DISTRICT COURT ADOPTS
BROAD INTERPRETATION OF
SUCCESSOR LIABILITY UNDER SUPERFUND
By:
Paulette S. Wolfson
Houston
Under traditional interpretations of corporate law, companies which purchase only the assets of another company are not liable for the obligations of the company from which the assets were purchased unless: (1) the liability is specifically assumed; (2) the purchase was a de facto merger; (3) the purchase is a "mere continuation" of the selling company's business; or (4) the purchase was a fraud to avoid liability. However, corporations which are created by a merger or stock purchase, as "successor corporations" do bear the liabilities, including the environmental liabilities, of the predecessor companies. Nonetheless, a recent decision in a Federal District Court in Pennsylvania, U.S. v. Keystone Sanitation Co., Inc., 1996 U.S. Dist. Lexis 13651, Case No. 1:CV-93-1482 (M.D. 1996), has broadened the circumstances under which a mere asset purchaser may be deemed a "successor corporation" and, therefore, held liable for cleanup costs and other liabilities pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund).
In this case, only certain assets of Keystone, a waste transportation company, were acquired by Waste Management. Although Keystone had operated a landfill, the landfill was specially excluded from the transaction. In fact, Keystone was not operating the landfill at the time of the acquisition and the landfill had already been listed as a site requiring cleanup on the National Priorities List. Nonetheless, the court was persuaded that Waste Management was a successor to Keystone and was liable for costs associated with the landfill because the purchase was a de facto merger or represented a substantial continuation of Keystone's business.
To establish a de facto merger, the following factors are considered: (1) is there a continuation of the business of the seller shown by retention of management, workers, physical location, assets and general operations; (2) is there a continuity of shareholders; (3) does the seller cease to do business; and (4) does the buyer assume the obligations necessary for the running of the business. All of the factors need not be present to show a de facto merger. The court was persuaded in this case that there was a de facto merger because Waste Management purchased the assets by using stock, thereby establishing "some degree of continuity of ownership."
The court went on to discuss the substantial continuity doctrine, noting that it had been followed "where the public policy vindicated by recovery from the implicated assets is paramount to that supported by the traditional rules delimiting successor liability." A finding of substantial continuity would be based on: (1) retention of employees; (2) same supervisory personnel; (3) same production facilities; (4) same product; (5) same name; (6) same assets; and (7) representation as a continuation of the previous enterprise.
The court determined that the purchase of Keystone met the "substantial continuity" or "continuity of enterprise" doctrine criteria because supervisors were retained, the former owners entered into consulting agreements with the new owners and one key employee, who was not retained for the long run, did remain with the new owners for a short time to provide "continuity." Other employees who functioned as drivers and laborers were retained in similar capacities. The court also considered that Waste Management purchased all of Keystone's operating assets and Keystone's customer accounts. However, Waste Management did not acquire Keystone's cash nor its trade name.
After the sale, Waste Management used the former Keystone facility for less than a month. The court, in discussing employees and temporary use of the Keystone facility, emphasized that the availability of employees and the use of Keystone's facility made possible the continuity of the business, even if the facility was used only for a brief time during a transition period. The court also cites correspondence after the purchase of Keystone in which Waste Management represented to Keystone's former customers that it would continue Keystone's waste collection and hauling business.
The court also considered that Keystone and Waste Management knew of potential litigation involving the landfill and carefully structured the transaction to minimize that potential liability. The court found that the careful structuring of the transaction provided additional justification for holding that Waste Management was Keystone's successor. "The court's use of the de facto merger doctrine is consistent with its obligation to ascertain the true nature of the transaction between the parties, despite their attempts to label the sale an asset purchase."
Because of CERCLA's remedial scheme and public policy goals, courts are beginning to adopt the substantial continuity test as the appropriate legal test for successor liability. (See B.F. Goodrich v. John Betkoski (1996 WL630980) (2d Cir. (Conn.))). This trend is worrisome because the traditional tests for successor liability lay out clear factors to be considered whereas the tests under the broader doctrines are not as clear and leave much to the court's judgment in determining when an asset purchase should be considered a merger or stock purchase for the purpose of imposing environmental liability. Not only is the trend generally troublesome but, in the Keystone case, the court held the successor company liable for assets that were not even part of the seller's current business. This decision and others emphasize that structuring a transaction as a sale of assets rather than a stock acquisition or merger may not always be successful in limiting environmental liability.
The decision is being appealed.
