On September 14, 2023, Justice Chan of the New York County Commercial Division issued a decision in Needham & Co., LLC v. UpHealth Holdings, Inc., 2023 NY Slip Op. 33210(U), holding that a defendant was liable for its predecessor’s contractual obligations, explaining:
Before addressing what constitutes the relevant Transaction under the Amended Agreement, the court first considers the threshold question of whether Holdings can be deemed liable for Services’ obligations under the Amended Agreement. On this point, as defendants note, the term Company is defined under the Amended Agreement as UpHealth Services Inc. Needham argues, notwithstanding this definition, that Holdings can be liable for Services’ obligations under the Amended Agreement as its successor. Specifically, Needham contends that Holdings became liable for Services’ obligations because (1) Holdings is a mere continuation of Services, (2) Holdings de facto merged with Services, and/or (3) Holdings impliedly assumed liability under the Amended Agreement. Defendants respond that Needham’s invocation of successor liability is an attempt to re-write the Amended Agreement.
The general rule in New York is that a company that acquires another company’s assets is not liable for its predecessor’s contract liabilities. Courts will nonetheless impose liability on a successor company in certain circumstances, namely if (1) the company is a mere continuation of the predecessor, (2) the transaction between the predecessor and successor is a de facto merger, and/or (3) the successor expressly or impliedly assumed the predecessor’s obligations. As explained below, Needham has made a prima
facie showing that Holdings is Services’ successor as to its contract liabilities, and defendants fail to rebut this showing.The court starts with the mere continuation doctrine, which refers to corporate reorganizations where only one corporation survives the transaction. The lynchpin of this analysis is whether the predecessor has been effectively extinguished, with the successor company continuing the predecessor’s operations. To assist with this determination, courts will assess, among
other things, whether the surviving company acquired the predecessor’s business location, employees, and good will. Here, a
review of the undisputed facts reveals that Holdings, upon its formation and acquisition of Services’ shares, retained the same shareholders, shared the same physical location as services, used the same management team, and maintained the employment of all of Services’ key employees. Further, the Holdings transaction was described as a reorganization and merger in various public filings with the SEC. To that end, as certain Holdings Services stakeholders explained, Holdings was continuing the business of Services, and Holdings was satisfying at least certain of Services’ liabilities. Meanwhile, although Services did not involuntarily dissolve until April 8, 2022, testimony in the record indicates that upon entering into the CEAs, Services had no assets and no operations. These factors, among others (to the extent undisputed), indicate that Holdings was essentially operating as Services’ surviving entity, with Services effectively extinguished.These same factors also support a finding that Holdings’ acquisition of Services was a de facto merger. The de facto merger exception applies when the acquiring corporation has not purchased another corporation merely for the purpose of holding it as a subsidiary, but rather has effectively merged with the acquired corporation. Similar to the mere continuation exception, the hallmarks of a de facto merger include a continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and continuity of management, personnel, physical location, assets and general business operation. Notably, not all of these elements are necessary to find a de facto merger.
Here, many of hallmarks of a de facto merger are present in Holdings’ acquisition of Services. Indeed, as discussed in the context of the mere continuation doctrine, there was largely a continuity of ownership between Services and Holdings (even if the exact extent is disputed), Services and Holdings relied on the same directors, management, key personnel, and physical location after execution of the CEAs, Services effectively ceased its operations, and Holdings assumed at least some of Services’ liabilities. The undisputed record therefore supports a conclusion that a de facto merger has occurred.
Finally, Needham has made a prima facie showing that Holdings impliedly assumed Services’ liabilities. “While no precise rule governs the finding of implied liability, the authorities suggest that the conduct or representations relied upon by the party asserting liability must indicate an intention on the part of the buyer to pay the debts of the seller. Courts will consider factors such as the effect of the transfer upon creditors of the predecessor corporation, as well as admissions of liability on the part of the officers or other spokesmen of the successor corporation. Here, in addition to the above discussed factors, testimony available in the record indicates an understanding among Holdings’ stakeholders that Holdings would be responsible for Successors commitment, which seemingly included Needham’s financial advisory services and other liabilities incurred by Services. These undisputed facts proffered by Needham support a conclusion that Holdings intended to pay Services’ obligations to other entities.
By contrast, defendants largely fail to adduce any evidence to rebut Needham’s prima facie showing. Rather, defendants focus the bulk of their briefing on arguing that Needham’s successor liability arguments effectively amount to an improper attempt to modify the Amended Agreement. But none of the cases defendants cited in support of this proposition supports such a conclusion. For example, defendants cite to Ladenburg v Tim’s Amusement, Inc. (275 AD2d 243 [1st Dept 2000]) to argue that unless an agreement to vary the terms of the underlying contract the contract cannot be rewritten o swap the related company for the company identified in the contract. The court in Ladenburg, however, confronted two separate issues in connection with an engagement agreement entered between plaintiff and defendant. The first issue pertained to whether the parties’ alleged oral agreement that plaintiff would receive a fee for its services to defendant was sufficient to overcome General Obligation Law§ 5·701(a)(l0)’s prohibition against contracts to pay compensation for services rendered in negotiating the purchase of a business opportunity. As defendants correctly note, the court agreed that plaintiff’s allegations were sufficient to withstand dismissal because the oral agreement, as reflected in a subsequent letter between the parties, manifested an agreement that plaintiff would be compensated on the same terms to which defendant had agreed. But this issue is not germane to the present dispute as it had nothing to do with successor liability. The second issue addressed by the Ladenburg court, by contrast, pertained to whether a company related to defendant succeeded defendant’s obligations under the parties’ engagement agreement. On this issue, the court concluded that plaintiffs claim premised on successor liability could proceed. Specifically, the court concluded that plaintiff alleged sufficient hallmarks of a de facto merger-including rechanneled funds, common ownership, leadership, and headquarters, and the stripping of assets from the predecessor-to establish a question of fact as to whether defendant’s related entity was devised as a way to avoid defendant’s obligations. The Ladenburg court’s analysis on this second issue thus plainly supports a conclusion that successor liability can bind a successor to contractual terms to which its predecessor agreed.
Defendants’ reliance on Iconoclast Advisers LLC v Petro-Suisse Ltd. is similarly misplaced (27 Misc 3d 1230[A] [Sup Ct, NY County, May 14, 2010]). In Iconoclast, after the parties had entered into an engagement agreement, plaintiff alleged that it was later frozen out of the parties’ contemplated transaction. The transaction was then subsequently closed by different entities. Upon
the parties’ motions for summary judgment, the court dismissed plaintiffs complaint, noting that the engagement agreement contemplated a specific transaction between specific parties under which plaintiff would be entitled to fees, and it did not provide for any affiliates to be included in that definition. Notably, however, plaintiff in Iconoclast, unlike here, was not advancing a claim under a theory of successor liability. Hence the court’s analysis in Iconoclast has no meaningful bearing on whether Holdings can be liable for Services contractual obligations under a theory of successor liability.At bottom, Needham has met its prima facie burden of establishing Holdings’ successor liability to Services’ contractual obligations, and defendants fail to rebut that showing or otherwise create a triable issue of fact. This includes, as relevant to the parties’ motions, Needham’s showing that Holdings is liable for Services’ contractual obligations as the defined “Company” under the Amended Agreement.
(Internal quotations and citations omitted).