The facts of 24/7 Records, Inc. v. Sony Music Entertainment, Inc., 566 F. Supp 2d 305 (S.D.N.Y. 2008) should not come as any surprise to a business lawyer with a few years of experience. A corporation is formed to produce records. It enters into a contract with a record distributor. Later, because a new investor would bust the corporation's S election, the owners form an LLC. It is the LLC that continues the business and the corporation falls into disuse and was eventually administratively dissolved for failure to file its annual report. Competent counsel would not have allowed this, but who wants to pay for a lawyer?
So when there is an alleged breach of the contract by the record distributor (and tortious interference claim by a third party to boot) how does the LLC have the right to bring the claim? The district court helped out the recalcitrant plaintiffs and concluded that a de facto merger had taken place because there was continuity of ownership (well, not quite, there was a new investor), cessation of the business of one entity, continuity of the business including assumption of liabilities, and most important of all in this case,the defendants also disregarded the technical distinction and treated the entities as one in the same.
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