Successor Jurisdiction in New York for Buyers in Asset Deals: Lelchook v Société Générale de Banque au Liban SAL (2024)
Jascha D. Preuss, Partner | Marzia Schilleci, Foreign Associate
On April 18, 2024, the New York Court of Appeals, the highest court of the State of New York, set a new precedent on “successor jurisdiction”, holding that that when one entity acquires all the assets and liabilities of another, it inherits the seller’s contacts establishing personal jurisdiction of New York courts. The court’s ruling aims to prevent buyers from evading jurisdiction while enjoying the benefits of the seller's business in New York. See Lelchook v Société Générale de Banque au Liban SAL, 2024 WL 1661460, N.Y. App.
The case is of interest to litigators representing parties in international litigation in New York and M&A lawyers representing buyers in asset deals involving targets with potential liabilities arising out of New York contacts. New York adopts a stance similar to other States aiming to ensure ongoing accountability for injuries caused by a seller’s actions prior to the closing of the transaction.
Lelchook triggers new legal considerations for buyers in M&A transactions involving a seller with contacts to New York. Buyers are advised to conduct a thorough due diligence of the seller to assess not only potential successor liability but also the seller’s jurisdictional contacts to New York, and to take mitigating measures in structuring the deal and during contract negotiation.
Factual Background
The decision arises from a long-lasting litigation brought by plaintiffs who were harmed by a 2006 Hezbollah bombing in Israel. In 2008, the plaintiffs sued Lebanese Canadian Bank (“LCB”) in the federal District Court for the Eastern District of New York under the Anti-Terrorism Act of 1990 for allegedly providing extensive financing to Hezbollah in the years leading up to the attack. LCB was held to be subject to specific personal jurisdiction in New York under C.P.L.R. § 302 (New York’s long-arm statute) because it allegedly used New York correspondent accounts to make transfers to Hezbollah. In February 2011, the United States Department of Treasury designated LCB a primary money laundering concern. A few months later, Société Générale de Banque au Liban SAL, a Lebanese company (“SGBL”), and LCB entered into an agreement stating that, in exchange for a purchase price of $580 million, “[SGBL] … shall receive and assume from [LCB] all of [LCB’s] Assets and Liabilities.” LCB continued to exist as legal entity after the transaction but allegedly was defunct and insolvent. Largely the same plaintiffs then sued SGBL in the District Court on the basis of successor liability. The District Court dismissed the case against SGBL for lack of personal jurisdiction, determining that merely acquiring the assets and liabilities of the predecessor company does not impute successor jurisdiction on the acquiror and concluding that LCB’s contacts could not be imputed to SGBL. On appeal, the 2nd Circuit certified the question of personal jurisdiction over SGBL to the New York Court of Appeals.
Requirements for Personal Jurisdiction
To hear a case, a New York court must have general personal jurisdiction or specific personal jurisdiction over the defendant. Specific personal jurisdiction requires the defendant to have specific contacts with New York and a nexus between these contacts and the allegations in the complaint. Contacts may be limited, as long as they are purposeful. New York courts determine personal jurisdiction under applicable state law, here: C.P.L.R. § 302, and under the due process clause of the U.S. Constitution.
New York courts previously sparsely addressed the question of successor jurisdiction but determined when buyers of assets and liabilities may be subject to successor liability for the seller’s pre-closing acts and omissions. In so doing, courts identified four exceptions to New York’s general rule that a purchaser of assets is not liable for the seller’s torts where: (1) the buyer 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 (i.e., following a corporate reorganization), or (4) the transaction is entered into fraudulently to escape such obligations. But New York lacked clear judicial guidance on successor jurisdiction over buyers in an asset deal.
The Court’s Rule
The Court of Appeals outlined the theories supporting successor liability to determine if they should also inform the question of successor jurisdiction and held: “where an entity acquires all of another entity’s liabilities and assets, but does not merge with that entity, it inherits the acquired entity’s status for purposes of specific personal jurisdiction.” The court noted that ruling otherwise would allow a buyer to evade jurisdiction in the court in which the seller could have been sued and – in doing so – reap the benefits of the predecessor’s business in New York while shielding the acquired assets from being available to satisfy the claims in the forum. The injured parties might have to sue the successor in a less favorable forum, likely resulting in a devaluation of their claims and their personal absorption of costs. This would contravene the goal of having a “responsible party” available to compensate injured parties. The court also observed that the alternative defendant, the predecessor, might no longer have sufficient assets to satisfy a judgment against it in New York, as was the case with LCB.
It is not entirely clear if and how the buyer’s knowledge of the seller’s New York jurisdictional contacts factors into the test. In Lelchook, the court found that SGBL acquired LCB’s assets and liabilities after it would have been on notice of LCB’s exposure in New York in connection with the terrorist attacks because of the 2008 New York lawsuit against LCB. Even though the issue of successor jurisdiction was not settled in New York at that time, there was significant authority, including case law from other states, for the proposition that in successor liability cases the acquiror would also be imputed the seller’s jurisdictional contacts. Thus, the acquiror should have reasonably anticipated being subject to successor jurisdiction in New York. The court reasoned that “[s]ophisticated corporate entities such as SGBL will undoubtedly engage in robust due diligence before agreeing to acquire all assets and liabilities of another entity. In doing so, they should understand where jurisdiction over such liabilities may lie and the potential cost if ultimately found liable, and will presumably negotiate a purchase price that is discounted by that prospect.” Therefore, under New York law, in an acquisition of all assets and liabilities, the buyer’s knowledge of the seller’s contacts to the forum and the resulting personal jurisdiction risk (i) is either assumed, because the buyer had the opportunity of due diligence, or (ii) is a factual question that may be answered differently depending on the facts of the case, and what the buyer actually knew or under the specific circumstances should have known about the seller’s forum contacts.
Note that in Lelchook, the Court of Appeals only answered the question of jurisdiction under New York state law. The 2nd Circuit will have to assess if jurisdiction over SGBL also satisfies the constitutional requirements of constitutional due process. Whether a defendant could foresee that it would have to defend itself against the claims in the forum state is one of the factors in determining the constitutionality of personal jurisdiction.
Consequences for Buyers in Asset Deals
Considering Lelchook, when performing a due diligence review in an M&A transaction, a potential buyer should evaluate not only the seller’s liability risks and whether the structure of the transaction may expose the buyer to successor liability but also whether the seller engaged in conduct that could expose it to specific personal jurisdiction in New York. Under New York law, even a single purposeful act in New York may suffice if the potential claims arise out of or are connected to the act. Cases in which New York courts have exercised specific personal jurisdiction over foreign companies who committed acts in New York include, for example, foreign banks allegedly misusing correspondent New York bank accounts (Al Rushaid v. Pictet & Cie, 28 N.Y.3d 316, 2016); and foreign sellers engaging in false advertising in New York (People by James v. JUUL Labs, Inc., 212 A.D.3d 414, 2023).
Under Lelchook, a buyer acquiring all of the assets and liabilities of such a company may find itself subject to jurisdiction of courts in New York due to the seller’s pre-closing actions even if the buyer has no relevant New York contacts of its own. A buyer should thus ensure a thorough due diligence process with sufficient disclosures, not only about the seller’s liability risks but also including the seller’s contacts to New York (or other states of the United States, see below). If a risk of successor liability and jurisdiction exists, the potential buyer who still wishes to proceed with the transaction should consider measures to protect itself, for example:
negotiating a discounted purchase price considering the buyer’s successor liability and jurisdictional risks;
drafting a purchase agreement that includes relevant representations and warranties, indemnification provisions, and an appropriate holdback of a portion of the purchase price to satisfy claims arising from the seller’s pre-closing actions;
acquiring only the seller’s assets or only certain assets; or
excluding the assumption of all or certain liabilities from the transaction.
Lelchook does not answer whether or under what circumstances a New York court would impute successor jurisdiction on a buyer acquiring only (certain) assets or specifically excluding (certain) liabilities from the transaction. As in the case of successor liability, even absent an assumption of liability, if the transaction results in the continuation of the legal personality of the seller, whether by merger or corporate reorganization, or if it is intended to fraudulently avoid the seller’s liability, a court may find that successor jurisdiction exists. While not in itself determinative, Lelchook indicates that New York favors the availability of an effective means of redress to an injured party and thus frowns upon transactions that result in removing a plaintiff’s ability to bring suit in a previously available New York forum.
Other States Jurisprudence
When answering the question of successor jurisdiction, most states adopt an approach similar to that of the New York’s Court of Appeals, imputing jurisdictional contacts whenever (1) the predecessor is subject to personal jurisdiction in the forum and (2) any of the bases for successor liability is found, such as in cases of assumption of liability, de facto merger, fraud, or “mere continuation” of the selling corporation, which has some of the same shareholders, directors, and officers. See, e.g., State ex rel. Stein v. E.I. du Pont de Nemours & Co., 382 N.C. 549, 556–558, 879 S.E.2d 537, 543–544 (2022); Anotek LLC v. Venture Exchange, 2021 WL 2577604, *2 (Del. Sup. Ct. 2021); CenterPoint Energy, Inc. v. Superior Ct., 157 Cal. App.4th 1101, 1120, 69 Cal. Rptr. 3d 202, 218 (2007); Patin v. Thoroughbred Power Boats, Inc., 294 F.3d 640, 653 (5th Cir. 2002); City of Richmond, Va. v. Madison Mgmt. Grp., Inc., 918 F.2d 438, 454–455 (4th Cir.1990). Case law in other States follows different criteria, for example, imputing jurisdictional contacts under the “proper circumstances” (Jeffrey v. Rapid Am. Corp., 448 Mich. 178, 195–197, 205–206, 529 N.W.2d 644, 653–654, 657–658 (1995)) or upon express assumption of the predecessor’s liabilities by the successor (Williams v. Bowman Livestock Equip. Co., 927 F.2d 1128, 1131–1132 (10th Cir.1991)).
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If you have any questions regarding the Court of Appeals’ decision in Lelchook or successor jurisdiction generally, please reach out to Jascha Preuss at jascha.preuss@wg-law.com or 212-509-4718.
This article has been prepared as general information and does not constitute legal advice. It does not contain all details applicable to the question of successor jurisdiction in an individual case. This article may be construed as attorney advertising.