United States v. Mirabile

No. 84-2280 (E.D. Pa. September 4, 1985)

The court holds that a hazardous waste site owner's secured creditors, including one who foreclosed on the site, may be held liable for response costs under § 107 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) only if they exercised control over the nuts-and-bolts operation of the site. The statutory definition of "owner or operator" excludes persons who do not participate in management and hold indicia of ownership primarily to protect a security interest. The court notes that the problem of creditor liability is analogous to the problem of stockholder liability. There is an inference that a stockholder who actively participates in management may be held liable. The court distinguishes between the nuts-and-bolts involvement in decisionmaking in the shareholders cases and the strictly financial involvement in the case before it. The participation must be in the management of the "facility," i.e., the operational, production, or waste disposal activities. In the instant case, one creditor, ATB, merely foreclosed on the property after all operations had ceased and then took prudent and routine steps to secure the property. It is free from liability and entitled to summary judgment. A second creditor, the Small Business Administration, had authority to participate in management but apparently did not, and so is also not liable. A third creditor, Mellon, sent advisors, one of whom may have participated in day-to-day nonfinancial management decisions. Though the court rejects the argument that Mellon should be held liable because it refused to provide the operator with enough money to meet environmental obligations, the court reserves judgment until it develops more of a record on Mellon's involvement in management.

Counsel are listed at 15 ELR 20992.

[15 ELR 20994]

Newcomer, J.:

Memorandum

The United States commenced this civil action to recover costs incurred in the removal of allegedly hazardous waste from property presently owned by defendants Anna and Thomas Mirabile. The lawsuit was brought pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). 42 U.S.C. § 9601 et seq. Presently before me are motions [15 ELR 20995] for summary judgment filed by American Bank and Trust Company, Mellon Bank (East) National Association, and the United States (on behalf of the Small Business Administration).¹ Each of these motions requires me to determine the circumstances under which CERCLA liability may be imposed upon parties that have been involved in financing the owner or operator of an alleged hazardous waste dumpsite. The parties agree that I am presented with issues of first impression.

Before proceeding to an analysis of the merits of these motions, an outline of the somewhat unusual posture of the parties is in order. The site at issue is located in Phoenixville, Pennsylvania, and will be referred to as the Turco site. The United States filed this action against, amongst others, the present owners of the Turco site, Anna and Thomas Mirabile. The Mirabiles, in turn, joined American Bank and Trust Company (ABT) and Mellon Bank (East) National Association (Mellon), amongst others, as third-party defendants. ABT and Mellon counterclaimed against the United States, relying on the alleged involvement of the Small Business Administration in creating the conditions existing at the site.

ABT, Mellon, and the SBA were each involved in financing the operations of Turco Coatings, Inc. (Turco), which operated a paint manufacturing business at the site at the time the allegedly hazardous condition was created. The Mirabiles contend that, by virtue of certain actions taken during the course of their financial dealings with Turco, Mellon and ABT became liable for creation of the hazardous conditions at the Turco site.

Mellon and ABT do not dispute the factual basis for this claim. Instead, they argue that a secured creditor's exercise of financial control over a debtor should not bring the creditor within the scope of CERCLA liability. In addition, Mellon and ABT do not contend with conviction that the factual basis underlying their claims against the SBA properly give rise to CERCLA liability. Instead, they argue that if their activities in connection with the Superior site provide a basis for the imposition of liability, then the SBA's activities provide an equally, if not more, compelling basis for liability. Thus, the major opposition to all three motions comes from the Mirabiles² despite the fact that the Mirabiles have asserted no direct claim against the SBA.³

Congress enacted CERCLA in 1980 in response to the growing problems caused by improper disposal of hazardous wastes. CERCLA authorizes the federal government, through the Environmental Protection Agency, to clean up hazardous waste dumpsites. Section 107 permits the United States to recover costs incurred from various parties involved in creation of the site. Potentially liable parties include those who owned or operated the site at the time the cleanup activities occurred, 42 U.S.C. § 9607(a)(1), and those who owned or operated the site at the time of disposal. 42 U.S.C. § 9607(a)(2). The lenders in this case are alleged to have acted as "owners or operators" within the meaning of the statute, thereby subjecting them to liability for cleanup costs.

Thus, the statutory definition of "owners or operator" becomes critical:

'owner or operator' means . . . (ii) in the case of an onshore facility or an offshore facility, and person owning or operating such facility . . . Such term does not include a person, who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility.

42 U.S.C. § 9601(20)(A). (Emphasis added.) Were it not for the underscord exemption liability, the definition would be a hopeless tautology. Nevertheless, the exemption plainly suggests that provided a secured creditor does not become overly entangled in the affairs of the actual owner or operator of a facility, the creditor may not be held liable for cleanup costs. The difficulty arises, of course, in determining how far a secured creditor may go in protecting its financial interests before it can be said to have acted as an owner or operator within the meaning of the statute.

As noted previously, this issue has never been addressed; however, whether an individual involved in the management of a corporate disposer/defendant may interpose the corporate shield to protect himself from personal liability has been addressed. Courts have generally concluded that the exemption from liability gives rise to an inference that an individual who owns stock in a corporation and who actively participates in its management can be held liable for cleanup costs incurred as a result of improper disposal by the corporation. State of New York v. Shore Realty Corp., No. 606 — August Term, 1984, slip op. at 6 [15 ELR 20358] (2d Cir. April 4, 1985). United States v. Carolawn, 14 ELR 20699, 20700 (D.S.C. 1984); United States v. Northeastern Pharmaceutical & Chemical Co. (NEPACCO), 579 F. Supp. 823, 849 [14 ELR 20212] (W.D. Mos. 1984). I recently applied this same principle in the present case in denying third-party defendant Robert Horstmann's motion to dismiss. See Memorandum and Order, June 6, 1985 at 4-5.

NEPACCO, Shore, and Carolawn, provide only limited guidance in the instant case because in each case the individual defendants were extremely active in the affairs of closely held corporations. Thus, while each court found active participants in day-to-day to corporate affairs could be held liable, none provided any guidance on the issue with which I am presented — defining the point at which participation is too attenuated to permit the imposition of liability.⁴ In addition, each of those cases involved the liability of corporate officers and shareholders, as opposed to secured creditors. The courts were therefore confronted with individuals whose active participation in the management of the corporation plainly involved participation not only in financial aspects of management but also in the nuts-and-bolts, day-to-day production aspects of the business. In contrast, in the case before me, the participation of the creditors — at least, with respect to SBA and ABT — in the management of the corporation appears to have been limited to participation in financial decisions. In my view, the distinction is critical.

In NEPACCO, the court reasoned that imposition of liability on individuals whoi actively participate in corporate management was consistent with the Congressional intent "to insure, so far as possible, that the parties responsible for the creation of hazardous waste sites be liable for the response costs in cleaning them up." 579 F. Supp. at 848. The court also gleaned from the statutory scheme and its legislative history an intent to impose cleanup costs on those who bore the fruits of hazardous waste disposal and who were involved in the planning and implementation of the disposal practices. Similarly, another court has noted that "site control is an important consideration in determining who qualifies as an 'owner' under Section 107(a)." United States v. SCRDI, 21 ERC 1577, 1581 [14 ELR 20895] (D.S.C. 1984) (imposing liability on lessor of site).

This reasoning simply does not apply with the same force to secured creditors as it does to corporate officers and/or shareholders. In addition, I note that the exemption from liability is afforded to secured creditors who do not participate in the management of a "facility." "Facility" is defined as:

(A) any building, structure, installation, equipment, pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located; but does not include any consumer product in consumer use or any vessel;

42 U.S.C. § 9601(9). The reference to management of the "facility," as opposed to management of the affairs of the actual owner or operator of the facility, suggests once again that the participation which is critical is participation in operational, production, or waste disposal activities. Mere financial ability to control waste disposal practices of the sort possessed by the secured creditors in this case is not, in my view, sufficient for the imposition of liability.

That Congress intended to draw a distinction between parties [15 ELR 20996] involved in the actual operation of the facility and those who are involved in what may properly be characterized as the financial aspects of the business conducted at the facility finds some limited support in the legislative history:

In the case of the facility an "operator" is defined to be a person who is carrying out operational functions for the owner of the facility pursuant to an appropriate agreement.

H.R. Rep. No. 172, 96th Cong., 2d See9., reprinted in 1980 U.S. Code Cong. — Adm. News, 6160, 6180.⁵

The facts adduced to date, and which are not in dispute, are as follows. During the 1970's defendant Arthur C. Mangels Industries, Inc. (Mangels) owned the Turco site. In February of 1973 ABT loaned a sum of money to Mangels, which operates a paint manufacturing facility on the site. The loan was secured, in part, by a mortgage on the Turco site. In 1976 defendant Turco acquired 95% of the outstanding shares of Mangels and shortly thereafter began to manufacture paint at the site. Turco filed a petition in bankruptcy under Chapter 11 of the Bankruptcy Code in January 1980. It ceased all operations at the site in December of 1980. ABT's mortgage remained in effect throughout this period.

In 1981 the Bankruptcy Court dismissed Turco's Chapter 11 petition. This enabled ABT to proceed with foreclosure on the Superior site. ABT was the highest bidder at the sheriff's sale held on August 21, 1981. It informed the Chester County Sheriff and tax department that it intended to take title to the property. Both before and after the sale ABT negotiated with other parties for purchase of the property. On December 15, 1981, ABT assigned its bid to defendant Thomas. A. Mirabile who, together with hiswife, defendant Anna Mirabile, accepted a sheriff's deed to the property.

In the period between the sheriff's sale and ABT's assignment of its bid to the Mirabiles, ABT took the following actions with respect to the property. It secured the building against vandalism by boarding up windows and changing locks, made inquires as to the approximate cost of disposal of various drums located on the property, and, through its loan officer Donald Hans, visited the property on various occasions for the purpose of showing it to prospective purchasers. All these activities occurred several months after Turco ceased its operations at the site.

In 1976 Girard Bank, the predecessor-in-interest of Mellon Bank, entered into a financing agreement with Turco whereby Girard would advance working capital to Turco. These advances were to be secured by the inventory and assets of Turco. At an unspecified date thereafter, the President of Turco, third-party defendant Robert Horstmann, established an Advisory Board to oversee Turco's operations. One member of the Advisory Board was Brett Sauers, the Girard Loan Officer initially responsible for the Turco account. Sometime after Turco filed its bankruptcy petition, Peter McWilliams replaced Mr. Sauers as the loan officer in charge of the Turco account and Girard increased its monitoring of Turco's financial condition.⁶

After Turco ceased operations in late 1980 Girard, with the consent of Turco and approval of the Bankruptcy Court, took possession of Turco's inventory. A portion of the inventory was disposed of through private sales, with the balance being sold at a public auction in May of 1981.

In July of 1979 the SBA loaned $150,000 to Turco which was to be applied to specified debts. The loan was secured by a second lien security interest in Turco machinery and equipment, a second lien on inventory and accounts receivable, and a second mortgage on the real estate. The SBA also required a pledge of stock to secure its loan. SBA regulations in effect at the time of this loan required that the SBA provided management assistance to its borrowers. No evidence has been adduced to suggest that any such assistance was ever provided; however, SBA representative visited the site three times during 1981 to monitor liquidation of assets. The loan agreement also required Turco to obtain SBA approval prior to the execution of any contracts for management consulting services. Turco never entered into any such contracts.

Finally, the loan agreement between Turco and the SBA contained certain restrictions on Turco's financial dealings. For example, the agreement placed specific limitations on the annual compensation to Turco's operating officers. In addition, the purchase of life insurance and payment of dividends or advances to Turco officers required prior written SBA consent.

In 1978 defendant Charles Curtis was hired to assist in administration of the SBA loan.⁷ The only factual dispute which exists with respect to SBA involvement concerns who hired Mr. Curtis. The third-party defendants alleged Mr. Curtis was retained by the SBA. In response, the United States has provided an affidavit to the effect that the SBA never employed Mr. Curtis as a Management Consultant. None of the parties asserting claims against the SBA has come forward with any competent evidence to the contrary.⁸ The Mirabiles, who as noted above are the only parties to contest the instant motions with conviction, appear to assume that, during his term as management consultant, Mr. Curtis was employed by Turco. I therefore conclude, for purposes of this motion, that Turco, as opposed to the SBA, hired Mr. Curtis in 1978 to implement the SBA loan.

I turn first to ABT's motion for summary judgment because I believe ABT's involvement with the site presents the most compelling case for the granting of such a motion. ABT's arguments are essentially twofold. First, it contends that under Pennsylvania law its successful bid at the sheriff's sale gave it only equitable title to the property which never evolved into legal title by virtue of its subsequent assignment of that bid to the Mirabiles. Second, ABT argues that its activities at the site were undertaken merely to protect its security interests in the property, and that it never participated in the management of the site. The Mirabiles respond that ABT's equitable ownership of the property is sufficient to bring it within the statutory definition of "owner," and that its activities, outlined above, confirm that ABT acted as an owner or operator of the site.

I need not resolve the issue of whether under Pennsylvania law, ABT's successful bid at the Sheriff's sale technically vested ABT with ownership as defined by the statute. Regardless of the nature of the title received by ABT, its actions with respect to the foreclosure were plainly undertaken in an effort to protect its security interest in the property. ABT made no effort to continue Turco's operations on the property, and indeed foreclosed some eight months after all operations had ceased.

In addition, I believe the statutory exemption for secured creditors is particularly applicable to ABT's limited activities at the property following foreclosure. The actions undertaken by ABT with respect to the site simply cannot be deemed to constitute participation in the management of the site. As noted above, in enacting CERCLA Congress manifested its intent to impose liability upon those who were responsible for and profited from improper disposal practices. Thus, it would appear that before a secured creditor such as ABT may be held liable, it must, at a minimum, participate in the day-to-day operational aspects of the site. In the instant case, ABT merely foreclosed on the property after all operations had ceased and thereafter took prudent and routine steps to secure the property against further depreciation.

Obviously, imposition of liability on secured creditors or lending institutions would enhance the government's chances of recovering its cleanup costs, given the fact that owners and operators of hazardous waste dumpsites are often elusive, defunct, or otherwise judgment proof. It may well be that the imposition of such liability would help to ensure more responsible management of such sites. The consideration of such policy matters, and the decision as to the imposition of such liability, however, lies with Congress. In enacting CERCLA Congress singled out secured creditors for protection from liability under certain circumstances. Because I believe ABT has brought itself within that protection, ABT is entitled to the entry of summary judgment in its favor.

The SBA's motion is also compelling. At the time the motion was filed, the Mirabiles responded, in part, that the motion was [15 ELR 20997] premature because discovery had not then been completed. The discovery completion date has now passed. Since no party has supplemented the record I must conclude that the motion is now ripe for disposition.⁹

Unlike ABT, the SBA never took either legal or equitable title to the site. In this respect, its case for summary judgment is stronger than that of ABT. The Mirabiles place principal reliance on the SBA's loan agreement with Turco which apparently contemplated some degree of involvement which could be characterized as participation in day-to-day management; however, this involvement apparently never occurred. The loan agreement also contained certain restrictions on Turco's finances which the Mirabiles contend are evidence of SBA participation in the management of Turco. They argue that in placing restrictions on the use of loan proceeds, the SBA "may have failed to prevent Turco from disposing of alleged hazardous substances on the site." I find nothing in the language of the statute or the case law under it which suggests that a lender must ensure that its loan proceeds are applied to clean up costs.

As noted above, I do not believe participation in purely financial aspects of operation, of the sort which occurred here, is sufficient to bring a lender within the scope of CERCLA liability. Furthermore, in the present case, many of the restrictions imposed by the SBA loan agreement limited the flow of corporate funds to principals of Turco. Thus, these restrictions do not support the Mirabiles' contention that the SBA precluded the use of its funds for cleanup activities and should therefore be held potentially liable. I will therefore enter summary judgment in favor of the SBA on all claims asserted against it.

The motion of Mellon Bank presents a cloudier situation. Because resolution of this motion requires a more finely tuned determination of the sort of participation in management which will lead to the imposition of CERCLA liability, I believe a full development of the factual record at trial is preferable.

The Mirabiles advance various contentions with which I have great difficulties. For example, they suggest that Mellon may be liable because it "may have failed to provide sufficient financial resources to allow the officers of Turco to properly dispose of the waste." (Mirabile response at 12.) No authority is cited to support the proposition that a lender has anaffirmative obligation to advance funds specifically for the purpose of hazardous waste cleanup.

The Mirabiles place principal reliance upon Mellon's participation, through its loan officer Brett Sauers, in the Turco Advisory Board, and upon Mellon loan officer Peter McWilliams' post-bankruptcy oversight of the company. Were the record before me limited to the activities of Mr. Sauers, I would have little difficulty in granting Mellon's motion.

For example, the Mirabiles rely upon the deposition testimony of Edwin Stulb, IV to establish Sauers' participation in the management of the company; however, that testimony unmistakably reveals that Mr. Sauers gave general financial advice and did not discuss production or waste disposal:

A: What was [Mr. Sauers'] participation in the advisory board? Did he give plant operations advice, financial advice to the advisory board?

A: No, [he] would give financial advice and he would talk about, as anybody would, about getting the selling price up. You know, I don't know to what degree of corporate bankers, but their advice is very general, even though they try to make it sound very specific. I would really have a hard time answering that question.

Q: He sat in while you discussed specifics concerning plant operations and production, though; is that correct?

A: Well, the advisory board meetings weren't really geared to talk about the production end of the business. They were more to talk about marketing gain plans, sales gain plans.

(Stulb dep. at 38; Exhibit D to Mirabile response.)

Similarly, Mr. Horstmann's deposition testimony suggests that Sauers' role was limited to input into general financial matters:

A: We had [on the Advisory Board] the Stulbs and Dick Fitch in the paint business and myself and Brett Sauers, who were supposed to have been good businessmen. . . .

Q: Generally, what took place at these meetings?

A: It was a discussion of general business problems. We consistently tried to make the production schedule meet the sales forecast.

(Horstmann dep. at 37-39; Exhibit A to Mirabile response.)

What gives me pause with respect to Mellon's summary judgment motion is the uncertainty surrounding McWilliams' participation in the management of the company. Mr. McWilliams testified he became involved with Turco because his superiors at Mellon wanted him to have "more of a day-to-day hands-on involvement." He described this involvement as including monitoring the cash collateral accounts, ensuring that receivables went to the proper account, and establishing a reporting system between the company and the bank. (McWilliams dep. at 42, Exhibit F to Mirabile response.) Under my reasoning outlined above, this sort of activity would not give rise to CERCLA liability.

Mr. Fitch testified it seemed for a period of time as if Mr. McWilliams was "always" present at the site. He clarified this by stating that McWilliams visited the plant perhaps once a week. (Fitch dep. at 56; Exhibit B to Mirabile response.) He stated that Mr. McWilliams would, for example, determine the order in which orders were filled. (Fitch dep. at 56.) His deposition concluded with the somewhat conclusory statement that "Girard Bank had obvious, whatever, control." (Fitch dep. at 187.)

Mr. Curtis testified that at some point Girard Bank "became more heavily involved in the day-to-day operations" of Turco. More specifically, he stated that Girard demanded that "additional sales efforts be made and whatnot." (Curtis dep. at 39-40; Exhibit C to Mirabile response.) At some point, Harvey Forman, an attorney respresenting Girard, stated that Turco would have to accept the day-to-day supervision of Alfred Garfinkel if it wanted to continue operations with Girard funds. (Curtis dep. at 43.) Finally, Mr. Curtis testified that McWilliams came to the site frequently and insisted on certain manufacturing changes and reassignment of personnel. (Curtis dep. at 46.)

The reed upon which the Mirabiles seek to impose liability on Mellon is slender indeed; however, bearing in mind that all doubts are to be resolved in favor of that party opposing a motion for summary judgment, I conclude that, taken as a whole, the deposition testimony outlined above presents a genuine issue of fact as to whether Mellon Bank, through its predecessor Girard Bank, engaged in the sort of participation in management which would bring a secured creditor within the scope of CERCLA liability. In particular, it would be helpful to have a clearer picture of McWilliams' participation in the manufacturing processes and of the extent to which Garfinkel acted at the direction of Girard.¹⁰

Accordingly, I will deny Mellon's motion for summary judgment.

Order

AND NOW, this 4th day of September, 1985, it is hereby Ordered that

1. American Bank and Trust Company's motion for summary judgment is granted, and judgment is entered in favor of American Bank and Trust Company on all claims asserted against it.

2. The motion of the United States for summary judgment on the counterclaims of third-party defendants Mellon Bank, Inc., American Bank and Trust Company, Robert L. Horstmann, and Carl George is granted, and judgment is entered in favor of the United States on the specified claims.

3. Mellon Bank (East) National Association's motion for summary judgment is DENIED.

AND IT IS SO ORDERED.

1. Motions for summary juddgment have also been filed by the United States, with respect to its claims against the Mirabiles, and by third-party defendants Alfred Garfinkel, Impervious Paint Industries, Ltd., and Joseph Stulb, V. Those motions will be treated separately.

2. Third-party defendants Carl George and Robert Horstmann, who also counterclaimed against the SBA, have not responded to the United States' motion for summary judgment.

3. The Mirabiles have asserted as a defense that the Small Business Administration is an indispensable party under F.R.C.P. 19.

4. In fact, Carolawn was merely a ruling on a motion to dismiss for failure to state a claim.

5. My ruling in this case is limited to financial institutions which provide funds to entities which dispose of hazardous wastes as a result of their business operations. It may be that a different test would be appropriate for financers of entities whose sole business is that of hazardous waste disposal.

6. The activities of Mr. Sauers and Mr. McWilliams are discussed in greater detail below.

7. Mr. Curtis ultimately succeeded Mr. Horstmann as President and Chief Operating Officer at Turco.

8. The only other evidence on the question is Mr. Curtis' deposition where, at page 30, he simply stated he was "retained as a consultant, strictly to implement the SBA loan" but did not identify his employer. This ambiguous statement is insufficient to create an issue of fact in light of the clear affidavit supplied by the government.

9. The matters on which the Mirabiles suggested further discovery was necessary do not appear to be critical to a ruling on the motion. For example, they initially claimed that issues of fact existed as to whether the SBA had knowledge of problems at the site at the time it administered the loan and whether, in earmaking the loan proceeds for certain types of activities, it "failed to prevent Turco from disposing of alleged hazardous substances on the site." (Mirabile response at 29.) As noted above, the critical issue under the statute is whether the SBA participated in the management of the facility, not whether it knew of Turco's waste disposal practices or earmarked its loan proceeds for certain purposes.

10. By separate memorandum I have denied Mr. Garfinkel's motion for summary judgment.