United States v. Atlas Minerals & Chemicals, Inc.

No. 91-5118 (E.D. Pa. November 22, 1993)

The court holds that the purchaser of the assets of a corporation that allegedly arranged for the disposal of hazardous waste is not liable for contribution in a cost recovery action under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The court holds that the asset purchaser does not fall under CERCLA's "mere continuation" exception to the general rule precluding liability for corporate successors, because although the successor operates the same type of business under a similar name, there is no identity of stock, stockholders, and directors between it and its predecessor. The court declines to apply the broader "continuity-of-enterprise" theory of liability, which the court notes should be used only when the application of traditional corporate law principles would frustrate CERCLA's goal of having responsible parties contribute to cleanup costs. This is not such a case, because the purchaser had no knowledge or actual notice of the seller's potential CERCLA liability, the purchaser had no substantial or continuous ties to the seller, and there is no evidence that the parties entered into the transaction strategically to evade CERCLA liability.

[Earlier decisions in this litigation are published at 23 ELR 20288 and 23 ELR 21609.]

Counsel for Plaintiff
David A. Garrison, Ass't U.S. Attorney
U.S. Attorney's Office
3310 U.S. CtHse.
Independence Mall W., 601 Market St., Philadelphia PA 19106
(215)597-1716

Counsel for Defendant
Frederick C. Jacobs
214 Bushkill St., Easton PA 18042
(215) 253-9389

[24 ELR 20506]

Cahn, J.:

Memorandum

This is a cost recovery and contribution action pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq. For the factual background of this case, see this court's opinion in United States v. Atlas Minerals and Chems., Inc., 824 F. Supp. 46 [23 ELR 21609] (E.D. Pa. 1993).

Currently before the court is third-party defendant Barclay Contracting Company's ("Barclay Contracting") Motion for Summary Judgment. The third-party plaintiffs allege that Barclay Contracting is liable as the corporate successor to Barclay Cleaning Co., Inc. ("Barclay Cleaning"). The parties do not address whether Barclay Cleaning arranged for thedisposal of hazardous substances at the site. Therefore, this court addresses the successor liability arguments only.

I. Standard for Summary Judgment

The Federal Rules of Civil Procedure provide that summary judgment is appropriate if "there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the burden of "showing — that is, pointing out to the district court — that there is an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317,325 (1986); Vines v. Howard, 676 F. Supp. 608,610 (E.D. Pa. 1987). The non-moving party must then go beyond the pleadings to "establish the existence of each element on which it bears the burden of proof," J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1531 (3d Cir. 1990), cert. denied, 499 U.S. 921 (1991), because "a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial." Celotex, 477 U.S. at 323.

When considering a motion for summary judgment, the court must draw all justifiable inferences in favor of the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,255 (1986). The court may not make credibility determinations or weigh the evidence. Id. at 252. If the record thus construed could not lead the trier of fact to find for the non-moving party, there is no genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

In order to establish a prima facie case of liability under CERCLA, a plaintiff must demonstrate the following elements:

1. the defendant falls within one of the four categories of responsible parties;

2. the hazardous substances are disposed at a facility;

3. there is a release or threatened release of hazardous substances from the facility into the environment;

4. the release causes the incurrence of response costs.

United States v. Alcan Aluminum Corp., 964 F.2d 252,258 [22 ELR 21124] (3d Cir. 1992). Barclay Contracting argues that it is not a responsible party because it is sufficiently unrelated to Barclay Cleaning, the corporate entity that allegedly sent hazardous waste to the site. The third-party plaintiffs argue that Barclay Contracting is a "mere continuation" of Barclay Cleaning and that therefore the former is liable under CERCLA for the waste stream of the latter.

II. Corporate Origins of Barclay Contracting

The following relevant facts are not [in] dispute. In 1950, Morris Weinman ("Weinman") began operating under the fictitious name "Barclay Cleaning Company" in Allentown, Pennsylvania. Barclay Cleaning's business included cleanup of fire and smoke damage, carpet, rug, and upholstery cleaning, and the cleaning and maintenance of hardwood floors. Barclay Cleaning mainly serviced residential clients, although it had some commercial and industrial clients as well.

In 1968, Weinman incorporated Barclay Cleaning as Barclay Cleaning Company, Inc. The corporation maintained ostensibly the same business that Weinman originally developed. In 1970, Barclay Cleaning applied to operate under the fictitious name "Barclay Cleaning Industries" ("Barclay Industries"). Barclay Cleaning Industries was an informal division of Barclay Cleaning that serviced the cleaning needs of heavy industry. Barclay Cleaning continued to provide the original residential and light-commercial cleaning services, while Barclay Industries focused on providing a heavy-duty vacuuming service and hauling for industrial furnaces, cement mills, and steel companies that generated waste ash, dust, and various solid and liquid waste. Weinman last operated from an office on Ridge Avenue in Allentown.

In 1978, Barclay Cleaning sold substantially all of its assets to John N. Schramak ("Schramak"), who was employed by Barclay Cleaning in various capacities. Although the sale did not involve a transfer of stock, Schramak purchased certain accounts receivable, inventory, office furniture, machinery, equipment, vehicles, the Ridge Avenue parcel, and the office building situated upon it. Since Schramak sought to capitalize on Weinman's accumulated good will, he also purchased a non-competition covenant and the right to use the Barclay Cleaning Company name. Schramak began to operate under the fictitious name "Barclay Cleaning Service," and retained Weinman's foreman, Danny Lopez ("Lopez"). Although Schramak continued to perform the fire restoration and rug cleaning services of Barclay Cleaning Co., Inc., he did not maintain the heavy industrial cleaning service performed by "Barclay Cleaning Industries."

In 1983, Schramak sold his entire business to Spinosa Associates, Inc. ("Spinosa"). Again, although no stock was transferred, Schramak granted Spinosa a non-competition covenant, which Spinosa used to continue servicing Barclay customers. Spinosa sought to re-enter the heavy industrial cleaning business, and employed Weinman as a consultant on setting up such services. Spinosa also retained both Schramak and Lopez as employees. Spinosa purchased heavy duty vacuum trucks and Weinman trained Spinosa employees in heavy industrial cleaning. In addition, to capitalize on over 40 years of good will, Spinosa began operations under the fictitious name "Barclay Contracting and Cleaning Company." Barclay Contracting thus performs ostensibly the same services that the pre-Schramak Barclay Cleaning performed.

III. Standard for Successor Liability

This court has recently considered the issue of successor liability in this case. In United States v. Atlas Minerals and Chems., Inc., 824 F. Supp. 46 [23 ELR 21609] (E.D. Pa. 1993) this court considered a similar motion by third-party defendant Garnet Electroplating ("Garnet") [24 ELR 20507] and discussed the governing standard for the successor liability of asset purchasers under CERCLA:

Under settled rules of successor liability, asset purchasers are not liable as successors unless (1) the purchasing corporation expressly or impliedly agrees to assume liability; (2) the transaction amounts to a "de facto" 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. United States v. Mexico Feed and Seed Co., 980 F.2d 478, 487 [23 ELR 20461] (8th Cir. 1992); United States v. Carolina Transformer Co., 978 F.2d 832, 838 [23 ELR 20365] (4th Cir. 1992); Louisiana-Pacific Corp. v. ASARCO, Inc., 909 F.2d 1260, 1263 [20 ELR 21079] (9th Cir. 1990).

Id. at 49. The third-party plaintiffs' sole argument is that Barclay Contracting is liable under the third exception, as a mere continuation of Barclay Cleaning. Accordingly, this court will not address the other three exceptions.

The traditional rule is that the purchaser is a "mere continuation" of the seller when there is an identity of stock, stockholders, and directors. Mexico Feed, 980 F.2d at 487; Soo Line R.R. v. B.J. Carney & Co., 797 F. Supp. 1472, 1483 [23 ELR 20172] (D. Minn. 1992); Sylvester Bros. Dev. Co. v. Burlington Northern R.R., 772 F. Supp. 443, 449 [22 ELR 20594] (D. Minn. 1990). As was the case with Garnet, Barclay contracting must prevail on this issue because there is no evidence that such identity exists.

The third-party plaintiffs next argue a theory of successor liability that they unsuccessfully asserted against Garnet. In considering Garnet's motion, this court noted

that some courts have recognized the "continuity of enterprise" theory, which expands the scope of the "mere continuation" exception. Factors to be considered under the "continuity of enterprise" approach include whether or not the purchaser (1) retains the same employees and production facilities; (2) produces the same products; (3) maintains the same assets and business operations; (4) retains the same business name; and (5) holds itself out to the public as a continuation of the previous enterprise.

Id. (internal footnote and citations omitted). This court has already expressed its reluctance to adopt the continuity of enterprise theory. Id. at 51 (discussing Polius v. Clark Equip. Co., 802 F.2d 75 (3d Cir. 1986)).

It should be restated here that the general rule precludes liability for corporate successors. Successor liability theory is a judicial expression of policy — courts will not permit corporate law formalities to frustrate the larger policies behind substantive rules of liability. See, e.g., Polius, 802 F.2d at 78 (discussing policy behind strict products liability). Because successor liability principles sometimes require courts to disregard the formalities of the state-created corporate form, courts apply these principles no more broadly than that which is necessary to advance the goals of the underlying substantive law that imposes the liability. Accordingly, this court noted that "the 'continuity of enterprise' theory should be applied only when the application of traditional corporate law principles would frustrate the remedial goals of CERCLA, namely to have responsible parties contribute to the cleanup costs." Id. at 50 (emphasis in original) (citing United States v. Distler, 741 F. Supp. 637, 642 [20 ELR 20942] (W.D. Ky. 1990)).

This court's review of the CERCLA cases applying the continuity of enterprise theory revealed that, under certain circumstances, application of the theory may be appropriate. One such circumstance is where the purchaser had knowledge or actual notice that the seller had incurred potential CERCLA liability. Id. (citing Mexico Feed, 980 F.2d at 487-89; Carolina Transformer, 978 F.2d at 838-41; Louisiana-Pacific, 909 F.2d at 1263; Allied Corp. v. Acme Solvents Reclaiming, Inc., 812 F. Supp. 124, 129 (N.D. Ill. 1993); Distler, 741 F. Supp. at 642)). In such cases, courts have expanded successor liability to prevent strategic behavior and evasive actions calculated to avoid CERCLA responsibility. Id.

Another factor identified by this court was whether, despite the fact that the successor corporation was not a "mere continuation," there were substantial and continuous ties between the seller and buyer corporations. Id. (citing City Envtl., Inc. v. U.S. Chem. Co., 814 F. Supp. 624, 638-39 (E.D. Mich. 1993)). In such cases, a court might be able to infer that the successor is indeed a "responsible party" under CERCLA.

Although the third-party plaintiffs argue that Barclay Contracting had knowledge of potential liability and substantial ties to its predecessor, they point to no probative evidence on these points. They ask this court to infer that, because Spinosa chose to resurrect the heavy industrial cleaning business, Spinosa must have known of the potential CERCLA liability. As strained an inference as this is, there is no evidence that any of the relevant transactions were made for the strategic purpose of evading potential CERCLA liability. See Louisiana Pacific, 909 F.2d at 1266 (noting that the corporate predecessor had not been identified as a potentially responsible party at the time of the asset sale). Similarly, although the third-party plaintiffs flatly state that substantial ties do exist here, they point to no evidence that Spinosa and Schramak entered into anything but an arm's-length, bona fide transaction. As was the case with Garnet, the circumstances surrounding the successive businesses that operated under the name "Barclay" do not indicate that imposition of successor liability is appropriate in this case.¹

IV. Conclusion

Congress designed CERCLA to impose liability upon "responsible parties" for the costs of cleaning up hazardous substances. Third-party defendant Barclay Contracting Company did not arrange for the disposal of hazardous substances at the site, but one of its predecessors may have. Thus, although Barclay Contracting is not a "responsible party" in the strict sense of the term, the third-party plaintiffs argue that Barclay Contracting is nonetheless responsible for its predecessors' waste stream.

The general rule dictates that Barclay Contracting is not liable for that waste stream. As the foregoing analysis demonstrates, the traditional theories of successor liability, as embodied in the four policy-based exceptions to this rule, do not apply in this case. Finally, although other courts have been willing — with good reason — to expand the traditional notions of successor liability in the CERCLA context, this court finds that such an expansion is not warranted here. Therefore, because there is no legal basis for displacing the general rule, Barclay Contracting is entitled to judgment as a matter of law.

Order

AND NOW, this 22nd day of November, 1993, upon consideration of Barclay Contracting Company's Motion for Summary Judgment, IT IS ORDERED that the Motion is hereby GRANTED. Judgment is granted in favor of Barclay Contracting Company and against the Third-Party Plaintiffs on all counts in the Third-Party Complaint.

1. On page 12 of their Brief, the third-party plaintiffs state that this court "adopted" the continuity of enterprise doctrine in its opinion in this case at 824 F. Supp. 46. To the contrary, this court was quite hesitant and stopped short of a holding that would establish this view of successor liability as precedent in this district. In light of this court's careful approach to expanding policy-based judicial constructs such as successor liability, see supra at page 7, this court will stay its hand until an appropriate case is presented.