Menche v. CDx Diagnostics, Inc.

199 A.D.3d 678

157 N.Y.S.3d 61

Solomon MENCHE, appellant,

v.CDX DIAGNOSTICS, INC., et al., respondents.

2018–02978

Index No. 31224/17

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

Argued—September 24, 2021

November 3, 2021

The Feinsilver Law Group, P.C., Brooklyn, NY (H. Jonathan Rubinstein of counsel), for appellant.

Benowich Law, LLP, White Plains, NY (Leonard Benowich of counsel), for respondents.

WILLIAM F. MASTRO, J.P., ROBERT J. MILLER, COLLEEN D. DUFFY, LARA J. GENOVESI, JJ.

DECISION & ORDER

In an action, inter alia, to recover damages for fraud, the plaintiff appeals from an order of the Supreme Court, Rockland County (Paul I. Marx, J.), dated February 13, 2018. The order granted the defendants' converted motion for summary judgment dismissing the complaint.

ORDERED that the order is reversed, on the law, with costs, and the defendants' converted motion for summary judgment dismissing the complaint is denied.

In 2008, the plaintiff commenced an action to collect on a promissory note against CDx Laboratories, Inc. (hereinafter Labs), Oral Cancer Prevention International, Inc. (hereinafter OCPI), and Mark R. Rutenberg. The parties to that action agreed to submit their dispute to arbitration, and in February 2011 the arbitrator issued an arbitration award which provided that Labs was required to pay the plaintiff the principal sum of $250,000, and that Rutenberg was required to transfer to the plaintiff 1% of the shares of OCPI and 20,000 shares of Labs. Rutenberg also was to pay the plaintiff a substantial monetary sum in exchange for a stay of enforcement of the award so that Labs could acquire financing to pay the award.

Shortly thereafter, various secured creditors commenced an action against Labs alleging that it had defaulted on promissory notes worth more than $9 million which were secured by liens on all of Labs' assets. On September 26, 2011, Labs' assets were sold to the secured creditors for the sum of $5 million.

In September 2014, the Supreme Court granted the plaintiff's renewed motion to confirm the arbitration award. In December 2015, the court issued an amended judgment in favor of the plaintiff and against Labs in the principal sum of $250,000.

In March of 2017, the plaintiff commenced this action against CDx Diagnostics, Inc. (hereinafter Diagnostics), OCPI, and Rutenberg. The plaintiff alleged in the complaint that Diagnostics had acquired all of Labs' assets, retained Labs' management and employees, begun operating from the same business location, and retained the telephone numbers, customer relationships, vendor relationships, and goodwill of Labs' business operations. The plaintiff sought, inter alia, a declaration that Diagnostics is liable for Labs' obligations to the plaintiff pursuant to successor liability. In April of 2017, the defendants moved pursuant to CPLR 3211(a)(1), (3), (5), and (7) to dismiss the complaint. The Supreme Court converted the motion into a motion for summary judgment dismissing the complaint, and, in an order dated February 13, 2018, granted the motion. The plaintiff appeals.

Initially, we note that the Supreme Court erred in converting the motion to dismiss to one for summary judgment (see CPLR 3211[c] ; Hendrickson v. Philbor Motors, Inc., 102 A.D.3d 251, 955 N.Y.S.2d 384 ). The plaintiff objected to this procedure on the ground that he had not received any discovery, and no preliminary conference had taken place due to the pendency of the motion to dismiss, which was made only one month after this action was commenced. Indeed, a motion for summary judgment is premature when a party had no reasonable opportunity to conduct discovery, and discovery may result in disclosure of evidence relevant to the causes of action asserted in the complaint (see CPLR 3212[f] ; Bank of Am., N.A. v. Hillside Cycles, Inc., 89 A.D.3d 653, 932 N.Y.S.2d 128 ). Here, issue was not yet joined and there had been no opportunity to engage in discovery regarding the plaintiff's allegations of successor liability and fraud with respect to the apparent transformation of Labs into Diagnostics. Therefore, converting the motion to dismiss into a motion for summary judgment was premature.

In any event, upon the limited record developed herein, the defendants failed to establish their prima facie entitlement to judgment as a matter of law dismissing the complaint. The defendants' evidence did not establish as a matter of law that Diagnostics was not the de facto continuation of Labs. "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 [was] entered into fraudulently to escape such obligations" ( Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 245, 464 N.Y.S.2d 437, 451 N.E.2d 195 ; see Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d 167, 970 N.Y.S.2d 178 ; Nationwide Mut. Fire Ins. Co. v. Long Is. A.C., Inc., 78 A.D.3d 801, 801–802, 912 N.Y.S.2d 226 ). For a successor corporation to establish entitlement to summary judgment on the ground that it is not liable for the debts of its predecessor, it must demonstrate that none of these exceptions applies (see Nationwide Mut. Fire Ins. Co. v. Long Is. A.C., Inc., 78 A.D.3d at 802, 912 N.Y.S.2d 226 ). A transaction structured as a purchase of assets may be deemed to fall within the exception to nonliability as a de facto merger (see Bonanni v. Horizons Invs. Corp., 179 A.D.3d 995, 118 N.Y.S.3d 137 ). The hallmarks of a de facto merger, which are to be considered in determining whether it was the intent of the successor to absorb and continue the operation of the predecessor, are "continuity of ownership; cessation of ordinary business and dissolution of the predecessor 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, a continuity of management, personnel, physical location, assets, and general business operation" ( Matter of AT & S Transp., LLC v. Odyssey Logistics & Tech. Corp., 22 A.D.3d 750, 752, 803 N.Y.S.2d 118 ). When the acquired corporation is shorn of its assets and becomes a "shell," legal dissolution is not required to support a finding of de facto merger ( Bonanni v. Horizons Invs. Corp., 179 A.D.3d at 998, 118 N.Y.S.3d 137 [internal quotation marks omitted]). Continuity of...