ring v. Elizabeth Found. for the Arts

In Fitzgerald v Fahnestock (286 AD2d at 575), the First Department stated that "[t]he IAS court erred in holding that there could be no de facto merger where the subsidiary is not legally dissolved.

Summary of this case from Ring v. Elizabeth Found. for the Arts

In Fitzgerald, the First Department demonstrated this focus on substance over form, holding that de facto merger can be established where, like here, an asset buyer's initial acquisition of seller's stock was followed by seller's transfer of its assets and liabilities to the buyer in exchange for non-stock consideration.

Summary of this case from Mbia Ins. Corp. v. Countrywide Home Loans, Inc.

In Fitzgerald, the First Department demonstrated this focus on substance over form, holding that de facto merger can be established where, like here, an asset buyer's initial acquisition of seller's stock was followed by seller's transfer of its assets and liabilities to the buyer in exchange for non-stock consideration.

Summary of this case from MBIA Ins. Corp. v. Countrywide Home Loans, Inc.
Case details for

Fitzgerald v. Fahnestock Co.

Case Details

Full title:PAUL H. FITZGERALD, Plaintiff-Appellant, v. FAHNESTOCK CO., INC.…

Court:Appellate Division of the Supreme Court of New York, First Department

Date published: Sep 6, 2001

Citations

286 A.D.2d 573 (N.Y. App. Div. 2001)
730 N.Y.S.2d 70

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