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.

It is hard to tell if Malcolm Carter Enterprises v. Microsemi Real Estate, Inc., 2011Cal. App. Unpub. LEXIS 3583 (Ct. App.-4th Div 5/12/11) is a case of buyer’s remorse, sloppy drafting or simply the lack of a meeting of the minds. It is surprising that what should have been a fairly straight-forward transaction resulted in a bench trial, a motion for summary judgment and two trips to the appeals court.

In this case, a two-acre parcel of real property inSanta Ana,California(Parcel 17) had been part of a larger manufacturing site. Parcel 17 had been used as the parking lot for the larger site. Because a cleanup was being performed at the adjacent manufacturing site, the defendant initially wanted to lease Parcel 17 until the cleanup at the adjacent site was completed. Thus, in 1996, plaintiff agreed to lease Parcel 17 and also executed a 30-year option purchase agreement. The option provided that it would terminate ninety days after the plaintiff obtained a no further action or other similar letter from the appropriate governmental agency upon completion of the “remediation of the environmental conditions on the Property as set forth in this Agreement or in the Lease”. Neither the lease nor the option agreement defined “environmental conditions” nor did they contain any exhibit or disclosure schedule identifying the “environmental conditions.”

Prior to the execution of these agreements, plaintiff provided defendant with a phase 1 report. The report indicated that Parcel 17 had been a parking lot and before then had been used for agriculture purposes. The report said there were no underground or aboveground storage tanks and no signs of significant staining or significant sources of contamination were observed. The report did indicate that pesticides, herbicides, and fertilizers may have been used on the site in connection with the past agricultural use but were unlikely to exist in concentrations that would pose a risk or that a government regulatory agency would require to be remediated. Indeed, the only potential environmental condition identified was petroleum hydrocarbons and VOCs that had leaked or overflowed from a clarifier and its associated surface drain at the adjacent manufacturing plant.. The report said subsurface investigations performed by a consultant for that site had not detected any significant contaminants on the Parcel 17 and that the soil contamination on the adjacent site had  been remediate to the satisfaction of the California Regional Water Quality Control Board, Santa Ana Region (the Board). The report did indicate the Board had some concern for a residual plume of contaminated groundwater extending from the adjacent site and that additional groundwater monitoring was required to obtain closure. However, it was anticipated that closure would be obtained in the near future.

In July 2003, the Board issued a no further action letter to the environmental consultant for the adjacent site. The letter indicated that the clarifier and associated structures had been removed, 1,200 cubic yards of contaminated soil had been excavated and that the groundwater treatment had been shut down in 1995. The letter concluded that the site did not pose significant environmental threat and no further remediation or monitoring was required. Plaintiff’s environmental consultant obtained a copy of the Board letter in July 2004 and forwarded it to the defendant. The plaintiff informed defendant that the letter triggered the 90-day expiration period. Defendant waited more than 90 days to respond and disagreed with that the letter satisfied the option agreement.

As a result, plaintiff then filed a complaint in January 2005 seeking declaratory judgment that the that July 2003 letter satisfied that No Further Action Letter condition and that the Option Agreement had expired on October 14, 2004. The defendant argued the letter did not satisfy the contractual agreement because it was a year old and did not address the environmental conditions in the environmental report. The defendant claimed there were other environmental at the Parcel 17 including past storage of volatile chemicals and hazardous materials, an old spray booth area, past pesticide use, stained pavement, and possible groundwater contamination from other properties. Defendant’s executive vice-president testified that he saw drums and debris at the parcel. Defendant also said the Board letter had not been informed about the other environmental conditions discussed in the environmental report such as the chemical storage and spray booth area. The defendant’s expert suggested that these conditions could be an independent source of groundwater contamination and that the Board letter did not provide closure for past agricultural use, the stained pavement, the material storage, and the temporary structures observed in the historical photographs. The trial court granted summary judgment to the defendant, finding that the letter failed to trigger the expiration period because it was already a year old when plaintiff gave it to defendant, did not refer to Parcel 17, had not been issued to the plaintiff and did not mention the environmental report.

The appeals court reversed, holding that while a reasonable optionee may have preferred a different letter, defendant did not bargain for a different letter. The court said the defendant bargained for a letter stating no further action was needed to remediate environmental conditions “set forth in” certain documents. The court noted that the defendant had rejected a prior draft of the option agreement that provided the option expiration period would commence when plaintiff obtained a No Action Letter upon “remediation of the environmental conditions of the Property as set forth in the Environmental Report” and had insisted the final language refer “remediation of the environmental conditions of the Property as set forth in this Agreement or in the Lease.”

In addition, the appeals court ruled that the agreement did  not require that the letter be obtained within any specified time after completion of remediation. Moreover, the appeals court said there was no language in the contract requiring the no action letter expressly identify Parcel 17 or reference the environmental report. The court also found that the letter only had address those environmental conditions set forth in the environmental report and not any other environmental conditions that might exist on the property. However, the appeals said there was a triable issue of fact if the letter addressed the environmental conditions set forth in the environment report and remanded the case.

After a bench trial, the trial court ruled in favor of the plaintiff. Regarding the other environmental problems on the Property, the trial court said there was no language in any of documents where plaintiff agreed to remediate “all inchoate environmental conditions”. Instead, the Option Agreement or Lease was limited to the environmental conditions that the environment report indicated required remediation.

The appeals court affirmed. The court agreed that the option agreement and lease do not “set forth” any environmental conditions on the Parcel 17 but only alluded to environmental conditions contained in the environmental report. Turning to the report, the court said it plainly stated “no significant sources of contamination existed” and “no significant indications of contamination were observed”. According to the report, the court continued, the only environmental conditions on the Parcel 17 that potentially required any remediation was the residual plume of contaminated ground water extending beneath the Parcel 17 from the adjacent site which the Board letter plainly said did not require any further action. Thus, the Board letter thus triggered the option expiration period

In response to defendant’s contention that the Board letter did not provide “closure” of the Parcel 17, the court said that condition was not what the option agreement required. The court said that if defendant wanted the option expiration period to be triggered by a letter providing no further action  was required to remediate any environmental condition potentially affecting Parcel 17 had “closure” — it should have contracted for that condition. The court said the indemnity of the lease addendum buttressed this conclusion since it provided the plaintiff had to indemnify defendant for losses involving Hazardous Substances present at the Property on the Lease Commencement Date whether such Hazardous Substances are identified in any Environmental Report. The court said this was evidence that the parties knew how to craft contract language addressing all environmental conditions.

As I said at the outset, it is unclear if the defendant was trying to use the court to extract a concession it was unable to achieve through negotiation. However, it is also possible that the loose contractual language meant that the parties never reached a meeting of the minds on allocating environmental liability. In any even, this case reinforces the importance of clearly defining or describing the specific environmental issues being addressed and the specific type of closure or cleanup standard that must be achieved to satisfy a contractual obligation. For example, it is not unusual to see a schedule in a corporate transaction that serves as exceptions to representations and warranties in agreements to simply refer to all conditions identified environmental reports. This type of drafting is a recipe for litigation. If is far better to have the specific conditions discussed in the report to be identified in the schedule. It may be extra work especially where there may be a dozen or so reports that are referenced but it can prevent misunderstandings and litigation down the road. This kind of specificity will also help parties see if they have a fundamental misunderstanding on how they ate allocating environmental risks BEFORE the closing. As I tell my students, the last thing transacting parties want is to have a judge try to guess what the parties thought they meant by a certain provision.

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.

In the usual veil piercing case, a plaintiff asks a court to disregard a corporate entity so the assets of the owner can be used to satisfy the liability of the entity. However, sometimes the plaintiff seeks to use corporate assets to satisfy the debts of a shareholder under a theory known as “reverse veil-piercing”. In the environmental context, this tactic has been used to hold a subsidiary liable for a parent corporation that has no assets or that has been burdened with debt, or to reach assets of an affiliated entity when the corporate responsible party is judgement-proof.

In Commissioner of Environmental Protection  v. State Five Industrial Park, Inc., 304 Conn. 128 (Conn 2012), the Connecticut Supreme Court had the opportunity to review the circumstances when reverse veil-piercing may be appropriate. In this case, the Connecticut Department of Environmental Protection (CTDEP), commenced an enforcement action Joseph J. Farriciell (Joseph) and the five corporations that he controlled and/or owned—Hamden Salvage, Inc., Tire Salvage, Inc., North Haven Tire Disposal, Inc., Quinnipiak Real Estate & Development Corporation and Hamden Sand &    Stone, Inc.(Hamden). The CTDEP alleged violations of solid waste laws as well as a 1998 consent order. Following a bench trial, Joseph and his corporations were ordered fund the closure of two illegal solid waste landfills, reimburse the CTDEP for past costs and pay approximately $3.8 million in civil penalties to the commissioner and the town. In 2004, an appeals court affirmed the judgment.

The defendants posted bonds and implement much of the remediation but failed to pay the civil penalties. In 2005, CTDEP commenced an action, alleging that Joseph’s wife ( Jean)  and State Five should be held liable for all of the obligations imposed upon Joseph and his corporations pursuant to the 2001 judgment.

The trial court ruled that State Five was the alter ego of Joseph Farricielli should be held liable for the obligations imposed by the 2001 judgment. The court trial found that Joseph transferred all of the stock of State Five to Recycling Enterprises (Recycling) which, in turn, was 80% owned by Jean with the remaining 20% owned by their two sons. The trial court also found that Joseph had quitclaimed real property to State Five to be used for rental income.

The trial court also noted that between 2001 to 2004, Recycling transferred ownership of all of State Five’s stock to a friend of Jean and Joseph, William J. LaVelle. The trial court found that Joseph had negotiated the transfer of stock to LaVelle, that it was not an authentic sale, and that Joseph and Jean retained control over State Five during the period of LaVelle’s ownership. Jean frequently was present at State Five’s offices and dealt with its tenants. Joseph maintained an office at State Five, sometimes received wages from the corporation and continued to deal with its tenants. He directed its bookkeeper and accountant as to how to characterize transactions, and he wrote correspondence on State Five’s behalf. Both Joseph and Jean continued to write checks from State Five’s checking account.

The trial court also observed that prior to 2001, State Five had operated profitable and did not have any debt. After the 2001 judgment, though, State Five began to take on substantial debt. Joseph caused Hamden to go out of business,  Jean and Joseph  caused State Five to assume the debt of Hamden that they had personally guaranteed without adequate consideration. Between 2001 and 2004, Joseph wrote personal checks transferring funds to State Five.

Between  2001 and 2006, the trial court found, State Five’s financial condition worsened. The firm became thinly capitalized and most of its debt did not relate to its business as a landlord. To keep State Five viable, the trial court said Jean contributed her own funds and borrowed funds from her mother. Additionally, she borrowed against her own property, property she owned jointly with Joseph, and put the proceeds into State Five.

Despite its poor financial condition, the trial court said State Five paid thousands of dollars of personal expenses for Jean and Joseph, including  Joseph’s legal expenses. The court said State Five’s accounting treatment of these personal expenses was improper and inconsistent, and lacked appropriate documentation. The court also found that although Joseph and Jean caused State Five to make payments to themselves or loans to family members, State Five did not make any payments due under the 2001 judgment.

The Supreme Court began its analysis noting that some jurisdictions have adopted reverse veil piercing as a logical corollary of traditional veil piercing since both theories are based on the same equitable goals. Both doctrines are only to be used under exceptional circumstances where the corporation is a mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.

However, the Court also observed that other courts recognized there are important differences between the concepts and have either limited or disallowed entirely reverse veil piercing. The Court highlighted three principal concerns about reverse veil piercing. First, the Court noted that reverse veil piercing bypasses normal judgment-collection procedures since corporate assets are attached directly for the benefit of the creditors of an individual and can prejudice creditors of the corporation who relied on the entity’s separate corporate existence when extending credit and understood the loans were to be secured by the corporate assets. Second, the Court said that non-culpable shareholders would be prejudiced if the corporation’s assets can be attached directly. In contrast, the court continued, only the assets of the particular shareholder or other insider who is determined to be the corporation’s alter ego are subject to the attachment. Finally, the court said corporate veil piercing is an equitable remedy, it should be granted only in the absence of adequate remedies at law.

Turning to the facts of the case, the Court then concluded that the trial court should not have applied reverse veil piercing because certain of the trial court’s critical factual findings were not supported by the evidentiary record. First, the court said, the plaintiffs had failed to demonstrate that the sons who held a 20% interest in State  Five participated in any wrongdoing in relation to State Five’s affairs. The court said there was no testimony or other evidence that tended to show that the sons were aware of and acquiesced to any of the conduct that the trial court found objectionable. The court said that the absence of the sons’ lack of absence of decision making could not serve as evidence that they were were complicit in Joseph’s activities. Because the plaintiffs did not establish that the sons were not innocent shareholders, it was improper for the trial court to apply reverse veil piercing without regard to whether their interests would be impacted.

Second, the court said the plaintiffs did not demonstrate that non-party creditors of State Five would not be harmed by making all of the corporation’s assets available to satisfy the 2001 judgment by way of a reverse veil pierce. The court said there was evidence that State Five had a $200K line of credit with a local bank that it had actively accessed, sometimes with balances that were close to the limit. The trial court determined that the bank would not be harmed by reverse veil piercing because the line of credit was secured with Jean’s personal assets and noted that a 2007 accounting ledger of State Five indicated that the line of credit had  been paid off. However, the Supreme Court  ruled that this finding was clearly erroneous because a lender in this context extends credit in reasonable reliance on the existence of both a viable borrower in possession of assets and the additional security provided by a secondary obliger.

The court said that to justify imposing the entire obligation of the 2001 judgment on State Five, the plaintiffs needed to show that Joseph exercised control over State Five to divert or secrete assets belonging to him personally or to his corporations that would otherwise have been available to satisfy that judgment, and that these maneuvers were the proximate cause of the plaintiffs’ inability to collect $3.8 million that it otherwise would have been able to recover. The court found that although there was evidence that Joseph transferred some assets from himself and his corporations to State Five, the trial court did not calculate the value of those transfers, and the evidence presented would not support a finding that their value came anywhere near to the  amount which the court ultimately held State Five liable. Additionally, although Joseph transferred rental income property to State Five for no consideration, this was done more than three years before the institution of the 1999 action and more than five years prior to the 2001 judgment that imposed the fines at issue. Given that circumstance, the court said it cannot be argued that the transfer was contrary to the plaintiffs’ legal rights and proximately caused their inability to collect on their judgment.

Finally, to the extent that Joseph caused State Five to use its own assets or those transferred to State Five by its majority owner to pay his personal expenses and the tax bill of one of his corporations, the Supreme Court found that these actions did not offend the plaintiffs’ collection rights nor cause them any detriment. Because neither Jean nor State Five were defendants in the 1999 action, and because Joseph has had no ownership interest in State Five since the late 1980s, the Court concluded the assets of Jean and State Five were not subject to the 2001 judgment. Accordingly, the Court held that while the use of those assets to pay Joseph’s personal expenses may have been offensive to State Five’s interests, the tactic was not the proximate cause of the plaintiff’s  inability to collect the judgment against Joseph. Indeed, the Court reasoned, payment of a judgment debtor’s expenses by non-liable third parties enhanced a creditor’s ability to collect from the judgment debtor.

Hager’s of Cohasset, Inc. v. Nelson, 2011Minn. App. Unpub. LEXIS 156 (Minn.Ct. App. Feb. 15, 2011) is yet another lesson from a long line of cases that illustrate the risks of not using counsel for commercial property transactions especially those have problematic environmental issues.

In this case, the plaintiff operated a fuel-oil business. In October 2007, plaintiff decided to sell his property and divided it into two parcels. After selling Tract A, he entered into a purchase agreement with the defendant for Tract B. Another defendant, the broker, served as a dual agent.

The broker drafted a clause at the instruction of the defendant buyer that provided the sale was contingent on seller obtaining a letter from the Minnesota Pollution Control Agency (MPCA) stating that the land was free from any future clean up. In addition, the clause stated that “Seller was to have tanks removed and proper fill removed and new fill in place prior to closing per MPCA rules in place at present time, seller to provide buyer with a completion certificate by the MPCA. Buyer to have no financial obligation for the removal and compliance with MPCA rules and regulations”

After the contract was signed, the plaintiff removed the above-ground fuel tanks and fuel pumps removed from tract B but did not provide buyer with any documentation from MPCA that the tanks were removed in compliance with MPCA rules and regulations, nor a letter from the MPCA stating that the land was free from future cleanup. The only letter from the MPCA seller provided was dated six months before the parties had entered into the purchase agreement that addressed a petroleum release associated with two 10,000-gallon USTs that had been removed in 2007. The MPCA closure letter simply indicated the petroleum release had been adequately addressed and did not require any additional investigation or cleanup work at that time. However, the letter also said that “file closure does not mean that all of the petroleum contamination has been removed from this site” and “that the MPCA reserves the right to reopen this file.” In addition, the letter stated “This letter does not release any party from liability for the petroleum contamination . . . . If future development of this property or the surrounding area is planned, it should be assumed that petroleum contamination may be present.”

Buyer refused to close, saying that the 2007 MPCA letter was not satisfactory. Seller then filed a breach of contract action and sough an order compelling specific performance. Seller also sued the broker, asserting that the broker breached his fiduciary duty because he drafted the purchase agreement per Nelson’s instructions without seeking legal advice or additional expertise from the MCPA about the conditions.

The buyer and broker moved for summary judgment and dismissal of all of Hager’s claims. The district court granted summary judgment in favor of buyer and the broker, concluding that the 2007 MPCA letter did not satisfy the minimum requirements of the condition because it predated the purchase agreement, released no party from liability, and indicated that it should be assumed that petroleum contamination may be present.

The appeals court affirmed, holding that because seller did not provide buyer with any documentation from the MPCA related to the tank removal in May 2008, the conditions precedent were not satisfied.  On the claim against the broker, the court said seller had not shown that the broker had a duty to obtain legal advice or consult with MPCA prior to drafting the condition precedent.

A federal district court ruled that purchaser of a coal-fired power plant was held liable as a successor for violations of the New Source Review program that had occurred prior to the transaction. The court said the purchaser had expressly assumed the liabilities even though the order of the bankruptcy court approving the sale provided that the purchaser was not to be considered a successor of the seller of the plant.

In United States v. La. Generating, LLC, 2011 U.S. Dist. LEXIS 137973 (M.D. La. 12/1/11), the Cajun Electric Power Cooperative (Cajun Electric) began constructing the “Big Cajun II” (BCII) coal-fired power plant in 1976 amendments to the Clean Air Act (CAA). Big Cajun began operating in 1981. In 1994, Cajun Electric filed a chapter 11 bankruptcy proceeding and a bankruptcy trusts was appointed in 1995.

Meanwhile, in 1994 and 1995, Cajun Electric upgraded the turbines of Units 1 and 2 (“the 1994/95 work”). Cajun Electric did not obtain a Preventing of Significant Deterioration (PSD) permit prior to starting work. In 1998 and 1999, Cajun Electric replaced portions of the primary boiler reheaters (“the 1998/99 work”) also without obtaining a PSD permit. The cost of each project was estimated at $5 million.

As part of the Cajun Electric bankruptcy reorganization plan, the trustee solicited bids for substantially all of Cajun Electric’s assets, including BCII. After a protracted auction process, a subsidiary of NRG Energy, Louisiana Generating, LLC (LaGen), submitted a final bid that was accepted by the trustee and memorialized in what was called the Fifth Amended Asset Purchase Agreement (APA).

The APA provided, inter alia, that the bankruptcy court confirmation order would state that LaGen would not assume or be liable for any liabilities of Cajun Electric except for “Assumed Liabilities and any Environmental Liabilities that attach to the owner of any of the Acquired Assets by operation of law.” The definition of “Environmental Liabilities” included any known or reasonably expected liability or obligation….. under any Environmental Law.” [emphasis added]. The APA also contained representations that the company was in material compliance with all environmental laws permits, had obtained all permits necessary to operate the business and that no other permits were required for the business.

In October 1999, the bankruptcy court issue an order approving the sale “free and clear” under section 363 of the Bankruptcy Code.  “free and clear”. The confirmation order also provided that LaGen was not a successor and “shall not have any liability for any claims against [Cajun Electric] as a result of s purchase of the Acquired Assets”. LaGen acquired BCII in April 2000.

In September of 2001, LaGen submitted a revised Title V permit application for BCII. While the application was still pending, EPA issued a notice of violation (“NOV”) regarding the 1998/99 work. Despite the NOV, the state issued the Title V permit and renewed this permit in 2011. The EPA did not formally object to the issuance of the permit or its renewal.

In 2009, the federal government filed a lawsuit against LaGen seeking civil penalties and injunctive relief for violations of the CAA New Source Review (NSR) permit program for Prevention of Significant Deterioration (PSD) and the Title V permit. Under the NSR/PSD, a new major source or an existing major source that is to undergo a physical change or change in operation (modification) that will result in a significant net increase in pollutants must apply for a pre-construction permit and install pollution control technology  known as Best Available Control Technology (BACT).  Work that qualifies as “routine maintenance, repair and replacement” is exempt from the NSR program.

The parties each filed motions for summary judgment. LaGen argued that the CAA only imposed liability on the person owning or operating the facility when the violation occurs and prohibited the application of successor liability.  Specifically, LaGen argued that the express language of section 165 of the CAA and the implementing regulations of 40 CFR 52.21 imposed the obligation to obtain a PSD permit on the owner or operator who actually engaged in the construction or modification project that triggers the requirements. Likewise, LaGen said the State Implementation Plan (SIP) only prohibited construction without a permit. In other words, LaGen argued PSD was a pre-construction program and there was nothing in the statutory or regulatory language extended PSD obligations to cover operation by entities, including a purchaser who acquired a plant after construction is completed from operating the source without a PSD permit. [emphasis added].

LaGen also pointed to a line of cases holding that violations of the PSD pre-construction permitting requirements occur at the time of construction and do not extend to post-construction operations. LaGen also claimed that a substantial majority of district courts have held that PSD imposes a one-time permitting obligation and that these cases have rejected any argument based on a “continuing violation” theory. Since the alleged modifications occurred prior to LaGen’s acquisition of the Units 1 and 2, LaGen said it could not have complied with or violated the obligation to comply with PSD prior to the commencement of the projects. Moreover, since PSD liability could not attach to the owner of acquired assets by operation of law, LaGen asserted that it could not assumed liabilities for the 1998/99 work under the APA.

The court rejected the notion that successor liability was precluded under the CAA, saying the doctrine was so well established that Congress would have to expressly exclude its application in a statute. Then ignoring the express language of the order issued by the bankruptcy court, the court proceeded with a successor liability analysis. Pointing to the language of APA section 2.4 that the purchasers assumed “any Environmental Liabilities that attach to the owner of any of the Acquired Assets by operation of Law”, the court concluded that LaGen assumed any environmental liability that it knew about or reasonably expected at the time of the signing of the Fifth APA.

The court said the 1998/99 work was the type of liability that LaGen could have assumed under APA Section 2.4. The court noted that when NRG first considered purchasing the BCII assets in 1996, a member of NRG’s due diligence team was concerned about the 1994/95 work and that the trustee had notified all of the bidders about the 1998/99 work but NRG did not perform any due diligence regarding potential PSD applicability. The government argued that this was evidence that NRG effectively hid its head in the sand while the defendant said it relied on the trustee’s representations that the plant was in compliance with environmental laws. As a result, the court said there was a genuine dispute if the Defendant knew or reasonably expected the 1998/99 work to BCII Units 1 and 2 created liability under the CAA that precluded granting of summary judgment

The defendant also argued that the government’s PSD claim was barred by the statute of limitation. LaGen said the five-year SOL began to run in 1998 when construction on the units began and had expired in 2003-six years before the government brought its action. The government, on the other hand, asserted that the SOL was tolled because the PSD violation was ongoing. The court agreed that since the CAA did not have a period of limitation period for enforcement actions, the general five-year statute of limitations found in 28 U.S.C. § 462 applied. However, the court ruled that while the applicable caselaw suggested that the SOL had not expired, the government was only able to seek penalties for the five years preceding the time the suit was filed.

The government also asserted that LaGen had submitted a deficient Title V permit by not identifying the applicability of the PSD program. Under EPA’s “no look back” policy, LaGen argued it had no obligation to evaluate prior projects when completing its Title V permit. The court ruled that even if an application had no “look back” obligation, it has an ongoing duty to supplement or correct applications “upon becoming aware of such failure or incorrect submittal.

LaGen said its certification obligation could be based only on a reasonable belief at the time of the submission. The court disagreed, saying that an applicant to perform a reasonable inquiry. Moreover, since LaGen had not properly supplemented its Title V permit to reflect the PSD and BACT applicability, the court declined to find that EPA’s failure to object to the permit renewal precluded the enforcement action. To hold otherwise, the court said, would be to encourage and reward sources for not being forthright in their Title V permit applications.

Historical environmental compliance is critically important in corporate transactions especially when a business or facility may be subject to a regulatory programs that is evolving or subject to re-interpretation such as the New Source Review program. In such cases, the parties will try to contractually allocate the risks. Despite the fact that these agreements are heavily negotiated, regulatory issues may subsequently arise that the parties may have no contemplated or that the parties simply disagree on how the agreement addressed the issue.

An interesting example is the unreported decision in Lucite International, Inc. v E. I. Du Pont De Nemours and Co., No. 2:09-cv-02279 (W.D. Tenn. 5/17/11) involved a 1993 sale of aMemphis acrylics plant by DuPont to ICI Acrylics, Inc. (now known as Lucite International, Inc). Unreported decision tend to be overlooked by the legal trade press because they have no precedential value. However, the vast bulk of law is made in unreported cases and these opinions can provide insights on how judges may view similar situations or provide roadmaps on what arguments  may present the best chance of success. These informal decisions can also often provide practical insights and lessons learned about contract drafting and interpretation.

In this case, theMemphisplant manufactured methyl methacrylate.  The manufacturing process used a sulfuric acid recovery unit (“SAR Unit”) to convert spent acid sludge into sulfuric acid. In 1973, the Tennessee Division of Air Pollution Control (the “TDAPC”) classified the SAR Unit as a “process” instead of a “sulfuric acid plant. If the SAR unit had been classified as a sulfuric acid plant, it would have been potentially subject to the New Source Performance Standards (NSPS) of the Clean Air Act (CAA). The TDAPC subsequently delegated permitting authority to theMemphisand Shelby County Health Department (“MSCHD”). This agency initially informed Dupont that the SAR was considered to be a ‘pollution prevention device’ and not a NSPS-regulated unit because it recycled the spent acid to the process eliminating the discharge of spent acid to the process server.

In 1975, Dupont applied for a permit from the MSCHD to construct a second furnace train. In 1982, the MSCHD issued a permit that allowed the plant to emit 11.9 tons per day of sulfur dioxide (SO2) which exceeded of the amount permissible under the NSPS. EPA subsequently approved the facility’s Title V operating permit with the SO2 emission rate.

In November 1985, the MSCHD advised Dupont that it had re-classified the SAR Unit as a sulfuric acid plant. However, the MSCHD informed Dupont that it would not enforce the NSPS or retroactively penalize Dupont for modifications made between 1975 and 1978 since the facility had relied in good faith on the prior determination that the SAR unit was not subject to NSPS. However, the agency cautioned that any future modification would trigger the NSPS. The MSCHD indicated in its letter that while it believed the SAR classification was correct, DuPont could request a determination by the EPA.

In December 2002, the EPA conducted a multimedia compliance investigation and subsequently concluded that the plant was operating in violation of the NSPS emission limits for SAR units since at least 1978, when the second furnace train came online. Following two years of negotiations, EPA and Lucite entered into a consent decree in February 2006 where Lucite agreed to install dual absorption technology to bring the SAR unit air emissions within NSPS and paid almost $25 million in civil penalties. The consent decree was terminated in 2008 after the court determined that Lucite had complied with its terms.

In May 2009, Lucite filed a breach of contract action against Dupont for failing to honor it’s indemnification obligations under the 1993 the Asset Purchase Agreement (APA). Specifically, Lucite alleged that Dupont had breached APA Clause 12.2.1 that provided that the seller indemnify the buyer for “Environmental Liabilities” attributable to conditions existing at the Closing Date.

Dupont argued that it was not required to indemnify Lucite because the environmental liabilities resulted from Lucite’s failure to install dual absorption technology. Dupont claimed that Lucite had failed to mitigate or avoid exacerbating environmental liabilities. Dupont specifically pointed to APA clause 12.2.2 providing that its indemnity obligation did not extend to environmental liabilities that “have arisen, been increased, exacerbated, enhanced, or caused as a result of an act or omission (whether direct or indirect) of the buyer . . .”.  Dupont also argued that it was not required to indemnify Lucite the NSPS determination by EPA was a change in legislation after the closing of the APA agreement.

On Dupont’s claim that Lucite caused its damages by failing to install the dual absorption technology, the court said that for an act or omission to constitute a complete bar to indemnity, the court said that Dupont would have to show that Lucite was the sole cause of the environmental liabilities but had failed to do so since the EPA Investigation Report had concluded that the SAR had been exceeding the NSPS emission limits years before Lucite purchased the site.

On the related issue that Lucite failure to mitigate its damages relieved Dupont of its indemnity obligation, the court said the duty to mitigate only attaches once a material breach of contract occurs and then all that is required of the non-breaching party is to act reasonably so as to not unduly enhance the damages. The court said the APA did not alter the traditional mitigation duty. The court pointed to APA Clause 12.4.1 which suggested a narrow range of activities that Lucite had to perform to mitigate against environmental liabilities, such as “carrying out (where reasonably practicable) soil tests” (APA Clause 12.4.1.1) and “settling a claim of any party . ..with respect to loss, harm or other damage” (APA Clause 12.4.1.3).

Under these clauses, the court continued, Lucite only had to take reasonable and practical steps to mitigate damages. Requiring Plaintiff to install a multi-million dual absorption technology prior to an allegation or determination by a government regulator that the NSPS apply to the SAR Unit would not be reasonable or practicable. Thus, the court found that the earliest point at which a “potential environmental liability” may have arisen to trigger APA Clause 12.4.1 was when the EPA first informed Lucite that it intended to assert claims for violations of the NSPS. Prior to this event, the court reasoned, Lucite was not aware of any “potential environmental liabilities” and thus could not be found to have failed to mitigate such liabilities under APA Clause 12.4.1. The court also rejected Dupont’s interpretation that Lucite had a duty to “monitor the status of the law” and to “proactively request” an NSPS applicability determination from the EPA.

In response to the Lucite’s claim that Dupont had breached its environmental compliance warranty, Dupont asserted that its disclosures in the Schedules of the APA relieved it of any duty to indemnify. Dupont specifically pointed to APA Clause 9.7 providing that “[t]he Buyer shall not be entitled to make any claim with respect to any breach or alleged breach of the Warranties to the extent that: the facts, matters or circumstances giving rise thereto (with respect to which any such claim or alleged claim arises) have been disclosed in this Agreement or the Schedules hereto.” Dupont also relied on APA Clause 1.2.2 that stated that the schedules forms part of the APA and Clause 9.2.1 that provided that the warranties are given subject to the information disclosed in the Schedules. Dupont pointed out that ICI had requested information identifying all environmental capital expenditures during the last ten years that were greater than $100,000 and that the schedules referred to a Site Assessment Report and Environmental Baseline Study that included an entry of “SO2 Stack Dual Absorption” at a cost of “8 million dollars. Dupont also cited a document disclosed in the schedules titled “Environmental Topics and Path Forward,” that summarized a meeting between ICI and MSCHD representatives concerning emissions permits in October 1992

However, the court ruled that the disclosures in the APA Schedules did not viscitate its indemnity obligation. The court said the disclosure about the SO2 Stack Dual Absorption reflected a potential but unauthorized capital project that did not come to fruition. The mere fact that Lucite subsequently had such a project on its capital forecast, the court said,  did not obligate Lucite to install the equipment. The court also found that pre-closing communications did not relieve Dupont of its potential indemnification obligation since the APA constituted the final, integrated agreement among the parties.

The court said that Dupont agreed to indemnify Lucite for environmental liabilities attributable to pre-closing conditions and failed to cited any cases supporting its arguments that pre-closing disclosures can nullify express representations in a contract. The court pointed out that Delaware law provided that a party to a contract can rely on express warranties and representations in that contract regardless what they learned or should have learned during due diligence. The court said contracting parties do not have to prove that they were justified in relying on the representations and warranties set forth in the contract. Accordingly, the court held that Lucite’s failure to install dual absorption technology prior to being informed by the EPA that the agency intended to assert claims against Plaintiff for violations of the NSPS did not constitute an omission or a failure to mitigate under APA Clause 12.4.1. However, the court did find there was an issue of material fact as to when the EPA informed Plaintiff of its intent to bring these claims.

Dupont also argued that EPA’s determination that the NSPS applied to the SAR Unit fell within the change of law exclusion to its indemnity obligation since the EPA interpretation ran counter to prior rulings of the state and MSCDH. The court rejected this claim, holding no change in legislation occurred when the EPA issued its 2003 Investigation Report. The court said neither the governing law enforced by the EPA or the NSPS regulations had changed since the 1993 closing date. The court said that the MSCDH had informed Dupont in 1985 that the SAR Unit was incorrectly classified as a sulfuric acid process but had decided to exercise its discretion not to enforce the NSPS. The fact that EPA decided to enforce the long-existing NSPS regulations did not constitute legislation not in effect at closing.

Moreover, the court rejected the assertion that the MSCDH had “grandfathered” and exempted the SAR from the NSPS regulation. The court said EPA’s delegation to the state expressly reserved EPA’s right to enforce any applicable standard and EPA was not bound by any decision of the state or local authority. In addition, the court said, neither Congress nor the EPA delegated to local authorities the power to make local plants “exempt” from federal laws and regulations. Indeed, the court noted that MSCHD acknowledge in its letter to Dupont that the EPA could make a subsequent enforcement determination and informed Dupont that it could request a determination by the EPA if they so desired. Regardless of what the parties believed, the court ruled, EPA retained the authority to decide that the parties’ understanding of the compliance status of the SAR Unit was in error, regardless of whether it was operating under emissions permits issued by the MSCHD.

The court docket had lots of sealed documents presumably to prevent disclosure of confidential information or trade secrets. Recently, the parties reacged a confidential settlement of this case.

Anyone who has negotiated the purchase of a gas station is aware that these agreements are incredibly complex. The contracts have dense definitions, dependent and inter-related provisions, and grant broad discretion to the sellers in determining the scope and conduct of the cleanup.

A buyer who does not retain an environmental attorney who has previously worked on one of these agreements runs the risk of committing G. Gordy Liddy’s infamous aphorism of being unarmed in the battle of the minds.  The recent decision of D& H Ventures v Exxon Mobil, 2011 Cal. App. Unpub. LEXIS 8580 (Ct.App-2nd^h Div 11/8/11) illustrates this point.

In this case, D&H Ventures purchased a gasoline service station site from Exxon in 1995. D&H was owned by the franchisee that had been operating the property since 1989. Exxon had been remediating the contamination at the property since 1991 and had submitted a summary report to the Los Angeles County Department of Public Works (Regional Board in 1994. The Regional Board eventually issued an NFA letter in October 1997.

The agreement provided that the sale was “as-is” and the purchaser acknowledged that some spills had occurred that resulted in soil or groundwater contamination. Section 10 of the Agreement outlined the parties’ remediation rights and obligations. Exxon was obligated to conduct an environmental site assessment prior to closing and provide the results to the purchaser before closing. If the initial assessment or any additional assessment was unacceptable to D&H, it had the right to terminate the Agreement prior to closing. The environmental assessments served as the “Baseline Condition” for the contamination. If the Regional Board required further testing or remediation, the agreement provided that the Baseline Condition would be amended to reflect the additional sampling. Exxon made no representation or warranty regarding any aspect of any reports delivered to the purchaser and the purchaser had the right to conduct its own investigation.

Exxon was obligated to remediate the Baseline Conditions as it reasonably deemed necessary or appropriate to comply with “Legal Requirements”. Exxon’s remedial obligations under the agreement would be satisfied (1) upon receipt written notice from the appropriate Government Authority that either no further remediation and monitoring of the Baseline Condition was required or (2) when Exxon provided written notice to D&H that remediation had been completed, Exxon had submitted a written request for closure indicating that the soil and/or groundwater had been remediated to the applicable levels but  Government Authority had not provided a written notice within a reasonable time.

The agreement also provided that Exxon was not responsible for investigation or remediation of contamination occurring after the closing date or for increases in contaminant levels above the Baseline Condition.  In addition, the agreement indicated that Exxon’s remediation responsibilities inured only to the benefit of D&H and its lender, and did not extend to subsequent purchasers or assignees.

Exxon agreed to indemnify the purchaser until October 31, 2003 from third parties claims resulting from contamination occurring from Exxon’s use, operation or remediation of the property. However, Exxon would not indemnify purchaser for environmental contamination occurring after closing unless the contamination resulted from the remediation activities or negligence of Exxon. In exchange for the indemnity, purchaser provided a general release for itself, its representatives, successors and assigns except for any obligations of Exxon relating to the Baseline Conditions. The deed conveying title incorporated the environmental provisions of the agreement and provided that the environmental provisions were covenants that ran with the land.

In October 2006, D&H sold the Property to Fry’s Petroleum, Inc (Fry’s). One month later, the Regional Board advised D&H that groundwater contamination had been detected at a former service station site near the property and that the Regional Board was re-opening the case to determine if some of the contamination had migrated from the site. In April 2007, the Regional Board directed both D&H and Exxon to install additional groundwater monitoring wells to determine the direction of groundwater flow and groundwater quality. Exxon refused D&H’s request to resume its assessment and remedial activities at the Property.

D&H then filed its lawsuit, claiming Exxon had breached the agreement and asserting other common law claims. In the breach of contract claim, D&H argued that the 2006 reopener triggered section 10.B providing that if further testing or remediation is required by any government authority, the Baseline Condition would be modified by the results of any such tests. D&H also argued that even if Exxon had no contractual obligation to remediate the Property in 2006, Exxon was not entitled to summary judgment because there were triable issues of fact whether Exxon had breached the Agreement in 1997 and 1998 by failing to properly remediate the contamination.

The trial court rejected all of D&H’s claims and granted summary judgment in favor of Exxon. The court ruled that Exxon had completed its obligations under the agreement when the Regional Board issued the NFA letter. The court said the purchaser was relying on clauses outlining Exxon’s initial assessment obligations as well as pre-closing obligations but not relating to regulatory site closure

Exxon had asserted that D&H’s inadequate remediation claim was barred by the statute of limitations. D&H responded that the discovery rule should have operated to toll the statute of limitations. The court found for Exxon, finding that there was undisputed evidence that D&H was aware of the environmental conditions of the property, including the Baseline Condition, when it purchased the site in 1995, when the application for closure was submitted in 1997 and when Exxon ceased all remediation activities in 1998. The court said that the delayed discovery rule typically did not apply to breach of contract actions, which ordinarily accrue at the time of breach. The trial court also ruled that the broad release clearly and explicitly applied to bar D&H’s the common law claims. Likewise, the court held the release precluded Fry’s claims since the release specifically applied to successors and assigns, and was incorporated into the deed.

The appeals court affirmed. Looking at the entire agreement, the court said the only reasonable construction of the agreement was that the NFA letter relieved Exxon from any further remediation obligation. The court noted that Exxon was required to conduct an assessment, the results of the assessment would establish the Baseline Condition, that Exxon was to remediate the Baseline Condition and that Exxon’s remedial obligations continued until an NFA letter was issued by the appropriate Government Authority. The court said that to impose an indefinite remedial obligation on Exxon for an unidentified period of time was patently inconsistent with the provisions of Section 10 as well as other clauses of the Agreement

On the statute of limitations issue, the appeals court said that even though D&H knew the property was heavily contaminated at the time of purchase, it conducted no independent environmental investigation prior to purchase. Moreover, the court said, the purchaser did not investigate the requirements for site closure when Exxon submitted its request and did not object to Exxon’s representation that it had satisfied all the requirements for site closure. On the basis of this undisputed evidence, the court agreed that the doctrine of delayed discovery did not apply, and that any claim for breach of contract accrued more than 10 years before D&H filed its action

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.

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.