The most recent decision in Flake v. Schrader-Bridgeport Int’l, Inc., 2011 U.S. Dist. LEXIS 30372  (M.D. Tenn., Mar. 23, 2011) is just another chapter in this long-running environmental saga involving a successor liability, bankruptcy, toxic tort and environmental justice issues along with a piece of American automotive history. This well-traveled case began in a Tennessee county court in 1994, moved to the federal bankruptcy court and federal district court in New York, went back to Tennessee for rulings by a federal district court, and is now on appeal to the Court of Appeals for the Sixth Circuit.

The story begins simply enough in the 1920s when Scovill, Inc acquired the A. Schrader Co, a manufacturer of the Schrader pneumatic tire valve (a/k/a the American valve). From 1964 to 1985, the Schrader Automotive division of Scovill, Inc. operated a plant located in Dickson, Tennessee. The plant was leased from the Dickson County Industrial Development Authority (IDA). The plant used TCE as a degreaser.

In 1985, Scovill was acquired by First City Industries (First City) who began to divest the firm of its non-core assets. As part of this strategy, the Dickson plant was closed. Around this time, the state started to become concern about potential groundwater contamination from a local landfill that had received wastes from the Dickson plant and other manufacturers in the areas.

Scovill decided to spin-off its Schrader Automotive division into a newly formed subsidiary, Schrader Automotive, Inc. (SAI). Pursuant to an October 1985 transfer agreement, SAI acquired all of the assets and liabilities of the Schrader Automotive division. SAI agreed to indemnify Scovill from all known and unknown liabilities relating to the Schrader Automotive Division’s business.

In March 1986, ArvinMeritor, Inc. (Arvin) agreed to purchase SAI. The purchase Agreement attempted to disclaim any liability on the part of Arvin relating to Dickson County by expressly affirming that SAI was not the owner of the Dickson Plant and that Arvin would not be assuming any liabilities relating to the operation of the Dickson Plant. To facilitate the transaction, SAI and Scovill entered amended the 1985 Transfer Agreement to unwind or rescind the SAI’s obligation to indemnify Scovill for claims arising from the Dickson Plant. Scovill released SAI and also agreed to indemnify SAI as well as Arvin for any breach of any representation or warranty by Scovill under the 1986 Agreement. Scovill’s indemnification obligation was guaranteed by First City.

In 1988, Scovill exercised its option to purchase the Dickson Plant from the IDA and then sold the Plant to Tennsco Corporation (“Tennsco”). In the mid-1990s Arvin sold SAI which was merged with Bridge Products, Inc. SAI was the surviving entity and changed its corporate name to Schrader-Bridgeport International, Inc (SBI).

Between 1985 and 1988, Saltire worked with the state to obtain closure of the facility’s hazardous waste management units. However, the closure did not include groundwater analysis and EPA launched its own RCRA Facility Assessment in 1987 that resulted in the identification of 15 solid waste management units. Scovill entered into a RCRA 3008(h) order to implement corrective actions.

First City filed for bankruptcy protection and as part of pre-packaged chapter 11 plan of reorganization, Alper Holdings (Alper) began the controlling shareholder of First City and assumed the obligations of First City under the Arvin Guaranty. By this time, Scovill changed its name to Saltire Industries, Inc. (Saltire). Alper and Saltire entered into a management agreement in where Alper agreed to manage Saltire’s various environmental matters. Nicholas Bauer was appointed as Saltire’s Vice President of Environmental Affairs but he was paid by Alper and sometimes represented himself as an Alper official. He also worked out of an office in Virginia where Alper was authorized to do business.

In December 2003, a number of plaintiffs filed suit against Saltire and Alper Holdings, alleging property damage and personal injuries from TCE in the groundwater. Partly to manage the environmental liabilities related to the Dickson plant, Saltire filed a chapter 11 petition in 2004. Arvin filed a claim against Saltire pursuant to the Indemnity that was disallowed after Saltire filed an objection and Arvin decided not to oppose the motion. Arvin reasoned it had a full guarantee from Alper that would provide greater protection than an unsecured claim in the bankruptcy proceeding. SBI did not file a proof of claim, though. A liquidating plan of reorganization was confirmed in 2006. As part of the plan, Alper negotiated a settlement on behalf of Saltire with the creditors committee where Alper agreed to forego its claims against Saltire and to pay $1 million to Saltire.

In 2004 and 2005, residents filed claims against Saltire, Alper, Schrader and ArvinMeritor alleging personal injury and property damage claims arising out of the contamination of a spring flowing through their property by the Dickson manufacturing plant. The Flake plaintiffs wanted to bottle and sell water from the spring and asserted their plans were upended when they learned that the wells on their property were contaminated. Other plaintiffs asserted property damage and personal injury claims.

In 2007, Scovill reached a $15MM settlement with its insurer that resolved the plaintiffs’ claims arising out of remediation of the Dickson Plant as well as liabilities associated with other facilities. The bankruptcy court issued a Stipulation and Order Approving Settlement that allowed plaintiffs’ claims for personal injury and property damage in the aggregate amount of $1.5 million, and expressly released Scovill/Saltire from any and all other claims.

Schrader notified Alper of a claim under the Guarantee in 2006 and then filed a complaint against Alper in 2007. This action prompted Alper to file its own chapter 11. The plaintiffs filed claims in the Alper bankruptcy case. Schrader also filed claims for past and future defense costs relating to the toxic tort litigation as well as indemnification. In a series of opinions in 2008, the bankruptcy court ruled that Alper could not be held liable for claims arising out of the Dickson plant and disallowed the claims. In re Alper Holdings USA, 2008 Bankr. LEXIS 86, (Bankr. S.D.N.Y. Jan. 15, 2008); In Re Alper, 2008 Bankr. LEXIS 522 (Bank. S.D.N.Y. 2/25/08), In re Alper Holdings USA, Inc., 386 B.R. 441 (Bankr. S.D.N.Y. 2008). The rulings said that Alper could not be directly liable for causing the contamination because Alper had no connection or relationship to Saltire or Dickson County until seven years after the Dickson Plant closed in 1985. The court also concluded that Alper’s “indirect, incidental” ownership interest in Saltire through First City did not retroactively make Alper liable for what went on in the Dickson Plant prior to its closure. The court also said that the plaintiffs had failed to plead sufficient facts to show that Alper had direct liability for negligent remediation when it effectively loaned Bauer, its employee, to Saltire to supervise the remediation. Finally, the court found that Alper had no indirect liability to the on either an alter ego or veil piercing theory, holding that neither the existence of a management agreement nor the common employee between the parent and subsidiary justified the extraordinary remedy of piercing the corporate veil. The plaintiffs appealed but the bankruptcy court rulings were affirmed. In re Alper Holdings USA, 398 B.R. 736 (S.D.N.Y. 2008).

Alper also objected to the Schrader claim, asserting they should be disallowed under section 502(e)(1)(B) of the Bankruptcy Code because they were contingent claims for reimbursement or contribution from an entity that is co-liable with the debtor. The bankruptcy court found that Alper was obligated under the Guaranty to indemnify Schrader for its past legal fees and expenses and that these were not contingent liabilities since these costs had already been incurred. Thus, the court overruled the objection. However, the court said the claims for future costs and indemnification were clearly claims for contribution or reimbursement, and contingent since the amount of the ultimate liability was unknown. Schrader argued that it could not be co-liable with Alper under 502(e)(1)(B) because Tennessee law no longer recognizes the common law doctrine of joint and several liability. However, the court said that the toxic tort plaintiffs had alleged that Alper and Schrader were liable as the corporate successors to Saltire for the negligent actions of Saltire. These allegations were in stark contrast to those asserted against ArvinMeritor which had been sued based upon its own subsequent and independent negligent and grossly negligent conduct. Accordingly, the court disallowed the Schrader claims for future costs and indemnity. In re Alper Holdings USA, 2008 Bankr. LEXIS 2634 (Bank. S.D.N.Y 9/18/08).

Plaintiffs then turned their attention to Schrader-Bridgeport International, Inc (SBI), its parent, Tomkins plc, and Arvin. First, the district court disposed with the claims against Tomkins, ruling in 2010 that general involvement with the subsidiary corporation’s performance, finance and budget decisions, and general policies and procedures was insufficient basis to assert personal jurisdiction over the parent much less pierce the corporate veil. Flake v. Schrader-Bridgeport Int’l, Inc, 2010 U.S. Dist. LEXIS 23951 (M.D.Tenn. 3/15/10).

Turning to the claims against SBI and Arvin, the court also rejected plaintiff’s motion for partial summary judgment that the defendants were the successor in interest to Scovill, and Schrader Automotive. The court agreed with SBI that none of the exceptions to the general rule of non-liability for purchasers of corporate assets applied. The court said that Scovill retained responsibility for the Dickson Plant under the 1986 agreement. Likewise, Arvin did not acquire the plant in the 1995 agreement. Indeed, the court observed that Scovill continued to list the plant on its insurance policy after the 1986 transaction. Thus, the court held, so there was no assumption of liability.

The plaintiffs also asserted that SBI and Arvin were liable under the mere continuation theory. The facts that plaintiffs relied on were that Schrader Automotive Group employees became SAI employees and performed the same work after the transfer to SAI, Plaintiffs also pointed to the fact that Arvin and Schrader Automotive Group had the same general manager. The court ruled there was no successor liability under a mere continuation theory because there was no common identity of stock, shareholders and directors among SBI and Scovill or Arvin.

Plaintiffs had also pointed to an affidavit that SAI removed waste materials from the Dickson Plant. However, the court said the public records reflected that Scovill was the cleanup lead for the property. Moreover, the court said the contamination described in the affidavit related to metal sludge materials deposited offsite from the Dickson Plant and was unrelated to plaintiffs’ claims about TCE-contaminated groundwater.

Finally, the court said that even if SBI or Arvin could be considered to be successors to SBI’s, their liability would be limited to the extent of Scovill’s liability. However, the court explained, plaintiff’s settlement with Scovill settled SBI’s liability. As a result, the settlement also extinguished SBI’s and ArvinMeritor’s liability for those claims.

Ameripride Services. v. Valley Indus. Services, 2011U.S. Dist. LEXIS 55634 (E.D.Ca. 5/12/11) discussed how delays or failure to comply with CERCLA reporting requirements may impact a claim for contribution or cost recovery.

In this case, Texas Eastern Overseas, Inc (TEO) conducted industrial dry cleaning at a facility until 1983 when it sold the property to a predecessor of AmeriPride Services. While working on a trench as part of an expansion project in 1983, employees of AmeriPride employees smelled fumes that they identified as PCE. The discovery of PCE fumes was not reported to any authorities and concrete was placed over the contaminated soil. In August 2001, PCE was detected in water from two nearby wells. The California Regional Water Quality Control Board (“RWQCB”) issued a number of abatement orders to AmeriPride who incurred over $18MM in response costs. Ameripride sought cost recovery from TEO. Interestingly, TEO had been dissolved but was reinstated under a receivership in a separate proceeding to allow the plaintiff to pursue TEO’s insurance policies.  See In re Texas Eastern Overseas, 2009Del.Ch. LEXIS 198 (Del. Ch. 11/30/09)’ aff’d. by 998 A.2d 852 (2010).

Ameripride and TEO filed motions for summary judgment. AmeriPride sought 100% of its costs asserting that all of the contamination pre-dated its ownership. TEO argued that Ameripride was at least partially responsible because wastewater discharged by AmeriPride contained PCE from washing of uniforms and industrial clothing contaminated with solvents. TEO pointed to a number of discrete spill incidents. TEO also alleged that the leaking sewer system aggravated the pre-existing PCE contamination by mobilizing PCE in the soil so that it migrated into the groundwater.

TEO also alleged that AmeriPride’s costs had not been incurred consistent with the National Contingency Plan (NCP) by failing to report the discovery of PCE in 1983. Specifically, TEO pointed to 40 C.F.R. § 300.700(c)(5)(iv) where one of the indicia of “substantial compliance” with the national contingency plan was reporting of releases as set forth in 40 C.F.R. § 300.405.

The court noted that parties seeking cost recovery or contribution have to demonstrate “substantial compliance” with the NCP. The court agreed that a party whose failure to timely report a release caused contamination to become worse should bear the costs of the increased costs. However, the court said that noncompliance with the reporting requirement by itself would not render the incurrence of response costs inconsistent with the national contingency plan.

The court also said that TEO’s broad interpretation would undermine the goals of CERCLA. The court explained that if TEO’s approach was adopted, if a party failed to report a discharge and this delayed a cleanup, the party would be forever barred from recovering response costs. The court reasoned this would diminish if not wholly eliminate a party’s incentive to clean the site. Moreover, the court said this would also make a violation of reporting requirements a more extreme violation of CERCLA than discharge of pollution itself since even a party responsible for the majority of pollution can bring a contribution claim against another party to recover the small fraction of costs attributable to the second party. TEO’s interpretation would have the effect of removing a key incentive for the non-reporting party to remediate the site, thereby frustrating CERCLA’s primary purpose.

Instead, the court said the failure to report could be one factor that may be evaluated together with other violations in determining substantial compliance. Finally, the court suggested that the failure to timely report that results in delayed cleanup and exacerbated contamination should more properly be considered by a court when allocating liability in a contribution action. The court then held that the reporting requirement created a triable question as to whether TEO was 100% responsible and denied AmeriPride’s argument for summary judgment.

In Precision Brand Products. v. Downers Grove Sanitary District, 2011 U.S. Dist. LEXIS 88009 (N.D. 8/811), the Illinois Environmental Protection Agency (“IEPA”) detected TCE in private wells  serving a residential community adjacent to the Ellsworth Industrial Park (EIP) in Downers Grove, Ill in 2001. The federal EPA conducted an investigation and issued PRP notices. A number of PRPs entered into an Administrative Settlement Agreement and Order to implement a remedial investigation and feasibility study (RI/FS). In 2004, residents filed a class action lawsuit alleging contamination from the EIP had impacted their drinking water. The plaintiffs sought damages for loss of property value and exposure due to drinking or using contaminated water as well as vapor intrusion or off-gassing from hot water used in bathing and cooking. Eventually, the class action was settled in 2006 for approximately $16MM .

Precision Brand Products (Precision) subsequently filed a contribution action against various parties associated with the EIP for past and future remedial responses costs, including the costs of the government RI/FS and expenses to connect 600 residences to the municipal water supply.  One of the named defendants defendant was Corning, Inc.

Precision alleged that Coming was a responsible party as a corporate successor.  According to the complaint, Harper-Wyman Company (“Harper”) owned and operated a manufacturing facility in the EIP from the mid-1960s to the early 1970s where it used a degreasing operation that used solvents. In 1971, Harper discontinued its operations at EIP and sold the property to Lovejoy who did not use the contaminants of concern, TCE or PCE.

In 1999,Corning became an indirect owner of Harper as a third-tier parent  through two other wholly owned subsidiaries. At the time of acquisition, Harper was a wholly-owned subsidiary of OakGrisby which, in turn, was 100% owned by Oak Industries, Inc (Oak Industries).Corning formed a wholly-owned subsidiary, Reisling Acquisition Corporation (Reisling), which was merged with Oak Industries who became the surviving corporation. Each share of common stock of Oak Industries was cancelled and converted into the right to receive 0.83 shares of common stock of Corning. In 2002, substantially all of Harper assets were sold to Appliance Controls Group. The agreement provided that the selling “Oak Parties” retained the existing environmental liabilities associated with Harper’s business.

On its alter ego (veil piercing) claim, Precision argued that Corning had assumed control over Harper’s environmental matters from 2000 through 2005. However, the court said the problem with Precision’s alter-ego theory was that a company cannot be liable for the acts of an alleged wrongdoer under an alter-ego theory for actions that occurred before the company controlled the alleged wrongdoer. Since the operations that could have contributed to contamination occurred 28 years before Corning acquired Harper, the court said Precision could not plausibly suggest that Corning controlled Harper at the time it discharged solvents at the EIP.

On the successor liability claim, Precision asserted that Corning had assumed the environmental liabilities through the merger agreement. Precision relied on a prior decision in a related case where Lovejoy had sought contribution from Corning. In that case, Muniz v. Rexnord Corp., 2006 U.S. Dist. LEXIS 81267 (N.D. Ill. Nov. 2, 2006), the court denied Coming’s motion for summary judgment. However, the court its denial of Coming’s motion for summary judgment was because there were multiple genuine issues of material fact exist on if Corning impliedly agreed to assume Harper’s liabilities, if the transaction resulted in a de facto merger, and if the purchaser was a mere continuation of Harper.

In the motion to dismiss, the issue before the court was the sufficiency of the pleadings. The court said that Precision did not allege any facts that would support a reasonable inference that any of four exceptions to the general rule that a purchaser of corporate assets does not acquire the liabilities of the seller. The court said that Precision simply alleged that Corning became the indirect 100% owner of Harper  through various transactions and that as a result of these transactions and agreements and its subsequent actions,Corning had succeeded to and was legally responsible for Harper’s operations at EIP. The court ruled that such threadbare recitals and conclusory statements were insufficient to state a plausible claim for relief.

Precision did request leave to amend its complaint to incorporate the facts from the Muniz action if the court grantedCorning’s motion. The court dismissed the claims against without prejudice and said Precision could request the right to amend its complaint. Subsequent to this decision, a confidential settlement was reached.

Hobart Corp v Waste Management of Ohio, 2011 U.S. Dist. LEXIS 148224 (S.D.Ohio 2/10/11) is an obscure decision from 2011 but has some complaint drafting lessons.

This case started off as a classic CERCLA contribution action for a landfill cleanup. The plaintiff entered into a settlement with EPA to perform an RI/FS and then decides to invite other arrangers to the party. The defendants raised the now routine  Twombly pleading argument that the complaint did not sufficiently allege the intent to dispose required by the Supreme Court decision in Burlington Northern & Santa Fe Ry v U.S., 556 U.S. 599 (2009) which the court rejected.

But then the plaintiffs added a claim against adjacent property owners that they had arranged for disposal on their property and then allowed the contaminated groundwater to migrate onto the landfill.  The court asked the plaintiffs if they only intended to assert “arranger” liability and the plaintiffs confirmed. The court found this allegation to be too vague as to the “intent to dispose” hazardous substances on the landfill site,and granted the defendants’ motion to dismiss on the “migration” claim.

The plaintiffs could have simply alleged that these parties were owners or operators of the adjacent site where the disposal took place and that the release then migrated to the landfill. It is unclear why the plaintiffs chose to limit their claim to arranger liability

From a purely legal standpoint, the recent ruling In Tennessee v. Roane Holdings Ltd., 2011 U.S. Dist. LEXIS 143703 (E.D.TN 12/14/11) was not unusual. The court ruled on a motion to dismiss that a party who had entered into an administrative order on consent could not bring a cost recovery action under CERCLA section 107 but instead was limited to bringing a section 113(f) contribution action. This opinion was consistent with decisions that have been entered by the 2^nd, 3^rd and 8^th Circuits.

Instead, the reason this case caught my attention was that it was the identity of one of the third party defendants- Citigroup, Inc. This case was the latest example of the banking conglomerate becoming ensnarled in CERCLA litigation because of legacy liabilities it incurred from prior acquisitions.

Much of the environmental due diligence performed for commercial real estate and multifamily properties transactions is a result of requirements imposed by banks as conditions for issuing loan commitments. In many ways, lenders frequently act as surrogate regulators, requiring borrowers to investigate and remediate contamination.

However, when it comes to their own transactions, lenders sometimes follow the old adage “Do as I say, not as I do” and may perform a level of due diligence that is less rigorous than they would require of their borrowers.

Perhaps the most glaring example involved the White Swan Cleaners superfund site in Sea Girt,New Jersey. The White Swan Laundry and Cleaners had operated at the site located in Wall Township,New Jersey. PCE had been was discharged from the dry cleaner into two on-site septic systems where it subsequently migrated into the groundwater.

Sometime after dry cleaning operations ceased, the property was acquired by Summit Bank who converted it to a bank branch. Fleet Bank then took title to the property when it acquired Summit Bank. Apparently, neither bank appeared to perform the kind of environmental due diligence that they customarily expect from their borrowers. They decided to not do any diligence-not even transaction screens on the branch offices. Had the banks examined the historical use of the property, they would have learned about the dry cleaner and also that the property had a septic system.

In any event, after Fleet took title to the property, the New Jersey Department of Environmental Protection (“NJDEP”) then conducted its own investigation and detected PCE in one of the municipal wells used byWallTownship. Elevated levels of PCE vapors were also detected in the basements of several residential and commercial properties.  Interim remedial actions have been implemented at the site including installation of vapor control systems, and site characterization is underway. Needless to say, the bank is paying dearly for its decision not to do any diligence on this branch office.

Turning back to Citigroup, the company has become involved in a number of federal superfund sites because of its merger with 1998 Travelers, Inc. Under the leadership of Sandy Weill, Travelers had gone on an acquisition binge in the 1990s that brought along with those investments lots of CERCLA liability.

For example, in 2003, Citigroup entered into a $7.2MM settlement resolving the liability of S.W. Shattuck Chemical Company (“Shattuck”) for a former radium-processing plant located inDenver. Citigroup Inc. became involved in this site through its merger with Travelers who, in turn, had acquired Salomon Inc in 1997. Salomon had acquired Philbro Resources Corporation in 1981. Philbro was a spin-off of Phillip Brothers, which had been acquired by Englewood Minerals and Chemicals. Salomon (renamed Salomon Smith Barney after it was acquired by Travelers in 1997) had issued corporate guarantees of Shattuck’s obligations in 1993 and 2000.

In June 2009, Citigroup subsidiary, MRC Holdings, agreed to implement a groundwater cleanup estimated to cost $6,700,000 at the MRI Superfund Site in Florida. This followed a December 2001 settlement where the firm agreed to perform a soil cleanup estimated at $2,130,111, and to reimburse the federal government nearly $1MM in past costs. MRC Holdings was a successor to American Can Company which became Primerica in 1986. Primerica acquired Smith Barney in 1987, Commercial Credit Corporation acquired Primerica in 1988 and the combined company became Primerica which merged with Travelers in 1993.Citigroup then merged with Travelers in 1998.

MRC Holdings is also the reason that Citigroup was named as a PRP in 2010 at the Gowanus Canal Superfund Site in New York City. Citigroup/MRC Holdings is part of the PRP group that agreed to perform the remedial investigation at this site.

Turning back to the Roane Holdings case, Citigroup was brought into the litigation as a successor to Phillip Brothers which had manufactured ferroalloys at the site when it was by Engelhard Minerals and Chemical Corporation (“Engelhard”). As discussed above, Engelhard spun off as Philbro in 1981 which then merged with Salomon, Inc. In 1997, Salomon was acquired by Travelers which then merged with Citibank in 1998.

The manufacturing operations at theTennesseesite generated slags along with bag house dust from pollution control equipment. These waste materials were stockpiled on the site during ownership of a number of entities. After operations ceased, decommissioning activities occurred. In 1987, the Tennessee Department of Health and Environment (the “TDHE”) commenced an investigation following complaints about discoloration and high pH in Cardiff Creek. The site was added to the state superfund list in 1989 and remedial actions were implemented.

Following sediment sediments in 2003, the state requested additional remedial measures to prevent migration of wastes from the site.  Additional investigation was performed that resulted in Administrative Consent Order (the “AOC”) in January 2009 to implement remedial measures.

In November 2010,Tennessee filed a cost recover action against Roane Holdings which resulted in the entry of a Consent Decree where Roane agreed to reimburse the state for its past response costs. In February 2011,  Roane filed a third party complaint Citigroup and others seeking cost recovery and contribution.

Environmental due diligence in corporate transactions often resembles a good mystery novel or an investigative journalism piece. The environmental lawyers and consultants have to review the corporate history and identify potential liabilities associated with the various iterations of the company being acquired including owner or operated sites as well as sites where wastes may have been sent. Then, we have to trace the liabilities through the various transactional agreements and evaluate which liabilities were conveyed in prior transactions, what liabilities may have been retained but the company received an indemnity, if that indemnity is associated with a viable entity, if the terms and conditions of the indemnity remain in effect, and finally what liabilities have followed the target company. After the liabilities are understood, then the negotiating and drafting can occur though for me that tends to be less fun than the detective work.

The Court of Appeals for the Eleventh Circuit joined the 2^nd,3^rd and 8^th Circuits in holding that a PRP that incurs response costs pursuant to a consent decree may only recover its costs through a section 113(f) contribution action and may not bring a 107 cost recovery action.

In Solutia v McWane, 2012 U.S.App. LEXIS 4634 (11^th Cir. 3/6/12), EPA brought an enforcement action against Solutia and Pharmacia to address contamination at the  Anniston PCB and Lead sites. Monsanto Company had produced PCBs at the Anniston plant from 1929 to 1971. In 1997, Monsanto spun off Solutia which now owns and operates the Anniston plant. In 2000, Monsanto and Pharmacia & Upjohn merged and resulted in the creation of Pharmacia Corporation.

In 2003, Solutia and Pharmacia entered into a Partial Consent Decree (PCD) in 2003 where the companies agreed to address the Anniston sites.  As is typical with CERCLA settlements, the PCD reserved the rights of Solutia and Pharmacia to bring CERCLA contribution actions. Nearly two years later, EPA entered into a separate settlement agreement with the Foothills Community Partnership (Foothills) that provided contribution protection to Foot. Solutia & Pharmica filed a motion to with the district court that had approved the settlement arguing that the Foothill settlement undermined their contribution rights. The District Court agreed that the EPA had repudiated the PCD and indicated that, upon motion, he would suspend Solutia & Pharmacia obligations under the consent order. Solutia & Pharmacia  never took the District Court up on its offer and in July 2006 they entered into a Stipulation that clarified specified geographical areas where the parties would remediate lead contamination.

In the meantime, Solutia & Pharmacia filed a contribution under § 113(f) costs incurred at the Anniston Lead and PCB sites along with a § 107 cost recovery action for response costs incurred at the Anniston Lead Site. The parties to the Foothills settlement moved for for summary judgment on the § 107(a) recovery and § 113(f) contribution claims. Two other PRPs who were not parties to the Foothills settlement also moved for summary judgment on the § 107(a) recovery claims.

In June 2008, a magistrate judge for the district court for the northern district of Alabama granted summary judgment to the settling defendants on the § 113(f) contribution claims because of the contribution protection provided by the settlement. However, the judge ruled that Solutia & Pharmacia could proceed with their § 107 cost recovery claim against all defendants.

Following the United States Supreme Court decision in U.S v. Atlantic Research Corp, the Defendants filed motions for reconsideration. The Magistrate Judge vacated his prior order and entered summary judgment against Solutia & Pharmacia  on their § 107(a) claims. The Judge ruled that because the PCD and the Stipulation granted Solutia & Pharmacia contribution rights under § 113(f) for certain costs, they could not choose to bring their claims under § 107(a) for those same costs.

Solutia & Pharmacia appealed to the 11^th Circuit, arguing that there was no language in either § 107 or § 113 to suggest that § 107(a) and § 113(f) were mutually exclusive remedies. However, the court said that if a party subject to a consent decree could simply repackage its § 113(f) claim for contribution as one for recovery under § 107(a), this would destroy CERCLA’s statutorily-created settlement incentive. Moreover, the court said that if parties like Solutia & Pharmacia were able to bring 107 cost recovery actions, settling defendants would be barred from asserting any § 113(f) counterclaims since the plaintiffs would have already entered into a judicially approved settlement with the EPA.

Dry cleaners may be small businesses but they have a disproportionate impact on the environment. Studies suggest that at least 75% of the dry cleaners in operation prior to 2000 have probably had releases of PCE which means lots of strip malls and shopping centers may have been contaminated by PCE.

Not surprisingly, dry cleaner contamination has spawned lots of litigation that has ensnared property owners, family trusts, property managers, equipment manufacturers, franchisors, equipment financiers, PCE suppliers and even local governments that owned the sewer systems from which the PCE may have leaked. A recent example is Lewis v Russell, 2012 U.S. Dist. LEXIS 26393 (E.D.Ca. 2/29/12).

In this case, the plaintiffs had operated a dry cleaner business in Davis,California from 1975 to 1996. After the California Regional Water Quality Control Board (“RWQCB”) discovered PCE in the soil and groundwater, the agency issued a Cleanup and Abatement Order in 2002 to the current and past owners and operators of the Property to investigate the extent of the PCE contamination and to prepare work plans to address the contamination.

The plaintiffs filed a complaint in 2003 seeking cost recovery and contribution from a variety of former owners and operators of the property including a number of family trusts, equipment manufacturers, PCE suppliers and the City ofDavisas owner of the sewer system under CERCLA and state common law theories.

The plaintiffs alleged that one of the defendants, Ben Newitt, had operated the dry cleaning business from 1971 to 1975. Mr. Newitt asserted that his now-deceased brother, Philip, had operated the business. Mr. Newitt said his only role with the business was to provide his brother with a loan and that because he held title to the dry cleaning equipment as security for the loan, he was entitled to secured creditor exemption.

An equipment financer of a plating operation had asserted the secured creditor exemption in U.S. v. Saporito, 684 F. Supp. 2d 1043 (N.D.Ill. 2010). In that case, the defendant has stated that his purchase and leasing of the equipment was “part of his efforts to get his money back”. However, the court said there was no evidence to supports his bare assertion that he owned the equipment primarily to protect a security interest.

In the instant case, the parties notified the court that they had agreed to a proposed settlement where Newitt would pay the plaintiffs $25K. In their motion asking the court to approve the settlement, the parties said that the settlement was within the reasonable range of Newitt’s potential liability and ability to pay, that he was elderly, in ill health, uninsured, and his was only affiliated with the Property for four of the approximately forty-one years it used as a dry cleaning facility.

When reviewing CERCLA settlements, courts evaluate if the settlement is fair, reasonable, and adequate. The court said that although the parties did not explain how the $25K settlement payment compared to the total clean-up costs. However, the court said that the fact that the plaintiff would bear the risk if the settlement proves inadequate and that the parties contend that the amount was reasonable suggested that the settlement should be approved.

The second our series of recent cases involving the due care element of the CERCLA third party defense is State of New York v Adamowicz, 2011 U.S. Dist. LEXIS 102988 (E.D.N.Y. 9/13/11) where a property owner was unable to establish that it exercised due care despite spending over $1MM addressing environmental concerns at its site. The problem was that it waited too long to respond to the environmental concerns caused by its tenant.

In this case, National Heatset Printing (NHP) entered into a five-year lease in 1983 for a building located in East Farmingdale, New York.  NHP used the premises for lithographic tri-color printing and generated a variety of hazardous wastes including wastes solvents and used inks. A the time of the lease, the property was owned by the Michael Adams Co., Inc with partial ownership interests held by Michael Adamowicz individually and as trustee of the Michael Adamowicz IV trust, and Mary Adamowicz, as trustee for the Bonnie Anne Fraser and Mary Margaret Fraser trusts. The One Adams Blvd. Realty Co (OABR) partnership managed the property.

Soon after the lease, the Suffolk County Department of Health Services (“SCDHS”) notified NHP that its discharge of wastewater into the on-site leaching pools was a violation of state and county environmental laws. The SCDHS advised NHP that it either had to connect the discharge to the municipal sewer system or cease all industrial discharge. Two years later, the SCDHS observed waste drums stored outside without secondary containment and soil stained from inks and oils. MHP entered into an Order on Consent with SCDHS that required NHP to clean out the leaching pools and bring its facility into compliance. The property was eventually connected to the municipal sewer system in January 1987 but the liquids and sludges in the leaching pools were not removed despite a series of notices in 1988 from the SCDHS to both NHP and the property owner. In November 1988, SCDHS issued a complaint against Adamowicz.

Meanwhile, NHP filed a chapter 11 bankruptcy petition in November 1987 that was converted to a Chapter 7 case in 1988. The bankruptcy court ruled that the NHP lease was terminated as of June 17, 1988 and that OABR could take possession of the property by that date. The court issued the final decree for the Chapter 7 bankruptcy in December 1992.

In 1988, OABR began implementing response actions at the site. These actions included retaining consultants to remove the contents of the leaching pool, investigating the pool’s connection to an overflow pool, removing drums and containers abandoned by NHP, implementing a remedial investigation and a treatment system for the PCE.

In 1990, the OABR partnership acquired title to the site. Also that year, Elizabeth Fraser succeeded Mary Adamowicz as trustee. In 1996, the OABR partnership conveyed the Site to OABR Corp.

In February 1994, the New York State Department of Environmental Conservation (“NYDEC”) notified Adamowicz that the agency was considering placing the site on the state superfund list but offered OABR the opportunity to voluntary undertake cleanup. When OABR Corp declined to remediate the site, the NYSDEC implemented response actions. During the investigation, the NYSDEC identified contaminated groundwater migrating toward a residential area that was served by private wells. In response, the Suffolk County Water Authority connected six residences and three businesses served by these wells to the public water supply at a cost of $24MM. By the 2009, the NYSDEC incurred $4MM in response costs and sought cost recovery under CERCLA.

The State of New York filed a motion for summary judgment against OABR Corp as the current owner and the trust beneficiaries. In an unpublished order dated March 31, 2011 (doc. 222), the court granted but denied the motion against the trust beneficiaries. The court denied a motion for reconsideration that is cited above.

The court found that OABR was liable both as a current owner and as a successor to the OABR partnership who had owned the property at the time of the releases identified by SCDHS. OABR asserted the third party defense, claiming it had not been in a contractual relationship with NHA when SCHDS had confirmed contamination in early 1988 because the November 1987 bankruptcy filing had the effect of terminating the lease. However, the court said the lease did not terminate until the lease was deemed rejected by the court in June 1988.

Moe relevant to our discussion, the court said that even if the lease had been severed by the bankruptcy filing in 1987 and that release occurred after that date, the OAB Defendants had failed to demonstrate that they satisfied the “due care” and “precautions” elements of the third party defense. In supporting its due care argument, the OABR defendants contend that they had spent over $1MM to address concerns of the state and country regulators since early 1988. The State responded that the February 1988 SCDHS letter had directed NHP and the owner to immediately remove all liquids and sludge from the leaching pools, that OABR Corp knew that NHP operated a photo-plate making and printing business, that the building was not connected to the public sewer system until 1987, and that NHP used leeching pools at the Site.

The Court agreed with the NYSDEC that OABR Corp had not established the due care and precautionary elements. First, the court said the defendant owners knew the nature of NHP’s business from the lease and periodic inspections by Adamowicz or his father. Second, the court noted the lease expressly gave the landlord the right to enter the premises if it was abandoned or the tenant had defaulted on its rent payments, and that this right of re-entry had been triggered by that time the state inspectors had observed staining and improperly stored drums. Despite knowing the site contained numerous leeching pools, that discharges to cesspool system where prohibited and the environmental conditions at the site, the court said the OABR defendants failed to take any action for five years. The court also observed that these events took place prior to NHP’s filing for bankruptcy and prior to the February 1988 SCDHS letter. Moreover, the noted that unlike other “due care” cases, OABR Corp was not a new owner confronting the scope of its duty to investigate a new property acquisition but instead it or its predecessor had been in possession of the site since at least 1980 and charged with the knowledge of the environmental conditions at the site. Accordingly, the court ruled that OABR Corp has not shown it is entitled to the protection of an affirmative defense under CERCLA.

The portion of the decision ruling that the trust beneficiaries of a distributed trust was also interesting and will be the subject of later post.

In Burlington Northern & Santa Fe Railway Co. v. United States, 129 S.Ct. 1870 (2009), the United States Supreme Court held that to establish that a defendant is a CERCLA “arranger” or generator under § 9607(a)(3), a plaintiff must  establish that the defendant intended to dispose hazardous substance. The court said that while an entity’s knowledge that a product it sells will be discarded may be a probative factor of its intent to “dispose of” that product, mere knowledge of future disposal will not trigger arranger liability.

Many commentators predicted the decision would allow many parties to elude liability for contribution or cost recovery at hundreds of superfund sites. While Burlington Northern has spawned additional rounds of discovery and motion practice, the predicted demise of generator liability has been-to paraphrase Mark Twain- greatly exaggerated. A recent decision from the Court of the Appeals for the First Circuit illustrates this point.

In United States v. General Electric, 2011 U.S. App. LEXIS 4148 (1^st Cir. 2/29/12), two GE plants in New York manufactured capacitors that contained Pyranol that was valued for its dielectric properties. To manufacture Pyranol, GE purchased virgin Aroclors from Monsanto that was processed or refined until it achieved certain purity specifications. Pyranol that did not achieve the purity specifications was and stored in 55-gallon drums. The drums were labeled as “scrap Pyranol,” “waste Pyranol,” “scrap oil,” and located in designated salvage areas.

According to the opinion, GE eventually accumulated a glut of scrap Pyranol and explored a variety of arrangements to reduce its scrap Pyranol stockpile, including transferring scrap Pyranol to local landfills, selling it to local government entities for road dust suppressant, giving it away to its employees for use as a weed killer, or discharging it into the Hudson River. Meanwhile, Fred Fletcher (“Fletcher”) who owned a number of paint manufacturing and storage businesses had also been purchasing Aroclors from Monsanto as a “plasticizer” additive for his paints.

In the mid-1950s, Fletcher struck a deal with GE where he would buy scrap Pyranol to satisfy his plasticizing needs for what was characterized by the court as “bargain pricing.” During the ten-year period, Fletcher purchased over 200,000 gallons of scrap Pyranol ten year period, with almost half of the volume purchased between early 1966 and November 1967 when GE started using the third party transporter.

Sometime in 1966, Fletcher stopped making payments for what had become monthly shipments of scrap Pyranol. In November 1967, GE sent a collection notice to Fletcher. In response, Fletcher sent a letter to GE informing the company that the quality of the scrap Pyranol he received had markedly declined in recent years so that many of the scrap Pyranol drums Site were unusable. According to the court opinion, Fletcher wrote” All of a sudden we could not dispose of this Pyranol as you had apparently added something and we could find nothing to neutralize the additive you were using. Secondly you put the Pyranol in badly contaminated drums . . . . [Y]ou have shipped drums one quarter and one half full and drums of more than half water. In other words, what we were buying as a reasonable scrap product, turned into a large percentage of what is known as garbage in the Chemical trade.”

Fletcher proposed that GE retrieve those drums he could not use. He also said he would not accept receive any additional scrap Pyranol unless GE could ensure higher quality material. In response, GE conducted sampling of the scrap Pyranol drums to corroborate Fletcher’s claims that he had received poor quality scrap Pyranol. The testing confirmed Fletcher’s claim that much of the scrap Pyranol sent Fletcher in recent years had contaminated and/or unusable. GE then decided to forgive Fletcher’s debt but made no effort to retrieve or otherwise properly dispose of the thousands of drums of scrap Pyranol.  Indeed, a former GE employee testified at the trial that “We just hoped he was able to use some of it, and the balance of it he could dispose of it.” (court added emphasis)

In 1987, EPA found hundreds of drums at the Fletcher Site and implemented response actions. EPA sought cost recovery from GE in 2006 and following a bench trial, the federal district court for the district of New Hampshire ruled GE was liable as a CERCLA arranger. Following Burlington Northern, GE filed a motion requesting the court withdraw its ruling, arguing that it had sold a useful product and had not intended to dispose of hazardous substances.

The district court acknowledged that Fletcher used an unknown amount of scrap Pyranol as a plasticizer agent in his paint making operations. However, the court said the record was devoid of any evidence suggesting there was a general demand for scrap Pyranol.  The court said that if use as a plasticizer ingredient was indeed a practical or sustainable application for scrap Pyranol, GE as sophisticated profit-seeking entity would have either used it as an additive in its own paint making operations or sought to expand the market for its scrap Pyranol to purchasers other than Fletcher

The appeals court affirmed, finding that GE’s actions and inaction provided sufficient inference that GE had not sold a useful product but that the purpose of the Fletcher relationship was to dispose of hazardous substances. The court said that the fact that GE viewed the scrap Pyranol in its salvage areas as a waste product was not by itself sufficient to bring GE within the purview of arranger liability. It was the nature of GE’s dealings with Fletcher, the court said, showed that GE possessed the element of intent necessary to qualify as an arranger.

To evaluate GE’s intent, the court said it was necessary to examine what GE understood or knew what Fletcher intended to do with the large volume of scrap Pyranol that it received from GE during the relevant time period. The court said the record sustained an inference GE knew or otherwise understood that Fletcher was a small paint company that used an unknown amount of the scrap Pyranol he purchased as a plasticizer in his paint manufacturing operations. The court said that GE also understood that Fletcher saw some value in the scrap Pyranol because he paid for it and at times complained the quality of the material or rejected some material after testing it.

However, the court also noted that the GE-Fletcher relationship was dynamic and had evolved over time. The court pointed out that initially GE gave Fletcher between 100 and 500 drums of scrap Pyranol at no charge. Starting in 1956, though, GE required payment of $3.50 to $4.00 per drum. In addition, Fletcher was initially allowed to replace drums he claimed to be unusable free of charge. In 1964, GE began requiring Fletcher to pay for each drum that Fletcher transported from GE facilities to the Site. As a result, Fletcher’s employees started testing drums of scrap Pyranol for quality assurance at GE facilities before loading them onto Fletcher’s truck, and rejected those that failed the tests. GE started using a third party vendor to ship the drums to Fletcher in 1966.

The court said the arrangement between Fletcher and GE changed again during 1966. The court found that GE’s conduct over the following two years left little doubt that GE availed itself of its relationship with Fletcher to rid itself of the scrap Pyranol in its inventory. The court said there was nothing in the record that Fletcher solicited or wanted the dramatic increase in volume between 1966 and 1967. Indeed, the court said the evidence suggested that during this final stage of the GE-Fletcher relationship, GE largely controlled the flow of scrap Pyranol between GE facilities and the Fletcher Site.

The letter that Fletcher wrote in response to the GE letter was perhaps the proverbial icing on the cake to the court. The panel held that the letter put GE on notice that (1) large quantities of the hazardous substances that it had provided were of absolutely no use to Fletcher and were, at that moment, “piled” at the Fletcher Site, (2) Fletcher had not consciously accepted large quantities of the chemicals GE had delivered at the Fletcher Site (3) importantly, that Fletcher expected GE’s cooperation in resolving the matter of the more than 1,800 55-gallon drums of unusable chemicals sitting at the Site

Also persuasive to the court was GE’s actions and inactions after being advised by Fletcher that he had no use for large quantities of the scrap chemicals GE had sent because they were contaminated and had asked . Summing up the record, the court said it was clear that: (1) GE considered scrap Pyranol waste material; (2) because Fletcher, a “chemical scrapper,” saw some value in GE’s scrap Pyranol, GE, in turn, saw in Fletcher an auspicious and efficient manner in which to rid itself of thousands of gallons of scrap Pyranol; (3) GE understood that not all of its scrap Pyranol would be of use to Fletcher; (4) during the last years of the GE-Fletcher relationship, GE largely controlled the amount and quality of the scrap Pyranol shipped from its facilities to the Fletcher Site; (5) during this same period, scrap Pyranol transfers from GE to the Fletcher Site increased drastically and continued even once Fletcher became delinquent in paying his account; (6) Fletcher eventually complained that GE had sent him considerable amounts of contaminated or otherwise unusable scrap Pyranol — a claim that GE eventually confirmed through its own testing — and asked that GE retrieve those drums that were of no use to him; (7) crunching numbers, GE then concluded that writing off Fletcher’s debt and unburdening itself of the responsibility to dispose of the scrap Pyranol represented a more financially advantageous option than complying with Fletcher’s request; and (8) in accordance with this conclusion, GE took no further action, leaving Fletcher to dispose of the scrap Pyranol as he best saw fit.

Reviewing the total record, the appeals court said the evidence established that GE purposefully entered into its arrangement with Fletcher to rid itself of the scrap Pyranol. Though the initial informal arrangement may not have directed Fletcher to dispose of GE’s scrap Pyranol, the court said, GE certainly understood this would be the result of its actions and took the conscious and intentional step of leaving Fletcher to dispose of the materials.

The Supreme Court has now issued three important CERCLA decisions in the past ten years that appeared to undo two decades of CERCLA jurisprudence. Each time, the pundits have predicted that the decision could seriously curtail CERCLA liability. However, like the movie Night of the Living Dead, all these decisions have really done is to great lots of additional rounds of litigation with little impact on liability-albeit with some outliers. The only ones who seem to have benefitted from the Supreme Court wadding into the CERCLA liability pool have been the clever CERCLA litigators. Some wags have suggested that CERCLA has helped finance two generations of college students. If the Supreme Court keeps intervening in CERCLA litigation, CERCLA may reach middle age before it stops financing higher education.

An Illinois appeals court ruled that an insurer had a duty to defend a successor  of an insured where the insured made an assignment of benefits pursuant to a asset sales agreement. The assignment of benefits had been made without consent of the insured and the insurance policy had contained an anti-assignment clause..

In Illinois Tool Works, Inc. v Commerce and Industry Insurance Company and United States Fire Insurance Company, 2011 Ill. App. LEXIS 1250 (App. Ct. 12/12/11), a landlord had filed a lawsuit against its former tenant, Binks Manufacturing and Illinois Tools Works (ITW)as successor to Binks, for contamination alleged to have been caused by the tenant operations.Binks had leased the property from 1959 to 1998 when it sold its assets to a predecessor of ITW who continued to lease the premises until 2003 As part of the asset purchase, ITW received an assignment of rights to all insurance Binks’ insurance policies.

Defendants Commerce and Industry Insurance Company (C&I) and United States Fire Insurance Company (USF) defended Brinks in the lawsuit filed by the landlord but declined to defend ITW. In 2006, ITW  filed a declaratory judgment action in Illinois state court seeking a ruling that C&I and USF had breached their policies by refusing to defend ITW in the underlying landlord litigation. ITW asserted that it was entitled to a defense because it was a successor of Binks and had been assigned the rights under the policies.

On cross-motions for summary judgment, the trial court ruled in favor of the insurers but the appeals court reversed, holding that an assignment of rights can be made without consent of an insured since such as assignment does not expand the risk to carriers as the assignor cannot grant rights greater than it has under ther policy. The court also said that an assignment of a policy can be made without the insurer’s consent where a loss has occurred. Since in this case, the contamination had occurred prior to ITW’s purchase of the Binks assets, the court held the assignment was valid and the insurers should have provided defense to ITW,