09-1390-cv
Douglas v. Stamco
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO
A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS
GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S
LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH
THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING
A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY
COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan Courthouse, 500 Pearl Street, in the City of New York, on the 1st day of
February, two thousand ten.
Present:
WILFRED FEINBERG,
JOHN M. WALKER, JR.,
ROBERT A. KATZMANN,
Circuit Judges.
________________________________________________
RONNIE DOUGLAS,
Plaintiff-Appellant,
v. No. 09-1390-cv
STAMCO, A DIVISION OF MONARCH MACHINE TOOL CO.,
Defendant,
MONARCH MACHINE TOOL, AND MONARCH MACHINE TOOL, INC.,
Defendants-Cross-Claimants,
HERR-VOSS STAMCO,
Defendant-Cross-Defendant,
GENESIS WORLDWIDE II, INC.,
Defendant-Cross-Defendant-Appellee.
________________________________________________
For Appellant: Anthony R. Martoccia, McMahon, Kublick & Smith,
P.C., Syracuse, NY
For Appellee: David G. Klaber, Mark D. Feczko, Jared S. Hawk,
K&L Gates LLP, Pittsburgh, PA; Kenneth M. Alweis,
Lisa M. Robinson, Goldberg Segalla LLP, Syracuse,
NY
Appeal from a judgment of the United States District Court for the Northern District of
New York (Hurd, J.).
ON CONSIDERATION WHEREOF, it is hereby ORDERED, ADJUDGED, and
DECREED that the order of the district court be and hereby is AFFIRMED.
On October 10, 2008, the district court granted defendant’s motion to dismiss for failure
to plead successor liability and because public policy favored the extinguishing of plaintiff’s
claim after an asset sale pursuant to 11 U.S.C. § 363. Though plaintiff did not seek to amend the
complaint at any time to include a claim of successor liability, the district court sua sponte denied
leave to amend finding that any attempt would be futile. We assume the parties’ familiarity with
the facts, procedural history, and specification of issues on appeal.
We review de novo the district court’s grant of a motion to dismiss pursuant to Federal
Rule of Civil Procedure 12(b)(6). Staehr v. Hartford Fin. Servs. Group, Inc., 547 F.3d 406, 424
(2d Cir. 2008). We review the district court’s denial of leave to amend for abuse of discretion.
Holmes v. Grubman, 568 F.3d 329, 334 (2d Cir. 2009).
“Under both New York law and traditional common law, a corporation that purchases the
assets of another corporation is generally not liable for the seller’s liabilities.” N.Y. v. Nat’l Serv.
Indus., Inc., 460 F.3d 201, 209 (2d Cir. 2006). Therefore, successor liability attaches only where:
“(1) [the successor] expressly or impliedly assumed the predecessor’s tort liability, (2) there was
a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere
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continuation of the selling corporation, or (4) the transaction is entered into fraudulently to
escape such obligations.” Id. Plaintiff cannot demonstrate that any of these exceptions applies in
this case and so cannot sustain a claim for successor liability against Genesis Worldwide II, Inc.
(“Genesis II”).
The parties appear to agree that neither the first nor the fourth exception applies. The two
remaining exceptions—namely the de facto merger and mere continuation exceptions—though
routinely listed separately, are often regarded as so similar as to be considered a single exception.
See Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45 n.3 (2d Cir. 2003). The inquiry is
whether “a transaction, although not in form a merger, is in substance a consolidation or merger
of seller and purchaser.” Nat’l Serv. Indus., 460 F.3d at 209. Thus, to determine whether there
has been a de facto merger, the Court considers whether there was: “(1) continuity of ownership;
(2) cessation of ordinary business and dissolution of the acquired corporation as soon as possible;
(3) assumption by the purchaser of the liabilities ordinarily necessary for the uninterrupted
continuation of the business of the acquired corporation; and (4) continuity of management,
personnel, physical location, assets, and general business operation.” Id. Though the Court
examines all of the foregoing factors, “‘continuity of ownership is the essence of a merger,’” id.
at 211 (quoting Albatrans, 352 F.3d at 47), and therefore the exception cannot apply in its
absence. Id. (extending the reasoning in Albatrans to tort claims). Indeed, in authorizing the
asset sale in this case, the bankruptcy court explicitly stated that “[t]here is no common identity
among the Purchaser and the Debtors’ incorporators, officers, directors or material
stockholders.”1 Moreover, to the extent that the mere continuation exception is considered
distinct from the de facto merger exception, it also appears that the predecessor entity, Genesis
1
Though defendant paid 15% of its common stock as part of the consideration for the
sale, that was paid into a bank and never in the possession of the debtors.
3
Worldwide, Inc. (“Genesis I”), survived the asset sale as a bankrupt entity, which renders the
mere continuation exception unavailable to breathe life into plaintiff’s successor liability claim.
See Wensing v. Paris Indus. - N.Y., 158 A.D.2d 164, 167 (N.Y. App. Div. 1990) (“The record
reveals that Paris Industries Corporation survived the asset transfer as a distinct corporation,
albeit in bankruptcy. Under such circumstances, Leander cannot be cast as its mere
continuation.”).
The underlying public policy concerns implicated by this case also weigh in appellee’s
favor. Allowing the plaintiff to proceed with his tort claim directly against Genesis II would be
inconsistent with the Bankruptcy Code’s priority scheme because plaintiff’s claim is otherwise a
low-priority, unsecured claim. See 11 U.S.C. § 507(a); see also In re Trans World Airlines, Inc.,
322 F.3d 283, 292 (3d Cir. 2003) (“To allow the [plaintiff] to assert successor liability claims
against [the purchaser] while limiting other creditors’ recourse to the proceeds of the asset sale
would be inconsistent with the Bankruptcy Code’s priority scheme.”). Moreover, to the extent
that the “free and clear” nature of the sale (as provided for in the Asset Purchase Agreement
(“APA”) and § 363(f)) was a crucial inducement in the sale’s successful transaction,1 it is evident
that the potential chilling effect of allowing a tort claim subsequent to the sale would run counter
to a core aim of the Bankruptcy Code, which is to maximize the value of the assets and thereby
maximize potential recovery to the creditors. See Toibb v. Radloff, 501 U.S. 157, 163 (1991)
(recognizing that the Bankruptcy Code’s general policy is “maximizing the value of the
bankruptcy estate”); see also Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380, 387
(2d Cir. 1997) (stating that a sale pursuant to § 363 of the Bankruptcy Code “maximizes the
1
The APA states: “The Purchaser would not enter into the Asset Purchase Agreement or
consummate the Sale . . . if the Sale were not free and clear of all Liens and Claims . . . or if the
Purchaser were or would be liable for any Excluded Liabilities.”
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purchase price of assets because without this assurance of finality, purchasers could demand a
large discount for investing in a property that is laden with the risk of endless litigation as to who
has rights to estate property”). In light of the foregoing, we conclude that the district court did
not err in granting the defendants’ Rule 12(b)(6) motion.
Moreover, because plaintiff is unable to substantiate a claim for successor liability under
New York law, we also do not find that the district court abused its discretion in denying leave to
amend the complaint for futility,1 see Holmes, 568 F.3d at 334 (“Generally, [a] district court has
discretion to deny leave [to amend] for good reason, including futility.”) (internal quotation
marks omitted) (alterations in original), particularly where the plaintiff initially failed to plead the
cause of action and subsequently failed to seek leave to amend at any point in the underlying
proceedings despite several obvious opportunities to do so.
For the foregoing reasons, the judgment of the district court is hereby AFFIRMED.
FOR THE COURT:
CATHERINE O’HAGAN WOLFE, CLERK
1
Indeed, plaintiff admitted on the record that further discovery would not have altered the
facts as already recited in the Sale Order, suggesting that amending the complaint would have
been futile.
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