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.
