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
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.
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
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):
Cargo Partner AG v. Albatrans, Inc., No. 01-Civ-2609 (DAB), slip op. at 2, 2002 U.S. Dist. LEXIS 18325, at
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
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.
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." Schumacher, 59 N.Y.2d at 245, 451 N.E.2d at 198, 464 N.Y.S.2d at 440. Applying New York law, we have observed that:
Arnold Graphics Indus., 775 F.2d at 42 (quoting Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F.Supp. 834, 839 (S.D.N.Y. 1977)) (first brackets in original).
Cargo Partner concedes that it lacks "any factual basis," as required by Fed.R.Civ.P. 11(b)(3), on which to plead continuity of ownership between Chase-Leavitt and Albatrans. Appellant's Br. at 10. It argues instead that the New York courts have adopted a more relaxed standard for determining that a sale of assets was a de facto merger since our decision in Arnold.
Id., 286 A.D.2d at 574, 730 N.Y.S.2d at 71 (citing Sweatland v. Park Corp., 181 A.D.2d 243, 245-46, 587 N.Y.S.2d 54, 56 (4th Dep't 1992) (citing Arnold)). But the court noted that "[n]ot all of these elements are necessary to find a de facto merger." Id., 286 A.D.2d at 574-75, 730 N.Y.S.2d at 71; accord Sweatland, 181 A.D.2d at 246, 587 N.Y.S.2d at 56. Cargo Partner argues that Fitzgerald, not Arnold, states the present law of New York and that, under Fitzgerald, a de facto merger may be found without fulfillment of the last factor, continuity of ownership.
We have no need to resolve the asserted conflict between Arnold and Fitzgerald or determine whether all four factors must be present for there to be a de facto merger. Whichever test applies, we are confident that the doctrine of de facto merger in New York does not make a corporation that purchases assets liable for the seller's contract debts absent continuity of ownership.
The purpose of the doctrine of de facto merger is to "avoid[ the] patent injustice which might befall a party simply because a merger has been called something else." In re Penn Central Securities Litig., 367 F.Supp. 1158, 1170 (E.D.Pa.1973); accord SmithKline Beecham Corp. v. Rohm & Haas Co., 89 F.3d 154, 164 (3d Cir.1996) (quoting In re Penn Central); Philadelphia Elee. Co. v. Hercules, Inc., 762 F.2d 303, 312 (3d Cir.), cert. denied, 474 U.S. 980 106 S.Ct. 384, 88 L.Ed.2d 337 (1985) (quoting In re Penn Central); Binder v. Bristol-Myers Squibb, Co., 184 F.Supp.2d 762, 770 (N.D.Ill.2001) (quoting In re Penn Central); Perl v. IU Int'l Corp., 61 Haw. 622,
To be sure, Fitzgerald speaks of "continuity of ownership," 286 A.D.2d at 574, 730 N.Y.S.2d at 71, while Arnold talks in terms of "continuity of stockholders," 775 F.2d at 42. But the former is simply a more general way to state the latter. And, for our purposes, it is a distinction without a difference. Leavitt's unsecured contractual interest (through her ownership of equity in Chase-Leavitt) in limited future profits generated using Chase-Leavitt's former assets establishes neither continued "ownership" nor "stockholdings."
The two cases cited by Cargo Partner for its argument, Fitzgerald and Ladenburg Thalmann & Co. v. Tim's Amusements, Inc., 275 A.D.2d 243, 712 N.Y.S.2d 526 (1st Dep't 2000), are not to the contrary. In Fitzgerald, the court denied a motion to dismiss a claim relying on the de facto merger doctrine for liability, in which the buying corporation owned all of the selling corporation's stock when the seller's assets were transferred to it. 286 A.D.2d at 575, 730 N.Y.S.2d at 72. In Ladenburg Thalmann, the court concluded that the plaintiff properly alleged a de facto merger in its pleadings when a parent corporation owned 20% of the corporation selling its assets and 72% of the corporation to which the assets were transferred. 275 A.D.2d at 248, 712 N.Y.S.2d at 530. There was continuity of stockholders (and thus ownership) in both cases.
It is true that a number of states, beginning with Michigan in Turner v. Bituminous Casualty Co., 397 Mich. 406, 429-30, 244 N.W.2d 873, 883 (1976), and California in Ray v. Alad Corp., 19 Cal.3d 22, 30-34, 560 P.2d 3, 8-11, 136 Cal.Rptr. 574, 579-82 (1977), have relaxed the requirement of continuity of ownership in products-liability cases. E.g., Andrews v. John E. Smith's Sons Co., 369 So.2d 781, 785-86 (Ala.1979); Savage Arms, Inc. v. W. Auto Supply Co., 18 P.3d 49, 55-57 (Alaska 2001); Ramirez v. Amsted Indus., Inc., 408 A.2d 818, 824-25 171 N.J.Super. 261, 408 A.2d 818, 824-25 (N.J.Super.1979), aff'd, 86 N.J. 332, 431 A.2d 811 (1981). But see Downtowner, Inc. v. Acrometal Prods., Inc., 347 N.W.2d 118, 124-25 (N.D.1984) (rejecting Turner and Ray); Flaugher v. Cone Automatic Mach. Co., 30 Ohio St.3d 60, 507 N.E.2d 331, 335-37 (1987) (same). Although some New York courts have applied this rule, e.g., Hart v. Bruno Mach. Corp., 250 A.D.2d 58, 60-61, 679 N.Y.S.2d 740, 742 (3d Dept.1998); Wensing v. Paris Indus.-N.Y, 158 A.D.2d 164, 167-68, 558 N.Y.S.2d 692, 694-95 (3d Dept.1990), the New York Court of Appeals declined to adopt it, Schumacher, 59 N.Y.2d at 245, 451 N.E.2d at 198, 464 N.Y.S.2d at 440. As far as we know it has never been applied, in this state or elsewhere, outside of the products-liability context. This apparently reflects
For the foregoing reasons, the decision and order of the district court dismissing the plaintiff's complaint with respect to Cargo Partner's assertion of the de facto merger doctrine is affirmed,
14A William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 6970.147 (2002) (footnotes omitted).