Category: Uncategorized

It is absolutely time to revisit and revise New York State’s absolute liability standard imposed upon contractors and owners for construction-related accidents. New York Labor Law Sections 240 and 241, colloquially referred to as the “Scaffold Law,” impose a strict liability standard on contractors and owners for elevation/gravity related accidents.  Unlike other personal injury matters, the Scaffold Law does not allow for any consideration of the comparative fault of the injured worker for causing and/or contributing to his/her accident. As a result, facts such as the injured worker’s decision not to wear personal protective equipment (“PPE”) that is provided by his/her employer and readily available at the jobsite are not considered in evaluating liability or the award of damages.

Having worked in the construction industry for the past twenty years, and having overseen the Safety, Risk Management, and Loss Control Departments for contractors with a New York (as well as a national and international) presence, I’ve seen beyond dispute that New York’s Scaffold Law is among the primary reasons for the soaring cost of construction.  It drives up the value of settlements and verdicts which, in turn, increases the cost of insurance.  In fact, many insurance carriers have stopped writing policies in New York as a result of this antiquated and imbalanced law. And those carriers that have kept writing programs in New York have dramatically increased their premiums as well as the deductibles and self-insured retentions that the insured contractors are required to carry.

The net effect is an ever-increasing cost to build.  Further, it has forced many contractors and subcontractors to seek projects outside of New York, price shop insurance programs with carriers that are not admitted in New York State, and purchase policies that contain numerous exclusions that do not provide any actual coverage. These increased costs are then passed along to consumers on private sector projects and taxpayers on public sector projects.

This is not to say that injured workers should not be compensated for elevation-related accidents on construction sites.  Nor is it intended to endorse contractors that curtail spending on training, safety, PPE, and supervision that the workforce needs to perform their work.  But, when the Occupational Safety and Health Administration (“OSHA”) investigates an elevation-related accident and determines that the injured worker caused or contributed to his/her accident by not using available PPE, rushing/cutting corners, failing to follow proper procedures and/or the employee’s own training, but the contractor/employer cannot use OSHA’s findings to mitigate or cut off the worker’s entitlement to compensation for his/her own negligence, which is precisely what the Scaffold Law does, then it is time for some major reform.

Until New York State addresses this inequity, contractors and subcontractors should do the following:

• Read your insurance policies very carefully. Be careful of endorsements that exclude coverage for elevation-related work.

• Engage experienced insurance brokers, advisors, and other professionals who specialize in the construction industry. With insurance premiums being among the top three annual expenses for most contractors (along with payroll and brick & mortar costs), it is imperative to work with specialists who understand your business, the types of coverage that are needed, and how to put together a program that provides real coverage.

• Spend money on training, upgrading PPE, and supervision. In this era of increasing deductibles, think about how much it costs to proactively address safety issues vs. how much you spend on claims within your insurance deductibles.

New York’s construction industry cannot move forward and realize its full potential if antiquated laws keep it tethered to the past.

By Christine Malafi

The Internet has become a necessity for the marketing and promotion of businesses, services, and merchandise. An evolving legal issue is website accessibility to those with disabilities and the applicability of Title III of the Americans with Disabilities Act (“ADA”). Accessibility of public websites and compliance with the ADA in connection with public websites may cause issues for some time to come, given the lack of governmental regulations and guidance in this area. Nevertheless, it’s important for businesses to know where the law currently stands.

The purpose of the ADA is to provide equal opportunity to individuals with disabilities. Title III of the ADA specifically prohibits discrimination of individuals with disabilities “in the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation by any person who owns, leases (or leases to), or operates a place of public accommodation.” While the ADA is silent on the specific issue of website accessibility, case law has made it clear that the ADA applies to public websites, and businesses must accommodate individuals with disabilities and make their websites ADA accessible. However, the extent to which websites must be made accessible has not been definitively determined. Questions remain as to whether all websites fall under the ADA and whether a website must also be tied to a physical location before it falls under the ADA, among other questions.

In December 2015, the Department of Justice (“DOJ”) announced that it would not issue private sector website ADA accessibility regulations until fiscal year 2018. However, a recent Presidential Executive Order cut regulatory resources, and may subsequently freeze the DOJ’s public accommodations website rulemaking.

In the absence of DOJ regulations, what should businesses do? Many settlements approved by the DOJ have implemented the World Wide Web Consortium’s Web Content Accessibility Guidelines 2.0 (WCAG) on how to make a website more accessible. At the most basic level, an ADA accessible website should provide these (and other) types of features:

• Text alternatives for any non-text content;
• Alternatives for time-based media;
• Content that can be presented in different ways without losing information or structure;
• Be easy to see and hear, including separating foreground from background;
• Permit all functionality from a keyboard if needed (as opposed to a cursor);
• Permit sufficient time to read and use content;
• Not be designed in a way that is known to cause seizures;
• Include ways to help users navigate, find content, and determine where they are;
• Include text content that is readable and understandable;
• Operate and appear in predictable ways;
• Help users avoid and correct mistakes; and
• Compatible with current and future user agents, including assistive web technologies.

The best option for business owners to not fall victim to a successful Title III suit is to comply with these WCAG guidelines.

However, it may not always be deemed “reasonable” for businesses to create a fully ADA compliant website. As is stated in the ADA: “A public accommodation shall make reasonable modifications in policies, practices, or procedures, when the modifications are necessary to afford goods, services, facilities, privileges, advantages, or accommodations to individuals with disabilities, unless the public accommodation can demonstrate that making the modifications would fundamentally alter the nature of the goods, services, facilities, privileges, advantages, or accommodations. “ 28 C.F.R. § 36.302 (2012).

If making your website fully compliant with the WCAG is too costly for your company, other options may be available. Although New York courts have yet to address this specific issue, others have. In National Federation of the Blind v. Target Corp., Target was sued because its website did not enable visually impaired persons to directly purchase products, redeem gift cards, or find stores.  The court ruled against Target, as Target failed to show that the information on its website was available in another reasonable format. The court acknowledged ADA defines discrimination to include a failure to take such steps “as may be necessary to ensure that no individual with a disability is excluded, denied services, segregated or otherwise treated differently than other individuals because of the absence of auxiliary aids and services, unless the entity can demonstrate that taking such steps would fundamentally alter the nature of the goods, service, facility, privilege, advantage, or accommodation being offered or would result in an undue burden.” 42 U.S.C.S. § 12182(b)(2)(A)(iii). The court specifically noted the following examples of accessibility: “if a menu cannot be read by a blind person, the restaurant need not make the menu available in Braille; the restaurant could ensure that waiters are available to explain the menu”; and “while a bookstore must ensure that it communicates with its customers in formats which accommodate the disabled, a bookstore is not required to stock books in Braille.” Courts therefore recognize that there may be significant limitations on the possibility of making a website completely or fully ADA accessible.

In a more recent case, Robles v. Domino’s Pizza LLC, a blind plaintiff claimed that he could not order pizza from the Domino’s website because it was not accessible using a screen reader. The court found that although Domino’s website was not in compliance with the WCAG guidelines, their 24-hour toll free phone number, where live agents provided assistance with using the website, was enough to meet its obligations under the law.

Absent further guidance, businesses and individuals with public business websites are urged to ensure accessibility. At CMM, we are available to assist and guide you on this issue.

By Patrick McCormick

The basic rule of karma is what goes around comes around. While in everyday life this principle may appeal only to the superstitious, the harsh reality is that in a court of law one mistake or bad act from your past can come back to haunt you.

In New York courts, the rule regarding the admissibility of uncharged prior bad acts is derived from the landmark case People v. Molineux, 168 N.Y. 264 (1901). Put simply, the admissibility of uncharged prior bad acts is dependent upon why the evidence was proffered. Generally, courts will deem evidence of uncharged prior bad acts inadmissible if it is proffered as pretext to demonstrate that the defendant has a propensity to act in a certain way. However, evidence of a defendant’s uncharged prior bad acts is admissible if it demonstrates something other than propensity, such as intent, motive, knowledge, common scheme or plan, identity of the defendant, or necessary background information and context.

Recently, the Court of Appeals and the Third Department decided two cases that demonstrate the increasing scrutiny courts apply when determining the admissibility of evidence pertaining to uncharged prior bad acts: People v. Leonard, 29 N.Y.3d 1 (2017) and People v. Anthony, 152 A.D.3d 1048 (3d Dep’t 2017). While on the surface these two cases may seem to warrant similar conclusions of law as to the admissibility of the evidence at issue, a subtle distinction can be gleaned to give insight as to how courts analyze this evidentiary issue.

In Leonard, the Court of Appeals reversed the finding of the trial court holding that the trial court erred in admitting Molineux evidence. The defendant was charged with sexual assault. At trial, the victim’s boyfriend testified that the defendant approached the victim, who at the time was intoxicated and vomiting, and then knelt by the victim and inappropriately touched her while her pants were down to her knees.

In an attempt to elicit testimony from the victim regarding an earlier incident of sexual abuse by the same defendant in which the circumstances were nearly identical, the prosecutor filed a “Molineux Proffer.” The testimony described how on an earlier occasion the victim was intoxicated and asleep on her coach when the defendant approached her, pulled down her pants, and inappropriately touched her. The prosecutor argued that this testimony was relevant because it demonstrated intent, absence of mistake, background, and a common scheme or plan. Over the defendant’s objection, the trial court ruled that the testimony could be elicited.

However, on appeal, the Court of Appeals found that the testimony regarding the prior incident of sexual abuse was propensity evidence that merely sought to show that the defendant committed the charged crime because he acted that way on a prior occasion. Notably, the Court stated that the testimony at issue did not fall into the background evidence exception because it was “not necessary to clarify their relationship or to establish a narrative of the relevant events.” Leonard, 29 N.Y.3d at 8.

Shortly after Leonard was decided, the Third Department confronted a case with the identical evidentiary issue. In People v. Anthony, the Third Department affirmed the trial court’s ruling that the evidence fell within recognized Molineux exceptions. In Anthony, the victim and defendant were acquainted through a course of drug deals. During the course of drug deals, the defendant, a member of the Bloods gang, invited the victim to join the gang multiple times. The victim rejected each invitation. Unfortunately, one drug deal went south when the victim rejected a gang invitation, which incensed the defendant. The defendant pulled out a gun and fired multiple shots at the victim, ultimately killing him. The prosecutor elicited testimony regarding the defendant’s gang membership and his earlier attempts to recruit the victim, arguing it provided context for the crime. The trial court admitted the testimony.

On appeal, the Third Department affirmed the trial court’s ruling. The Third Department noted that the defendant’s “purported gang membership fell within several Molineux exceptions, including placing testimony regarding defendant’s earlier attempt to recruit the victim in context.” Anthony, 152 A.D. at 1051. Unlike the Leonard Court, the decision in Anthony in no way expressed concern for propensity evidence.

These two cases shrewdly present how courts carefully scrutinize evidence in cases where prosecutors attempt to admit uncharged prior bad acts. In Leonard, the court deemed the evidence a mere subterfuge to demonstrate the defendant had a propensity to act a certain way. The Leonard court highlights that a court will not buy the argument that an identical uncharged prior bad act should be admitted because it is necessary provide background information or context out of fear that it will give rise to a propensity inference by those jurors who may not be thinking critically. Rather, a court is much more likely to admit evidence of prior uncharged bad acts if the evidence necessarily elucidates a narrative of events, like in Anthony.

So, for the would-be criminal defendants out there, remember: your past just might come back to haunt you.

By Christine Malafi

Given the recent headlines, all employers should be reminded that they have a legal duty to maintain a workplace that is free from sexual harassment. Sexual harassment suits are prosecuted under the same federal and state laws that are used to sue employers for racial discrimination and harassment, so it is critical that every employer take this form of sexual discrimination seriously. As we have seen, employers have paid a high price for failing to address sexual harassment complaints adequately.

What is sexual harassment?

The New York State Division of Human Rights defines sexual harassment as a “hostile environment” consisting of words, signs, jokes, pranks, intimidation, or physical violence which are of a sexual nature, or which are directed at an individual because of that individual’s sex. This will also consist of any unwanted verbal or physical advances which are offensive or objectionable to the recipient.

Another type of sexual harassment is known as “quid pro quo,” where a person in authority, such as a supervisor, attempts to trade job benefits (i.e. hiring, promotion, or continued employment) for sexual favors.

It takes only a single incident of inappropriate sexual behavior to serve as the basis of a sexual harassment claim.

What Should Employers Do?

Employers can take several steps to reduce the risk of sexual harassment in the workplace, including:

• Sexual Harassment Policy: Have an employee handbook that sets forth a policy defining sexual harassment and the consequences of engaging in such conduct. This policy should also set out a procedure for filing sexual harassment complaints, and state that each complaint will be taken seriously and investigated thoroughly, and also make it clear that retaliation is unlawful. An employer is not allowed to retaliate against an employee who has filed a sexual harassment complaint, whether or not that complaint is ultimately founded.
• Train Employees: Employers should hold training sessions for both managers/supervisors and employees to teach them what sexual harassment is and what conduct is acceptable and not. The training should also review complaint procedures, and remind employees that they are entitled to have a workplace free of sexual harassment. Training is highly recommended because your managers and employees should all be familiar with the law and what to do if such conduct should occur, and if you face a lawsuit, you will be able to show that you took the necessary steps to prevent harassment.
• Monitor Your Workplace: Talk with your employees periodically and ask for their input on any issues that may be occurring inside the workplace. Look around to see if there are any offensive posters or notes that may raise concern. Make your employees aware that the lines of communication are always open.

Sexual harassment has no boundaries, and can occur in any business, and to a male or female. Training and prevention are critical to eliminate these issues to the extent possible. Employers are encouraged to take these necessary steps to eliminate sexual harassment.

Legislative Efforts

In early December, Assemblywoman Sandy Galef (Westchester) introduced a bill that would have the New York State Division of Human Rights develop and implement a uniform sexual harassment policy that would apply to employees of State agencies, offices, departments, and members and employees of the State Assembly and Senate. The policy would create a standard procedure for the handling of sexual harassment complaints and investigation. The future of this bill, and any other new legislation that may come out of this national moment of reckoning regarding sexual harassment, remains to be seen.

For guidance on employee handbooks, policies, and procedures to create a safe workplace, please contact us.

One of the more challenging and ever-evolving issues that we continue to see is determining what is necessary to obtain personal jurisdiction in New York State over an individual or business that resides or does business out of state. If you are dealing with real property in New York, a tort that occurred in New York, or a defendant who resides in or regularly does business in New York, jurisdiction is easily exercised.  The issue arises when the defendant you are seeking to sue in New York has few or no ties to the state.  In such cases, courts go through a very fact-specific analysis to determine whether the defendant has sufficient contacts within New York to avail itself of jurisdiction here.

A recent Suffolk County Commercial Division decision from Justice Emerson in Katherine Sales & Sourcing, Inc. v. Fiorella provides a great snapshot of what courts will consider when determining whether personal jurisdiction exists over an out-of-state defendant.  This derivative action centered on the plaintiff’s claims that defendants engaged in a scheme to defraud a company they jointly owned, Zingarr Sales and Marketing, by submitting fraudulent and inflated bills for services rendered to Zingarr and diverted contracts to a business separately owned by defendants, TGG Direct.

The rundown on the confusing cast of characters in this case: the plaintiff, Katherine Sales and Sourcing, is a New York corporation that owned a 50% interest in one of the nominal defendants, Zingarr, a New Jersey limited liability company that is authorized to do business in New York.  Zingarr is in the business of developing, manufacturing, and selling consumer goods to retail stores, online retailers and wholesalers and has offices in both New Jersey and New York. The other 50% owner of Zingarr is another nominal defendant, Emily Gottschalk, who also owns and manages a third nominal defendant, TGG, a New Jersey limited liability company with offices in New Jersey. Gottschalk and non-party Arthur Danzinger are co-managers of Zingarr.  Danzinger is also the president and a shareholder of Katherine Sales.  Gottschalk’s office is in New Jersey, while Danzinger’s is in New York. Defendant Robert Fiorella is a resident of California, where he maintains an office.  So, in summary, we have a New York plaintiff, nominal defendants in New York and New Jersey, and a defendant who resides in and has an office solely in California.  Fiorella made a motion to dismiss the case against him for lack of personal jurisdiction.

Fiorella was hired by Zingarr at Gottschalk’s request to perform certain consulting services for Zingarr over a period of seven months in 2014.  Fiorella performed all services in California, and never came to New York.

In her decision, Justice Emerson first noted that CPLR 302(a)(1) provides that the court can exercise jurisdiction over a nondomiciliary who transacts any business in New York if the plaintiff’s claims arise from the transaction of such business.  Opticare Acquisition Corp. v. Castillo, 25 A.D.3d 238, 243 (2d Dep’t 2005).  A single act of business in New York has been held to be sufficient under certain circumstances when the business activities in New York were purposeful and there is a substantial relationship between the transaction and the claim asserted.  Id.  While being physically present in New York when a contract is agreed to is generally sufficient to confer jurisdiction, courts will likely not exercise jurisdiction over a non-resident when the contract was negotiated solely by mail, phone, or fax without any New York presence by the out-of-state defendant.  Patel v. Patel, 497 F.Supp. 2d 419, 428 (E.D.N.Y. 2007).  

The court found that although Fiorella had an ongoing relationship with Gottschalk and Zingarr, he never entered New York to negotiate their consulting arrangement, to perform under that consulting arrangement, or for any reason related to his relationship with Gottschalk and Zingarr.  Fiorella’s only actual contacts with New York that directly related to the consulting services were through telephone calls and emails with Danzinger, which the Court found were incidental to the work Fiorella was performing for Gottschalk.  Indeed, Fiorella’s primary business relationship was with Gottschalk, who was located in New Jersey.  The Court also factored in that the calls and emails from Danzinger were initiated by Danzinger and Fiorella was merely responding, thus not actively and purposely availing himself to New York activities.  Fiorella also sent two of the products at issue to Danzinger in New York but, again, these were sent at Danzinger’s request and, as such, the court held that Fiorella was not purposely availing himself to New York.

The court went on to consider the other options to exercise jurisdiction over Fiorella under CPLR 302(a)(2) and (3), but found that the plaintiff could not establish that Fiorella committed a tortious act in New York nor could plaintiff establish that it has sustained any injury other than a financial loss in New York.

Based on this analysis, the court dismissed the Complaint against Fiorella for lack of jurisdiction.  While there is no concrete standard for analyzing the sufficiency of an out-of-state defendant’s contacts with New York, this decision further amplifies the importance of evaluating how you are going to obtain personal jurisdiction over an out-of-state defendant before you commence the lawsuit. If you are the plaintiff, it is critically important to know in advance whether the out-of-state defendant does any business in New York, has an office in New York, negotiated an agreement at issue in New York, held meetings in New York, performed services in New York, regularly communicated with individuals in New York, and so on.  As seen in this case, if you are unable to establish a New York presence for an out-of-state defendant, your case could be over before it begins.

By Christine Malafi

Businesses with employees in New York City, take note: beginning October 31, 2017, employers cannot inquire about an applicant’s salary history (wages, benefits, or other compensation) or rely on that history to make decisions in the hiring process, such as determination of salary, benefits, or in the negotiation of an employment contract.

It’s critical that employers understand their obligations under the new law and take proactive steps to ensure compliance.  Here, some details:

What does the law prohibit?

The law prohibits employers from asking questions or seeking information about a candidate’s current or prior earnings or benefits, such as on a job application; asking for this information from a candidate’s current or former employer; or searching public records for this data. Employers are also barred from relying on any information about an applicant’s current or prior earnings or benefits to determine compensation in the new position, if hired.

Which employers and applicants does the law apply to?

The law applies to all New York City employers, regardless of size; even if you employ just one employee in New York City, your business must comply. The law covers candidates for new jobs in New York City; applicants for a promotion or transfer with their current employer are not covered.

Can I bring up salary at all?

Employers are not prohibited from discussing the anticipated salary, bonus, and benefits of a position, and remain free to inquire about the candidate’s requirements or expectations for salary, bonus, benefits, or commission structure. Employers may also ask for objective information about the applicant’s productivity in a current or prior position, such as their revenue, sales, reports of profit or production, or books of business.

Employers can also contact an applicant’s current or former employer or search online to verify information such as work history or responsibilities. However, it is important to note that if these inquiries lead to the accidental discovery of prohibited salary information, the employer cannot rely on that information in making salary decisions. The law also does not prohibit employers from making inquiries required or authorized by federal, state, or local law.

The only circumstance in which employers may verify and consider salary information is if a candidate offers the information voluntarily and without prompting on the employer’s part during an interview.

What are the consequences for violations?

The law is intended to encourage employers to make compensation decisions based on qualifications, in an effort to combat wage inequality for female and minority job applicants. A non-compliant employer could face fines, damages, and mandatory training. The New York City Commission on Human Rights may impose civil penalties of up to $125,000 for unintended violations and up to $250,000 for willful violations; employers may also face civil lawsuits.

What steps should my business take to comply?

Businesses are advised to update their hiring policies and documents, such as job applications and background check forms, to remove prohibited inquiries about salary history. Remember, not all of these documents are physical; posts on online job boards or social media must also comply. If your company has a list of topics or questions to address during interviews, be sure they are revised to keep the salary discussion focused on expectations and requirements rather than history. Update all internal documents used in the hiring process.

Training all employees involved in hiring (not just HR professionals) is also crucial. They must understand the law’s requirements and resulting changes to the hiring process.

Please reach out to us with any questions about the law and guidance on compliance.

It’s happening more and more these days: massive data breaches are affecting companies that people use on a regular basis for business or personal reasons.  Typically, hackers will infiltrate a company’s security system, exposing sensitive and personal information of that company’s customers.  Lawsuits then follow, typically in the form of a class action.  Back in May of this year, Target agreed to pay $18.5 million across 47 states as part of a settlement in a lawsuit stemming from a data breach that occurred in 2013.  As anyone who shops at Target may recall, this particular data breach occurred during the holiday season in 2013 and exposed credit and debit card information of tens of millions of customers.   In total, Target claimed that the 2013 data breach cost the company approximately $290 million.  Notably, following the Target settlement, California Attorney General Xavier Becerra said in a statement, “This should send a strong message to other companies: You are responsible for protecting your customers’ personal information.”

Target is just one of many companies across the country that have fallen victim to data breaches over the last five years.  One of those many other companies, Nationwide Mutual Insurance Company and its subsidiary Allied Property and Casualty Insurance Company (collectively “Nationwide”), recently announced a settlement of a lawsuit relating to a 2012 data breach incident.

In the lawsuit against Nationwide commenced by the Attorneys General of 33 states, it was alleged that in October 2012, Nationwide had a data breach that led to the exposure of personal information, including names, sex, occupations, driver’s license numbers, social security numbers, and other information of more than 1.27 million people.  This personal information was not only from Nationwide’s actual customers but also people who merely applied for insurance plans or quotes from Nationwide.  It was alleged that Nationwide failed to properly implement what is known as a “security patch” on the company’s shared computer systems, a critical measure intended to prevent hacking or computer viruses. This failure to properly implement the patch ultimately allowed hackers to gain access and penetrate the company’s databases, according to the lawsuit.  New York Attorney General Eric Schneiderman described Nationwide’s actions as “true carelessness while collecting and retaining information from prospective customers, needlessly exposing their personal data in the process.”  Nationwide denied any liability for the data breach.

On August 9, 2017, it was announced that Nationwide settled the lawsuit by agreeing to pay $5.5 million across the 33 states covered in the lawsuit.  As part of the settlement, Nationwide is also required to provide more transparency to consumers about data collection and retention practices.  In particular, Nationwide is required under the settlement agreement to hire an information technology officer and, over the next three years: (a) update its procedures and policies on maintenance and storage of consumers’ personal data; (b) conduct regular inventories of the patches and updates applied to its systems; (c) maintain and utilize system tools to monitor the security of systems used to maintain personal information; and (d) perform internal assessments of its patch management practices.  Nationwide must also disclose to consumers that it retains their personal information, even if they do not become Nationwide customers.

Interestingly, Nationwide was also named in two separate class action lawsuits after the 2012 data breach that were consolidated into a single lawsuit in federal court in Ohio.  Although the lawsuits were initially dismissed, a federal appeals court partially overturned the dismissal in September 2016 and the consolidated cases were remanded to the lower court for further proceedings.  Those cases were not resolved as part of this settlement.

Certainly, now more than ever, companies that handle and manage personal information should heed the words of the California Attorney General and realize that even smaller companies must have proper cybersecurity measures enacted and policies in place to prevent cyberattacks and to quickly respond to any such attacks to minimize exposure.  Please contact us to discuss how your company can protect itself and your customer data.

Congratulations…you just bought a business. But, what else did you “buy”?

Many M&A deals are structured as asset purchase transactions so that the buyer can acquire only those things that make money and leave the liabilities and obligations that cost money behind for the seller to resolve after the closing.  But, that’s not always what happens in reality.

Let’s begin with a bit of good news. In New York, the general rule is that a purchaser of a company’s assets is not liable for the seller’s liabilities and obligations except for those that are specifically identified as being acquired by the purchaser in the asset purchase agreement. [1]

But, simply structuring a deal as an asset purchase transaction does not, in and of itself, insulate the purchaser from “successor liability,” a legal theory wherein the purchaser is deemed to have assumed the liabilities and obligations of the seller.  New York courts recognize four exceptions to the general rule and have held that successor liability may be imposed where [2]:

1. The purchaser/successor expressly or impliedly assumes the seller’s/predecessor’s liabilities;
2. The purchaser/successor is a mere continuation of the seller/predecessor;
3. The asset purchase transaction was simply a consolidation or merger of the seller and the purchaser (a de facto merger); or
4. The transaction sale was an attempt to fraudulently evade the seller’s creditors or escape seller’s obligations to third-parties.

A clear example of where the exceptions to the general rule against successor liability would apply is where a business entity transfers its assets to a newly formed entity that is owned by the same shareholders/members, hires the same employees in the same positions, and leaves the liabilities behind in the original entity.  Not each situation is as clear-cut, and because each case is determined on the specific facts and circumstances, litigation over whether one of the exceptions applies tends to be protracted and quite costly.

Exception #1:  Express or Implied Assumption of the Seller’s Liabilities

This exception turns on whether the asset purchase agreement expressly states that the purchaser agrees to assume some or all of the seller’s liabilities (e.g. an express assumption of the seller’s liabilities), or whether the purchaser engages in some form of conduct that implies that it intended to pay the seller’s debts or otherwise assume its liabilities, such as where the purchaser voluntarily pays a seller’s debt that was not required by the asset purchase agreement (e.g., an implied assumption of the seller’s liabilities). [3]

If the purchaser agrees to pay or assume some, but not all, of the seller’s liabilities, the liabilities being assumed by the purchaser should be identified with specificity and scheduled in the asset purchase agreement (e.g., identifying the creditors that the purchaser agrees to pay, the amount owed to each creditor, what the payment is for, etc.). Such liabilities are commonly defined in the asset purchase agreement as “Assumed Liabilities.” The purchase agreement should also make it clear that the purchaser is acquiring only the Assumed Liabilities on the disclosure schedule and that the seller remains responsible for any and all known or unknown liabilities that are not listed on the disclosure schedule. Further, the purchase agreement should require the seller to indemnify the purchaser against any and all known and unknown liabilities, except for the Assumed Liabilities.

Exception #2:  Mere Continuation

The mere continuation exception turns on whether or not the transaction was simply a corporate reorganization disguised as an asset deal. Specifically, “[t]he mere continuation exception refers to a continuation of the selling corporation in a different form, and not merely to a continuation of the seller’s business. It applies where a purported asset sale is in effect a form of corporate reorganization.” [4]  In determining whether the purchaser is a mere continuation of the seller, New York courts consider several factors including: (1) commonality of directors; (2) commonality of stockholders; and (3) whether only one corporation exists at the conclusion of the transaction. [5]

A finding of successor liability is likely where the seller ceases to exist after the transaction is completed, as this would be indicative of a corporate reorganization.  In short, for the mere continuation exception to apply, the court would need to find that the purchaser and seller were so closely intertwined that the transaction was the equivalent of the seller simply changing hats.  [6]

Exception #3:  De Facto Merger

The “de facto merger” exception is the most commonly litigated exception to the general rule against successor liability.  Specifically, “the de facto merger doctrine creates successor liability when the transaction between the purchasing and selling companies is in substance, if not in form, a merger.” [7] New York courts have determined that successor liability exists when:

1. The shareholders/members of the seller continue to be the shareholders/members of the purchaser (this is an essential component of the test);
2. The seller discontinued its operations or is dissolved soon after the asset sale occurred;
3. The purchaser assumed the liabilities ordinarily necessary for the uninterrupted continuation of the business of the seller (g., the purchaser assumes only those liabilities that are necessary to continue the business operations); and
4. There is substantial continuity of the seller’s operations by the purchaser, as evidenced by the same management personnel, assets, and physical location. [8]

New York law treats a de facto merger in the same way as a traditional merger.

Exception #4:  Fraudulent Attempt to Evade Creditors

Under this exception, New York courts consider certain “badges of fraud” to determine whether a transfer was simply a fraudulent attempt to evade creditors.  These badges of fraud can include any of the following: (1) a close relationship among the parties to the transaction; (2) a secret and hasty transfer not in the usual course of business; (3) inadequacy of consideration; (4) the transferor’s/seller’s knowledge of the creditor’s claim and the transferor’s/seller’s inability to pay it; (5) the use of dummies or fictitious parties; and (6) retention of control of the property by the transferor after the conveyance.  [9]

The most important factor in this analysis is whether the seller retained control of the assets from which the creditors seek to recover.

Conclusion

While New York continues to adhere to the general rule against successor liability, the exceptions clearly demonstrate that there is no bright line test to insulate each transaction from judicial scrutiny and challenges by the seller’s creditors. In drafting an asset purchase agreement, the parties should consider whether they intend for the purchaser to assume any liabilities of the seller, whether there will be substantial continuity of the business as operated by the seller, and whether the transaction may leave a creditor or other third party with a claim for which there is no adequate remedy.  Due consideration of these factors at the outset of every asset purchase transaction is essential so that the intended allocation of risk and liability between the purchaser and seller is not only clearly specified in the purchase agreement, but also upheld in a courtroom.

[1] Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41 (2d Cir. 2003); Aguas Lenders Recovery Group v. Suez, 585 F.3d 696 (2d Cir. 2009).

[2] Aguas Lenders Recovery Group v. Suez, 585 F.3d 696, 702 (2d Cir. 2009), citing Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45 (2d Cir. 2003); Schumacher v. Richards Shear, 59 N.Y.2d 239 (1983).

[3] Danstan Props. v. Merex, 2011 WL 135843 at 3 (S.D.N.Y. 2011).

[4] Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41 (2d Cir. 2003); New York v. Nat’l. Serv. Indus., Inc., 460 F.3d 201, 205 (2d Cir. 2006).

[5] Id.

[6] Alvarado v. Dreis and Krump Manufacturing Co., 781 N.Y.S.2d 622 (NY. Sup. Ct. Bronx Cty. 2004)

[7] Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41 (2d Cir. 2003).

[8] Id.

[9] Kaur v. Royal Arcadia Palace, Inc., 643 F.Supp.2d 276, 290 (E.D.N.Y.2007) (summary judgment) (citing Shelly v. Doe, 671 N.Y.S.2d 803, 806 (3d Dept. 1998)).