4th Circuit Hears Oral Argument on Ashley II Case

The United States Court of Appeals for the Fourth Circuit heard oral argument in early December on the appeal of the Ashley II of Charleston v PCS Nitrogen decision, 2010 U.S. Dist. LEXIS 104772 (D.S.C. 9/20/10).  The case involves a 43-acre Columbia Nitrogen Superfund Site in the Upper Peninsula area of Charleston, South Carolina.

The hearing was much anticipated by environmental lawyers and brownfield developers because Ashley II was the first reported case to interpret the scope of the “appropriate care” requirements of the CERCLA Bona Fide Prospective Purchaser (BFPP) liability protection. To the surprise of most observers, the three judge panel devoted most of its time on corporate liability.

Site History

In this case, Planters Fertilizer and Phosphate Company (“Planters”) owned and operated a phosphate fertilizer plant in Charleston from 1906 to 1966. Planters made phosphate by reacting sulfuric acid with phosphate rock. The sulfuric acid was generated by burning pyrite ore, which produced pyrite slag (also called pyrite “cinders” or “clinkers”). The trial court found that the source of the principal contamination at the Charleston site was from the burning of pyrite ore and disposal of slag.

At some point, Ross Development (Ross) became the successor to Planters. Columbia Nitrogen Corporation (CNC) acquired the site in 1966 and terminated production at the acid plant in 1970 and the fertilizer plant in 1972. CNC razed all buildings and structures by 1981. CNC sold the vacant Charleston property to Henry Fair, Jr., James H. Holcombe, and J. Holcombe Enterprises LP (collectively, “H&F”) in 1985. H&F sold three acres to an intermediary who, in turn, sold the parcels to Allwaste 1989. In 1991, H&F leased two additional acres to Allwaste, and sold a portion of the property for a road to the City of Charleston. In 1992, H&F sold two acres to the president of Robin Hood II (Robin Hood) who leased the parcels to Robin Hood Container Express, Inc. (RHCE).

Allwaste used its land to clean tanker trucks and shipping containers that stored hazardous and non-hazardous materials. Robin Hood used its parcel to store shipping containers.

In 2003, Ashley II of Charleston, an entity owned by the brownfield developer Cherokee, purchased all of H&F’s 27.62 acres. The purchase was part of a larger acquisition of over 200 acres along the Ashley River in the Neck area of Charleston and North Charleston, South Carolina that was to developed into a mixed use project known as the “Magnolia.”  In 2008, Ashley bought Allwaste’s 3-acre tract.

PCS Nitrogen Corporate History

CNC sold its two remaining phosphate fertilizer plants in 1982. In 1986, CNC’s sold its nitrogen-based fertilizer business located in Augusta, Georgia to Andlinger & Company (Andlinger).  Following the sale, CNC was dissolved by its parent corporation, DSM, N.V., a Dutch corporation (DSM).

Andlinger acquired liabilities relating to CNC’s “business that produces and sells ammonia and nitrogen-based products” and other assets existing on the Effective Date” of the agreement.  As discussed previously, CNC did not own the Charleston site at the time of this asset sale. Andlinger placed the assets into its newly-formed subsidiary, CNC Corp (New CNC), which was then merged into Fertilizer Industries, Inc. (Fertilizer). In 1989, Fertilizer changed its name to Arcadian Corporation (“Arcadian”). Arcadian merged with PCS in 1997.

Trial Court Proceedings

In September 2005, Ashley sued PCS seeking cost recovery for $195K in response costs. PCS, in turn, filed a contribution action under section 113 of CERCLA against Ashley and other defendants. The proceedings were bifurcated, with the first phase focusing on the question of the liability of PCS.

The first trial judge ruled in 2007 that PCS was the successor to Andlinger and therefore was responsible for the contamination of the Charleston property. After PCS rejected a settlement offer, the trial judge had to reuse himself because he had apparently discussed potential employment with the firm then representing Ashley.

The new trial judge allowed PCS to file a motion for reconsideration but upheld the successor liability ruling on three grounds. The court ruled that the 1986 asset sale had amounted to a merger so that the CNC liabilities passed on to Andlinger. The court also found Andlinger had expressly assumed the liabilities associated with the Charleston property in the asset agreement and that Andlinger could be liable as a successor corporation under the Substantial Continuity doctrine.

The second judge then turned to the apportionment/allocation phase of the litigation. In 2010, the court ruled that the harm was not divisible and therefore PCS was jointly liable. The court found Ashley was not a BFPP because it had failed to prove that all “disposals” had occurred prior to taking title, it had an improper “affiliation” with H&F and had failed to exercise appropriate care.

On the “disqualifying affiliation” requirement, the district court found that the Ashley’s indemnity of H&F coupled with the fact that Ashley affirmatively acted on H & F’s behalf by contacting EPA “to persuade EPA not to take enforcement action to recover for any harm at the Site caused by the Holcombe and Fair Parties” was the kind of prohibited affiliation that Congress had envisioned.

The court said Ashley failed to exercise “appropriate care” when it failed to address impacts from Recognized Environmental Conditions (RECs) that had been identified in a phase 1 report. The phase 1 had identified sumps and concrete pads along with a debris pile and the ROC cover as RECs. The phase 1 recommended that the sumps be cleaned out and filled, the cracks in the concrete pad and debris pile be investigated and that the ROC be maintained. The court found that Ashley failed to timely implement these recommendations. When the above-ground structures were demolished, the court found that Ashley’s failure to implement the phase 1 recommendations exposed the sumps and pads to the elements and resulted in “new” disposals and exacerbated the existing environmental conditions.

H&F were also found liable because they disturbed contaminated soil when excavating a trench across the site in the early 1990s. RHCE was found liable as an operator because its construction of a detention pond, two asphalt driveways as well as and grading activities redistributed and spread contamination soil across the site.

Turning to the contribution claims, the court found that Ross Development Corp (Ross) was 45% liable, PCS 30%, H&F 16%, Allwaste 3% and Robin Hood 1%. Holcombe & Fair dug a ditch across a stretch of contaminated land between 1990 and 1998

In the most controversial aspect of the decision, the court held that Ashley was liable for 5% of the response costs. Moreover, the court said that because of the indemnification agreements among Ashley, H&F and Allwaste, Ashley was responsible for those parties’ allocations. Thus, Ashley was held responsible for 24% of the cleanup.

Appellate Arguments

The court was asked to review the successor liability, divisibility, allocation and BFPP rulings by the district court. However, approximately 90% of the oral argument was devoted to the successor liability issue. Indeed, Ashley’s counsel only had about 3 minutes of oral argument to address the BFPP issue.

In their briefs, the parties disputed the significance of the particular factual findings of the district court. We will not regurgitate the disputed facts. Instead, following is a summary of the themes espoused by the parties in their briefs.

Appropriate Care

Ashley argued that the district court was wrong when it concluded that Ashley was not a BFPP because it failed to exercise “appropriate care.” PCS characterized Ashley’s appeal on the BFPP issue as resting on an unprecedented request that the court apply a “new relaxed standard” in the BFPP analysis. This writer agrees with this analysis of Ashley’s legal argument.

When Congress enacted the third party defense, it required defendants to establish that they exercise “due care.” However, Congress used the term “appropriate care” when it established the BFPP landowner liability protection in 2002.  Person seeking to avail themselves of the BFPP liability protections must demonstrate that they exercised “appropriate care” by taking reasonable steps regarding releases of hazardous substances after taking title.

It is widely accepted by environmental lawyers that the different terminology was a scribner’s error that amounted to a distinction without a difference. Indeed, when EPA published its so-called “Common Elements” guidance in 2003, the agency said the due care caselaw was a starting point for interpreting what constituted “appropriate care.”

In a novel argument that has no support in caselaw or the legislative history, Ashley asserted that Congress deliberately used the phrase “appropriate care” to create a more liberal requirement for parties willing to redevelop contaminated sites. Ashley said in its brief that the “due care” requirement had been narrowly construed because it was a defense to be asserted by parties that were otherwise liable as PRPs. In contrast, Ashley told the court that Congress intended a liability shield when it created “a unique class of persons” that can knowingly take title to contaminated property and still be protected from liability. Thus, Ashley contended, a liberal construction of appropriate care and reasonable steps was necessary to encourage parties to remediate and develop contaminated properties.As a result, Ashley said thedistrict court relied upon an excessively heightened standard to determine that Ashley had not exercised appropriate care.

Pointing out that all the contamination at the site was associated with historic uses, Ashley also asked the Fourth Circuit to reconsider its 1992 ruling in Nurad v William Hooper & Sons(966 F.2d 837) that “disposals” included passive migration. Instead, Ashley told the court to encourage redevelopment, the court should reinterpret “disposal” to mean the “placement of new or additional hazardous substances onto the site that materially increases the environmental harm.”

Moreover, Ashley asked the court to ignore decisions of other circuits finding that “disposal” could occur when contaminated soil was moved or spread during grading activities. Despite these holdings, Ashley argued that demolition activities, construction, grading, installing roadways, removing concrete pads, underground tanks or other buried structures were activities that are inherent with redeveloping sites for productive use. To hold otherwise, Ashley suggested, would result imposing liability on parties for very acts that Congress intended to encourage to undertake when it added the BFPP liability protections.

If there were some “disposal” at the site, Ashley sought to characterize such “de minimis” or “non-actionable” disposals that did not contribute materially to the site contamination. To support its contention that it should not be liable for de minimis disposals, Ashley pointed to the de minimis generator exception of Section 107(o)-truly a slender reed that upon which to rest such a heavy burden of proof.

Finally, Ashley contended that it did not enter into a prohibited affiliation when it provided a release and indemnity to H&F, noting that a BFPP cannot be liable based on a instrument conveying title to the facility. However, PCS pointed out that the release of H& F was contained in the purchase and sale agreement and not the quit-claim deed. Since only a deed conveys title under South Carolina law, PCS argued that the BFPP exception did not apply.

Ashley also relied on EPA’s 2011 BFPP affiliation guidance document for support that it did not enter into a prohibited affiliation. However, the guidance was not in effect when Ashley entered into the prohibited affiliations in 2002. Moreover, EPA’s Common Elements guidance recognizes that “[k]nowledge of contamination and the opportunity to plan prior to purchase” is relevant “and could result in greater reasonable steps” to be taken for BFPP status.

If the panel rules that PCS is not a successor to CNC, Ashley’s claims could be dismissed or the matter remanded back to the district court. Since the 1986 agreement provided that New York law should apply and the Second Circuit has already ruled that the Substantial Continuity test may not be used in CERCLA cases, the decision will hinge on the court’s interpretation of the contract. Given that New York law sets a high threshold for successor liability and CNC did not own the Charlotte property at the time of the 1986 transaction, it would not be surprising to this observer if the Fourth Circuit vacates the district court ruling and finds PCS was not a successor of CNC.

Another interesting corporate law question will be whether the court will reinstate the claims of PCS against its parent, DSM, and a sister corporation be reinstated under the single enterprise theory.

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