Examples of New Jersey Complex Business Litigation Program Opinions (SAR Privilege and Successor Liability)

Following up on developments in New Jersey’s Complex Business Litigation Program (CBLP), we note that opinions issued by CBLP judges can be found on this webpage.  Here are two brief examples of CBLP opinions.

Suspicious Activity Report Privilege

In this Union County decision, written by Judge Robert Mega, a trustee sued a number of affiliated banking entities. During litigation, the plaintiff brought a wide-ranging motion to compel compliance with outstanding interrogatories and document requests. Among the numerous discovery issues presented, Judge Mega closely analyzed the Suspicious Activity Report (SAR) privilege.

An SAR itself is clearly privileged, and the court found that if “any document sought will reveal the existence of a SAR, or contain information explicitly related to SAR requirements, it is not discoverable.” However, Judge Mega had to address how far this privilege reached into the bank’s conduct and documents.

Judge Mega concluded the SAR privilege is “to be interpreted narrowly” and that discovery is permissible so long as the party seeking discovery does “not request or reveal the existence of a SAR.” Thus, “documents and information relating to [a bank’s] internal investigation, as well as [that bank’s] investigatory policies and procedures, are admissible as long as they do not reveal the existence of a SAR.” Judge Mega explicitly rejected the notion that the SAR privilege automatically covers all “investigations, policies and monitoring of suspicious activity”.

This opinion also addresses limits on the attorney-client privilege when an attorney solely performs non-legal services; proper notice to third parties when discovery of third party banking records is sought; the sufficiency of factual support for an expert’s opinions under Daubert; and the scope of “relevance” as the means of measuring permissible discovery.

Harry Kuskin 2008 Irrevocable Trust v. PNC Financial Group, Inc., Superior Court of New Jersey, Union County, Case No. UNN-L-383-17 (Law Division Oct. 18, 2018)

Limits on Successor Liability

The second opinion, issued by Judge Robert Wilson of Bergen County’s CBLP, addresses successor liability and de facto merger.

The usual rule is that an entity purchasing a company’s assets does not become encumbered with the seller’s liabilities. There are four exceptions to this rule:

(1) where the purchasing corporation expressly or impliedly agrees to assume such debts and liabilities;

(2) where the transaction amounts to a consolidation or merger of the seller and purchaser;

(3) where the purchasing corporation is merely a continuation of the selling corporation; and

(4) where the transaction is entered into fraudulently in order to escape responsibility for such debts and liabilities.

Determining whether one of these exceptions applies requires a fact intensive inquiry.

The plaintiff in this case argued the purchaser was a mere continuation of the seller and/or there was a de facto merger. Courts consider the following factors in weighing mere continuation or de facto merger arguments:

(1) the purchasing entity assumed a significant portion, if not all, of the liabilities necessary for a continuation of the seller’s business;

(2) the seller ceased to exist after the transaction with the purchasing entity; and

(3) it was the intent of the purchasing entity to absorb and continue the operation of the seller.

This last factor carries the most weight.

In this case, an entity (the “debtor”) breached a sublease with plaintiff. Two of the debtor’s affiliates sold their assets to another entity (the “buyer”), but the debtor itself was not a party to that asset purchase agreement and did not sell its assets to the buyer. Yet, plaintiff pursued the debtor, the two affiliates, and the buyer for breach of the plaintiff-debtor sublease.

The buyer was purportedly liable under theories of de facto merger and mere continuation of the debtor, as well as the two affiliates. Judge Wilson rejected both arguments.

As to the debtor, Judge Wilson found it of great significance that the buyer had not assumed one of the debtor’s loans, even though a loan assumption was possible. Successor liability also failed because (1) the debtor was not one of the asset sellers, i.e., the buyer did not enter any agreement to purchase the debtor’s assets; and (2) the buyer did not continue to operate the debtor’s facilities in carrying out business operations.

The court likewise found the buyer was not a mere continuation of the two actual transferors, nor was there a de facto merger between them. The sellers’ principal retained only a 5% non-voting interest in buyer after the asset sale, with no control or management responsibility. Further, the buyer used its own facilities to carry out its business after the sale; the sellers’ management structure changed after the asset sale and its leadership and managers did not continue on with the buyer; a lease could not be transferred from the sellers to the buyer; and the sellers were suing the buyer in a separate litigation. This last point makes clear that the sellers continued to have distinct identities from the buyer, even after the asset sale.

Booth Movers Ltd. v. Sleepable Sofas Ltd., Superior Court of New Jersey, Bergen County, Docket No. BER-L-4341-17 (Law Division Feb. 6, 2019)