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Last Atlantis Capital LLC v. AGS Specialists LLC

March 10, 2009

LAST ATLANTIS CAPITAL LLC, LOLA LLC, LULU LLC, GOODBUDDY SOCIETY LLC, FRIENDLY TRADING LLC, SPEED TRADING LLC, BRYAN RULE, BRAD MARTIN, AND RIVER NORTH INVESTORS LLC, PLAINTIFFS,
v.
AGS SPECIALISTS LLC, BEAR HUNTER STRUCTURED PRODUCTS LLC, BEAR WAGNER SPECIALISTS LLC, GROUP ONE TRADING LP, KNIGHT FINANCIAL PRODUCTS LLC, CITIGROUP DERIVATIVES MARKETS, INC., SLK-HULL DERIVATIVES LLC, GOLDMAN SACHS EXECUTION AND CLEARING LP F/K/A SPEAR, LEEDS & KELLOGG LP, SUSQUEHANNA INVESTMENT GROUP, TD OPTIONS LLC, AND WOLVERINE TRADING LLC, DEFENDANTS.



The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge

MEMORANDUM OPINION AND ORDER

This case involves alleged violations of federal and state law based on improper securities trading practices by defendants.*fn1 Now before me is defendant Citigroup Derivatives Markets, Inc.'s ("CDMI") motion for summary judgment.*fn2 For the following reasons,

CDMI's motion is granted.

I.

Summary judgment is appropriate where the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R.

CIV. P. 56(c). A genuine issue for trial exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The movant initially bears the burden of "identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the movant has met this burden, the non-movant "may not rest upon the mere allegations or denials of the adverse party's pleading," but rather "must set forth specific facts showing that there is a genuine issue for trial." FED.R.CIV.P. 56(e). I must construe all facts in the light most favorable to the non-movant and draw all justifiable inferences in favor of that party. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505.

II.

Defendant Knight Financial Products, LLC ("KFP") operated as a securities broker/dealer through December 9, 2004, when it sold its "specialist business" to Citigroup Financial Products, Inc. ("Citigroup") for $225 million dollars.*fn3 The purchased assets were subsequently assigned by Citigroup to defendant Citigroup Derivatives Markets Inc. ("CDMI").*fn4 Citigroup and CDMI are distinct corporate entities, with no relation to KFP or the other parties to the asset purchase agreement. It is unclear what KFP's current business is, if anything. However, it is undisputed that although KFP ceased its "specialist business" when the asset sale closed, it remains to date an active, distinct corporate entity and a defendant in this action.

CDMI now moves for summary judgment, arguing that it did not assume liability for defendant KFP's pre-asset sale alleged wrongdoing and that plaintiffs have not alleged any post-asset sale bad acts by CDMI itself.*fn5 Plaintiffs contend that CDMI is liable for KFP's alleged bad acts (both pre- and post-asset purchase) under a successor liability theory, and in the alternative, that "there is an independent factual basis from which it can be strongly inferred that CDMI acted with the requisite scienter with respect to the thousands of [o]rders alleged to have been mishandled by CDMI's exchange specialists between December 10, 2004 and April 2007."*fn6 (See Pls.' Supp. Resp. 2.)

The assets subject to the purchase agreement, now owned by CDMI, include: 1) substantially all the assets of KFP; 2) KFP's business of acting as a market maker and specialist in the listed options; 3) leases for KFP's offices; 4) the business contracts of KFP; and 5) appointments on exchanges to trade all the option classes traded by KFP as of the closing date. CDMI also assumed a number of KFP's business-related liabilities, but it did not retain liability resulting from the present action, if any, or liability for "any other [p]roceedings initiated or filed (i) making claims based on the same set of facts or circumstances that are the specific basis of [the present action] and (ii) that relate solely to events, facts or circumstances arising prior to [December 10, 2004]." (See Freidman Decl. Ex. E.)

III.

Under New York law,*fn7 a corporation that acquires the assets of another corporation is not liable for the torts of its predecessor unless one of the following applies: (1) the successor corporation expressly or impliedly assumed liability; (2) there was a consolidation or merger of the two corporations; (3) the successor corporation is a "mere continuation" of the predecessor; or (4) the transaction was entered into fraudulently to escape liability. Schumacher v. Richards Shear Co., 451 N.E.2d 195, 198 (N.Y. 1983). CDMI argues that none of these exceptions apply because 1) there is no evidence of fraud, 2) the purchase agreement expressly states that KFP retains all liabilities resulting from the present action and all related claims based on events occurring prior to closing, and 3) the de facto merger and "mere continuation" exceptions are not applicable because the asset sale was an arms-length transaction between companies with no continuity of ownership and significantly different senior management. CDMI is right. Even viewing the facts in a light most favorable to plaintiffs, none of the exceptions apply here.

With respect to the first and fourth exceptions, plaintiffs simply offer a general statement that at trial they may be able to prove these exceptions. They present no evidence indicating that the asset sale was a fraudulent transaction entered into for the purpose of sheltering KFP from liability, that the asset sale was something other than an arms-length transaction, or that $225 million dollars was not an appropriate value for the assets sold. Further, the purchase agreement clearly states that this lawsuit, along with any action based on the same set of underlying facts and events, is specifically excluded from the liabilities transferred to CDMI as a result of the asset sale -- KFP expressly retained all such liability. Therefore, because CDMI did not assume liability for this action*fn8 and there is no evidence that the asset sale was a fraudulent transaction, the first and fourth exceptions do not apply.

The same is true for the "mere continuation" and de facto merger exceptions. While the facts show CDMI operated a specialist business and used the assets it acquired from KFP, including personnel and offices, for that business, continuation of a company's business alone does not trigger the de facto merger or "mere continuation" exceptions. A "mere continuation" is a continuation of the corporate entity itself -- not just a continuation of the transferred business. Ladjevardian v. Laidlaw-Coggeshall, Inc., 431 F.Supp. 834, 839 (S.D.N.Y. 1977). This exception "envisions a common identity of directors, stockholders and the existence of only one corporation at the completion of the transfer...something in the nature of a corporate reorganization, rather than a mere sale." Id.; see also Schumacher, 451 N.E.2d at 198; Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 46 (2d Cir. 2003). In this case, it is undisputed that four years after execution of the purchase agreement, KFP is still in existence as a distinct corporate entity and defendant in this action. While ...


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