First Department Reverses Grant Of Summary Judgment Concerning Successor Liability

In a Decision and Order, dated September 21, 2023, in 47 East 34^th Street (NY) L.P. v. BridgeStreet Worldwide, Inc. et al, Case No. 2022-01819, the First Department reversed orders of Justice Andrew Borrok which granted plaintiff’s motion for summary judgment on its claim to recover on a guaranty against defendants-appellants Versa Capital Management, LLC (Versa) and Domus BWW Funding, LLC (Domus Funding) as successors to and alter egos of guarantor defendant BridgeStreet Worldwide. The Court explained:

Generally, “a corporation which acquires the assets of another is not liable for the torts of its predecessor” (Schumacher v Richards Shear Co., 59 NY2d 239, 244 [1983]). There are limited exceptions to this general rule, including the mere continuation theory at issue here, which case law provides can only be asserted against a single corporation (see id. at 245 [successor liability may exist where “the purchasing corporation was a mere continuation of the selling corporation,” which “refers to corporate reorganization . . . where only one corporation survives the transaction”]).

A successor liability claim cannot stand where the surviving corporation did not acquire the assets of the selling corporation (see e.g. Highland Crusader Offshore Partners, L.P. v Celtic Pharma Phinco B.V., 205 AD3d 520, 522 [1st Dept 2022]). Neither defendant herein acquired BWW’s assets. The documentary evidence, including the CTA, the ATA, and the Stock Power — none of which plaintiff claims are fabricated — demonstrate that Domus Funding transferred BWW’s domestic collateral to nonparty Domus Group and BWW’s foreign collateral to nonparty Domus UK. For its part, Versa was not even a signatory to any of the relevant transactions.

Supreme Court did not consider the documentary evidence that completely undermined plaintiff’s successor liability claim based on its mistaken belief that it had a “limited factual issue” before it. Pointing to its 2019 order, Supreme Court noted that it had already determined that plaintiff made “a prima facie showing that the Versa Parties completely absorbed BWW’s business operations” (2022 order at 2). In the court’s view, it was irrelevant that it had denied plaintiff summary judgment, because it had narrowed the issues of fact in the 2019 order “to the location of the business before and after the Foreclosure and the degree to which there was continuity of employees and management” (id.). Supreme Court further noted that, in the 2019 order, it “rejected the defendants[’] remaining arguments about the mere continuation doctrine” which constituted “law of this case” (id. at 6). This was error.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning successor or alter ego liability, or documentary evidence.