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 2nd, 3rd and 8th 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.