Court of Appeals Clarifies New York’s Approach to “Successor Jurisdiction”

On April 18, 2024, the New York Court of Appeals (New York’s highest appellate court) issued a decision in Lelchook v. Société Générale de Banque au Liban SAL, --- N.E.3d ---, 2024 WL 1661460 (Apr. 18, 2024) in which it held that an entity that acquires all of the assets and liabilities of another entity also acquires the selling entity’s jurisdictional status for claims arising out of the seller’s liabilities. 

Factual Background

The Lelchook plaintiffs allege that Lebanese Canadian Bank (“LCB”) is liable for aiding and abetting under the Anti-Terrorism Act of 1990 because LCB facilitated millions of dollars in wire transfers for Hizbollah, which were then used to carry out the 2006 terrorist attacks on Israel.  LCB is subject to specific jurisdiction in New York because it used a New York correspondent bank to conduct those transfers.

In 2011, Société Générale de Banque au Liban SAL (“SGBL”) paid $580 million to acquire all of LCB’s assets and liabilities.  The Lelchook plaintiffs then filed suit against SGBL in the United States District Court for the Eastern District of New York under a theory of successor liability, i.e., that by virtue of its acquisition, SGBL became liable for LCB’s aiding and abetting of Hizbollah.  SGBL successfully moved to dismiss the action for lack of personal jurisdiction.  On appeal, the Second Circuit did not believe it could comfortably predict whether New York law would extend successor jurisdiction to parties who acquire liabilities from others without entering into a formal merger.  It therefore certified two questions to the Court of Appeals:

1. Under New York law, does an entity that acquires all of another entity’s liabilities and assets but does not merge with that entity, inherit the acquired entity’s status for purposes of specific personal jurisdiction?
2. In what circumstances will the acquiring entity be subject to specific personal jurisdiction in New York?

The Court of Appeals Holds That an Acquiror of Liabilities Acquires Jurisdictional Status

On April 18, 2024, the Court of Appeals answered the first question in the affirmative and found the second unnecessary to answer.  The Court began its analysis by noting that issues of successor jurisdiction have never been addressed by the Court of Appeals, and “only sparingly” by intermediate appellate courts, so it looked to cases addressing successor liability as “helpful touchstones in considering successor jurisdiction.” 

The Court used these touchstones to identify several relevant factors for applying successor jurisdiction, including “the impact of our rule on parties to a potential acquisition, whether imputing jurisdiction fairly reflects the reasonable assumptions and expectations of the parties to such transactions, whether doing so induces responsible parties to internalize responsibility for risks they create, and the impact of imputing jurisdiction on those injured by a predecessor’s acts.”

The Court then held that “[t]hose factors tip in favor of allowing successor jurisdiction where a successor purchases all assets and liabilities . . . Sophisticated 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.”

The Court also considered the “unfortunate incentives” that would arise if a successor could acquire another entity’s liabilities but escape jurisdiction in a forum where the predecessor would have been accountable, including transactions structured to separate assets from liabilities, or forcing injured parties to sue in less favorable fora, without effective enforcement mechanisms.  The Court also noted that the selling predecessor might not have assets left to satisfy a judgment following a sale of its assets and liabilities.

The Court of Appeals summarized its holding in a concluding paragraph that laid down a straightforward rule:

We see no good reason to require plaintiffs to take an indirect and uncertain path to recompense where a predecessor entity allegedly caused harm, subjecting it to jurisdiction in New York, and then agreed to an acquisition of all of its assets and liabilities by a successor, who in turn reaps the benefits of the predecessor’s business in New York while evading jurisdiction.  Thus, we clarify that 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.

Conclusion

While purporting to “clarify” New York’s law of successor jurisdiction, the Court of Appeals actually laid down a new rule extending specific personal jurisdiction over parties who acquire the assets and liabilities of entities that are subject to jurisdiction in New York in connection with those liabilities.  In the wake of this new rule, parties that purchase the assets and liabilities of other entities should be sure to add another item to their diligence checklists: a review of the selling party’s pending or potential litigation in order to determine whether the acquiror is buying a lawsuit in New York as part of the acquisition.