Opinion
Case No. 02 C 7016.
July 17, 2003.
MEMORANDUM OPINION AND ORDER
Currently before us is Defendant Wilson A. Campbell's ("Campbell") motion for reconsideration of our January 27, 2002 opinion and order. For the following reasons we amend our order but deny Campbell's motion to reverse that order.
Defendant Campbell has filed an action with the dispute resolution section of the National Association of Security Dealers ("NASD") naming, inter alia, Plaintiff Ryan Beck Co., Inc. ("Ryan Beck") as a respondent. On November 26, 2002, we issued an opinion and order granting Ryan Beck's motion for preliminary injunction. In that opinion we concluded that Ryan Beck would likely prove that it was not the successor in interest to Gruntal Co., LLC ("Gruntal") and, therefore was not obliged to arbitrate Campbell's dispute. Defendant Campbell then filed a timely motion for reconsideration under Rule 59(a) of the Federal Rules of Civil Procedure, arguing that new information, revealed during discovery, established that the transaction between Ryan Beck and Gruntal was a de facto merger, warranting a reversal of our November 26, 2002 order ("Campbell's First Motion to Reconsider"). On January 27, 2003, applying Illinois substantive law, we denied Campbell's motion for reconsideration. Campbell then filed a second motion for reconsideration under FRCP 59(e), arguing that the Court erred in its choice of choice of law analysis and urging reconsideration of its argument under New York law ("Campbell's Second Motion to Reconsider").
A detailed description of the facts presented to the Court in available in our opinions of November 26, 2002 and January 27, 2003.
Choice of Law
In deciding which state's substantive law to apply, a court sitting in diversity must apply the forum state's choice of law principles. See Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941). Illinois has adopted the "most significant contacts" test. See Ingersoll v. Klein, 262 N.E.2d 593, 596 (Ill. 1970). Under the principal of depecage, we must "cut up a case into individual issues," Ruiz v. Blentech, 89 F.3d 320, 324 (7th Cir. 1996), and apply the law of the state that has the most significant relationship to the occurrence and the parties with respect to each issue involved. See id. The factors pertinent to the most significant contacts test differ according to the area of substantive law governing the issue and according to the nature of the issue itself. See id.
In our January 27, 2003 opinion we erred in conducting one choice of law analysis for all issues in this case. We should have conducted one analysis for issues of successor liability and a separate analysis for issues of tort liability. See id. at 326. We therefore revisit this issue and determine that New York law applies for purposes of successor in interest liability. New York has the most significant contacts to the transaction between Gruntal and Ryan Beck. Gruntal's principal place of business was in New York. The transaction in which Ryan Beck acquired certain of Gruntal's assets occurred in New York. Furthermore, the asset purchase agreement executed by Gruntal and Ryan Beck contains a choice of law provision mandating that the agreement be governed by New York law. Although Illinois has the most significant contacts for purposes of the tort analysis, it has no significant contacts to the successor in interest issue. Successor in Interest Liability
Ryan Beck is a Florida corporation with its principal place of business in New Jersey. Neither party argues that Florida or New Jersey law should be applied.
Ryan Beck goes to great lengths to distinguish and narrow the holding in Ruiz. There is no evidence to support Ryan Beck's contention that the Seventh Circuit intended for its holding in Ruiz to apply only to the products line exception to the basic rule about successor liability. Ryan Beck correctly notes that we need not conduct a choice of law analysis unless there is actually a difference in the relevant laws of the different states that will affect the outcome of the case. Because we believe such a difference exists between New York and Illinois law with regard to successor liability, a choice of law analysis is necessary.
In its first motion to reconsider, Campbell argued that new evidence warranted a reversal of our November 26, 2002 order granting Ryan Beck's motion for a preliminary injunction. Campbell contended that this new evidence demonstrates that the transaction between Ryan Beck and Gruntal was a de facto merger. It is undisputed that a de facto merger is evidenced by four factors: (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 operations. See Lumbard v. Maglia, 621 F. Supp. 1529, 1535 (S.D.N.Y. 1985).
The parties concede that there was no continuity of ownership in the asset purchase agreement executed by Gruntal and Ryan Beck. The parties diverge, however, as to the relevance of this fact. Campbell contends that New York law allows a finding of de facto merger without continuity of ownership; Ryan Beck maintains that continuity of ownership is necessary except in certain limited situations such as product liability. Although we admit that the law on this question is somewhat convoluted, see e.g. Cargo Partners A.G. v. Albatrans Inc., 207 F. Supp.2d 86, 99 (S.D.N.Y. 2002), we agree with Campbell that New York law allows flexibility in assessing the factors of a de facto merger and that continuity of ownership, while important to a de facto merger analysis, is not an absolute requirement. See Sweatland v. Park Corp., 181 A.D.2d 243, 246 (N.Y. A.D. 1992) (holding that not all of the four factors "are needed to demonstrate a merger; rather these factors are only indicators that tend to show a de facto merger") ( citing Menacho v. Adamson United Co., 420 F. Supp. 128, 133 (N.J. 1976)); see also Fitzgerald v. Fahnestock, 286 A.D.2d 573, 574 (N.Y.A.D.2d 2001) ("not all of these elements are necessary to find a de facto merger"). Thus, the Sweatland court determined that "public policy considerations dictate, at least in the context of tort liability, courts have flexibility in determining whether a transaction constitutes a de facto merger." Id.
Ryan Beck argues that this public policy argument applies only in products liability cases. We disagree. The Sweatland court discusses "tort liability," a general term that includes but is not limited to products liability cases.
Although we hold that under New York law the lack of continuity of ownership does not absolutely bar a finding that Ryan Beck is the successor in interest to Gruntal, we nonetheless decline to reverse our decision of January 27, 2003. Our holding today is not that Ryan Beck is, in fact, the successor to Gruntal but rather that, despite the lack of continuity of ownership, Ryan Beck may be the successor in interest to Gruntal. Indeed, continuity of ownership is an extremely important factor, and its absence in this case weighs heavily against a finding that Ryan Beck is a successor to Gruntal. Also weighing against Gruntal is the fact that, although there has been some continuity of management between Gruntal and Ryan Beck, the upper echelon of management at Ryan Beck does not consist of former Gruntal employees. Ryan Beck, therefore, has still met its burden of showing that it has some likelihood of success on the merits. See Washington V. Indiana High School Ath. Ass'n, 181 F.3d 840, 845 (7th Cir. 1999). Even though Ryan Beck's chances of succeeding on the merits have diminished somewhat, we conclude that enjoining Campbell from continuing with the arbitration would "minimize the hardship to the parties pending the ultimate resolution of the law suit," Platinum Home Mortgage Corp. v. Platinum Financial Group, Inc., 149 F.3d 72, 726 (7th Cir. 1999), and therefore do not reverse our order of January 27, 2003.
Conclusion
For the forgoing reasons we amend our January 27, 2003 order under FRCP 59(e). This amendment shall reflect that New York law governs the issue successor liability and that, under New York law, continuity of ownership is not an absolute requirement for successor liability. Despite these amendments, we deny Campbell's motion to reverse our January 27, 2003 order. It is so ordered.