Dutton v. Young Men's Christian Ass'n of Buffalo Niagara

207 A.D.3d 1038

171 N.Y.S.3d 276

Roger DUTTON, Plaintiff-Appellant,

v.YOUNG MEN'S CHRISTIAN ASSOCIATION OF BUFFALO NIAGARA, Defendant-Respondent.

206

CA 21-00512

Supreme Court, Appellate Division, Fourth Department, New York.

Entered: July 1, 2022

JANET, JANET & SUGGS, LLC, BALTIMORE, MARYLAND (BRENDA A. HARKAVY OF COUNSEL), AND THE ABBATOY LAW FIRM, PLLC, ROCHESTER, FOR PLAINTIFF-APPELLANT.

PHILLIPS LYTLE LLP, BUFFALO (RYAN A. LEMA OF COUNSEL), FOR DEFENDANT-RESPONDENT.

PRESENT: PERADOTTO, J.P., LINDLEY, CURRAN, WINSLOW, AND BANNISTER, JJ.

MEMORANDUM AND ORDER

It is hereby ORDERED that the order so appealed from is unanimously reversed on the law without costs, the motion is denied, and the complaint is reinstated.

Memorandum: Plaintiff commenced this personal injury action pursuant to the Child Victims Act (see CPLR 214-g ) alleging that, as a child in the 1950s, he was subjected to repeated sexual abuse by an employee of Young Men's Christian Association of Niagara Falls, Inc. (YMCA Niagara Falls). Plaintiff further alleged that defendant, Young Men's Christian Association of Buffalo Niagara (YMCA Buffalo), is liable for the actions and omissions of YMCA Niagara Falls as a successor entity pursuant to either a de jure or de facto merger between the entities. More particularly, plaintiff alleged that the current iteration of YMCA Buffalo developed as a result of its merger with YMCA Niagara Falls, pursuant to which YMCA Buffalo took over the operation of YMCA Niagara Falls’ facilities and branches, absorbed existing YMCA Niagara Falls staff, and effected a continuity of management, personnel, physical location, assets, and general business operations of the YMCA Niagara Falls facilities.

YMCA Buffalo moved to dismiss the complaint pursuant to CPLR 3211 (a) (1) and (7). YMCA Buffalo contended that it was not liable as a successor to YMCA Niagara Falls because documentary evidence conclusively established that the entities did not merge. Rather, YMCA Niagara Falls was judicially dissolved by order pursuant to Not-For-Profit Corporation Law § 1404 (d), the National Council of Young Men's Christian Associations of the United States of America (Y-USA) then assumed control of YMCA Niagara Falls’ property, and Y-USA later agreed to transfer the property to YMCA Buffalo pursuant to a transfer agreement. YMCA Buffalo also contended that the de facto merger doctrine did not apply as a matter of law because that doctrine involves the purchase of assets of one corporation by another and requires a transaction between the two purportedly merged entities, but here YMCA Buffalo did not purchase assets or otherwise transact with YMCA Niagara Falls because that entity was dissolved, its assets were transferred to the intermediary Y-USA, and only subsequently did Y-USA transfer the assets to YMCA Buffalo.

Supreme Court agreed with YMCA Buffalo that the documentary evidence conclusively established that the de facto merger doctrine was inapplicable as a matter of law, and the court thus granted that part of the motion pursuant to CPLR 3211 (a) (1). The court did not rule on that part of the motion pursuant to CPLR 3211 (a) (7). Plaintiff appeals, and we now reverse.

"On a motion to dismiss a complaint pursuant to CPLR 3211, we must liberally construe the pleading and ‘accept the facts as alleged in the complaint as true, accord plaintiff[ ] the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory’ " ( Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc. , 37 N.Y.3d 169, 175, 150 N.Y.S.3d 79, 171 N.E.3d 1192 [2021], rearg denied 37 N.Y.3d 1020, 154 N.Y.S.3d 27, 175 N.E.3d 909 [2021], quoting Leon v. Martinez , 84 N.Y.2d 83, 87-88, 614 N.Y.S.2d 972, 638 N.E.2d 511 [1994] ). "Whe[re], as here, a defendant moves for dismissal of ... cause[s] of action under CPLR 3211 (a) (1), the[ ] documentary evidence must ‘utterly refute[ ] plaintiff's factual allegations, conclusively establishing a defense as a matter of law’ " ( id. , quoting Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 [2002] ).

With respect to the substantive law at issue, as a general rule, "a corporation which acquires the assets of another is not liable for the torts of its predecessor" ( Schumacher v. Richards Shear Co. , 59 N.Y.2d 239, 244, 464 N.Y.S.2d 437, 451 N.E.2d 195 [1983] ). There are exceptions, however, and thus "[a] corporation may be held liable for the torts of its predecessor if (1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations" ( id. at 245, 464 N.Y.S.2d 437, 451 N.E.2d 195 ). Plaintiff relies exclusively on the second exception, which implicates the de facto merger doctrine (see Sweatland v. Park Corp. , 181 A.D.2d 243, 245, 587 N.Y.S.2d 54 [4th Dept. 1992] ). The de facto merger doctrine is "based on the concept that a successor that effectively takes over a [corporation] in its entirety should carry the predecessor's liabilities as a concomitant to the benefits it derives from the good will purchased," which "is consistent with the desire to ensure that a source remains to pay for the victim's injuries" ( Grant-Howard Assoc. v. General Housewares Corp. , 63 N.Y.2d 291, 296-297, 482 N.Y.S.2d 225, 472 N.E.2d 1 [1984] ; see Simpson v. Ithaca Gun Co. LLC , 50 A.D.3d 1475, 1476, 856 N.Y.S.2d 397 [4th Dept. 2008], lv denied 11 N.Y.3d 709, 868 N.Y.S.2d 602, 897 N.E.2d 1086 [2008] ).

"Traditionally, courts have considered several factors in determining whether a de facto merger has occurred: (1) continuity of ownership; (2) a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; (3) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and (4) a continuity of management, personnel, physical location, assets, and general business operation" ( Sweatland , 181 A.D.2d at 245-246, 587 N.Y.S.2d 54 ). Nonetheless, " ‘[n]ot all of these factors are needed to demonstrate a merger; rather, these factors are only indicators that tend to show a de facto merger’ " ( id. at 246, 587 N.Y.S.2d 54 ). Indeed, "[p]ublic policy considerations dictate that, at least in the context of tort liability, courts have flexibility in determining whether a transaction constitutes a de facto merger" ( id. ; see Lippens v. Winkler Backereitechnik GmbH [appeal No. 2] , 138 A.D.3d 1507, 1510, 31 N.Y.S.3d 340 [4th Dept. 2016] ). The factors are therefore "analyzed in a flexible manner that disregards mere questions of form and asks whether, in substance, it was the intent of the successor to absorb and continue the operation of the predecessor" ( Matter of AT&S Transp., LLC v. Odyssey Logistics & Tech. Corp. , 22 A.D.3d 750, 752, 803 N.Y.S.2d 118 [2d Dept. 2005] ; see Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 176, 970 N.Y.S.2d 178 [1st Dept. 2013] ). In sum, when evaluating the applicability of the de facto merger doctrine, "the court should analyze each situation on a case-by-case basis" ( Lippens , 138 A.D.3d at 1510, 31 N.Y.S.3d 340 ; see Sweatland , 181 A.D.2d at 246, 587 N.Y.S.2d 54 ).

Here, the primary dispute between the parties does not relate to the evaluation of the de facto merger factors, but instead concerns the threshold issue of whether the court properly determined that the de factor merger doctrine is inapplicable as a matter of law under the circumstances of this case. We agree with plaintiff that the court erred in that regard.

Accepting the facts as alleged in the complaint as true and according plaintiff the benefit of every possible favorable inference, we conclude on this record that YMCA Niagara Falls, having experienced a decline in revenue and being unable to pay its debts, filed a petition for dissolution pursuant to Not-For-Profit Corporation Law § 1404 (d) for the purpose of allowing YMCA Buffalo to acquire its assets and continue its operations and programming. In 2005, Supreme Court (Kloch Sr., A.J.) granted the petition, but did so with conditions that were consistent with the purpose of the dissolution. In particular, the court ordered dissolution of YMCA Niagara Falls "with the proviso and understanding that [Y-USA] will transfer the property of [YMCA Niagara Falls] to [YMCA Buffalo]." The dissolution order also imposed the conditions that YMCA Niagara Falls’ facility could not be relocated without further court order, that YMCA Buffalo use its best efforts to make physical changes to the facility and continue programming, and that certain numbers of board and trustee members of YMCA Niagara Falls be elected to the respective boards of YMCA Buffalo. On the whole, the dissolution specifically contemplated, and was conditioned upon, the transfer of YMCA Niagara Falls’ assets and operations to YMCA Buffalo.

Here, however, YMCA Buffalo nonetheless asserts, and Supreme Court (Chimes, J.) agreed, that the next step in the transaction—the temporary transfer of YMCA Niagara Falls’ assets to Y-USA pursuant to Not-For-Profit Corporation Law § 1404 (d) —renders the de facto merger doctrine inapplicable as a matter of law. We reject that conclusion for several interrelated reasons.

First, the formalistic position of the court and YMCA Buffalo ignores the principle that the applicability of the de facto merger doctrine must be "analyzed in a flexible manner that disregards mere questions of form and asks whether, in substance, it was the intent of the successor to absorb and continue the operation of the predecessor" ( AT&S Transp., LLC , 22 A.D.3d at 752, 803 N.Y.S.2d 118 ; see Tap Holdings, LLC , 109 A.D.3d at 176, 970...