[The following is an excerpted from “Environmental Liability: Managing Environmental Risks in Corporate, Real Estate and Brownfield Transactions” written by Larry Schnapf and published by Lexis Law Publishing]

LIABILITY OF SUCCESSOR CORPORATIONS
The general rule in most American jurisdictions is that a corporation which acquires the assets of another company is not liable for the actions of its predecessor.  Over the years, the courts have developed four exceptions to the general rule of non-liability for asset purchasers.  The purpose of these exceptions is to make sure that corporations do not evade their liabilities or to prevent corporate evasions of debt through the use of corporate formalities i.e. transactional technicalities.
Under the traditional approach, asset purchasers will be considered corporate successors if one of the following applies:
1.		Assumption- The purchaser expressly or impliedly agrees to assume the liabilities of the seller;
2.		De Facto Merger- The transaction amounts to a de facto merger or consolidation so that the surviving corporation assumes the liability of its predecessor. The important concept in this exception is not the continuation of the business operation but the continuation of the corporate entity;
3.		Mere Continuation- Under this exception, a corporation will be held to be a successor if there is an .  same shareholders, directors and officers); and 
4.		Fraud- The transaction was fraudulently entered into to escape liability.
Because successor corporations are not specifically referred to in CERCLA, some courts initially ruled CERCLA did not apply to those successor corporations.  However, it is now generally agreed that Congress intended successor corporations to be liable under CERCLA.  One of the more influential cases which paved the way for this view was Anspec Company, Inc. v. Johnson Controls, Inc.  In that case, Anspec purchased a parcel of land from Ultraspherics which subsequently went through a series of  corporate mergers so that the surviving corporation was the Hoover Group.  Johnson Controls was the sole shareholder of the Hoover Group.  After the state of Michigan ordered Anspec to cleanup up contamination caused by an underground storage tank (“UST”) that had been operated by Ultraspherics, Anspec sought recovery from Ultraspherics and the surviving entities who moved filed a motion to dismiss.  The district court ruled that none of  the surviving entities were PRPs because they did not own or operate the property or the UST.  However, the court reversed the district court’s decision and ruled that successor corporations could fall within one of the four the categories of  PRPs that may be liable under CERCLA.
In defining what exactly constitutes a successor corporation, most courts will look to state law with its four traditional exceptions since corporations are creatures of state corporate law.  Courts tend to strictly construe these exceptions, though, because there is such a strong presumption against holding asset purchasers liable for the acts of their predecessors.  However, this narrow reading of the exceptions has made it difficult for the plaintiffs to prevail against asset purchasers particularly in the "de facto" and "Mere Continuity" exceptions where courts have required a high degree of continuity in management, personnel and stockholders.  Indeed, some courts have held that continuity of shareholders is the most important element of the de facto merger test.
The requirement that there be a continuity of shareholders has often proved to be a daunting obstacle for plaintiffs to hurdle.  Because of the difficulties encountered by plaintiffs seeking to impose liability on successor corporations under traditional corporate law, some jurisdictions have adopted two additional exceptions for imposing liability upon successor corporations.
A.	Product Line Exception
The first non-traditional exception that is sometimes used to impose successor liability on asset purchasers is known as the "Product Line" exception.  Under this doctrine, a successor corporation can be held liable for the acts of its predecessor if it continues to manufacture the same product even if there is no continuity in ownership.  This exception originated in products liability cases and only four states have adopted the test.  Those jurisdictions that have adopted the doctrine have tended to narrow its application. Some courts have extended the use of the doctrine in environmental cases but its use in CERCLA cases has been expressly rejected..  The overwhelming majority of state courts have declined to endorse this theory of liability.  Federal courts have also been reluctant to adopt this doctrine where the state court has not directly addressed the issue.
B.	Continuity of Enterprise or Substantial Continuity Test
The other non-traditional exception that courts have used to impose successor liability on asset purchaser’s is the "Continuity of Enterprise" or "Substantial Continuity" doctrine.  This test originated with a line of Supreme Court labor relation cases and product liability cases.  It is essentially a more relaxed version of the  "mere continuation" exception.  However, instead of focusing on the corporate entity, the Continuity of Enterprise exception analyzes whether the business operation has continued.  Under this theory, a successor corporation may be found liable if it continues the same business or manufacturing operation as it predecessor even if there is no continuity of ownership.  Thus, under this doctrine, liability may be imposed on corporations that would otherwise be insulated under the traditional exceptions.
Since courts generally use traditionally state corporation law to determine successor liability and the substantial continuity test is a federal law concept, the first hurdle a plaintiff  must overcome to apply this test is to convince a court that the definition of a successor corporation should be decided by federal common law.  The recent trend has been for courts to apply federal common law where strict adherence to traditional state successor liability rules would frustrate CERCLA’s remedial objectives as well as to promote uniform enforcement of CERCLA.  While an increasing number of courts have been willing to adopt the continuing business enterprise exception, the doctrine still remains a minority view and has been used only under limited circumstances.
In 1984, the EPA announced that it would use the continuity of enterprise theory as a basis for imposing liability on successor corporations under CERCLA.  Initially, EPA’s effort to use this doctrine  met with mixed success.  However, beginning in 1992, several circuit courts have endorsed the substantial continuity test  and it has now become a weapon used by PRPs in CERCLA contribution and cost recovery actions.
In 1990, the Court of Appeals for the Ninth Circuit became the first federal circuit court to endorse in theory the use of the substantial continuity test for determining CERCLA liability.  In Louisiana-Pacific Corp. v. Asarco, Inc.. the defendant Asarco had operated a copper smelter in Ruston, Washington which produced a waste known as slag.  Asarco arranged with Industrial Mineral Products (IMP) to sell the slag.  IMP sold the slag to several companies including Louisiana-Pacific from 1970 to March, 1985 when Asarco ceased its copper smelting operations.  Nine months after IMP stopped selling slag, L-Bar Products purchased substantially all of the assets of IMP.  The slag had been used as fill at the Louisiana-Pacific log yard and heavy metals leached from the slag into the soil and groundwater.  Louisiana-Pacific and the Port of Tacoma filed suit against Asarco claiming it was liable for the cleanup costs.  Asarco, in turn, brought a contribution claim against L-Bar as a successor to IMP.  In response, L-Bar moved for summary judgment.
The court ruled that none of the traditional exceptions applied because there was no continuity of shareholders between IMP and L-Bar.  The court then indicated that while the substantial continuity test could be used in some circumstances,  the facts of the particular case did not justify its application.  The court pointed out L-Bar did not have actual notice of IMP’s potential CERCLA liability and IMP had ceased its slag business nine months before L-Bar purchased the assets.
In discussing the elements of the doctrine,  the court indicated the following factors should be considered under the test to determine if a successor corporation should be held liable are as follows:
(1)	retention of the same employees;
(2)	retention of the same supervisory personnel;
(3)	retention of the same production facilities in the same location;
(4)	production of the same product;
(5)	retention of the same name;
(6)	continuity of assets;
(7)	continuity of general business operations; and
(8)	does successor hold itself out as a continuation of the previous enterprise.
One of the first cases to apply to the substantial continuity test to CERCLA was U.S. v. Distler.  In that case, Angex Corporation arranged to have hazardous substances disposed at two landfills in Kentucky in 1976.  In 1979, the general manager, sales manager and plant manager of a company formed a new company, Angell Manufacturing Corporation and purchased virtually all of the assets of Angex which then dissolved.  Angell retained the same employees, initially continued to produce the same products and served the same customers.  In 1988, EPA sought recovery of its cleanup costs from Angell and the other customers of the landfill.  Angell moved to dismiss arguing that it was not liable under the mere continuity exception because there were no common shareholders.  However, the court said that while a majority of jurisdictions followed the traditional exceptions, to do so here would conflict with CERCLA’s objectives.  To avoid such a conflict, the court said it would apply the substantial continuity test.  Using this test, the court found that the Angell retained essentially the same employees and management, operated out of the same facilities, produced the same product line and held itself out to the public as the same company.  The court ruled that to permit Angell to avoid liability would amount to a victory for form over substance and conflict with congressional intent that producers of hazardous substances be held liable for the improper disposal of those  wastes.
It was not until 1992, though, that a federal appellate court used the substantial continuity test to impose liability on a successor corporation.  In U.S. v. Carolina Transformer Company, North Carolina environmental authorities discovered PCB contamination in 1978 in the soils and groundwater of a facility operated by Carolina Transformer which was a transformer repairer and salvager.  The company was owned by a sole shareholder  and  in 1979, the children of the sole shareholder formed a new company FayTranCo which built new transformers.  After Carolina Transformer received an administrative order from EPA to remediate its property, FayTranCo began acquiring all of the assets of Carolina except for the scrap metal salvaging operation which had caused the releases of the PCBs as well as the contaminated facility.  When EPA sought a recovery of its cleanup costs against FayTranCo, the company argued that it was not a successor corporation because there was no continuity between the companies and also because the company was in a different market it manufactured new transformers.
However, the court found that the sale was essentially a ploy to continue the business in all material respects while avoiding environmental liability arising from the contaminated Carolina facility.  Some of the factors which influenced the court were that the successor retained most of Carolina's employees who worked in the same job and received the same salary, the company informed Carolina's credit customers that their debts would become accounts of FayTranCo and that the sole shareholder of Carolina participated in the control FayTranCo's operations, a substantial portion of the consideration for the asset sale was paid in the form of forgiveness of debt owed to FayTranCo by Carolina for parts sold but which were never actually delivered.  The court was also dismissed the different market argument, stating that market conditions had changed and Carolina would have had to enter the same market had it remained in business.
Less than a month later, the Eighth Circuit declined to adopt the substantial continuity test in U.S. v. Mexico Feed and Seed Co., Inc.  In that case, the Moreco Energy, Inc. (Moreco) had purchased the assets of a Pierce Waste Oil Services (PWOS) who had stored waste oil at a Missouri site during the 1960's.  After the transaction, the EPA determined that four storage tanks located at the Missouri site had released hazardous substances into the ground.  The agency conducted a clean up and then sought recovery against a number of parties including the Moreco.
Reversing a lower court decision, the  court determined that Moreco was not  liable under the substantial continuation test.  The court did examine the eight factors customarily used to determine liability under this test.  However, the court was heavily influenced by the fact that Moreco had no actual knowledge of the of the leaking tanks at the time of the sale.  Furthermore, Moreco did not consist simply of the acquired assets but, instead, was a larger, pre-existing company who had bought PWOS assets such as trucks and truck routes to expand its network and increase the flow of oil to under-utilized facilities.
The outcomes in both the Eighth Circuit’s Mexico Feed decision and the Ninth Circuit’s opinion in Louisiana-Pacific were strongly influenced by the asset purchaser’s lack of knowledge.  It was unclear from these decisions if the courts were expressly altering the basic test for determining if an asset purchaser should be considered a successor corporation under the substantial continuity test by adding a notice requirement or simply saying that a court should consider knowledge when determining whether to apply the substantial continuity test.  The subsequent decisions have struggled with the proper role of knowledge when applying the substantial continuity test.
One vexing case was Chesapeake and Potomac Telephone Company of Virginia v. Peck Iron and Metal Co. Inc., where a sole proprietor who had acquired her deceased husband's car battery business through his will was found liable under the continuing business enterprise theory even though she did not have "any reason to anticipate the possibility of incurring liability under CERCLA and had no contact with the business prior to her husband's death.  The court felt that between the widow and the taxpayers, the widow was closer to a responsible party and, therefore, her lack of knowledge should not relieve her of CERCLA liability.
Subsequent decisions have seemed to treat the knowledge requirement as part of the substantial continuity test.  In Anderson v. City of Minnetonka, the City of Deephaven filed a contribution against the customers of the landfill including the corporate successors of the Nevens Company which had operated a dry cleaning business and had sent waste to the landfill.  Deephaven urged the court to adopt the substantial continuity test.  However, the court declined to apply that exception because the application of the traditional rule would not frustrate the purposes of CERCLA and Deephaven had other theories of liability under CERCLA to pursue against the defendants.  The court said that even if it adopted the substantial continuity test, there would be no liability because the asset purchaser was a competitor, the sale had been an arm’s length transaction, adequate compensation had been paid and the asset purchaser had no notice of the predecessor’s practice of  sending dry cleaning fluid to the landfill.
In Allied Corp. v. Acme Solvents Reclaiming, Inc., Speed-O-Laq sold its paint, lacquer and industrial coatings business to Valspar in 1973.  Speed-O-Laq was dissolved in 1978.  Hazardous wastes generate by Speed-O-Laq were apparently disposed at a landfill and PRPs brought a contribution action against Valspar as a successor to Speed-O-Laq.  The federal district court ruled that the traditional mere continuity and de facto merger tests did not apply and declined to apply the substantial continuity test.  The court said that the more relaxed standard may only be used when it is shown that the asset purchaser had knowledge of the potential environmental liability AND was in some way responsible for the contamination and that the plaintiff had failed to set forth any such facts.
U.S. v. Atlas Minerals and Chemicals, a federal district court in Pennsylvania held that the substantial continuity test may only be invoked when the purchaser has “substantial ties” to the selling corporation and there is a causal link between the purchaser and the environmental harm.  In that case, Garnet Chemical Corporation (“Garnet Chemical”) apparently arranged to have hazardous wastes sent to a Pennsylvania landfill from 1969-72.  Robert Williams purchased all of the assets of Garnet Chemical in 1985 who then assigned his rights to Lehigh Valley Plating and Chemical, Inc. which subsequently changed its name to Garnet Electroplating.  After the sale, Garnet Electroplating ceased the chemical operation but continued the electroplating business.  It initially continued to operate at the same plant located in Allentown, Pa., retained most of the same employees and held itself out as the continuation of Garnet Chemical.  Sometime thereafter, Garnet Electroplating shut down the Allentown plant.  In 1986, EPA instituted response actions at the landfill and filed a cost recovery action against a number of PRPs.  In 1992, these PRPs brought a contribution action against several dozen PRPs including Garnet Electroplating.  In response to a motion for summary judgment filed by Garnet Electroplating, the plaintiffs urged the court to find that Garnet Electroplating was a successor corporation to Garnet Chemical using the substantial continuity test.  The court said that the  substantial continuity test is designed to prevent strategic behavior by corporate actors who know of or anticipate CERCLA problems.  Because the purchaser in this case had no  knowledge of that the seller had disposed of hazardous waste at the landfill, there was no wrongful conduct on the part of the purchaser.  The court ruled that the substantial continuity test should not apply and that it would apply the traditional exceptions.  Because there was insufficient identity of shareholders and directors, the court granted the motion for summary judgment .
Notice of past hazardous waste disposal practices was not at issue in Charter Township of Oshtemo v. American Cyanamid.  In that case, a municipality filed a cost recovery action against customers of the municipal landfill for reimbursement seeking reimbursement of response costs associated with the closure of the landfill.  One of the users of the landfill had been Illinois Envelope, Inc.(“Illinois Envelope I”)  In 1985, a group of investors purchased all of the assets of the company and placed them into a newly formed corporation which was renamed Illinois Envelope, Inc. (“Illinois Envelope II”).  Following the sale, Illinois Envelope I dissolved and the proceeds of the sale were distributed.  None of the shareholders of the predecessor were shareholders of the new company.  The only corporate overlap between the  two companies was that the former president and director of the former company was the president and a director of Illinois Envelope II and the same individual served as controller for both companies.  The new company operated out of the same location, used the same employees and continued to manufacture the same product.  The company moved for summary judgment, arguing that it could not be liable as a successor corporation because of the lack of identity between the two companies.  However,  the court denied the motion pointing to the commonality of officers, location, employees, products and use of the same name.  Another influential fact was that the purchaser was not a pre-existing corporation with its own identity but was formed specifically for the purpose of acquiring the assets of its predecessor.
Notice of potential environmental liability once again played a critical role in Atlantic Richfield Company v. Blosenski.  In this case, Eastern Waste Industries, Inc. (“EWI”) purchased the assets of Blosenski Corporation (“Blosenski”) in 1986.  One year earlier, Blosenski had been formed from three waste hauling proprietorships which sent waste to a disposal site owned and operated by the owner of the three waste hauling businesses.  The restructuring took place two years after EPA placed the disposal facility on the NPL and began to conduct an investigation of the contamination at the site.  The EPA and a number of PRPs moved for summary judgment against the Blosenski entities including EWI.  Distinguishing a Third Circuit decision declining to apply the substantial continuity test in products liability cases, the court said it was appropriate in this case to apply in this case because EWI knew of  Blosenski’s potential liability and because such an approach was consistent with CERCLA’s broad remedial aims.  Having found that the substantial continuity test was applicable, the court then found that all the hallmarks of  substantial continuity were present and granted summary judgment as to EWI.
The next substantial continuity case was Northwestern Mutual Life Insurance Company v. Atlantic Research Corp.,  In this case, a mortgagee brought a cost recovery action against a former tenant who had conducted testing and developing of  rocket propellants.  The defendant had acquired the assets of the Susquehanna Propulsion Division of  Susquehanna Corporation (“Susquehanna”) in 1972.  Susquehanna Properties, Inc. (“SPI”) retained title to the property and later sold the site to RS Company (“RS”) who executed a mortgage in favor of the plaintiff.  When the defendant’s lease expired in 1991, the defendant vacated the premises.  Before vacating the premises, the defendant did perform a limited cleanup of the facility.  After the defendant vacated the premises, RS defaulted on its promissory note.  The plaintiff chose not to foreclose and retained an environmental consultant to investigate the extent of contamination of the property.  When the plaintiff learned that there was widespread contamination of the  property, the plaintiff filed suit against the defendant.  On the plaintiff’s motion for summary judgment, the court found the substantial continuity test was applicable because all eight of the factors were present in this case .
Lack of knowledge reappeared as a critical factor in Gould, Inc. v. Alter Metal Co.  In that case, the operator of a lead smelting facility filed a contribution action against a number of battery salvagers including Kar-Life Battery Co (“Kar-Life”) which had purchased the assets of Battery Lead Salvage from Detroit Bank & Trust in 1982.  The bank had acquired the assets in its capacity as the executor of the estate of Robert Sova who had died in 1981 and had been Christopher’s uncle.  Until the sale, Christopher Sova who was the principal shareholder of Kar-Life had helped the bank run the business.  When Kar-Life was in the business of selling batteries, starters and alternators when it acquired the remaining assets of Battery Lead Salvage.  While the asset purchase agreement granted Kar-Life the right to operate the Battery Lead Salavage business, it did not do so.  Instead, Kar-Life sold off  the equipment and used the proceeds to pay off certain debt Kar-Life did take over the warehouse previously occupied by Battery Lead and used it to store supplies for the Kar-Life business.  The court granted Kar-Life’s motion for  summary judgment.  The court found there was no basis for imposing liability on Kar-Life under the traditional successor liability exceptions since there had been no continuation of the business, all personnel had been laid off and there was no continuity of  ownership.  The court declined to consider the substantial continuity test because there was no evidence that Kar-Life had knowledge of the potential liability at the Gould site and was not in any way responsible since it never shipped batteries to that facility.
In U.S. v. Vermont American Corp., the lack of notice and the lack of any connection with the landfill where the predecessor’s waste was disposed were the critical factors in the court declining to apply the substantial continuity test.  In that case, Atkinson Manufacturing Company (“Atkinson”) disposed of electroplating and painting operation wastes at a landfill from  1971-75.  The landfill closed in 1978 and Vermont American purchased the assets of Atkinson in 1980.  The assets were placed in Atkinson Mfg. Corp. (“AMC”) which continued to operate the business under the same name and location as well as with essentially the same employees, suppliers and customers.  AMC employed the former owner as president or general manager for one year and then as a consultant for four more years.  There was no identity of shareholders or directors.  After the landfill was placed on the NPL, the EPA filed a cost recovery action against the users of the landfill, including AMC as successor to Atkinson and AMC moved for summary judgment.
The court found that AMC had not assumed Atkinson’s CERCLA liabilities because CERCLA was not enacted until 8 months after the transaction so there had not been any CERCLA liabilities to assume.  Moreover, because of the lack of identity between the two corporations, the mere continuation exception did not apply.  Turning to the substantial continuity test, the court said that each time the test had been employed, factors of knowledge and responsibility were present.  Because Vermont American had no notice of CERCLA liability and there was no evidence that it ever arranged for the disposal of hazardous wastes at the landfill or that it had “substantial ties” to Atkinson, the court granted the defendant’s motion for summary judgment.
In Hunt’s Generator Committee v. Babcock & Wilcox Co.,a committee of PRPs who were remediating a landfill filed a contribution action against a number of  generators who had sent their waste to the site, including Mid-America Steel Drum Company (“MDC”).  The plaintiffs alleged that MDC was a successor to Northwestern Drum Company (“NDC”) which has been in the business of reconditioning and reselling used barrels and drums.  NDC had apparently arranged in the past to have a hauler dispose of its waste at the Hunt landfill but ceased this practice in 1970.  Five years later, MDC acquired NDC’s assets.  The two companies did not have common ownership but MDC retained the same employees, operated at the same location, used the same production facilities, serviced 75% of NDC’s former customer base and notified NDC’s former customers that while it was a new company under new ownership, it would continue the same business.  In addition, MDC’s president had been a vice-president of marketing for NDC and a part-time maintenance worker for NDC ultimately became MDC’s president. MDC brought a motion for summary judgment and the only question before the court was whether the substantial continuity test require that the successor corporation have knowledge of the predecessor’s liability.  The court ruled that it did not have to reach the issue because MDC had established it was not a successor corporation.  While the court acknowledged that the two companies were in the same business, had the same employees and many of the same customers, there were insufficient ties between the companies and MDC had no knowledge of NDC’s potential cleanup liability.  In addition, NDC had ceased using the landfill four years prior to the sale so the deal was not an attempt to avoid liability.
The next successor liability case was interesting because of  the reasons the court used to refrain from apply successor liability law.  In Chicago Cutler, Inc. v. Hurlin, the current owner and operator of a kitchen cutlery sought reimbursement of its cleanup costs from the former CEO, shareholder and shareholder of Godell Manufacturing (“Godell”) which had owned and operated the business for over 100 years until 1981.  The defendant asserted that the plaintiff was liable as a successor corporation.  However, the court said it was not necessary to invoke the successor liability doctrine because there was a sufficient basis to hold the defendant liable as a past owner or operator under CERCLA since the defendant had exercised control over the disposal practices of the company.  Moreover, the court said that the successor liability doctrine was used to effectuate the purpose of CERCLA that the taxpayers not be saddled with cleanup costs and in this case it was a private party and not the government who was seeking recovery of its cleanup costs.
Knowledge of the asset purchaser was again the key factor leading a court to use the substantial continuity test in State of New York v. Storonske Cooperage Co., Inc., the district court for the Northern District of New York found a successor corporation liable under the de facto merger and Continuity of Enterprise Theory.  In this case, Storonske Cooperage Company ("SCC") operated a drum recycling facility and sometime after SCC entered into a consent decree with the NYDEC to remediate contamination and reimburse the NYDEC for its response costs, the company filed a bankruptcy petition.  SCC transferred substantially all of its assets to Container Management Corporation ("CMC") consisting primarily of equipment and cash.  CMC operated for two years out of the same facility, serviced SCC's former client base and employed many of the same employees.  CMC argued it could not be a successor corporation because there was no continuity of shareholders at the time of the transfer and SCC still remained in existence.  The court found that SCC remained simply as a shell corporation with its only asset being the contaminated property so this would not preclude a de facto merger finding.  Moreover, the court noted that the initial sole shareholder of CMC was the wife of the principal shareholder of SCC and that one year later, the former sole shareholder of SCC acquired all of the shares of CMC.  Noting that other courts have ruled that when one person owns all of the shares of both the selling and purchasing corporation, continuity of shareholder was automatically found.  The court said it would not let a brief period of stock ownership by the wife prevent a finding of continuity of shareholder interest.
Having found a de facto merger, the court gratuitously went on to rule CMC was also liable under a Continuity of Enterprise theory.  The court found that CMC had knowledge of the prior liability because of its common management.  Moreover, the court when reviewing the entire record, the only reasonable inference would could draw was that  the transfer of the customer base to CMC and the vacating of the facility that had been used the prior seven years was part of an effort to avoid the environmental liability associated with the contaminated site.
The importance of performing environmental due diligence prior to completing an acquisition was illustrated in Kleen Laundry & Dry Cleaning v. Total Waste Management.  In this case, Portland Waste Oil (“PWO”) through a division known as Conn-Val Oil Recycling (“Conn-Val”) operated property containing two 20,000 underground storage tanks that was leased from the plaintiff in 1984.  In 1988, Total Waste Management, Inc. (“TWM”) acquired the assets of PWO but the agreement was silent on matters related to Conn-Val or the leasehold.  After the plaintiff learned the property was contaminated and incurred investigatory and cleanup costs, the plaintiff then sought recovery of its costs from. as successor.
TWM had been a pre-existing business and competitor of PWO.  After the transaction, there were no shared any stockholders, both corporations maintained separate existences, none of the management personnel were hired by the purchaser, the defendant did not use the PWO name and, in fact, had the name retire.  PWO had agreed to indemnify the TWM for any liabilities associated with the purchased assets.  Adopting the substantial continuity test, the court found that the defendant was a successor corporation..  Factors influencing the court were the defendant  moved the operations into its offices, it either retired or repainted the trucks used by PWO, hired and retrained 5 of the 8 drivers, assumed contracts for Yellow Pages advertising, received the right to the PWO name and serviced PWO’s customers without interruption.
TWM argued that the contamination had been caused by Conn-Val which had been disbanded several years before the transaction and that TWM had no knowledge about the existence of Conn-Val much less the contamination at the former facility.  The court found that PWO was responsible for the contamination caused by Conn-Val and that the broad remedial purpose of CERCLA required TWM to be liable for those costs as well as the successor to PWO.  While the court expressed sympathy for TMW’s plight, it said the company had been in the oil recycling business for ten years, knew the risks involved, benefited from the expanded operations and could have become aware of the liabilities had it exercised due diligence.  “If Portland’s activities were unknown to the defendant at the time of purchase,” the court explained, “ they may not have been unknowable.”
In Blackstone Valley Electric Co. v. Stone & Webster, Inc., the district court for Massachusetts seemed to confuse the traditional mere continuity exception with the substantial continuity test.  The court said that the “mere  continuation “test had been unanimously embraced in the CERCLA context  and also observed that courts have unanimously held that CERCLA liability runs to successor corporations.  However, the court then shifted to the eight factors of the substantial continuity test and ruled that there were sufficient allegations to defeat the defendant’s motion for summary judgment that it was not a successor corporation.
In City Environment Inc. v. U.S. Chemical Company the Sixth Circuit continued to refuse to employ the substantial continuity test in CERCLA cases.  In that case, City Environmental, Inc. (“CEI”) agreed in 1990 to purchase the assets U.S. Chemical (“USC”) who was in the solvent reclamation business.  CEI conducted extensive environmental investigations of USC’s facility.  When CEI determined that the site was contaminated, it negotiated a reduction in the purchase price and expressly limited its liability to the contamination found at the site.  While the negotiations were going on, USC received a letter from the EPA informing USC that it was a PRP at the Metamore landfill.  USC never disclosed this letter to CEI.  In 1991, CEI was informed by the group of PRPs cleaning up the landfill that it would be held liable as a successor to USC.  CEI then sought a declaratory judgment that it was not liable as a successor corporation for any of  the USC’s off-site CERCLA liability.  Abiding by its 1991 Anspec decision, the Sixth Circuit held that state law governed successor liability under CERCLA and concluded that the substantial continuation exception was only available in products liability cases in Michigan. The court did note that CEI continued to service USC's former customers, that all but one non-management employee had been retained and that it continued to operate at the same facility.  However, the there was no common ownership or management between the two companies.  Thus, CEI was held not to be liable as a successor corporation under the traditional mere continuation exception.
In U.S. v. Kenneth Peirce, et al., a district court for the northern district of New York rejected the notion that the existence of knowledge or “substantial ties” was required before the substantial continuity test could be applied.  The court said these were just additional factors that a court could consider together with the eight factors normally analyzed for that test.  In that case, a contribution action was filed action against a number of PRPs including the Capital District Transportation Authority ("CDTA").  The plaintiffs alleged that the CDTA was a successor to several private bus companies whose waste oil had been disposed at the York Oil Superfund site.  The CDTA argued in its summary judgment motion that it had purchased the assets of the private bus companies and that the transaction did not fall within any of the four recognized exceptions to the traditional successor liability theory.  The court said that it would adopt the continuity of enterprise test since this would further the goals of CERCLA.  However, because the CDTA had just been added as a party to the case and the opposing parties had not had sufficient time to perform discovery, the court denied the CDTA’s motion for summary judgment.
In a number of 1995 decisions, judges from the eastern district court of Pennsylvania continued to issue conflicting opinions regarding the standard for applying the substantial continuity test.  In U.S. v. Atlas Minerals and Chemicals, Inc., the eastern district was once again faced with a successor liability case arising out of the same landfill in the 1993 decision.  Not surprisingly, the court held once again that notice was a pre-requisite for applying the substantial continuity test.  The court said only the existence of knowledge, notice, willful blindness collusion would justify the application of the substantial continuity test.  Thus, even though each of the eight criteria for the substantial continuity test was met, the court declined to impose liability.
In contrast, the eastern district went ahead with a substantial continuity analysis in Elf Atochem North America v. U.S. even though there was no knowledge of potential liability.  In that case, Pennsalt purchased substantially all of the assets of Elko Chemical Works.  The court found that the transaction was an arm’s length transaction between competitors and that Pensalt was a larger, pre-existing company which purchased a manufacturing plant from Elko and continued to manufacture DDT from that plant using its own supervisors.  It was also uncontested that Pennsalt did not retain the Elko name and that did not hold itself  as Elko’s successor.  Moreover, Elko remained a competitor under a different name and eventually became a world leader in DDT production.  These factors combined with Pennsalt’s lack of knowledge about CERCLA liability led the court to deny the government’s motion for summary judgment.
In Ninth Avenue Remedial Group v. Allis-Chalmers Corp., a bankruptcy court for the northern district of Indian concluded that the Seventh Circuit would apply the substantial continuity test if the successor knew or had notice of the potential CERCLA liability and there were substantial ties between the asset purchaser and the seller.The court said it was unclear if the substantial continuity test could be applied when the predecessor still existed and could provide a remedy.  The court concluded that in this case, the successor could not be liable for claims arising from the conduct of its predecessor if the predecessor was still viable.  However, there were genuine issues of fact concerning the viability of the predecessor, the court said it could not grant summary judgment on that ground.
The most recent successor liability case refused to apply the substantial continuity test to asset purchasers who had no actual notice or knowledge of the potential CERCLA liability.  In State of New York v. Panex Industries, Inc., the defendant operated a button manufacturing division located Wellsville which had arranged for the disposal of hazardous substances at the Wellsville-Andover landfill.  The Wellsville button facility closed in 1980 and the landfill ceased operating in 1983.  Alpine Acquisition (“Alpine”) acquired the button operation in 1984 and Panex dissolved a few months following the sale.  The New York Department of Environmental Conservation (“NYDEC”) brought a cost recovery action against the customers of the landfill including Alpine as the successor to Panex’s button operation.
The court found no de facto merger and held that Alpine did not have the requisite knowledge to apply the substantial contiguity test.  The DEC argued that the President of the former button operation had become the President and CEO of Alpine and that his knowledge should be imputed to Alpine.  However, the court found that the President had simply “assumed” that wastes were taken off-site but was not personally aware of such liability.  The court said there was also no factual basis to infer that the asset purchase agreement had excluded the Wellsville facility to avoid potential CERCLA liability.  The court also rejected the state’s argument that Alpine could have or should have known about the potential liability because the substantial continuity test did not require purchasers to conduct a reasonable inquire into the seller’s potential environmental liability.  Because the production facility that contributed the hazardous wastes and the landfill itself had been closed several years before Alpine acquired the button business and the DEC did not notify any PRPs until at least four years after the sale, the court concluded it could not reasonably infer that Alpine had notice or knowledge of the potential off-site CERCLA liability at the time it purchased the button business.  Under such circumstances, the court held it would be inequitable and overreaching to apply the substantial continuity test.
	
At the time of this writing, there have been 21 decisions  where courts have adopted the substantial continuity test for determining CERCLA liability.  14 of those opinions required some degree of  notice and nine of  those so-called “notice” cases involved landfills where the plaintiffs were seeking to impose generator liability on the asset purchaser.  In each of those nine generator cases, the asset purchaser did not arrange to dispose of waste at the disposal facility that was subject to the cleanup.
While the outcome of the successor liability cases are extremely fact-dependent, there does appear to be a trend of many courts being  reluctant to use the substantial continuity test to impose generator liability on asset purchasers who never used a disposal facility that is the source of the CERCLA liability.  Under such circumstances, most courts seem to require some connection or nexus between the landfill and the asset purchaser before applying the more relaxed standard.  In contrast, when the liability is predicated on the asset purchaser being a current owner or operator of  a facility that was previously contaminated by a predecessor, the courts do not seem so troubled about applying the substantial continuity test and requiring the asset purchaser to remediate the pre-existing contamination.
It is difficult to rationalize the disparate treatment between generator and owner/operator liability for asset purchasers particularly on policy grounds particularly where the activities that led to the contamination were caused by the predecessor.  CERCLA is a strict liability statute which dispenses with a causation requirement.  To require causation before imposing generator liability on an asset purchaser while not requiring causation for owner/operator liability would seem to frustrate the goals of CERCLA especially where the predecessor is no longer a financially viable entity.  It may seem unfair to impose liability on asset purchasers for liability associated with waste they never generated but how is it any less unfair to impose liability a successor who owns property that was contaminated by an operation of  the target predecessor especially if the target predecessor ceased the particular business activity before the facility was sold to the asset purchaser.  For that matter, how is it any less unfair to impose liability on lenders, trustees or easement holders who have title to land they did not contaminate and did not operate the activities that caused the contamination?  The point is that CERCLA is not a model of fairness.  Under the approach taken by many courts, requiring causation for some PRPs such as generators but not for other PRPs such as landowners or operators of facilities would seem to only exasperate this unfairness.
It would seem to be inequitable to hold a successor liable who could not take into account the potential environmental liability when negotiating the acquisition price because of its lack of knowledge . This would be especially so where the predecessor was capable of paying for the remediation costs but instead tried to shift the liability to the purchaser.  It also seems that the continuity of enterprise doctrine should be only invoked when the particular circumstances of a transaction suggest that the corporate actors knew or should have known about environmental liability and structured the transaction to avoid those liabilities.  
However, aswe have seen,  the courts have not uniformly applied the test in determining CERCLA liability. This uncertainity only emphasizes the importance of performing environmental due diligence prior to acquiring the assets of a business even where there is no real estate  involved in the deal. If  the asset purchaser conducted environmental due diligence in accordance with the accepted practices and did not uncover significant and material environmental liabilities, the asset purchaser would seem to have a strong basis to argue in those jurisdictions that use notice as a basis for invoking the substantial continuity test that it could not have possibly known about the potential CERCLA liability and, therefore,  substantial continuity test should not be apply.  If the asset purchaser failed to conduct or did not perform adequate due diligence, a court may feel more free to apply the test regardless if the asset purchaser had actual notice of the potential CERCLA liability. Moreover, by alerting the environmental problems to the parties, the due diligence could help the parties allocate environmental liability as well as draft clear and precise language in the contract that would help courts honor the intent of the parties..

(c) copyright 1999 Lawrence Schnapf