Questions of Fact Preclude Summary Judgment on De Facto Merger Successor Liability Claims

On May 16, 2017, the First Department issued a decision in Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2017 NY Slip Op. 03886, holding that questions of fact precluded summary judgment on de facto merger successor liability claims, explaining:

Ambac, the insurer of a number of residential mortgage-backed securitizations originated by the Countrywide defendants (collectively, Countrywide), seeks to impose successor liability for fraud and breach of contract in connection with the securitizations upon BAC, which acquired substantially all of Countrywide's assets through a series of transactions that Ambac contends amounted to a de facto merger. Specifically, Ambac alleges that BAC acquired Countrywide in a transaction where Countrywide's shareholders became shareholders of BAC. Ambac further alleges that BAC subsequently integrated Countrywide's assets, through asset purchase agreements, so that Countrywide's former shareholders continued to have an interest in those assets through their interests in BAC's stock.

Continuity of ownership is the touchstone of the de facto merger concept and thus a necessary predicate to a finding of a de facto merger. Continuity of ownership exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor's purchase of the predecessor's assets, as occurs in a stock-for-assets transaction. Stated otherwise, continuity of ownership describes a situation where the parties to the transaction become owners together of what formerly belonged to each.

Contrary to BAC's contention, neither New York City Asbestos Litig. nor TBA Global limits continuity of ownership to only those situations where the shareholder interests are acquired in the same transaction as the asset sale. Rather, if the shares are acquired as an element of the asset purchase transaction, continuity of ownership may exist. Here, issues of fact exist as to whether, based on the multi-step transactions, Countrywide shareholders acquired ownership interests in BAC as an element of the subsequent asset purchases. Ambac points to evidence showing that BAC embarked upon the series of transactions as an integrated whole, that BAC began planning the asset sales before Countrywide shareholders acquired BAC stock, and that BAC always anticipated a transaction whereby BAC would acquire the assets of Countrywide.

We agree with BAC that there can be no continuity of ownership where the asset seller receives fair value consideration for its assets. Although BAC maintains that it paid fair value for Countrywide's assets, Ambac points to evidence showing that large amounts of money Countrywide received in the asset sale were then cycled back to BAC and its subsidiaries. Thus, issues of fact exist as to whether the transactions were coordinated with the goal of combining BAC's and Countrywide's mortgage businesses while avoiding Countrywide's liabilities so as to benefit Countrywide's former shareholders at the expense of its creditors.

(Internal quotations and citations omitted).