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United States: Successor Liability for Environmental Liabilities

by Julie Vanneman, Director, Cohen & Grigsby

What happens when one company acquires the assets of another, then—many years later—receives a demand to participate in the clean-up of a contaminated site based on the acquired company’s long-ago shipment of materials to the site? 

As a general rule, the buyer of assets in an asset acquisition does not automatically assume the liabilities of the seller. However, under the doctrine of successor liability, a claimant may be able to seek recovery from the purchaser of assets for liabilities that were not assumed as part of an acquisition. This claim may be employed in cases involving environmental liabilities, especially when the original party is defunct or remediation costs are greater than the original entity’s ability to pay for the cleanup.[1]

Courts have taken different positions on whether state law or federal common law governs the determination of successor liability for claims under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), known also as Superfund. This distinction may have little practical effect because federal common law follows the traditional state law formulation. Notably, though, when evaluating successor liability under federal law, and specifically environmental laws like CERCLA, the doctrine may be more liberally applied because of policy concerns about contamination.[2]

Under the successor liability doctrine, a buyer can be held responsible for liabilities of the seller if one of four “limited” exceptions applies:

(1) the successor expressly or impliedly agrees to assume the liabilities; (2) a de facto merger or consolidation occurs; (3) the successor is a mere continuation of the predecessor; or (4) the transfer to the successor corporation is a fraudulent attempt to escape liability.

K.C.1986 Ltd. P’ship v. Reade Mfg., 472 F.3d 1009, 1021 (8th Cir. 2007) (citing United States v. Mex. Feed & Seed, Co., Inc., 980 F.2d 478, 487 (8th Cir. 1992)). A fifth exception, the substantial continuity exception, is a broader standard,[3] but most circuit courts do not apply it in CERCLA cases.[4]

Exception 1, express or implied assumption, must be analyzed in terms of the specific asset agreement in question. Exception 4, fraud, is generally employed in circumstances where the acquired company shifts its assets to avoid exposure to another entity.[5]

Courts have addressed the main issue of successor liability by asking whether the transaction is simply the handing off of a baton in a relay race (successor liability) or whether the new company is running a separate race (no liability).[6]  Examining factors relevant to the remaining elements—numbers 2 (de facto merger) and 3 (continuation)—helps answer the question. Under the doctrine of a de facto merger, successor liability attaches if one corporation is absorbed into another without compliance with statutory merger requirements. A court would look at whether there is a continuity of managers, personnel, locations, and assets; the same shareholders become part of the acquirer; the seller stops operating and liquidates; and the acquirer assumes the seller’s obligations to continue normal business operations.[7]  The “mere continuation” theory “emphasizes an ‘identity of officers, directors, and stock between the selling and purchasing corporations.’”[8]

Given the high stakes that can be involved with CERCLA cleanups, assessing prospects for applying the successor liability doctrine could be an important part of the liability analysis.


[1] See, e.g., James T. O’Reilly, Superfund and Brownfields Cleanup § 8:16, at 360 (2017-2018 ed.) [hereinafter O’Reilly] (“Mergers, sales of assets, and changing corporate names does not remove potential CERCLA liability.”).

[2] See O’Reilly § 8:16; see also, e.g.In re Acushnet River & New Bedford Harbor Proceedings re Alleged PCB Pollution, 712 F. Supp. 1010, 1013-19 (D. Mass. 1989) (in the CERCLA context, concluding that successor liability applied where there would be “manifest injustice” if one of the companies could “contract away” liability for PCB contamination).

[3] See K.C.1986 Ltd. P’ship v. Reade Mfg., 472 F.3d 1009, 1022 (8th Cir. 2007)

[4] See Action Mfg. Co. v. Simon Wrecking Co., 387 F. Supp. 2d 439, 452 (E.D. Pa. 2005).

[5] See, e.g., Eagle Pac. Ins. Co. v. Christensen Motor Yacht Corp., 934 P.2d 715, 721 (Wash. Ct. App. 1997). This exception is rarely used. Restatement (Third) of Torts:Prod. Liab. § 12 cmt. e (Am. Law Inst. 1998).

[6] See, e.g.Oman Int’l Fin. Ltd. v. Hoiyong Gems Corp., 616 F. Supp. 351, 361-62 (D.R.I. 1985).

[7] Asarco, LLC v. Union Pac. R.R. Co., No. 2:12-CV-00283-EJL-REB, 2017 WL 639628, at *18 (D. Idaho Feb. 16, 2017).

[8] United States v. Mex. Feed & Seed Co., 980 F.2d 478, 487 (8th Cir. 1992)  (quoting Tucker v. Paxson Mach. Co., 645 F.2d 620, 626 (8th Cir. 1981)).

This article was first published on the Cohen & Grigsby website.

About the Author

Julie counsels and represents clients in a range of environmental and litigation matters. She assists clients with day-to-day environmental compliance concerns and provides enforcement defense counseling, particularly with solid waste and groundwater issues. Her extensive background in CERCLA matters includes serving as legal counsel for clients involved in remediation initiatives at complex Superfund sites as well as litigating cases through multiple phases, including discovery, allocation negotiations, and alternative dispute resolution. Julie’s litigation practice encompasses not only environmental matters, but also insurance coverage actions and other commercial and business disputes.

Vancouver files claim against owners of vessel that leaked fuel in 2015

As reported by CTV News, the City of Vancouver has filed a federal court claim against the owner of a vessel that spilled fuel into English Bay in 2015, as part of the city’s continuing effort to get compensation for its response efforts.

Vancouver Mayor Gregor Robertson says three years after the MV Marathassa spilled 2,700 litres of bunker fuel into the bay, the city still hasn’t been compensated for about $550,000 it spent on response efforts.

Robertson says Vancouver has sought repayment through the federal government’s Ship-source Oil Pollution Fund, but has only been promised compensation for 27 per cent of its costs — something Robertson called “totally unacceptable.

“It’s ridiculous that it’s taken over three years now fighting for our costs to be covered by an oil spill in our harbour,” Robertson told reporters gathered at Sunset Beach in Vancouver on Sunday.

The city’s claim against the ship owners — filed last month but announced on Sunday — calls for damages, interest and court costs related to the spill.

Robertson said the city’s difficulty in getting paid back for what he described as a “relatively small oil spill” shows there aren’t enough measures in place to protect coastal communities against more major spills.

He said the costs and impacts of a potential diluted bitumen spill from the increased tanker traffic that would come with the Kinder Morgan Trans Mountain pipeline expansion has not been meaningfully addressed by the federal government.

Robertson said the Ship-source Oil Pollution Fund was set up by the federal government to act in the interest of communities like Vancouver, but is failing to do so.

“It clearly does not do that, does not deliver the results. This speaks to the greater concern we have with Kinder Morgan and oil tankers,” he said.

Transport Canada, which oversees spill response, could not immediately be reached for comment.

The claim’s statements have not been proven in court.

Crews on spill response boats work around the bulk carrier cargo ship Marathassa after a bunker fuel spill on Burrard Inlet in Vancouver, B.C., on Thursday April 9, 2015. (Darryl Dyck/THE CANADIAN PRESS)

Court Rejects Environmental Consultant’s Third Party Claim Against Prior Owner/Occupants

by Stan Berger, Fogler Rubinoff

On March 22, 2018 the Ontario Superior Court of Justice in MVL Leasing Ltd. v CCI Group Inc. 2018 ONSC 1800 granted Rule 21 motions striking third party claims brought by an environmental consultant who was being sued by a purchaser of property for professional negligence and breach of contract. The lawsuit alleged that the plaintiff was led into closing the sale by the consultant’s Phase 1 and Phase 2 Environmental Site Assessments. The property turned out to be contaminated. The consultant in turn alleged that the contamination was caused by one or more businesses operated by the third parties. The consultant requested contribution indemnity from the third parties on 6 different grounds: nuisance, loss or damage caused by a spill pursuant to s.99 of Ontario’s Environmental Protection Act, the occupier’s duty under the Occupiers’ Liability Act to ensure the safety of persons entering upon the property, negligence, liability under the Negligence Act and unjust enrichment. The consultant argued that if found liable in the main action, it would have incurred pecuniary losses as a direct result of the spill, those damages being the plaintiff’s remediation costs and or the decrease in the property’s value.

Court’s Reasons for Rejecting the Third party Claims

The nuisance claim was rejected on the basis that the consultant did not own, occupy or possess the property, or any adjacent or nearby property impacted by the alleged contamination. The s.99 EPA claim was only available where the damages were directly caused by the spill and that was not the case. The occupier liability claim was rejected because the consultant suffered no damages as a result of entering the property in question. With respect to the negligence claim, the Court refused to impose a new duty of care upon the third parties. There was no proximity in the relationship between the consultant and the third parties. The potential economic harm to the consultant was not a reasonably foreseeable consequence of the alleged acts or omissions of the previous third party owners/occupiers. The Negligence Act claim was rejected on the basis that the consultant and the third parties did not meet the test under the Act of being concurrent tortfeasors for contribution and indemnity to be available. The plaintiff’s actual or potential causes of action against the consultant and the third parties were entirely different in nature. The damages allegedly caused by the third parties were different and discrete from those caused by the consultant. Finally, the unjust enrichment claim was rejected as the consultant had not pleaded any direct conferral of a benefit upon the third parties and the consultant had not suffered a corresponding detriment. If the consultant had incurred a detriment in the future by the plaintiff succeeding with its action, that detriment only related to the breach of contract and/or negligence of the consultant and the third parties were not parties to that relationship.

What can we take away from this Decision?

In order to sustain a third party claim against historic owners or occupiers of contaminated property, environmental consultants who are sued by a purchaser of contaminated property, will have to show that that the historic owners/occupiers were somehow responsible for or at least connected to the contractual breach or negligence which the purchaser alleges against the consultant.

This article was previously published by Fogler, Rubinoff LLP and can be found on the firm’s website.

About the Author

Stanley Berger is certified by the Law Society of Upper Canada as a specialist in Environmental Law.  He was called to the Ontario Bar in 1981.  He joined the law firm of Fogler Rubinoff in 2013.

 

U.S. EPA reaches settlement with Hazardous Waste Facility over Environmental Violations

The U.S. Environmental Protection Agency (U.S. EPA), Region 10, recently reached a settlement with Emerald Services, Inc., a hazardous waste storage and treatment facility in Tacoma, Washington, over violations of the Resource Conservation and Recovery Act (RCRA) and violations of the facility’s RCRA permit. This enforcement action was coordinated with the Washington Department of Ecology. The facility is located within the boundaries of the Puyallup Tribe’s reservation.

Emerald Services manages large volumes of hazardous waste, solvents, and antifreeze and re-refines used oil at the Tacoma facility. Emerald was purchased by Safety-Kleen Systems, Inc. on July 8, 2016, and both Emerald and Safety-Kleen are owned by parent holding company, Clean Harbors, Inc. Ensuring that funds will be available if the company’s operations harm people or damage property is an essential element of the “cradle to grave” RCRA hazardous waste management program.

Emerald Services Inc. Facility, Washington State, U.S.A.

This settlement resolves several RCRA violations at the Tacoma-area facility. Specifically, the company failed to maintain adequate third-party liability insurance coverage of the facility for the past six years.  As part of the settlement, Emerald Services agreed to pay a $125,800 penalty and amended its current insurance policy to comply with its RCRA permit.

“Having adequate insurance coverage for your business, especially one that stores and handles hazardous waste, isn’t an option, it’s the law,” said Ed Kowalski, Director of EPA’s Region 10 Compliance and Enforcement Division in Seattle. “Liability insurance is a key requirement of the hazardous waste permitting system, ensuring that commercial hazardous waste handlers operate in a safe manner to protect people’s health and the environment.”

There is a history of spills and incidents at Emerald’s Tacoma facility. In 2013, a 1,900-gallon spill of a highly dangerous fuel oil/asphalt mixture injured a worker. Emerald’s pattern of spills and releases suggests the facility may have a higher probability of future accidents, underscoring the need to have liability coverage for possible bodily injury, property damage and environmental restoration.

Violating environmental laws puts public health and the environment at risk. EPA protects communities by ensuring compliance with federal environmental laws. By fairly enforcing environmental laws, we level the playing field by deterring violators and denying companies an unfair business advantage over facilities and businesses that follow the rules.

United States: Protect Your Company from Waste Liability

Written by: Viggo C. Fish, McLane Middleton

Question: My company is purchasing real estate, and we are concerned there may be existing environmental contamination on the property. What steps can we take to protect ourselves from liability?

 Answer:  Conducting environmental due diligence correctly is essential to protect purchasers of potentially contaminated commercial properties from possible liability far exceeding the value of the property. Strict hazardous waste regulation exists at the federal, state and, sometimes, even the municipal level.

Under both the U.S. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as Superfund, and corresponding state law, owners of contaminated properties are liable, without regard to fault, for environmental conditions on the property, whether or not the owner was involved in any way in the initial release of the contamination. There are, however, steps prospective purchasers can take to limit this liability.

Hazardous waste laws allow purchasers of potentially contaminated property to conduct the necessary level of investigation, and, if performed correctly, limit their liability.

For example, the Superfund All Appropriate Inquiry (AAI) rule provides for certain limitations on liability of a so-called “innocent purchaser” if such an investigation is completed before the acquisition.

The innocent purchaser provision allows a purchaser who, under certain circumstances, did not know and “had no reason to know” that the property was contaminated to avoid later Superfund liability. Similar rules apply to state hazardous waste liability. Importantly, to avoid that liability, the purchaser must be able to establish it “carried out all appropriate inquiries … into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices.”

Careful compliance with AAI requirements can be used later to support the “innocent landowner” defense to liability of the new owner. The burden of proof is on the purchaser to establish it is entitled to this and other such landowner liability defenses.

The key element of proof is the Environmental Site Assessment (ESA).  Buyers of commercial property typically conduct a Phase I ESA to evaluate the potential for contamination in accordance with ASTM Standard E1527-13.

Following the ASTM Standard demonstrates compliance with the EPA’s AAI rule, that protects prospective purchasers of property from liability under CERCLA.  This area of the law is unusually complicated, and it is therefore usually necessary to have the advice and assistance of qualified environmental consultants and environmental legal counsel to assure that the legal and financial protections against hazardous waste liability will actually be available, if needed in the future.

This article was first published in Know the Law, a bi-weekly column sponsored by McLane Middleton, Professional Association.  Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation. 

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About the Author

Vigo C. Fish is an Environmental and Energy Associate in the Administrative Law Department where he assists clients with a wide variety of energy and environmental matters.  Viggo received his J.D., cum laude, and Master of Energy Regulation and Law (MERL) degree, magna cum laude, from Vermont Law School (2015), and his B.A. in English from Providence College (2010). While in law school, Viggo worked as a Research Analyst at Vermont Law School’s Institute for Energy and the Environment and as a Clinician in the Energy Clinic. In addition, Viggo worked as a Markets and Policy Intern in the National Renewable Energy Laboratory’s Strategic Energy Analysis Center.