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applying the similar New York de facto merger theory of successor liability and finding that the relevant time period to consider is “the time of the asset sale at issue”
Summary of this case from Call Ctr. Techs., Inc. v. Grand Adventures Tour & Travel Publ'g Corp.Opinion
No. 00 Civ. 4314 (MBM).
January 31, 2005
PAUL J. HYAMS, ESQ., Kerry Lutz, P.C., Elmsford, NY, (Attorney for Plaintiff).
KENNETH R. SCHACHTER, ESQ., MARC D. LEVE, ESQ., MICHAEL B. GOLDSMITH, ESQ., Silverberg, Stonehill Goldsmith, P.C., New York, NY, (Attorneys for Defendants Morgan Miller USA, LLC, Joseph Cavallaro, Robert Cavallaro, and Richard Cavallaro).
JOHN P. AMATO, ESQ., Hahn Hessen LLP, New York, NY, (Attorney for Defendant Century Business Credit Corp. n/k/a/ Wells Fargo Century, Inc.).
OPINION AND ORDER
Plaintiff Nolan Miller seeks to enforce an October 2001 judgment issued by this court against Forge Mench Partnership Ltd. ("Forge Mench") and Forge Industries, Inc. ("Forge Industries"). Plaintiff's supplemental complaint seeks to (i) set aside a January 2002 foreclosure and secured party sale of Forge Mench's assets as a fraudulent conveyance under Article 10 of the New York Debtor and Creditor Law (First through Third Causes of Action); (ii) impose successor liability on defendant Morgan Miller, USA, LLC ("Morgan Miller"), the company that purchased Forge Mench's assets in the private foreclosure sale (Fourth Cause of Action); (iii) impose direct liability on Forge Mench's lender, defendant Century Business Credit Corporation, as well as Forge Mench's day-to-day managers, Joseph, Robert, and Richard Cavallaro (the "Cavallaro defendants"), for participating in the alleged fraudulent conveyance (Fifth Cause of Action); and (iv) set aside the wages paid to the Cavallaro defendants from January 2000 to January 2002 as fraudulent transfers (Sixth through Fourteenth Causes of Action).
Plaintiff moves for summary judgment on his claims, and defendants cross-move for summary judgment dismissing the supplemental complaint in its entirety. For the reasons stated below, plaintiff's motion for summary judgment on his first through third and fifth through fourteenth causes of action is denied, and defendants' corresponding cross-motions for summary judgment dismissing the claims are granted. However, because defendant Morgan Miller conducted a de facto merger with, and is a "mere continuation" of, Forge Mench, see Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45-46 (2d Cir. 2003); Nettis v. Levitt, 241 F.3d 186, 193-94 (2d Cir. 2001), plaintiff's motion for summary judgment on his fourth cause of action is granted, and defendants' cross-motions are denied.
I.
When both sides in a case have cross-moved for summary judgment, each asserting that there is no genuine issue of material fact, a court must examine each motion separately, and in each instance, draw all reasonable inferences against the moving party. The reviewing court need not enter a judgment for either party. Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001); Heublein, Inc. v. United States, 996 F.2d 1455, 1461 (2d Cir. 1993); Padberg v. McGrath-McKechnie, 203 F. Supp. 2d 261, 274 (E.D.N.Y. 2002).
The facts are as follows. In 1992, Forge Mench, an importer and distributor of women's clothing, was formed as a 50/50 partnership between Forge Industries, which was owned by the Cavallaro defendants, and Lady Mench, Inc. ("Lady Mench"), which was owned by Michael Durbin and Jack Ormut. (Pl.'s Rule 56.1 Statement ¶¶ 10-12.) Throughout its existence, Forge Mench sold moderately priced women's suits to national retailers under the "Morgan Miller" label, an unregistered trade name owned by a principal shareholder of Forge Industries. (Goldman Decl. ¶ 9.) In August 1998, Forge Mench expanded its business by entering into licensing agreements to use the names Halston and Nolan Miller, and sold both clothing lines to higher-end department stores such as Nordstrom and Bloomingdale's. (See id. ¶¶ 9, 34.) Forge Mench, however, was unable to generate significant sales under either label, and in January 2000, Forge Mench failed to make its quarterly payment under the Nolan Miller licensing agreement. Shortly thereafter, Nolan Miller terminated the agreement and sued Forge Mench and Forge Industries for trademark infringement, unfair competition, and breach of contract, and to enforce a guarantee. This court granted summary judgment on Nolan Miller's claims, Miller v. Forge Mench P'ship, No. 00 Civ. 4314, 2001 WL 987922 (S.D.N.Y. Aug. 29, 2001), and issued a judgment for Nolan Miller totaling $445,488.20 — $411,130.20 of which remains unpaid. (Pl.'s Rule 56.1 Statement ¶ 2.)
With its financial situation deteriorating, Forge Mench cut its overhead through "staff and showroom reductions" in the fall of 2001 (Hyams Decl. Ex. M), having already ended its licensing arrangements with Nolan Miller by February 2000 and Halston at "[a]pproximately the same time." (See Hyams Decl. Ex. D at 15-16.) Faced with three consecutive years of unprofitability, Forge Mench's sole factor — or lender — Century Business Credit Corporation ("Century"), demanded increased cash collateral from Forge Mench (Hyams Decl. Ex. M) and began considering a foreclosure to enforce Forge Mench's debt, which apparently exceeded $4 million by October 2001. (See Pl.'s Rule 56.1 Statement in Opp'n ¶ 9.) The interest due to Century was secured by Forge Mench's accounts receivable and inventory under the parties' 1995 factoring agreement. (Hoffmann Decl. ¶ 6.) Under that agreement, the entry of Nolan Miller's judgment against Forge Mench was to become an event of default, triggered "without notice or demand," if it was not removed within 30 days after the judgment was filed, which was October 11, 2001. (Id. ¶ 12, Ex. 1 ¶ 13.)
After an unsuccessful attempt by Forge Mench to settle its dispute with Nolan Miller, Century decided to terminate the factoring agreement and convey Forge Mench's assets in a private foreclosure sale to Morgan Miller, a new company formed by the individual shareholders of Forge Mench. (See Hoffmann Decl. ¶ 1; Hyams Decl. ¶¶ 21-22.) On December 18, 2001, the same day on which Morgan Miller's articles of organization and operating agreement were filed (Hyams Decl. Exs. N, O), Century's Fred Hoffmann, who was responsible for monitoring the Forge Mench factoring agreement, drafted a memorandum outlining the "peaceful possession" plan:
A new company will be formed to whom the liabilities of Forge-Mench will be transferred. The name of this company will be "Morgan Miller USA LLC," the new name being derived from the active license name that [Forge Mench] uses. Management felt this was appropriate since any questions posed to them about this renaming can be answered by stating [that] use of the name will alleviate any confusion as to how Morgan Miller is related to Forge-Mench. It is our intention to set up this new factoring arrangement under the identical parameters and rates as with [Forge Mench]. . . .
(Hyams Decl. Ex. P.) In early January 2002, Century conducted a third-party appraisal of Forge Mench's inventory, which was valued for liquidation at 61% of its original cost, or about $700,000, along with other assets worth approximately $100,000. (Hoffmann Decl. ¶ 15; Goldman Decl. ¶ 24.) On January 17, 2002, Century sent a UCC foreclosure sale notice to Nolan Miller announcing that Century was to "sell the Debtor's inventory, machinery and equipment, trade names and purchase orders privately sometime after January 26, 2002." (Goldman Decl. Ex. 8.) The notice also offered an accounting of Forge Mench's unpaid indebtedness for $20.00. (Id.) Nolan Miller's attorney signed the notice as "received and acknowledged" but did not request an accounting or formally object to the foreclosure sale. (See Goldman Decl. ¶ 22, Ex. 8.)
Century then conducted the foreclosure sale, conveying Forge Mench's remaining assets to Morgan Miller in return for an assumption of Forge Mench's indebtedness to Century under the factoring agreement. (Hoffmann Decl. ¶ 18.) On the date of foreclosure, Forge Mench's indebtedness totaled $5,807,164, but with a $1.3 million deduction for future collection of accounts receivable, Forge Mench's net debt to Century stood at approximately $4.5 million. (See id. ¶ 15; Goldman Decl. ¶ 23.) Forge Mench ceased all business operations simultaneously with the foreclosure sale and Forge Industries was dissolved immediately by the Cavallaro defendants. (Hyams Decl. ¶ 30.) Unable to reach the assets of either defendant in his original action, plaintiff filed a supplemental complaint requesting,inter alia, that this court enforce the October 2001 judgment by either setting aside the January 2002 foreclosure sale as a fraudulent conveyance or imposing successor liability on Morgan Miller on the ground that it conducted a de facto merger with Forge Mench.
II.
Plaintiff's first through third causes of action request that Century's foreclosure and subsequent private sale of Forge Mench's assets to Morgan Miller be set aside as a fraudulent conveyance under the New York Uniform Fraudulent Conveyance Act ("UFCA"), codified at N.Y. Debt. Cred. Law §§ 270-81 (McKinney 2004). Under the New York UFCA, a conveyance may be deemed fraudulent as to creditors where it is made with actual or constructive intent to avoid payment of a debt. See In re Corcoran, 246 B.R. 152, 158 (E.D.N.Y. 2000); Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 124-25, 508 N.Y.S.2d 17, 19 (2d Dep't 1986). A conveyance is "actually" fraudulent if it is made "with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors." N.Y. Debt. Cred. Law § 276. Constructive fraud, by contrast, requires no showing of actual intent to defraud and may be found where a conveyance is made "without fair consideration" by a debtor (i) who is insolvent or will thereby be rendered insolvent, N.Y. Debt. Cred. Law § 273, or (ii) against whom an action is pending or a judgment for money damages has been docketed, if the judgment remains unsatisfied, N.Y. Debt. Cred. Law § 273-a. Marine Midland, 120 A.D.2d at 125, 508 N.Y.S.2d at 19; see also N.Y. Debt. Cred. Law §§ 274, 275 (providing additional grounds for finding of constructive fraud).
The parties vigorously dispute the circumstances under which the private foreclosure sale of Forge Mench's assets took place — particularly whether Forge Mench was in default on its factoring agreement with Century; whether Century was obligated to, and did in fact, declare a default; and whether it was Forge Mench or Century that suggested the foreclosure and secured party sale. However, I need not parse such arguments in great detail here. The substantive law underlying a claim determines whether a fact is material and "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). "In deciding whether to grant summary judgment, this Court must, therefore, determine (1) whether a genuine factual dispute exists based on the evidence in the record, and (2) whether the facts in dispute are material based on the substantive law at issue." Hall v. Paramount Pictures Corp., No. 97 Civ. 3553, 2002 WL 1858766, at *7 (S.D.N.Y. Aug. 14, 2002).
The evidence presented by the parties leads to two significant factual conclusions. First, because Forge Mench had failed to satisfy Nolan Miller's judgment within 30 days of the judgment's filing, Forge Mench was indeed in default on its factoring agreement with Century, which provided a legitimate basis for the January 2002 foreclosure and private asset sale. As stated in paragraphs 13 and 14 of that agreement:
13. . . . [Century] may terminate this Agreement without notice and all Obligations shall, unless and to the extent that [Century] otherwise elect[s], become immediately due and payable without notice or demand in the event that . . . there shall be issued or filed against [Forge Mench] any . . . judgment which is not removed within thirty (30) days after same was issued or filed. . . .
14. Upon . . . default . . . [Century] shall have all the rights and remedies of a secured party under the Uniform Commercial Code. . . . [and] may sell or cause to be sold any or all of such collateral . . . at a public or private sale as [Century] may deem appropriate.
(Hoffmann Decl. Ex. 1 at 9-10 (emphases added).) Second, the evidence shows that Forge Mench's debt to Century far exceeded its available assets on the date of foreclosure. As noted above, Forge Mench's net debt on January 26, 2002 stood at approximately $4.5 million, while its assets, all of which were pledged to Century under the factoring agreement, were valued at less than $2 million.
Although plaintiff relies on data from October 2001 and March 2002 to argue that Forge Mench's net debt to Century was lower than $4.5 million (Pl.'s Reply Mem. at 4), the only relevant figure here is the value of the net debt owed on January 26, 2002, the date of the foreclosure sale at issue.
Defendants, relying on the January 14, 2001 appraisal that they commissioned from the Daley-Hodkin Appraisal Corporation, allege that Forge Mench's inventory was worth approximately $700,000, or 61% of its original cost. (Def. Century's Rule 56.1 Statement ¶ 14; Hodkin Decl. ¶¶ 5-6.) Plaintiff, by contrast, cites an inventory designation schedule indicating that Forge Mench's inventory was valued, based on its cost, at almost $1.9 million on the date of foreclosure. (Hyams Decl. in Further Supp. ¶ 7, Ex. D.) For purposes of this opinion, the court will rely on plaintiff's proposed valuation because (i) the inventory designation schedule was created contemporaneously with the foreclosure sale, and (ii) defendant's appraisal erroneously estimated the value of Forge Mench's assets in an "orderly liquidation sale," rather than in a sale as a going concern. See Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, 213 n. 15 (3d Cir. 1990) (rejecting liquidation value appraisal also performed by Daley-Hodkin).
On these facts, the applicable substantive law requires dismissal of Nolan Miller's fraudulent conveyance claims. The New York courts have held consistently that to challenge a conveyance as fraudulent, a plaintiff must suffer prejudice or injury as a result of the conveyance at issue. See, e.g., HBE Leasing Corp. v. Frank, 48 F.3d 623, 637 n. 10 (2d Cir. 1995); A/S Kreditt-Finans v. Cia Venetico de Navegacion S.A. of Panama, 560 F. Supp. 705, 711 (E.D. Pa. 1983) (applying New York law). As the New York Court of Appeals explained over a century ago in Hamilton National Bank v. Halstead, 134 N.Y. 520 (1892):
Should A. convey his farm to B. subject to a valid preexisting mortgage of five thousand dollars held by a third party, and B. subsequently dispose of it for a larger sum, out of the proceeds of which he pays the mortgage, he cannot be required to pay to the creditors the full value of the farm without deducting the amount due on the mortgage, for as to that sum the creditors have no equity. If the fraud had not been consummated, only the value of the property in excess of the mortgage could have been made available in payment of the claims of the creditors. As to that interest secured by the mortgage, no wrong was done them.Halstead, 134 N.Y. at 523 (emphases added). Because a "creditor's remedy in a fraudulent conveyance action is limited to reaching the property which would have been available to satisfy the judgment had there been no conveyance," Marine Midland, 120 A.D.2d at 133, 508 N.Y.S.2d at 25, a complaining creditor must first demonstrate that it had an equity stake in the debtor's assets — that is, that some portion of the debtor's assets would have been available to satisfy the unsecured creditor's claims had there been no conveyance. See Halstead, 134 N.Y. at 523-24, 526-27. Absent any such equity in the assets conveyed, an unsecured creditor lacks standing to challenge the conveyance as fraudulent. See A/S Kreditt-Finans, 560 F. Supp. at 710-11 (judgment creditor lacked equity, and therefore standing, where pre-existing mortgages encumbering conveyed vessel exceeded vessel's fair market value by over $1.5 million).
Faced with these precedents, plaintiff concedes that "if a debtor possesses no equity in the property he conveyed in fraud of creditors[,] a cause of action to set aside the conveyance under the Debtor and Creditor Law may not lie." (Hyams Decl. in Further Supp. ¶ 4.) That principle applies in full force here, where Century's secured debt exceeded the value of Forge Mench's foreclosed-upon assets by about $2.5 million, and thus dwarfed the approximately $445,000 judgment owed to Nolan Miller. Nevertheless, plaintiff seeks to prove that he did in fact have an equity stake in Forge Mench's assets, asserting that the private foreclosure sale at issue included a massive transfer to Morgan Miller of Forge Mench's otherwise unaccounted-for good will. According to plaintiff, defendants "inexplicably and brazenly ignore the fact that Forge Mench was worth significantly more than the sum of its parts, having established substantial and valuable good will over the course of many years of selling ladies garments to department stores under the `Morgan Miller' trade name." (Id.)
However, plaintiff fails to propose any specific dollar value for Forge Mench's good will, and simply surmises that the good will allegedly transferred was of "substantial value." (Id. ¶ 5.) Such speculation does not suffice to overcome defendants' cross-motions for summary judgment.See, e.g, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986) ("[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial."); Del. Hudson Ry. Co. v. Consol. Rail Corp., 902 F.2d 174, 178 (2d Cir. 1990) ("Conclusory allegations will not suffice to create a genuine issue. There must be more than a `scintilla of evidence,' and more than `some metaphysical doubt as to the material facts.'") (citations omitted).
Moreover, even assuming that a substantial amount of good will associated with the Morgan Miller trade name was indeed transferred in the foreclosure sale, plaintiffs have failed to put properly in issue their claim that the good will in question exceeded the approximately $2.5 million gap between Forge Mench's assets and its net debt in January 2002. Cf. Constitution Realty, LLC v. Oltarsh, 309 A.D.2d 714, 715, 766 N.Y.S.2d 425, 427 (1st Dep't 2003) (requiring hearing to determine value of good will conveyed only where court had already determined that conveyance was fraudulent).
Nor has plaintiff successfully demonstrated that the January 2002 foreclosure sale took place "without fair consideration" under sections 273 and 273-a of the Debtor and Creditor Law. Section 272 provides that fair consideration is given when (i) in exchange for property, "a fair equivalent therefor" is conveyed or an antecedent debt is satisfied "in good faith"; or (ii) such property is received "in good faith" to secure a present advance or an antecedent debt in an amount "not disproportionately small" when compared with the value of the property obtained. N.Y. Debt. Cred. Law § 272. Unlike the cases cited by plaintiff in which the reviewing courts expressly held that the conveyances in question were not made for fair consideration, see Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, 215 (3d Cir. 1990); Orr v. Kinderhill Corp., 991 F.2d 31, 36 (2d Cir. 1993);MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co., 910 F. Supp. 913, 937-38 (S.D.N.Y. 1995), as noted above, the net value of the debt assumed here by the transferee, Morgan Miller, exceeded the value of Forge Mench's foreclosed-upon assets by a substantial margin.
Moreover, despite some evidence suggesting that the foreclosure sale at issue was engineered by defendants to evade plaintiff's judgment, plaintiff has failed to create a triable issue that the conveyance was not made "in good faith," as required by the statute. N.Y. Debt. Cred. Law § 272. The Second Circuit appears to have avoided adopting an "expansive reading" of the good faith standard, holding instead that where "a transferee has given equivalent value in exchange for the debtor's property, the statutory requirement of `good faith' is satisfied if the transferee acted without either actual or constructive knowledge of any fraudulent scheme." HBE Leasing Corp. v. Frank, 48 F.3d 623, 636 (2d Cir. 1995). The mere fact that a conveyance satisfies one creditor's interest over another's does not necessarily prove that the conveyance was made without fair consideration. See HBE Leasing, 48 F.3d at 634 ("As the definition of `fair consideration' in DCL § 272 makes clear, even the preferential repayment of pre-existing debts to some creditors does not constitute a fraudulent conveyance, whether or not it prejudices other creditors, because `[t]he basic object of fraudulent conveyance law is to see that the debtor uses his limited assets to satisfy some of his creditors; it normally does not try to choose among them.") (citation omitted); Nat'l Gypsum Co. v. Cont'l Brands Corp., 895 F. Supp. 328, 333-34 (D. Mass. 1995) ("In practice, of course, a corporate sale-of-assets transaction may leave some creditors without effective legal recourse. In the most obvious case, the. . . . [debtor's] assets may . . . be sold to pay a secured debt, leaving no surplus for distribution to unsecured creditors. Such insolvencies are the bread and butter of the bankruptcy courts and, while unfortunate, are the inevitable casualties of a competitive market economy.").
Because plaintiff has failed to demonstrate either that he has standing to challenge the January 2002 foreclosure sale as a fraudulent conveyance or that the transfer was made without fair consideration, plaintiff's motion for summary judgment on his first through third causes of action is denied, and defendants' cross-motions for summary judgment dismissing the claims are granted. In addition, and for the same reasons, the court dismisses plaintiff's closely related claims to (i) recover attorneys fees under Debtor and Creditor Law § 276-a (Third Cause of Action), (ii) impose direct liability on the Cavallaro defendants and Century for participating in the alleged fraudulent conveyance (Fifth Cause of Action), and (iii) set aside the wages paid to the Cavallaro defendants as fraudulent transfers (Sixth through Fourteenth Causes of Action).
III.
Although plaintiff's fraudulent conveyance claims have failed, the evidence underlying his fourth cause of action successfully demonstrates that Morgan Miller, the company that purchased Forge Mench's assets in the January 2002 foreclosure sale, should be held liable for plaintiff's October 2001 judgment because it conducted a de facto merger with, and is a mere continuation of, Forge Mench. As a general rule, when one corporation sells or otherwise transfers all its assets to another company, the acquiring corporation does not become responsible for the debts and liabilities of the transferor. See Cargo Partner AG v.Albatrans, Inc., 352 F.3d 41, 45 (2d Cir. 2003); Lumbard v. Maglia, Inc., 621 F. Supp. 1529, 1534 (S.D.N.Y. 1985); Fitzgerald v.Fahnestock Co., 286 A.D.2d 573, 574, 730 N.Y.S.2d 70, 71 (1st Dep't 2001). However, a successor firm may be held liable for the obligations of its predecessor if any of the following conditions is present: (i) the purchaser expressly or impliedly agrees to assume such debts or liabilities; (ii) the transaction amounts to a de facto merger or consolidation of the seller and purchaser; (iii) the purchasing corporation is a mere continuation of the selling corporation; or (iv) the transaction is entered into fraudulently to escape liability for such obligations. Cargo Partner, 352 F.3d at 45; Lumbard, 621 F. Supp. at 1534-35; Schumacher v.Richards Shear Co., 59 N.Y.2d 239, 245, 464 N.Y.S.2d 437, 440 (1983).
Because plaintiff has not alleged that Morgan Miller formally assumed payment of Nolan Miller's judgment as part of the private foreclosure sale, and because plaintiff's fraudulent conveyance claims have already been rejected, neither the first nor the last conditions listed above requires the imposition of successor liability here. However, both the "de facto merger" and "mere continuation" grounds for successor liability are directly applicable to the facts of this case. As the Second Circuit has stated, "[a] de facto merger occurs when a transaction, although not in form a merger, is in substance a consolidation or merger of seller and purchaser." Cargo Partner, 352 F.3d at 45 (internal quotation marks and citation omitted). The purpose of the doctrine is to "avoid [the] patent injustice which might befall a party simply because a merger has been called something else,"id. at 46 (citations omitted), and where "the form of the transaction d[oes] not accurately portray its substance, [courts will] impose successor liability upon the purchaser." Cargo Partner AG v. Albatrans, Inc., 207 F. Supp. 2d 86, 94-95 (S.D.N.Y. 2002) (adopting Report and Recommendation of Magistrate Judge Douglas F. Eaton).
The Second Circuit has recently noted that "[s]ome courts have observed that the mere-continuation and de-facto-merger doctrines are so similar that they may be considered a single exception." Cargo Partner, 352 F.3d at 45 n. 3 (citing Nat'l Gypsum Co. v. Cont'l Brands Corp., 895 F. Supp. 328, 336 (D. Mass. 1995); Glynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265, 275 (D.N.J. 1994); Lumbard v. Maglia, Inc., 621 F. Supp. 1529, 1535 (S.D.N.Y. 1985)). Accordingly, the analysis below will use the terms interchangeably and treat the de facto merger and mere continuation doctrines as a single basis for imposing successor liability on Morgan Miller.
"To determine whether such a `de facto merger' or `mere continuation' of the predecessor's business has occurred, courts consider (1) continuity of ownership; (2) cessation of ordinary business by the predecessor; (3) assumption by the successor of liabilities ordinarily necessary for continuation of the predecessor's business; and (4) continuity of management, personnel, physical location, assets, and general business operation." Nettis v. Levitt, 241 F.3d 186, 193-94 (2d Cir. 2001) (citations omitted). The determination of successor liability is "fact-specific," Ryan, Beck Co. v. Fakih, 268 F. Supp. 2d 210, 229 (E.D.N.Y. 2003), and courts are to analyze the facts "in a flexible manner that disregards mere questions of form and asks whether, in substance, `it was the intent of [the successor] to absorb and continue the operation of [the predecessor].'" Nettis, 241 F.3d at 194 (citations omitted).
Although the Second Circuit has recently declined to decide whether all four factors in the de facto merger test must be met, Cargo Partner, 352 F.3d at 46, the Court has affirmed that "continuity of ownership" is the "essence" of a de facto merger and therefore must be shown. Id. at 47. In this case, plaintiff alleges continuity of ownership on the ground that Morgan Miller is owned by the same individuals who held shares in Forge Industries and Lady Mench, the corporate partners of Forge Mench. (Hyams Decl. ¶ 22.) Defendants counter that there can be no finding of continuity of ownership here because unlike the Forge Mench partnership, Morgan Miller is a limited liability company owned by distinct legal entities as to which no basis for piercing the corporate veil has been shown. (Mem. of Law of Defs. Morgan Miller et al. at 18-19 ("Defs.' Mem. of Law").)
The facts show that the Cavallaro defendants, along with Michael Durbin and Jack Ormut, were the sole shareholders in the two 50/50 corporate partners of Forge Mench. (Pl.'s Rule 56.1 Statement ¶¶ 10-12.) They are now the sole owners, directly and indirectly, of Morgan Miller — the Cavallaro defendants collectively hold 50% of the membership units in Morgan Miller (Hyams Decl. Ex. O), while Manchu NY, Inc., which owns the remaining 50% stake in Morgan Miller, is in turn owned by Durbin and Ormut. (Pl.'s Rule 56.1 Statement ¶ 15; see Hyams Decl. Ex. P.) This is more than sufficient for a finding of continuity of ownership. Contrary to the thrust of defendants' argument, the de facto merger test requires continuity, not uniformity, of ownership, and nominal changes in the ownership structure of a corporate entity do not undermine the finding of a de facto merger. See Glynwed, Inc. v.Plastimatic, Inc., 869 F. Supp. 265, 276-77 (D.N.J. 1994) (sufficient ownership continuity where three minority shareholders of predecessor were also shareholders of successor); Allen Morris Commercial Real Estate Services Co. v. Numismatic Collectors Guild, Inc., No. 90 Civ. 264, 1993 WL 183771, at * 2, 6 (S.D.N.Y. May 27, 1993) (continuity of ownership established where three equal shareholders converted 100% ownership of predecessor company to 40% ownership of successor, with remaining 60% owned by unrelated investment holding company); see also Lumbard, 621 F. Supp. at 1535 ("[T]he cases uniformly hold that continuity, not uniformity, is the significant variable.").
Nor is it required that a plaintiff demonstrate continuity of ownership by showing that it would be appropriate to pierce the corporate veil. Defendants fail to cite any cases in which a veil-piercing analysis was applied as part of the de facto merger inquiry, and this court's research has disclosed none. Indeed, in Cargo Partner, a case on which defendants rely heavily, the Court held only that the "stringent requirements for piercing the corporate veil" are applicable where a purchaser buys the seller's capital stock rather than acquiring the seller'sassets in a de facto merger, as occurred here. See Cargo Partner, 352 F.3d at 44-45. As shown by the cases cited above, which emphasize continuity over uniformity of ownership, this court need not formally disregard the corporate form to recognize the realities of the transaction that took place here. See Nettis, 241 F.3d at 194 (courts applying de facto merger test are to "disregard mere questions of form and ask whether, in substance, `it was the intent of [the successor] to absorb and continue the operation of [the predecessor]'") (citation omitted); Cargo Partner, 207 F. Supp. 2d at 104 ("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."). Plaintiff has shown that there was continuity of ownership between Forge Mench and Morgan Miller.
The remaining three indicia of the de facto merger standard also are met. The second, "cessation of ordinary business by the predecessor,"Nettis, 241 F.3d at 193, is not in doubt. Plaintiff has alleged that Forge Mench ceased all operations simultaneously with the January 2002 foreclosure sale and that Forge Industries, which held a 50% stake in the Forge Mench partnership, was immediately dissolved by proclamation of the Cavallaro defendants. (Hyams Decl. ¶ 30.) Defendants concede the substance of these allegations (see Rule 56.1 Statement in Opp'n of Defs. Morgan Miller et al. ¶ 17 ("Defs.' Rule 56.1 Statement in Opp'n"); Hoffmann Decl. ¶ 20 (acknowledging that "Forge Mench is now defunct")), asserting only that Forge Mench was doomed to failure and would have terminated its operations regardless of the asset sale to Morgan Miller. (See Defs.' Rule 56.1 Statement in Opp'n ¶ 17.) This response, however, is beside the point; whether or not Forge Mench's termination was inevitable, a question that this court need not address, has no bearing whatsoever on whether Forge Mench did in fact cease its operations after the January 2002 foreclosure sale, which is all that is required by the de facto merger doctrine. See Fitzgerald v. Fahnestock Co., 286 A.D.2d 573, 575, 730 N.Y.S.2d 70, 72 (1st Dep't 2001) ("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."); McDarren v. Marvel Entm't Group, Inc., 94 Civ. 910, 1995 WL 214482, at *8 (S.D.N.Y. Apr. 11, 1995) (same).
The third of the bases for finding a de facto merger requires "assumption by the successor of liabilities ordinarily necessary for continuation of the predecessor's business." Nettis, 241 F.3d at 193. In this case, the facts show that as part of the January 2002 foreclosure sale, Morgan Miller agreed to assume the approximately $5.8 million in total indebtedness owed by Forge Mench to Century under its 1995 factoring agreement, with Morgan Miller entering into a new factoring agreement with Century on terms identical to those found in Forge Mench's prior agreement. (Hyams Decl. Ex. P (acknowledging that "the liabilities of Forge-Mench will be transferred" to Morgan Miller in the foreclosure sale and that a new factoring agreement with Morgan Miller would be established "under the identical parameters and rates as with [Forge Mench]"); see also Goldman Decl. Ex. 8 (foreclosure sale included sale of Forge Mench's outstanding purchase orders); Hyams Decl. Ex. E at 59 (collection of Forge Mench's accounts receivable used to pay down debt to Century after foreclosure).) That Morgan Miller, according to defendants, "never agreed to assume the unsecured debts and liabilities of Forge Mench," including plaintiff's judgment, is immaterial. (See Defs.' Mem. of Law at 21.) The de facto merger doctrine requires only that the successor assume the liabilities that would "ordinarily" be necessary to continue the predecessor's business, not the particular debt in question or all actual and potential debts. See McDarren, 1995 WL 214482, at *8 ("The proper inquiry regarding the assumption of the seller's liability is whether the purchaser assumed the existing seller's contracts, such as manufacturing or sale[s] representative contracts, necessary to continue the ordinary business without interruption."); Glynwed, 869 F. Supp. at 276 (assumption of liabilities found where successor company voluntarily paid debts owed to suppliers of predecessor). By continuing Forge Mench's factoring relationship with Century on identical terms, filling Forge Mench's outstanding purchase orders, and cooperating in the collection of Forge Mench's accounts receivable, Morgan Miller assumed those liabilities "ordinarily necessary for continuation of the predecessor's business."Nettis, 241 F.3d at 193.
Finally, the fourth factor in the de facto merger test, which evaluates whether there is "continuity of management, personnel, physical location, assets, and general business operation," Nettis, 241 F.3d at 194, provides what is arguably the most telling indication that Morgan Miller is a mere continuation of Forge Mench. In his memorandum of law, plaintiff alleges that, in addition to continuing Forge Mench's factoring relationship with Century, "[a]fter the [January 2002 foreclosure] plan was executed, Morgan Miller USA, LLC conducted the same business that had been conducted by Forge Mench, from the same location with the same employees, sold the same products, used the same inventory, used the same trade name and had the same owners." (Pl.'s Mem. of Law at 10.) Defendants respond that Morgan Miller is in fact distinguishable from Forge Mench because, unlike its predecessor, Morgan Miller is a smaller company that does not sell clothing under the "Nolan Miller" and "Halston" labels to higher-end department stores such as Nordstrom and Bloomingdale's, but is instead focused solely on selling clothing under the moderately priced "Morgan Miller" label to national retailers such as Sears, J.C. Penney, and Catherines. (See Defs.' Mem. of Law at 20; Hyams Decl. Ex. E at 11.)
Defendants' arguments, however, distort the facts. Although it is indeed true that Forge Mench once sold clothing under the Nolan Miller and Halston labels, it did so only for a relatively brief period beginning in late 1998, and ended its foray into higher-end fashion by early 2000. (See Miller v. Forge Mench, 2001 WL 987922, at *1; Hyams Decl. Ex. D at 15-16, Ex. M.) Indeed, it was Forge Mench's default on its licensing agreement with Nolan Miller that caused Nolan Miller to terminate his relationship with Forge Mench in February 2000 and bring the lawsuit that ultimately resulted in the approximately $445,000 judgment that Nolan Miller now seeks to enforce. Miller v. Forge Mench, 2001 WL 987922. In other words, for almost two years prior to the January 2002 foreclosure sale, Forge Mench had nothing to do with Nolan Miller, other than serving as his adversary in litigation, and it appears to have had no interaction at all with Halston during the same time period either. (See Hyams Decl. Ex. M ("Management elected to discontinue the Halston license and concentrate on core business.").) Moreover, the "Problem Loan Report" drafted by Century's Fred Hoffmann on November 11, 2001 unmistakably demonstrates that a $400,000 downsizing through "staff and showroom reductions" had already begun well before the January 2002 foreclosure sale (id.), which further undermines defendants' suggestion of a lack of continuity between Forge Mench and Morgan Miller. (See Goldman Dep., Hyams Decl. Ex. D at 17 ("As we were losing more and more money, we had to start thinking of ways to change around the business, and we had to cut overhead. So, little by little, we were letting go people, [and in] the year 2001, which is right before the end of Forge Mench [in January 2002], I guess [there] was a big drop that year.").)
In determining whether a corporate entity is a mere continuation of a predecessor entity, the relevant comparison to be made is to the predecessor entity at the time of the asset sale at issue, not at some prior time of the defendant's choosing. Once the appropriate comparison point is considered, it becomes apparent that Morgan Miller is indeed a mere continuation of Forge Mench because: (i) Although Forge Mench had shed several employees by the fall of 2001, Morgan Miller's management and personnel were largely the same as Forge Mench's on the date of foreclosure, with Robert Cavallaro continuing in his role as president of Morgan Miller, Jay Goldman maintaining his position as comptroller and chief financial officer, and Michael Durbin, Richard Cavallaro, and Joseph Cavallaro continuing to serve as officers of the new company (Hyams Decl. Ex. O; Goldman Decl. ¶ 1); (ii) Morgan Miller continued to maintain its offices in the same location as Forge Mench, using the same telephone number (Hyams Decl. Ex. E at 13, 23); and (iii) Morgan Miller purchased all of Forge Mench's "inventory, machinery and equipment, trade names and purchase orders" in the foreclosure sale (see Goldman Decl. Ex. 8), continuing to import and distribute moderately priced women's clothing under the Morgan Miller label, as had Forge Mench from its formation until the date of its foreclosure (see Hyams Decl. Ex. D at 61-62, Ex. E at 10-11).
Indeed, statements by defendants' own representatives underscore the continuity between Forge Mench and Nolan Miller. (See, e.g., Goldman Dep., Hyams Decl. Ex. D at 62 (acknowledging that although Morgan Miller was smaller than Forge Mench "in its heyday," otherwise there was "not too much difference" between Forge Mench and Morgan Miller); Hoffmann Dep., Hyams Decl. Ex. F at 73-74 (testifying that the January 2002 foreclosure sale was devised by the principals of Forge Mench primarily to change the company's name and that, from Century's perspective, "everything outstanding as Forge Mench closed down . . . when Morgan Miller started up[, it] was absolutely identical"); Hodkin Decl. Ex. 2 (in appraisal commissioned by Forge Mench, identifying company as "Morgan Miller" even prior to January 2002 foreclosure sale).) Defendants' argument that it was one of the Cavallaro defendants, and not Forge Mench, who technically owned the "Morgan Miller" trade name is pure semantics. (See Hyams Decl. Ex. P (noting that name of new company "Morgan Miller USA LLC" was "derived from the active license name that [Forge Mench] uses"); Goldman Dep., Hyams Decl. Ex. D at 62 ("Forge Mench sold its suits using the label Morgan Miller. And we were going to continue selling suits with that label, so we thought that name would be less confusing with the trade.").) Although there are undoubtedly some differences between Forge Mench and Morgan Miller, the de facto merger test requires continuity of "general business operation[s]," Nettis, 241 F.3d at 194, not complete identity or uniformity in every material characteristic of the predecessor and successor entities. Plaintiff has thus satisfied this fourth criterion in the de facto merger analysis.
Having failed to counter the elements of the de facto merger standard, defendants vigorously seek to inject another factor into the analysis, asserting that successor liability cannot be imposed on Morgan Miller "without any element of fraud" or injustice. (Defs.' Mem. of Law at 18-21.) In particular, defendants emphasize that the January 2002 transaction was a good faith foreclosure sale conducted at arms length, with full notice to Nolan Miller, and evincing no intent to defraud. (E.g., id. at 17, 20.) In addition, defendants rely heavily on Cargo Partner AG v.Albatrans, Inc., 352 F.3d 41, 45 (2d Cir. 2003), contending that the imposition of successor liability here would provide a "windfall" to plaintiff Nolan Miller, an unsecured creditor who allegedly would never have been able to collect on his judgment given Forge Mench's substantial indebtedness to Century on the date of foreclosure. (Defs.' Mem. of Law at 17, 21.)
Defendants' arguments fail for several reasons. First, courts have rejected the view that a foreclosure sale conducted under section 9-504 of the UCC precludes the imposition of successor liability. As the First Circuit stated in Ed Peters Jewelry Co. v. C J Jewelry Co., 124 F.3d 252 (1st Cir. 1997), "existing case law overwhelmingly confirms that an intervening foreclosure sale affords an acquiring corporation no automatic exemption from successor liability." Id. at 267. In so holding, the Peters Court relied on the District Court's opinion inGlynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265 (D.N.J. 1994), which concluded that despite the defendant's "predictions of the gloom and doom that will descend upon the area of commercial law if the Court permits [plaintiff] to proceed on its theory, nothing in the UCC supports [defendant's] argument that the 9-504 sale provides a safe harbor against successor liability claims." Id. at 273-74. Nor does this court's rejection above of plaintiff's fraudulent conveyance claims in any way preclude a finding of successor liability here. See Glynwed, 869 F. Supp. at 276-78 (dismissing fraudulent conveyance claim even while imposing successor liability under de facto merger/mere continuation doctrine); Ed Peters Jewelry Co., 124 F.3d at 267 ("True, [the foreclosing bank] might have sold the [debtor's] assets to an entity with no ties to [the debtor], but that is beside the point, since [plaintiff's] successor liability claim alleges that [defendant] is [the debtor] in disguise."); cf. Lumbard, 621 F. Supp. at 1535 ("In fact, [the predecessor's] insolvency argues for the application of the various theories of successor liability. Where a transferor . . . receives little if anything in exchange for its assets, it cannot respond to actions by creditors. Creditors must then pursue the transferee. . . .").
Second, contrary to defendant's arguments, no independent showing of fraud or injustice is required under the de facto merger doctrine. Not only do defendants fail to cite a single case in which a showing of fraud has been required by a court applying the de facto merger doctrine, but also any such holding here would render redundant the fraudulent conveyance doctrine, which is meant to provide a separate and independent basis for imposing successor liability. See Cargo Partner, 352 F.3d at 45; Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 245, 464 N.Y.S.2d 437, 440 (1983). Nor does the statement in Cargo Partner that "[c]ontinuity of ownership might not alone establish a de facto merger," 352 F.3d at 47 (emphasis added), justify the inferential leap suggested by defendants that "mere continuity of ownership, without the need to prevent injustice, is not sufficient to establish a de facto merger." (Defs.' Mem. of Law at 20 (emphasis added).) Cargo Partner simply indicates that although continuity of ownership is necessary to a finding of de facto merger, it is by no means sufficient. Other considerations — namely, "(2) cessation of ordinary business by the predecessor; (3) assumption by the successor of liabilities ordinarily necessary for continuation of the predecessor's business; and (4) continuity of management, personnel, physical location, assets, and general business operation" — must also be considered when applying the de facto merger doctrine. Nettis v. Levitt, 241 F.3d 186, 193-94 (2d Cir. 2001); see also Cargo Partner, 352 F.3d at 46 (declining to decide "whether all four factors must be present for there to be a de facto merger") (emphasis added).
Moreover, although the Second Circuit has stated that the purpose of the de facto merger doctrine is to "avoid [the] patent injustice which might befall a party simply because a merger has been called something else," Cargo Partner, 352 F.3d at 46 (citations omitted), such "injustice" is not a separate, free-standing criterion in the de facto merger analysis. Rather, it is the end result of allowing a successor company that effectively differs from its predecessor in name only to escape the predecessor's outstanding debts and liabilities. See, e.g., Cargo Partner, 207 F. Supp. 2d at 105 ("When a transaction, by calling itself an asset sale rather than a merger, attempts to retain the shareholders' interest while cutting off the creditors' claims, the resulting `patent injustice' calls for application of the de facto merger exception."). In this case, Morgan Miller did not exist in any meaningful way prior to the January 2002 foreclosure sale; it was created solely for the purpose of receiving the assets foreclosed upon by Century. Furthermore, having reaped the benefits of Forge Mench's 2001 downsizing efforts, Morgan Miller then went on to earn approximately $200,000 in profits on $7 million revenue in 2002 (compared with a $1.5 million loss for Forge Mench the prior year), even while Nolan Miller's judgment remained unpaid. (See Hyams Decl. Ex. D at 68-69.) Therefore, to the extent that any explicit showing of injustice is required here, it is met by the likelihood that Morgan Miller, as a mere continuation of Forge Mench, would be allowed to avoid payment of a valid judgment entered by this court "simply because a merger has been called something else." Cargo Partner, 352 F.3d at 46.
Finally, the imposition of successor liability on Morgan Miller will not result in a "windfall" to Nolan Miller by allowing him to collect on an otherwise uncollectible judgment. See Cargo Partner, 352 F.3d at 45 ("[A]llowing creditors to collect against the purchasers of insolvent debtors' assets would `give the creditors a windfall by increasing the funds available compared to what would have been available if no sale had taken place.'") (quoting Cargo Partner, 207 F. Supp. 2d at 112). Although Cargo Partner did indeed warn against providing a "windfall" to unsecured creditors, "windfall" refers simply to the effect of allowing an unsecured creditor to collect from an asset purchaser otherwise unrelated to the selling debtor, not from a successor entity that is simply a "mere continuation" of its predecessor. In fact, the Court inCargo Partner explicitly carved out an exception to its "windfall" principle for a de facto merger, holding that "[o]nly . . . when two corporations merge to become a single entity is the successor corporation automatically liable for the debts of both predecessors; itis both predecessors." Cargo Partner, 352 F.3d at 45; see also Cargo Partner, 207 F. Supp. 2d at 111-12 n. 36 (despite windfall concerns, affirming applicability of "well-established exceptions" for mere continuation and de facto merger "[w]here the debtor has transferred its assets in a purported asset sale but retains an ownership interest in the assets so transferred").
Holding Morgan Miller liable for Forge Mench's debt to Nolan Miller simply leaves the parties where they were before the January 2002 foreclosure sale. As a result, Nolan Miller will be permitted to use the remedies provided in Article 52 of the New York Civil Practice Law and Rules to collect the remainder of his judgment, along with interest, if any, against Morgan Miller instead of Forge Mench, while Century's position as a secured creditor on October 11, 2001, the date of this court's judgment for Nolan Miller, will remained unchanged.
For the reasons stated above, plaintiff's motion for summary judgment on his first through third and fifth through fourteenth causes of action is denied, and defendants' cross-motions for summary judgment dismissing those claims are granted. However, because defendant Morgan Miller conducted a de facto merger with, and is a mere continuation of, Forge Mench, plaintiff's motion for summary judgment on his fourth cause of action is granted, and defendants' cross-motions are denied. Settle judgment on ten days' notice.
SO ORDERED.