Cargo Partner Ag v. Albatrans, Inc.

Decision Date09 December 2003
Docket NumberDocket No. 02-9322.
Citation352 F.3d 41
PartiesCARGO PARTNER AG, Plaintiff-Appellant, v. ALBATRANS, INC. and Chase, Leavitt (Customhouse Brokers) Inc., Defendants-Appellees.
CourtU.S. Court of Appeals — Second Circuit

STEPHEN M. HARNIK, Harnik & Finkelstein, New York, NY, for Plaintiff-Appellant.

LAURA B. HOGUET, Hoguet Newman & Regal, LLP (Luisa K. Hagemeier, of counsel), New York, NY, for Defendant-Appellee Albatrans, Inc.

Before: CALABRESI, F.I. PARKER,* and SACK, Circuit Judges.

SACK, Circuit Judge.

The Plaintiff-appellant Cargo Partner AG appeals from a decision and order of the United States District Court for the Southern District of New York (Deborah A. Batts, Judge) dismissing Cargo Partner's claims against the defendant-appellee Albatrans, Inc. Cargo Partner brought this diversity action against the defendant-appellee Chase, Leavitt (Customhouse Brokers) Inc. ("Chase-Leavitt") seeking to recover on a trade debt owed by Chase-Leavitt to Cargo Partner. Cargo Partner also brought suit against Albatrans, alleging by purchasing all of Chase-Leavitt's assets, Albatrans became liable for Chase-Leavitt's debts, including its debt to Cargo Partner. Cargo Partner relied on a variety of theories in its attempt to demonstrate Albatrans's liability, all of which Magistrate Judge Douglas F. Eaton rejected in a report and recommendation, which the district court later adopted. Having concluded that Albatrans was not liable for Chase-Leavitt's debts, the district court granted Albatrans's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). Cargo Partner takes an interlocutory appeal by permission, pursuant to 28 U.S.C. § 1292(b), arguing that Albatrans is liable for Chase-Leavitt's debts under the "de facto merger" doctrine as recently interpreted by decisions of an Appellate Division of the New York Supreme Court. Albatrans contends that it is not liable because there can be no de facto merger when, as here, there is no continuity between the stockholders of the selling corporation and the purchasing corporation post-acquisition. For the reasons that follow, we agree with Albatrans and therefore affirm.


Cargo Partner, Albatrans, and Chase-Leavitt are in the shipping business. Between 1999 and 2001, Chase-Leavitt incurred a debt to Cargo Partner of approximately $240,000 for services rendered by Cargo Partner to Chase-Leavitt.1 On February 7, 2001, Albatrans entered into an agreement with Chase-Leavitt and its sole shareholder, Alison Leavitt, to purchase all of Chase-Leavitt's assets.

In connection with the acquisition, Chase-Leavitt, which holds a federal customs brokerage license allowing it to perform customs services for clients, see 19 U.S.C. § 1641(b)(1), agreed to provide its customs brokerage services exclusively to Albatrans until Albatrans (or one of its subsidiaries) acquired such a license. During this interim period, apparently to allow Albatrans to use Chase-Leavitt's license while Albatrans was seeking one of its own, Chase-Leavitt was to operate as a distinct "profit center" within Albatrans, using the assets it sold to Albatrans for that purpose. Letter Agreement by Albatrans, Inc. To Purchase Assets of Chase-Leavitt, at 4 (Feb. 6, 2001). Chase-Leavitt was required to "accept the advice and direction" of managers hired by Albatrans in this pursuit. Id. After Albatrans acquired a customs brokerage license, it would have the option of causing Chase-Leavitt to discontinue operations, or "conduct[ing Chase-Leavitt's b]usiness in its own or under a subsidiary's name." Id. at 6-7.

The acquisition agreement also required Leavitt to continue in Chase-Leavitt's employ until Albatrans obtained the license and gave Albatrans the option of continuing her employment for an additional five years on specified terms. Leavitt agreed to indemnify Albatrans for any breach by Chase-Leavitt of its obligations under the agreement and for any liabilities of Chase-Leavitt incurred before the agreement's execution, which obligation she secured with a mortgage on her personal residence. In exchange, Chase-Leavitt was to be paid a declining percentage of profits generated by the "profit center" over the ensuing five years, with $250,000 paid in advance immediately upon the close of the transaction.

In March 2001, Cargo Partner commenced a diversity action against Chase-Leavitt and Albatrans in the United States District Court for the Southern District of New York asserting that Albatrans was liable for Chase-Leavitt's debt to Cargo Partner. One of Cargo's theories of recovery — which underlies the only issue on this appeal — was based upon the common-law "de facto merger" doctrine. Albatrans moved to dismiss or, in the alternative, for summary judgment. The district court referred the motion to Magistrate Judge Douglas F. Eaton.

In due course, the magistrate judge issued a report and recommendation to the district court concluding that all claims against Albatrans should be dismissed. Cargo Partner AG v. Albatrans Inc., 207 F.Supp.2d 86, 118 (S.D.N.Y.2002). The magistrate judge decided that Cargo Partner had not pled facts sufficient to support a finding that there had been a de facto merger between Albatrans and Chase-Leavitt because Cargo Partner had not alleged that Leavitt received any ownership interest in Albatrans after the asset sale. Id. at 113-14. The magistrate judge concluded that the doctrine of de facto merger applies only when a merger of corporate entities is disguised as some other transaction, and that a necessary factor is continuity of ownership between the predecessor and successor entities. Id. at 104-05. Because Leavitt received no ownership interest in Albatrans, there was no de facto merger.

The district court adopted the magistrate judge's report and recommendation in its entirety, id. at 90, dismissed Cargo Partner's complaint with respect to Albatrans, see id., and certified the following question for interlocutory appeal to this Court pursuant to 28 U.S.C. § 1292(b):

Whether the New York State Court of Appeals would apply the weighing of four factors recognized by the Courts of the State of New York as potentially applicable to whether the "de facto merger" exception applies to a transaction styled as a sale of assets, or whether that Court would adopt a definition of the "de facto merger" exception as requiring that a plaintiff must plead and prove all four of those four factors.

Cargo Partner AG v. Albatrans, Inc., No. 01-Civ-2609 (DAB), slip op. at 2, 2002 U.S. Dist. LEXIS 18325, at *3 (S.D.N.Y. Apr. 24, 2002). We agreed to hear the appeal. Cargo Partner AG v. Albatrans, Inc., No. 02-8013 (2d Cir. Nov. 22, 2002).

I. Standard of Review

We review the district court's decision to grant a Rule 12(b)(6) motion de novo. Kalnit v. Eichler, 264 F.3d 131, 137-38 (2d Cir.2001). Dismissal is not warranted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim [that] would entitle [it] to relief" Id. at 138 (internal quotation marks omitted). We thus "accept[] all factual allegations in the complaint as true and draw[] all reasonable inferences in the plaintiff's favor." Id. at 137-38 (internal quotation marks omitted).

II. De Facto Merger

It is undisputed that New York law applies to this case. Under New York law, there are at least three ways in which a corporation can acquire the business of another: The purchaser can buy the seller's capital stock, it can buy the seller's assets, or it can merge with the seller to form a single corporation.2 In the first case, the purchaser does not become liable for the seller's debts unless the stringent requirements for piercing the corporate veil are met. See TNS Holdings, Inc. v. MKI Securities Corp., 92 N.Y.2d 335, 339, 703 N.E.2d 749, 751, 680 N.Y.S.2d 891, 893 (1998) (discussing veil piercing). Likewise, the purchaser of a corporation's assets does not, as a result of the purchase, ordinarily become liable for the seller's debts. See Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 244-45, 451 N.E.2d 195, 198, 464 N.Y.S.2d 437, 440 (1983) (holding that ordinarily, a corporation bears no responsibility for the prior tort debts of another corporation whose assets it has purchased); Arnold Graphics Indus. v. Indep. Agent Ctr., Inc., 775 F.2d 38 (2d Cir.1985) (applying this principle to a contract debt). The amount paid for the assets would ordinarily be available to satisfy those debts, at least in part. So long as the buyer pays a bona fide, arms-length price for the assets, there is no unfairness to creditors in thus limiting recovery to the proceeds of the sale — cash or other consideration roughly equal to the value of the purchased assets would take the place of the purchased assets as a resource for satisfying the seller's debts. Moreover, as the magistrate judge observed, allowing 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." Cargo Partner, 207 F.Supp.2d at 112. Only in the third case, when two corporations merge to become a single entity, is the successor corporation automatically liable for the debts of both predecessors; it is both predecessors.

New York recognizes four common-law exceptions to the rule that an asset purchaser is not liable for the seller's debts, applying to: (1) a buyer who formally assumes a seller's debts; (2) transactions undertaken to defraud creditors; (3) a buyer who de facto merged with a seller; and (4) a buyer that is a mere continuation of a seller. See Schumacher, 59 N.Y.2d at 245, 451 N.E.2d at 198, 464 N.Y.S.2d at 440; see also 10 William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 4880 (2002). Only the third exception, the doctrine of de facto merger, is relevant to this appeal.3

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