Our New York law office recently undertook a case in which we are alleging a company caused significant damage to the real property of our Client because of a tort by a defendant. However, the defendant company was acquired by another entity. In New York, the general rule is that a company that acquires on the “assets” of another is not liable for actions or inactions of this predecessor company. In many cases a acquirer shall merely purchase the assets of a company and not the company itself. Thus, the company selling the assets shall continue as a company, often, without any assets or it shall windup it assets. This, often, leads to a situation in which this company may have outstanding liabilities that would have been recoverable, but for the sale of the assets of this company.
NY’s Successor Liability Rule
In some cases, a plaintiff may sue the new owner of the acquired assets. A related article may, also, be of interest on: Buying a Company in New York. In New York, a plaintiff with a claim against a company that has since been acquired or had its assets acquired by another company may be able to pursue that claim under the rule of successor liability. Essentially, successor liability works just like it sounds: liability transfers from a predecessor company to an acquiring company (successor). Successor liability is designed to relieve plaintiffs when the rules of traditional corporate law, applied too rigidly, would produce unjust results.
The rules for successor liability vary from one state to the next, but New York courts have specified certain scenarios in which the NY courts shall impose successor liability onto an acquiring company. The following are the exceptions New York courts have carved out for when successor liability can be imposed:
- Express or Implied Assumption of Liability?
When a company expressly or impliedly assumes the liabilities of a predecessor company, New York courts shall, normally, grant an exception to the general rule of non-liability of successor companies for the actions or inactions of the acquired company. The language of purchase agreements are important here. Did the successor expressly or impliedly assume the liabilities of the predecessor?
2. Consolidation between Merger and Seller?
Even if a company acquires another company through a purchase of assets, New York courts may deem such a transaction to be a consolidation or merger of seller and purchaser, and thus impose successor liability. We shall write more about this area of law in a follow-up post in the next couple of weeks.
3. Fraudulent Scheme Intended to Avoid Liability?
If the transaction was structured in such a way to avoid tort liability, or “the transaction [was] entered into to escape [tort] obligations,” New York courts may impose successor liability.
4. Other Exceptions?
New York courts are divided on two other exceptions to the general rule that an acquiring company is not liable for the tort liabilities of an acquired company – The “Continuity of Enterprise” and the “Product Line Exception.” For some plaintiff these principles may also be available to plaintiffs seeking redress, but the law is not, yet, fully settled. We shall have more on these areas of law in a follow-up post. Check back often and subscribe to the blog.
Successor liability is complex – in many cases. We recommend finding a nuanced New York attorney well-versed in corporate law when seeking to pursue a claim against the purchaser of the predecessor company’s assets in New York courts. For a consultation please Contact Us or Schedule a Call.
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