Opinion
99 CV 7735 (ILG)
July 27, 2001
MEMORANDUM ORDER
This action for a declaratory judgment was filed against a number of defendants seeking a declaration that plaintiff Connecticut Indemnity Company ("Connecticut") is not obligated to defend or indemnify any of the defendants as a result of three motor vehicle accidents. Each of the accidents involved trucks owned and leased by defendant 21st Century Transport Co., Inc. ("21st Century") and two of the three accidents involved trailers owned by defendant Rutigliano Paper Stock, Inc. ("Rutigliano"). In April 1999, defendant Allied Waste Industries, Inc. ("Allied") entered into an asset purchase agreement to purchase the assets of Rutigliano. Rutigliano has failed to appear in this action and is in default, though it is listed as an active corporation by the New York Department of State. Now before the court is Allied's motion to dismiss pursuant to Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim upon which relief may be granted, as well as Allied's request that sanctions be imposed against plaintiff. In its opposition, Connecticut has argued that Allied's inclusion of the asset purchase agreement requires that its motion be converted into a motion for summary judgment and denied. For the reasons that follow, Allied's motion to dismiss need not be converted into a motion for summary judgment and is granted. As for Allied's request for sanctions, that is denied.
Background
The Complaint in this action arises from three separate motor vehicle accidents. Two of the three accidents are relevant to this motion. The first occurred on November 26, 1997 when the tractor trailer driven by John Haynes — who was working for and operating a tractor owned by defendant 21st Century that was attached to a trailer owned by and under dispatch to defendant Rutigliano — hit another vehicle in which defendants Ledian Williams and Karen Carr were passengers. The second accident occurred on February 20, 1998 when defendant Gregory Vaz, — who was driving a tractor owned by 21st Century that was attached to a trailer owned by and under dispatch to Rutigliano — hit another vehicle driven by defendant Clifton Messam.
Plaintiff's claim against Allied occupies three paragraphs in the Complaint which allege, in sum, that Allied is liable, as the successor in interest to defendant Rutigliano for all of Rutigliano's obligations and liabilities pursuant to New York Corporation Law § 906(b)(3) (incorrectly cited as § 906(3)). (Am. Compl. ¶¶ 15-16)
On April 1, 1999 Allied purchased the assets of Rutigliano in an Asset Purchase and Sale Agreement ("purchase agreement") which Allied has attached to this motion. (Mulholland Aff. Ex. C) Under the terms of this purchase agreement, Allied agreed to purchase many of Rutigliano's assets, including machinery, equipment, inventory and supplies, permits and licenses, operating data, physical plant, and good will. (Id.) The purchase agreement provided that some of the purchase price was to be paid to "Rutigliano Paper Stock, Inc." and other portions of the price to principals of Rutigliano. (Id. at § 1.3(a)) Significantly for purposes of this motion, § 1.4 of the purchase agreement states that Allied: "shall not be responsible for any liabilities of Sellers relating to the N Y business or the purchased assets for any period of time prior to closing." (Id., at § 1.4) In addition, the purchase agreement expressly requires Rutigliano to defend and indemnify Allied against any claims arising out of its preexisting liability. (Id.)
Discussion
I. Allied's Motion to Dismiss
Defendants' motion is styled as a motion for dismissal for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6). Defendant relies in its motion on affidavits by its counsel in this matter and its corporate counsel, the purchase agreement, and a letter from the New York State Department of State indicating Rutigliano's active status. (Mulholland Aff. Ex. C) When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court's consideration is limited to the factual allegations in the Complaint; documents incorporated by reference into the Complaint; matters of which judicial notice may be taken; and documents either in plaintiff's possession or of which plaintiff had knowledge and relied on in bringing suit. Brass v. American Film Technologies. Inc., 987 F.2d 142, 150 (2d Cir. 1993). However, when "asserting the defense numbered 6 to dismiss for failure to state a claim upon which relief can be granted, [and] matters outside the pleading are presented to and not excluded by the court, [Rule 12(b)(6) provides that] the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56. . . ." Fed.R.Civ.P. 12(b). Eklof Marine Corp. v. United States, 762 F.2d 200, 202 (2d Cir. 1985). Plaintiff, in opposing this motion, argues that because defendants have submitted matters outside the pleadings, namely the purchase agreement, the motion must be converted into a motion for summary judgment and disposed of pursuant to Rule 56. Plaintiff further argues that the motion should be denied, as it has not yet had the opportunity to take discovery from Allied, as Allied has not responded to its notice of deposition, requests for production or interrogatories or complied with the automatic disclosure requirements of Rule 26, Fed.R.Civ.P.
Before examining the merits of the motion presently before the court, it is first necessary to determine whether the motion should be considered under Rule 12(b)(6) or whether, as plaintiff contends, the inclusion of the purchase agreement requires that the motion be converted into a motion for summary judgment. The Second Circuit has held that documents submitted with a motion that are not attached to the Complaint or incorporated by reference may be considered by the court if, despite their omission from the Complaint, they may be considered "integral parts" of the plaintiff's claim. The court in Furman v. Cirrito, 828 F.2d 898 (2d Cir. 1987), stated:
Although appellees motion was made under Rule 12 (b)(1) and (6), the record before us consists of more than just the complaint. Specifically, it includes the partnership agreement, which spells out the rights and obligations of the parties, the contract for the sale of the partnership assets, whose terms appellants claim were unfair, and affidavits of counsel for both sides. The district court might have treated the motion as one for summary judgment. See In re G. A. Books. Inc., 770 F.2d 288, 295 (2d Cir. 1985), cert denied, 475 U.S. 1015, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986); Grand Union Co. v. Cord Meyer Development Corp., 735 F.2d 714, 716-17 (2d Cir. 1984). Despite its failure to do so, we nonetheless may refer to the partnership agreement and contract of sale, which are integral parts of appellants' claim and of the record before us. See Decker V. Massey-Ferguson. Ltd., 681 F.2d 111, 113 (2d Cir. 1982); 5 Wright Miller, Federal Practice and Procedure §§ 1327, 1357 at 593.Id. at 899.
Furman's reasoning is not confined to its facts, however. In fact, the Second Circuit has indicated in a range of circumstances that extrinsic evidence that is not specifically referred to in the Complaint may be considered in deciding a 12(b)(6) motion as long as it is integral to the Complaint. See also Yak v. Bank Brussels Lambert, 252 F.3d 127, 131 (2d Cir. 2001) ("Yak's complaint rests on the unstated belief that the Consulting Agreements were voided by the administrative decisions. Carefully avoiding all mention of the Consulting Agreements does not make them any less integral to her complaint. Therefore, the district court correctly considered the Consulting Agreements on the motion before it."); International Audiotext Network. Inc. v. American Telephone Telegraph Co., 62 F.3d 69, 72 (2d Cir. 1995) ("'The complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.' Moreover, 'when a plaintiff chooses not to attach to the complaint or incorporate by reference a [document] upon which it solely relies and which is integral to the complaint,' the court may nevertheless take the document into consideration in deciding the defendant's motion to dismiss, without converting the proceeding to one for summary judgment.") (citing Cortec Indus., Inc. v. Sum Holding L.P, 949 F.2d 42, 47-48 (2d Cir. 1991),cert. denied, 503 U.S. 960 (1992)); Barnum v. Millbrook Care. Ltd., 850 F. Supp. 1227, 1230 n. 2 (S.D.N.Y. 1994), aff'd, 43 F.3d 1458 (2d Cir. 1994) ("The Agreement was partially incorporated in [Plaintiff]'s Amended Complaint. However, the entire Agreement has been submitted by the Defendants, and may be duly considered by the Court upon a motion to dismiss.") (citations omitted); Ahmed v. Trupin, 809 F. Supp. 1100, 1105 (S.D.N.Y. 1993) ("In a motion to dismiss, the court may consider the offering prospectus itself, even if the prospectus was not attached to the complaint and made a part thereof under Federal Rule of Civil Procedure, Rule 10(c)." (citation omitted)).
Plaintiff here offers no convincing reason why the rule discussed in these cases should not be applied here. Nor can the court discern such a reason. Although Connecticut's Amended Complaint does not incorporate or specifically refer to the purchase agreement, the Amended Complaint makes specific reference to Allied's acquisition of Rutigliano and alleges that this acquisition made Allied a survivor and successor in interest to Rutigliano pursuant to New York Business Corporation Law § 906(b)(3). That provision, however, has been interpreted to permit a purchase of corporate assets that is arranged so as to insulate the purchaser from the seller's liabilities. See Gardner v. Fyr-Fyter Co., 47 A.D.2d 591, 363 N.Y.S.2d (4th Dep't 1975). Accordingly, even though the purchase agreement was not appended to the Complaint, it clearly is integral to the Amended Complaint since liability under plaintiff's theory would be available only if the purchase of assets did not insulate Allied from Rutigliano's liabilities.
In Cortec Industries, Inc. v. Sum Holding L.P, 949 F.2d 42, 48 (2d Cir. 1991), the Second Circuit wrote, in the course of opinion, "where the plaintiff has actual notice of all the information in the movant's papers and has relied upon these documents in framing the complaint the necessity of translating a Rule 12(b)(6) motion into one under Rule 56 is largely dissipated." Seizing upon the words "actual notice," the plaintiff has asserted upon oral argument that not having had actual notice of the purchase agreement, the "integral to the complaint" exception does not apply. That argument is flawed for two reasons. The pleading before the court is an Amended Complaint dated August 31, 2000. Attached as Exhibit F to an affidavit by Allied's counsel is a letter dated March 3, 2000, mailed to plaintiff's counsel by counsel for Allied stating that enclosed with it is "a copy of the asset purchase agreement between Allied and Rutigliano Stock." (Mullholland Aff. Ex. F) The letter goes on to state that "You will notice that Allied did not become the successor in interest to Rutigliano but merely purchased its assets." (Id.) In cases decided since Sum Holding and citing it, the Second Circuit has stated the principle as follows: "For purposes of a motion to dismiss, we have deemed a complaint to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference . . . as well as public disclosure documents require by law to be, and that have been, filed with the SEC . . . and documents that the plaintiff's either possessed or knew about and upon which they relied in bringing the suit see Sum Holding, 949 F.2d at 47-48." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (emphasis added). Here, plaintiff clearly knew about the purchase agreement before filing the Amended Complaint since its counsel received a copy of it in March, 2000, more than five months before the Amended Complaint was filed. As has been indicated above, the plaintiff alleged that Allied is the surviving entity and successor in interest to Rutigliano referring to § 906(3) of the Business Corporation Law, and as discussed below, a merger or consolidation becomes effective upon a filing of the appropriate certificate by the Department of State. N.Y.B.C.L. § 906(b)(3). No such certificate has been filed. Also submitted by Allied is a letter addressed to Allied's counsel by the Division of Corporations of the New York Department of State advising that Rutigliano is still an active corporation. (Mullholland Aff. Ex. E) Clearly, the record to that effect is a public one of which the court can take judicial notice pursuant to Fed.R.Civ.P. 201(b). That these documents are integral to the Amended Complaint and are properly considered in this 12(b)(6) motion is beyond dispute.
Having determined that the purchase agreement is integral to the Amended Complaint and that the motion therefore may be considered under Rule 12(b)(6), the court now turns to the agreement itself and its bearing on this motion.
In an Order dated May 17, 2001, this court noted that § 906(b)(3) is applicable only "upon the filing of the certificate of merger or consolidation by the department of state or on such date subsequent thereto, not to exceed thirty days, as shall be set forth in such certificate, the merger or consolidation shall be effected." N.Y. B.C.L. § 906(a). At the time that Order was issued, neither Allied nor Connecticut was aware of whether or not a certificate of merger or consolidation had issued. Neither plaintiff nor Allied has submitted a certificate of merger or consolidation in connection with this motion. The filing of a certificate of merger is not a "mere ministerial act" and "may not be regarded as an inconsequential technicality." Holmberg v. Attractions Land Inc., 230 A.D.2d 362, 364-65, 657 N.Y.S.2d 816 (3d Dep't 1997). Thus, its absence would appear to suggest that § 906 and its provisions regarding successor liability do not apply. Where there is no merger and § 906 does not apply, the rule in New York is that a successor corporation is not liable for the preexisting debts and obligations of the purchased corporation unless: (1) the purchasing corporation expressly or impliedly agreed to assume the selling corporation's liability; (2) the purchaser corporation is merely a continuation of the seller corporation; (3) the transaction is entered into fraudulently to escape liability for such obligations; or (4) the transaction amounts to a de facto consolidation or merger of the purchaser and seller corporations. See Santa Maria v. Owens-Illinois, 808 F.2d 848, 860 (1st Cir. 1986) (applying New York law) (citingSchumacher v. Richards Shear Co., 59 N.Y.2d 239, 244-45, 464 N.Y.S.2d 437, 440 (1983)).
Allied maintains in this motion that § 906 is inapplicable to this action because it did not enter into a merger with Rutigliano. Because no certificate of merger has been filed, Allied alleges that, as in the case of Ladievardian v. Laidlaw-Coggeshall. Inc., 431 F. Supp. 834, 838 (S.D.N.Y. 1977), successor liability may not be imposed under § 906. In that case, one corporation purchased the assets of another and the court found that "there was neither a consolidation nor a merger, for [the purchased corporation] continued to exist after the sale and continues to be entitled to the installment payments for the assets. Moreover, the purchase of assets was not effected through the exchange of stock and the two corporations have retained separate identities, notwithstanding the fact that there is an identity of certain employees and one officer." Here, Rutigliano continued to exist after the asset purchase, as even plaintiff acknowledges in the Complaint, which names Rutigliano as a defendant and describes it as a corporation organized under New York law with a principal place of business in Brooklyn (Am. Compl. at ¶ 14), and as a letter from the New York Department of State confirms. (Letter dated May 9, 2001 from Division of Corporations to Allied's counsel, Mullholland Aff. Ex. E) Moreover, the purchase agreement here indicates that Allied's acquisition of Rutigliano's assets was not effected through an exchange of stock, but rather through an exchange of cash. Thus, as in Ladjevardian, even Allied's retention of certain Rutigliano employees does not establish that a merger took place.
Besides demonstrating that an actual merger took place such that the successor liability provisions of § 906(b)(3) apply, a plaintiff may also establish that the purchasing corporation expressly or impliedly agreed to assume the selling corporation's liability. Here, there is simply no way plaintiff could establish such an agreement in view of the explicit terms of the purchase agreement. Second, a plaintiff can establish that the purchasing corporation is "merely a continuation" of the seller corporation. "The mere continuation exception refers to corporate reorganization . . . where only one corporation survives the transaction; the predecessor must be extinguished." Diaz v. South Bend Lathe, 707 F. Supp. 97, 100 (E.D.N.Y. 1989) (citing Schumacher, 464 N.Y.S.2d at 440). Thus, a corporation cannot be considered a mere continuation where both parties to a purchase agreement continue to exist following the transaction. Schumacher, 59 N.Y.S.2d at 440; Diaz, 707 F. Supp. at 100 ("If the predecessor corporation continues to exist after the transaction, in however gossamer a form, the mere continuation exception is not applicable"). Here, the mere continuation exception cannot be applied to Allied since the continued existence of Rutigliano was envisioned by the purchase agreement, which contemplated that a portion of the purchase price be paid to Rutigliano Paper Stock, Inc. Third, a plaintiff can establish that the transaction was a fraudulent attempt to escape liability. Plaintiff has not alleged, and would be hard pressed to allege in view of the facts, that the transaction was fraudulent.
Finally, a plaintiff may hinge a corporation's successor liability on the existence of a de facto merger. "Absent compliance with statutory requirements a merger may be considered de facto." Ladjevardian, 431 F. Supp. at 838 (citation omitted). "For a de facto merger to occur, there must be continuity of the successor and predecessor corporation as evidenced by (1) continuity of ownership; (2) a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; (3) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and (4) a continuity of management, personnel, physical location, assets, and general business operation." Lumbard v. Maglia, 621 F. Supp. 1529, 1536 (S.D.N.Y. 1985) (citing Arnold Graphics Industries, Inc. v. Electronic Tabulating Corp., 775 F.2d 38 (2d Cir. 1985) (listing factors); 15 Fletcher, Cyclopedia of Law of Private Corporations § 7165.5 at 339-40 (1961 Rev.Vol.) (same); J. Phillips, Product Line Continuity and Successor Corporation Liability, 58 N.Y.U.L. Rev. 906, 909 (1983) (same)); see also Ladjevardian, 431 F. Supp. at 839-40 (listing four factors, but holding that on the record a determination could not be reached as to whether or not the successor corporation had impliedly assumed liability for the debts of the acquired corporation). "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." Id. (citing Menacho v. Adamson United Co., 420 F. Supp. 128, 133 (D. N.J. 1976); 15 Fletcher, § 7165.5 at 339 (describing these as "factors which are indicative of a de facto merger. . . .")). Here, it cannot be argued that there was a de facto merger as three of the four factors are absent. First, there is no continuity of ownership between Rutigliano and Allied, as evidenced by the fact that Rutigliano shareholders did not become Allied shareholders as a result of the purchase, since Allied purchased Rutigliano for cash. See Arnold Graphics, 775 F.2d at 42. Second, Rutigliano was not dissolved promptly, as it still is in existence two years after the purchase agreement was executed. Third, the purchase agreement explicitly provides that Allied is not responsible for Rutigliano' s previous debts and obligations arising from its New York operations. As for the fourth factor, Allied has acknowledged, and no discovery is needed to establish, that some of Rutigliano's employees are working for Allied. However, the existence of a de facto merger cannot be proven on the basis of Allied's use of some of Rutigliano's workers and its physical plant alone. The fact that there was no continuity of shareholders between the two corporations; that there was no prompt dissolution; and that the purchase agreement explicitly declared that Allied would not assume Rutigliano's debts and liabilities all constitute overwhelming evidence that there was no de facto merger.
Even assuming that there was a de facto merger here, and that § 906(b)(3) therefore does apply, plaintiff would still fail to articulate a valid claim against Allied since New York has recognized an exception to the successor liability provisions of § 906(b)(3) when the asset purchase agreement, as here, explicitly insulates the purchaser from the seller's liabilities. See Gardner v. Fyr-Fyter Co., 47 A.D.2d 591, 363 N.Y.S.2d 693 (4th Dep't 1975). The court there, though it found factual issues that precluded the granting of summary judgment, held that "a purchase of assets may ordinarily be arranged so as to insulate the purchaser from the seller's liabilities" so long as the purchase is "for fair consideration and undertaken in good faith as a bona fide transaction. Id. at 591 (citing Male v. Atchison, Topeka Santa Fe Ry. Co., 230 N.Y. 158, 164 (1920); Cole v. Millerton Iron Co., 133 N.Y. 164 (1892)). Here, plaintiff has not alleged that there is reason to believe that Allied's purchase of Rutigliano was not undertaken in "good faith" and there is every indication that the purchase was for "fair consideration."
Contrary to plaintiff's arguments, the plain language of the purchase agreement conclusively establishes that Allied may not be held liable as a successor-in-interest to Rutigliano and therefore, cannot be called to answer for Rutigliano's obligations in this action. The fact that Allied has not responded to discovery requests by plaintiff does little to disturb this finding, as Allied should not be put to the burden of complying with discovery that is not needed to establish whether, as a matter of law, Allied undertook in the purchase agreement to assume Rutigliano's obligations and liabilities. Because it clearly did not, Allied cannot be held liable as a successor. Nor does the absence of Rutigliano from this litigation compel a different conclusion, as Allied should not be burdened by another party's decision not to appear in this action to defend itself.
II. Allied's Request for Sanctions
In a letter written on March 3, 2000, five months before the Amended Complaint was filed on August 31, 2000, Allied sent plaintiff a copy of the purchase agreement and informed plaintiff that its action against Allied should be discontinued in view of the agreement because it was clear that Allied was not a "successor in interest" to Rutigliano. (Mullholland Aff. Ex. F.) Allied argues that sanctions should be imposed under Rule 11, Fed.R.Civ.P., since this motion became necessary only after plaintiff's counsel refused to withdraw its claims against Allied. Though ultimately unsuccessful, plaintiff's persistence in this action against Allied was not the type of egregious action proscribed by Rule 11, and, accordingly, Allied's request for sanctions is denied.
Conclusion
For the foregoing reasons, Allied's motion to dismiss pursuant to Rule 12(b)(6), Fed.R.Civ.P., is granted and its request for sanctions is denied.
SO ORDERED.