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North Shore Gas Co. v. Salomon, Inc.

ELR Citation: 27 ELR 21254
Nos. 94 C 7250, 963 F. Supp. 694/(N.D. Ill., 05/05/1997)

The court holds that an Illinois utility company did not succeed to its sister corporation's direct liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for past or future response costs in connection with remediating contamination from the release of hazardous substances at a site in Denver, Colorado. Pursuant to a reorganization plan filed in 1941, the utility company purchased the assets of a company that, by virtue of its interests in two mining companies, allegedly owned and/or operated the site at the time hazardous substances were disposed. The court first holds that successor liability applies in CERCLA cases and that federal common law applies to the determination of successor liability under CERCLA. The court notes that the general rule of successor liability is that a corporation that purchases only the assets of another corporation does not acquire the liabilities of the selling corporation, with the following four exceptions: (1) the purchaser explicitly or implicitly agrees to assume liability; (2) the transaction amounts to a de factor merger or consolidation; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction was fraudulently entered into in order to escape liability. The parties agree that the fourth exception does not apply to this case. Defendant contends, however, that the utility company succeeded to the asset seller's alleged direct CERCLA liability under the first three exceptions. For purposes of its analysis, the court assumes arguendo that the asset seller has incurred direct CERCLA liability.

Applying Illinois law in interpreting the reorganization plan, the court holds that the plan was an asset purchase by which the utility company did not expressly or implicitly succeed to the asset seller's alleged direct CERCLA liabilities. One provision, though it does not mention the liabilities of the mining companies, expressly excludes the asset seller's ownership interests in the mining companies from the assets transferred to the utility company. It defies logic that the utility company would assume the liabilities of assets expressly excluded from the plan. Further, the utility company has never been involved in the mining business, nor has it ever engaged in any activity on the site found to be contaminated by the Colorado mining company's operations. Indeed, one of the plan's purposes was to divest plaintiff, a public utility, of non-utility assets. The court next considers extrinsic evidence to resolve ambiguities in the plan. The court notes that the corresponding bill of sale does not state that the asset seller retained the liabilities associated with the assets it retained under the plan. The court, however, declines to make the negative inference that the utility company thus succeeded to those liabilities. As both parties' exhibits demonstrate, a separate company succeeded to the asset seller's investments in the mining companies. Therefore, it appears that this separate company also succeeded to the accompanying liabilities. Further, the Securities and Exchange Commission's (SEC's) opinion suggests that the SEC interpreted the plan's exclusion of the asset seller's investment in the mining companies to include the liabilities associated with those investments. Additionally, statements in a report on the businesses and operations of the asset seller and the utility company support plaintiff's argument that it did not intend to acquire all of the asset seller's business under the plan, particularly not the assets or liabilities of the seller's non-utility operations.

Next, the court holds that there is some evidence to support defendant's argument that the plan was a de facto merger. The court holds, however, that the fourth criterion for a de facto merger is not satisfied. While the utility company assumed the obligations of the Illinois coke plant and related operations, it never assumed any obligations of the mining companies, whether or not related to the site. Further, noting that the de facto merger doctrine is an equitable doctrine, the court finds that equity would not warrant a finding of a de facto merger in this case. The utility company was not involved with the same business or operations as the entity found liable for environmental damage to the site.

The court then rejects defendant's argument that the utility company succeeded to all of the asset seller's liabilities, including those resulting from the mining companies' operations, on the theory that after the plan, the utility company's business was a "mere continuation" of the asset seller's business. The record is clear that the officers and directors of the asset seller and the utility company were not completely identical after the plan. Also, while the plan involved a stock purchase that maintained the identity of common stockholders between the parties, the evidence demonstrates that the utility company's ownership distribution changed after the plan. Moreover, the court emphasizes that the successorship doctrine is based on equitable principles. Neither the policy of preventing a successor corporation from structuring a sale to avoid potential environmental liability, nor general notions of equity would be served by imposing successorship liability on the utility company, because the parties agree that the plan was not structured to avoid environmental liability. Finally, the court's decision is consistent with Congress' broad policy in drafting CERCLA to spread the costs of hazardous waste cleanup among the parties responsible for the contamination. There is no evidence that the utility company ever operated any business on the site, and the public will not bear the brunt of the site's environmental cleanup costs.

Accordingly, the court finds that the utility company did not succeed to the asset seller's alleged direct CERCLA liabilities resulting from the seller's ownership and/or control of the mining companies. The court thus grants plaintiff's motion for summary judgment.

Counsel for Plaintiff
Kevin H. Rhodes
Kirkland & Ellis
200 E. Randolph Dr., Chicago IL 60601
(312) 861-2000

Counsel for Defendant
Richard J. Kissel
Gardner, Carton & Douglas
Quaker Tower
321 N. Clark St., Ste. 3400, Chicago IL 60610
(312) 644-3000