| Simpson v Ithaca Gun Co. LLC |
| 2008 NY Slip Op 03744 [50 AD3d 1475] |
| April 25, 2008 |
| Appellate Division, Fourth Department |
| David Simpson et al., Respondents, v Ithaca Gun Company LLC etal., Appellants. |
—[*1] Woods Oviatt Gilman LLP, Rochester (Andrew J. Ryan of counsel), forplaintiffs-respondents.
Appeal from an order of the Supreme Court, Livingston County (Kenneth R. Fisher, J.),entered December 13, 2006. The order, insofar as appealed from, granted in part plaintiffs'motion seeking leave to amend the complaint and partial summary judgment and denied in partdefendants' cross motion for summary judgment dismissing the complaint.
It is hereby ordered that the order insofar as appealed from is unanimously reversed on thelaw without costs, the motion is denied in its entirety, the cross motion is granted in its entiretyand the complaint is dismissed.
Memorandum: Plaintiffs, former employees of defendant Ithaca Gun Company LLC (IthacaGun), commenced this action alleging, inter alia, that Ithaca Gun, which had become insolvent,owed money to plaintiffs and that defendants IGC Recovery LLC (IGC Recovery) and IthacaOutdoors LLC (Ithaca Outdoors) were responsible for that debt by virtue of the de facto mergerof Ithaca Gun with IGC Recovery and Ithaca Outdoors. Supreme Court determined that there wasa de facto merger of Ithaca Gun and IGC Recovery and granted those parts of plaintiffs' motionseeking partial summary judgment on behalf of plaintiffs David Simpson and Richard Manganwith respect to several causes of action, and the court also granted that part of plaintiffs' motionseeking leave to amend the complaint. We conclude that the court should have denied plaintiffs'motion in its entirety and instead should have granted defendants' cross motion for summaryjudgment dismissing the complaint in its entirety.
"The de facto merger doctrine creates an exception to the general principle that an acquiringcorporation does not become responsible thereby for the pre-existing liabilities of the acquiredcorporation. This doctrine is applied when the acquiring corporation has not purchased anothercorporation merely for the purpose of holding it as a subsidiary, but rather has effectively mergedwith the acquired corporation" (Fitzgerald v Fahnestock & Co., 286 AD2d 573, 574[2001]; see Schumacher v Richards Shear Co., 59 NY2d 239, 244-245 [1983]). Thepremise that a successor corporation may be responsible for the liabilities of a predecessorcorporation is "based on the [*2]concept that a successor thateffectively takes over a company in its entirety should carry the predecessor's liabilities as aconcomitant to the benefits it derives from the good will purchased" (Grant-Howard Assoc. vGeneral Housewares Corp., 63 NY2d 291, 296 [1984]).
Here, the record establishes that IGC Recovery did not acquire Ithaca Gun or purchase itsassets and goodwill. Rather, IGC Recovery was a secured creditor of Ithaca Gun and acceptedsurrender of Ithaca Gun's assets in accordance with certain security agreements (cf.Schumacher, 59 NY2d at 244-245; Matter of New York City Asbestos Litig., 15 AD3d 254, 255-256[2005]; Fitzgerald, 286 AD2d 574; Sweatland v Park Corp., 181 AD2d 243, 244[1992]). Although for at least several weeks after Ithaca Gun's assets were surrendered to IGCRecovery, orders were filled and repairs were completed at the Ithaca Gun facility by Ithaca Gunemployees, it is undisputed that within approximately six months thereafter IGC Recovery hadsurrendered assets to another secured creditor of Ithaca Gun, to which IGC Recovery hadsubordinated its position as a secured creditor. It also is undisputed that IGC Recovery sold theremaining assets of Ithaca Gun, including inventory and the trademark and intellectual property,and that the operations at the Ithaca Gun facility had ceased. Thus, we cannot agree with thecourt that there was a de facto merger of IGC Recovery and Ithaca Gun. Rather, the recordestablishes that IGC Recovery exercised its rights under the security agreements to dispose of thecollateral that secured Ithaca Gun's indebtedness to IGC Recovery. The court therefore shouldhave granted those parts of defendants' cross motion for summary judgment dismissing thecomplaint in its entirety against Ithaca Gun and IGC Recovery, as well as against the individualnamed defendants, Ithaca Gun's managing members.
We further conclude that the court should have granted the remainder of defendants' crossmotion, seeking summary judgment dismissing the complaint against Ithaca Outdoors. The onlymember of Ithaca Outdoors was IGC Recovery, and the record establishes that Ithaca Outdoorsmerely paid certain operating expenses of Ithaca Gun and that its bank account was utilized byIGC Recovery to deposit the proceeds of the sale of the assets of Ithaca Gun. Thus, defendantsestablished as a matter of law that there was no de facto merger of Ithaca Outdoors and IthacaGun, and plaintiffs failed to raise an issue of fact sufficient to defeat that part of the cross motion(see generally Zuckerman v City of New York, 49 NY2d 557, 562 [1980]).
Finally, we conclude that the court abused its discretion in granting that part of plaintiffs'motion seeking leave to amend the complaint to add a defendant and a cause of action alleging abreach of fiduciary duty by the individual defendants who, as noted, were the managing membersof Ithaca Gun. Plaintiffs sought to invoke the trust fund doctrine in support thereof (seegenerally Credit Agricole Indosuez v Rossiyskiy Kredit Bank, 94 NY2d 541, 549-550[2000]), and we conclude that the application of that doctrine to this case is "patently lacking inmerit" (Letterman v Reddington, 278 AD2d 868 [2000]). Present—Scudder, P.J.,Martoche, Smith, Green and Gorski, JJ.