February 2013 Newsletter

Welcome to the Second Edition of our Newsletter. 

In the first article, Michael Braunstein discusses the issues asset purchasers need to be aware of to protect themselves and the implications of the Zmos case.  

Harry Braunstein describes a real estate transaction the firm handled in Las Vegas involving ZAPPOS.

Vincent Georgetti shares some of the challenges involved in the leasehold financing of one of New York City's icons, the Four Seasons Hotel.  

Bill Turkish discusses the complications of construction litigation and the importance of ensuring that all parties involved in a construction project maintain proper insurance.

Finally, we conclude with some Musing we think you will enjoy.

If you find the information in this newsletter to be of value, please send us an email.    

Asset Buyers Beware!


warningRecent Decision by NY County Supreme Highlights Potential Pitfall for Business Buyers Seeking to Avoid Their Seller's Pre-Closing Liabilities.


by:  Michael Braunstein


Very often, buyers who are acquiring an existing business will desire to structure their transaction as a purchase and sale of all or substantially all of the assets of the seller. In contrast to a stock or interest purchase, the parties in an asset purchase transaction can specifically designate which assets will be included in the sale and which liabilities, if any, will be assumed by the buyer. In this way, buyers may avoid being held responsible for their seller's pre-closing liabilities, which very often cannot be easily identified and when they can be identified are not always easily quantified. As the New York County Supreme Court recently pointed out in Zmos Networks, LLC v. Momentum Investment Partners et. al., this strategy may not always work out as planned.


In Zmos, the court used the doctrines of de-facto merger and mere continuation to find that Momentum, the corporate defendant-buyer, was not entitled to a dismissal of the plaintiff-creditor's complaint that Momentum should be held liable for the obligations of its predecessor. 


The general rule of successor liability is that a corporation which acquires the assets of another is not liable for the torts or contractual obligations of its predecessor unless: 


(1) it expressly or impliedly assumed them,  


(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 is entered into fraudulently to escape such obligations. 


The de facto merger doctrine is an exception to the general rule under which a court will disregard the actual form of the parties' transaction and treat them as having merged with one another to find successor liability. The court stated that "the hallmarks of a defacto merger include: continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation 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 continuity of management, personnel, physical location, assets and general business operation... not all of these elements are necessary to find a defacto merger."


Regardless of the ultimate outcome of the Zmos case, there are a few important lessons to be learned from the decision on the motion. Most of them are not novel but are worth restating here.


First, merely structuring an acquisition as an asset purchase over a stock purchase does not mean that the buyer can always avoid its seller's pre-closing obligations. 


Second, whether a buyer will ultimately be held liable for these obligations is a highly fact sensitive question and creditors will often have a reasonably good shot at pleading a case that survives a motion to dismiss.


Third, although most Asset Purchase Agreements provide indemnities for these kinds of things, an indemnity alone may not be sufficient if the indemnitor does not have the wherewithal to pay claims. Proving at trial that there was no defacto merger or continuation will no doubt be time consuming and expensive. Moreover, an adverse decision will directly influence the outcome of claims by other creditors, which could start to add up very quickly.


All of this leads to what I consider to be the most important lesson: in a deal where any of the above factors are present, it is especially critical that the buyer insist on an escrow fund to back-stop the seller's indemnity obligations. The amount of the fund should correlate to any identifiable obligations of the seller plus an additional amount for the expense of defending claims and for any unforeseen liabilities. Finally, the escrow should survive long enough for any potential litigation to wind its way through the courts, a period usually stated in years. 


We have handled many deals involving these kinds of issues and would be happy to discuss them with you in greater detail should you have any questions. 


Read the decision here.  


Viva Las Vegas!

Getting the Deal Done in Las Vegas, Nevada.


Old Vegas City Hall
Old City Hall to become new ZAPPOS headquarters
enior partner, Harry Braunstein, recently handled a real estate transaction for one of the largest landowners in downtown Las Vegas who finds his properties in the midst of some very interesting changes occurring in downtown Las Vegas. 



In addition to three casino hotels containing approximately 1500 rooms, our client's holdings originally included numerous parcels of vacant land and a full square block, previously the site of the Ambassador Hotel, all located on East Fremont Street, just east of the Fremont Street Experience canopy of lights.  This part of Fremont Street is now rapidly being gentrified by Tony Hsieh, the almost billionaire founder of ZAPPOS, the online shoe retailer.


Working with local counsel we've recently completed the sale for our client of 23 separate tax parcels, including the former Ambassador site, to Tony Hsieh's real estate subsidiary for a sum in excess of $9 Million.  Retail shops, parks, and other entertainment and office uses are on the way along with thousands of new residents.


Tony's vision is to create an all-encompassing modern village containing not just high tech incubators but all the entertainment and other amenities that make a downtown environment a great place to live.  Our client has befriended Tony Hsieh and embraced his plans for changing the downtown environment.


Further to this vision, ZAPPOS has purchased the old Las Vegas City Hall, is renovating it and is creating a new worldwide headquarters.  As many as 2000 young, upwardly mobile employees will soon be moving into the downtown market. 
Downtown Vegas:  watch how it changes and real estate values increase in the months ahead.


Leasehold Financing


Completing a Complex Leasehold Financing for the Four Seasons Hotel


by Vincent Georgetti


Four Seasons Hotel
Four Seasons Hotel

When people think of the Four Seasons Hotel in New York, the word "excellence" is usually what comes to mind. When presented with the opportunity to represent one of our institutional lenders in a leasehold financing transaction concerning the Four Seasons Hotel in midtown Manhattan, we recognized the importance of getting the transaction done right.


The difficulty with any leasehold financing transaction is the lender's security is not a "tangible" asset like a commercial office building or a residential home that you can foreclose upon. Rather, the asset is the rights and interests that flow from the lease governing the relationship between your borrower and its landlord.  


As was to be expected, the asset that was being secured in this deal was a ground-lease between our borrower and the landowner of the property upon which the Four Seasons stands.  The ground-lease was highly complex and voluminous, which did not make the transaction easy. To further complicate the deal, the cash flow to pay the rent obligations under the ground-lease and cover the debt service on the loan emanated from an equally sophisticated sub-lease between our borrower and the Four Seasons.  Many protections were previously negotiated and built into both leases by the counsel for the landlord and the Four Seasons. However, we needed to flesh out the salient provisions that were most important in protecting the asset of our client, particularly the rights of a lender in a bankruptcy and the disbursement of casualty and condemnation proceeds.  


In the end, we were able to work out a deal structure that protected our client's interest while satisfying the demands of the other parties involved in the transaction. 


We are proud to have participated in shaping how the business of one of the great landmarks of Manhattan is conducted.


Complex Construction Litigation
Complex Construction Litigation Arising from Damage to Adjoining Property Confirms Need For Insurance Coverage Review. 


hi rise construciton Senior Partner Bill Turkish is counsel to the owner/developer of a multistory commercial/residential condominium in lower Manhattan involving a case that has been pending before the NY Supreme Court for several years.  What began as a simple claim by an adjoining property owner that our client's new construction project allegedly damaged the foundation of his six story residential building, the lawsuit presents a cautionary tale of the complexity of construction litigation and the numerous parties and issues that can be involved.


The plaintiff/owner of the allegedly damaged property commenced the lawsuit against our client and its general contractor claiming damages to his building of over $5,000,000.  However, the case has expanded to include several third-party claims and counterclaims involving not only the owner/developer and general contractor but also the foundation subcontractor, two of its sub-subcontractors and three different insurance companies. As the owner/developer of the new building, the key factor was establishing that the general contractor and all sub-contractors were sufficiently and properly insured and that our client was fully indemnified.


At the onset of the litigation, our client was immediately faced with an Order To Show Cause and a Temporary Restraining Order (TRO) stopping all construction on the project until it could be determined what, if anything needed to be done to stabilize the plaintiff's property.  The TRO stopping construction had potentially devastating financial consequences to our client who could face tens of thousands of dollars in additional construction loan interest and related expenses if construction were delayed while litigation was pursued. We had two important goals to meet for our client:  Get the TRO lifted as quickly as possible so the construction could proceed and reserve all rights, defenses and claims against the plaintiff, general contractor and subcontractors.  Fortunately, we succeeded in achieving these goals for our client.  Without conceding any liability, we negotiated a court-approved stipulation defining a limited scope of work to stabilize the plaintiff's building and TRO was lifted. 


In addition to claims for indemnification of the entire claim, we have additional claims against the general contractor and subcontractors to indemnify our client for the cost of the stabilization work, which was advanced by our client to keep construction moving.


As predicted, the litigation is complex and lengthy.  After resolving insurance coverage issues, we have worked closely with insurance counsel during numerous depositions and several attempts to mediate the dispute, to no avail.  The case is scheduled for a jury trial by this summer. 


We cannot stress enough how important it is to periodically review your insurance policies to confirm coverage on all property.  It is absolutely essential to your company's financial well-being that you receive proof of proper insurance from all parties working on your project.  In addition, your contracts must contain proper indemnification language to protect you from incurring unnecessary legal expenses to defend construction litigation.


Joke of the Month:

Two men waiting at the Pearly Gates strike up a conversation. "How'd you die?" the first man asks the second.
pearly gates   "I froze to death," says the second.

"That's awful," says the first man. "How does it feel to freeze to death?"

"It's very uncomfortable at first", says the second man. "You get the shakes, and you get pains in all your fingers and toes. But eventually, it's a very calm way to go. You get numb and you kind of drift off, as if you're sleeping. How about you, how did you die?"

"I had a heart attack," says the first man. "You see, I knew my wife was cheating on me, so one day I showed up at home unexpectedly. I ran up to the bedroom, and found her alone, knitting. I ran down to the basement, but no one was hiding there, either. I ran up to the second floor, but no one was hiding there either. I ran as fast as I could to the attic, and just as I got there, I had a massive heart attack and died." The second man shakes his head. "That's so ironic," he says.

"What do you mean?" asks the first man.

"If you had only stopped to look in the freezer, we'd both still be alive."

Quote of the Month:

   - Mae West                                                                  

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7600 Jericho Turnpike, Woodbury, NY  11791
516.802.0700          email

Disclaimer.  This newsletter is for education and information purposes only and is not intended to provide legal advice.  No attorney-client relationship exists or is created by the use of this newsletter.  This newsletter should not be used as a substitute for legal advice.

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Harry Braunstein

William Turkish

Vincent Georgetti

Michael Braunstein

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