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28 ELR 21500 | Environmental Law Reporter | copyright © 1998 | All rights reserved North Shore Gas Co. v. Salomon Inc.No. 97-2485 (152 F.3d 642, 47 ERC 1001) (7th Cir. August 5, 1998)The court holds that the equitable doctrine of successor liability applies under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). In 1941, a coke company sold its interest in a mineral processing company to a utility company and transferred the majority of its remaining assets to a gas company. Decades later, when a new owner of the mineral processing company sought contribution for response costs incurred at the processor's facility, it found that the coke company and the utility company had been dissolved. The new owner, therefore, seeks contribution from the gas company. The court first holds that the district court did noterr when it denied the new owner's motion to dismiss the gas company's action seeking a declaration that it was not liable for remediation costs associated with the facility. The court then holds that Congress intended the equitable doctrine of successor liability to apply under CERCLA. There is no concern about punishing the successor for the act of the predecessor; CERCLA is a remedial measure that is aimed only at correcting environmentally dangerous conditions. And holding the successor corporation liable for the cost of cleanup is not necessarily unfair because the successor and its shareholders likely will have derived some benefit from the predecessor's use of the pollutant and the savings that resulted from the hazardous disposal methods. The court notes, however, that while CERCLA permits successor liability, it does not require it unless justified by the facts of each case. The court next holds that the gas company succeeded to the direct CERCLA liabilities of the coke company, assuming that the coke company incurred CERCLA liability as an operator of the facility. Although the gas company did not agree to assume the coke company's direct CERCLA liabilities, the court relies on both the rationale for the de facto merger exception and on the underlying basis of the mere continuation exception. In the context of CERCLA and a reorganization under the Public Utility Holding Company Act of 1935, the policy of the de facto merger exception must find application in this case. The 1941 reorganization plan submitted by the gas and coke companies to the Securities Exchange Commission to comply with the Holding Company Act strongly resembles a de facto merger. After the 1941 plan, the gas and coke companies became a vertically integrated public utility system in form as well as in fact, with the gas company continuing all of the coke company's utility-related operations. If the court were to hold that there were no de facto merger and that hence the gas company could not succeed to the coke company's direct liabilities, the coke company would essentially circumvent CERCLA's prohibition on the transfer of direct liability. Continuity of ownership and control is the linchpin of the court's conclusion that the coke company merely continued on in the gas company after implementation of the 1941 plan. Although there was some variation between the officers and directors of the gas and coke companies after 1941, the essential character was the same. Furthermore, there was identity of stock after the sale of the assets, and there was only one corporation after the purchase of assets. On remand, the district court will have to determine whether the coke company incurred direct CERCLA liability from its activities relating to the facility. [The district court decision in this litigation is published at 27 ELR 21254.] Counsel for Plaintiff Counsel for Defendant Before Cummings and Kanne, JJ. Cudahy, J.: Who should assume responsibility for the cost of an environmental cleanup is the first messy question in what is generally a messy business. North Shore Gas Company filed suit in Illinois federal district court and sought a declaration that it was not liable for a remediation that was taking place in Colorado. After denying defendant Salomon Inc.'s motion to dismiss or transfer the case, the district court granted summary judgment in favor of North Shore Gas. On appeal, Salomon challenges the district court's decision to entertain this declaratory judgment action, and then raises arguments which require us to decide whether the equitable doctrine of successor liability applies in the context of CERCLA and how far the doctrine reaches. We affirm the denial of the motion to dismiss or transfer, but reverse the declaration that North Shore Gas cannot be held liable for cleanup costs under the doctrine of successor liability. Beginning in the early part of this century, the S.W. Shattuck Chemical Company (Old Shattuck) operated a mineral ore processing plant in Denver, Colorado (the Denver Site). In 1969, Salomon's predecessor-in-interest purchased Old Shattuck and renamed it the S.W. Shattuck Chemical Company, Inc. (New Shattuck). From 1969 to 1984, New Shattuck operated the Denver Site as a mineral processing facility. Unfortunately, the activities at the Denver Site were not without environmental costs. In 1983, the Environmental Protection Agency (EPA) placed the Site on its national priorities list. In 1992, the EPA ordered New Shattuck, the current owner of the Site, to remove certain hazardous substances. See 42 U.S.C. § 9613(f)(1). Salomon subsequently guaranteed the financial performance of New Shattuck, its wholly-owned subsidiary. At the time of this appeal, remediation costs had exceeded $ 20 million. After the EPA charged New Shattuck with liability, the company embarked on a search for entities that might contribute to response costs. It discovered that from 1934 to 1942, North Shore Coke & Chemical Company (the Coke Company) owned 60% of Old Shattuck. In the mid-1930s, the Coke Company had formed North Continent Mines, which mined mineral ores containing vanadium and uranium. North Continent Mines regularly transported radium slimes — a waste product as hazardous as its name suggests — to the Denver Site for processing and disposal. The Coke Company was incorporated in 1927 by William Baehr, the then-manager (and later president) of the North Shore Gas Company (the Gas Company), which supplied gas to communities around Waukegan, Illinois. In 1928, the Coke Company built a coke oven plant in Waukegan. The Coke Company sold all of the gas generated at the Waukegan plant to the Gas Company, furnishing more than 80% of the Gas Company's total supply. The Coke Company was also a source of coke for the Gas Company, as well as for other purchasers. The ore processed by Old Shattuck and North Continent Mines was not used to manufacture gas or coke. From 1927 to 1942, the Coke Company and the Gas Company were closely related entities. Virtually all of the Coke Company's stock was owned by North Continent Utilities Corporation, a holding company that Baehr formed in 1922; North Continent Utilities also owned 100% of the Gas Company's common stock and 2.28% of its preferred stock. The financial reports of North Continent Utilities listed the Coke Company and the Gas Company as consolidated subsidiaries. And the Coke and Gas Companies had virtually identical officers and directors.1 The companies even issued joint bonds, which were secured by a lien on the assets of both companies. In 1940, a consultant deftly summarized the companies' connection: The actual operations of the properties are interdependent. One is dependent on the other as a source of supply. One company is dependent on the other as a market for one of its primary products. Neither 1. In 1941, for example, the officers and directors of the companies were:
28 ELR 21500 | Environmental Law Reporter | copyright © 1998 | All rights reserved |