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Environmental Litigation: Piercing the Corporate Veil, Alter Ego, and Successor Liability

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Piercing the Corporate Veil, Alter Ego, and Successor Liability

Daniel Riesel, Esq.

DRIESEL@SPRLAW.COM

SIVE, PAGET & RIESEL P.C.

Daniel Riesel, Esq.

6

SIVE, PAGET & RIESEL P.C.

Dan Riesel started practicing environmental law and litigation in 1970, when he founded the environmental protection unit in the U.S. Attorney's Office for the Southern District of New York – the first of its kind. He has been a member of the New York City environmental and litigation firm Sive, Paget & Riesel since 1973. He recently concluded a 10-year veil-piercing litigation with a win in the Second Circuit Court

• f

Appeals. Dan has been consistently recognized by Chambers, SuperLawyers, and Best Lawyers as a leader in the field of environmental law and litigation.

Direct and Derivative Liability for Parent Corporations and Stockholders under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) 42 U.S.C. §§ 9601-75

7

Who is Liable Under CERCLA?

 (1) the owner and operator of a vessel or a facility



E.g., Carson Harbor Village, Ltd. v. Unocal Corp., 270 F.3d 863 (9th Cir. 2001) - “passive owners” not liable for a release that occurred prior to their ownership



E.g., Commander Oil Corp. V. Barlo Equipment Corp., 215 F.3d 321 (2d Cir. 2001) - lessees with typical leases are not liable as owners under CERCLA.



E.g., City of Los Angeles v. San Pedro Boat Works, 635 F.3d 440 (9th Cir. 2011) - holder of a revocable permit to operate a harbor berth was not an owner under CERCLA.

 (2) any person who at the time of disposal of any

hazardous substance owned or operated any facility at which such hazardous substances were disposed of



E.g., Litgo New Jersey Inc. v. N.J. Dep’t of Envtl. Prot., 725 F.3d 369 (3d Cir. 2013) - current operators are held strictly liable for all releases that occur at a facility, despite whether they have actually engaged in polluting activities

8

CERCLA § 107(A)

Who is Liable Under CERCLA?



(3) any person who . . . arranged for disposal or treatment . . . of hazardous substances owned or possessed by such person . . . at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances

 No arranger liability where defendant sells useful product  Burlington Northern & Santa Fe Ry. Co. v. United States, 556 U.S. 599

(2009) - interpreting the application of CERCLA “arranger” liability

 Factors to consider include foreseeability of harm, intent to dispose:

"[K]nowledge alone is insufficient to prove that an entity “planned for” the disposal . . . to qualify as an arranger, Shell must have [had] . . . the intention that at least a portion of the product be disposed of during the transfer process by one or more of the methods described in [Section 107(a)(3)]."



(4) any person who accepts or accepted any hazardous substance for transport to disposal or treatment facilities, incineration vessels or sites selected by such person, from which there is a release or a threatened release

9

CERCLA § 107(A)

Two Claims for Private Relief



CERCLA Section 107



Allows the government, or private parties not confined to §113 claims, to seek cost recovery for response costs against any other person who is liable or potentially liable under Section 107(a), with the US District Courts having exclusive original jurisdiction over all such controversies.

 E.g., PCS Nitrogen Inc. v.

Ashley II of Charleston LLC, 714 F.3d 161 (4th Cir. 2013) – discussing the bona fide prospective purchaser exception to owner liability under CERCLA



Joint and several liability



CERCLA Section 113(f)



Section 113(f)(1) allows any person to seek contribution from any other person who is liable or potentially liable under Section 107(a), with the US District Courts having exclusive

• riginal jurisdiction over all such

controversies.



Section 113(f)(3)B) allows any person whose own liability has been resolved by virtue of an administrative or judicial settlement or civil action to seek contribution from any other liable or potentially liable person who has not otherwise entered into a settlement with respect to CERCLA liability.



No joint and several liability

10

42 U.S.C. s 107(a)(4)(B) 42 U.S.C. s 113(f)(1), 113(f)(3)(B)

Mounting Tension: Section 107 vs. Section 113



CERCLA Section 113(f) requires contribution plaintiff to have a judgement or order against them.



107 actions are not available to those who previously participated in 113 actions because contribution is not considered a “response cost”



United States v. Atlantic Research Corp., 551 U.S. 128 (2007) - discussing the distinction between cost recovery under Section 107 and contribution under Section 113



In particular, footnote 6 raises the possibility that there IS overlap between the two claims (e.g., where a PRP sustains expenses involuntarily pursuant to a consent decree, it is unclear whether its costs are recoverable under Section 107, Section 113, or even both).



Agere Systems, Inc. v. Advanced Envtl. Tech. Corp., 602 F.3d 204 (3d Cir. 2010)



Parties who enter settlement agreements under 113(f)(2) are shielded from contribution claims against them, therefore they should not be allowed to bring a 107 claim because that would preclude the possibility of the defendant PRPs bringing a 113 contribution counterclaim

11

Liability for Parent Corporations and Stockholders – U.S. v. Bestfoods, 524 U.S. 51 (1998)



The United States sued CPC International, Inc. (Bestfoods) under CERCLA Section 107(a)(2) for the cost of cleaning up industrial waste generated by CPC’s subsidiary, Ott Chemical Co.



The District Court conflated derivative with direct operator liability for parent corporations when it held Bestfoods liable. On appeal, the Sixth Circuit limited its analysis to whether Bestfoods was indirectly liable via veil-piercing, but noted that direct liability could attach if the parent actively operated the facility (e.g., as a joint venture with the subsidiary). The Supreme Court took the case to resolve a Circuit conflict as to whether a parent corporation could be held liable under CERCLA for operating a facility ostensibly belonging to its subsidiary.



The Supreme Court held that a parent corporation may be held liable as an operator under CERCLA in two situations:



Indirect, or derivative liability, which requires the court to pierce the corporate veil



Direct liability, where the parent corporation is directly involved in the operations of the "polluting facility" - this is broader than the Sixth Circuit's characterization.

12

Indirect or Derivative Liability

“When (but only when) the corporate veil may be pierced, a parent corporation may be charged with derivative CERCLA liability for its subsidiary’s actions in operating a polluting facility.” U.S. v. Bestfoods, at 51-52.



Piercing the corporate veil requires fulfillment of a two-prong test:



Prong 1: Improper or illicit corporate dominance by the parent



Prong 2: An injustice, fraud, or wrong with a nexus to the corporate parent's dominance



Bestfoods indicates that this fraud/wrong is contamination in the context of CERCLA. In practice, the nexus between the parent and the contamination is key. 

Presumptions against veil-piercing include:



That a corporate relationship exists between two corporations does not make the

• ne liable for the torts of its affiliate.



The exercise of ordinary "control" by stockholders (including election of directors, creation of bylaws, and other actions incident to a stockholder's legal status) do not extend liability of a subsidiary past its assets to the stockholder.



Choice of Law question left open in Bestfoods



Circuit split between state law and federal common law

13

Choice of Law

“There is significant disagreement among courts and commentators over whether, in enforcing CERCLA’s indirect liability, courts should borrow state law, or instead apply a federal common law of veil piercing. Compare, e.g., … Lansford-Coaldale Joint Water

• Auth. v. Tonolli Corp., 4 F.3d, at 1225 (“given the federal interest in uniformity in the

application of CERCLA, it is federal common law, and not state law, which governs when corporate veil-piercing is justified under CERCLA”), … with, e.g., 113 F.3d, at 580 (“Whether the circumstances in this case warrant a piercing of the corporate veil will be determined by state law”)... Cf. In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. 22, 33 (Mass. 1987) (noting that, since “federal common law draws upon state law for guidance, … the choice between state and federal [veil- piercing law] may in many cases present questions of academic interest, but little practical significance”). … Since none of the parties challenges the Sixth Circuit’s holding that CPC and Aerojet incurred no derivative liability, the question is not presented in this case, and we do not address it further.”

14

US v. Bestfoods at note 9.

Choice of Law Cases since Bestfoods

 Price Trucking Corp. v. Norampac Indus.., Inc., 2014 WL

1012835 (2d. Cir. 2014)

 “Where federal statutory regulation is comprehensive and

detailed, as CERCLA is, we presume that matters left unaddressed are left subject to . . . state law.” New York v. National Service Industries, Inc., 460 F.3d 201 (2d Cir. 2006)

 U.S. v. Gen. Battery, 423 F.3d 294 (3d Cir. 2005)  Carter Jones Lumber Co. v. LTV Steel Co., 237 F.3d 745 (6th

• Cir. 2001)

 K.C.1986 Ltd. P'ship v. Reade Mfg., 472 F.3d 1009, 1025 n. 4

(8th Cir. 2007)

 Duke Energy Florida, LLC v. FirstEnergy Corp., 731 Fed. Appx.

385 (6th Cir. 2018)

 Applying choice of law rules in the forum state (OH) and using

the ”most significant relationship” test to apply FL law because the release of toxic waste occurred in FL

15

Prong 1 Dominance Factors



Absence of corporate formalities e.g. issuance of stock, election of directors, keeping corporate records separate, etc.



Inadequate capitalization



Whether funds are put in and taken out of the corporation for personal rather than corporate purposes



Overlap in ownership, officers, directors, and personnel, common office space, address and telephone numbers of corporate entities



Amount of business discretion displayed by the allegedly dominated corporation



Whether the related corporations deal with the dominated corporation at arm's length



Whether the corporations are treated as independent profit centers



The payment of guarantee of debts of the dominated corporation by other corporations in the group



Whether the corporation in question had property that was used by other of the corporations as if it were its own Passalacqua Builders, Inc. v. Resnick Developers South, Inc., et al., 933 F.2d 131 (2d Cir. 1991)

Other Circuits look to similar dominance factors: E.g., Pearson v. Component Tech. Corp., 247 F.3d 471, 484-85 (3d Cir. 2001); Van Dorn Co. V. Future Chemical & Oil Corp., 753 F.2d 565, 570 (7th Cir. 1985); Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 349 (4th Cir. 1998); Ranza v. Nike, Inc., 793 F.3d 1059, 1074 (9th Cir. 2015); Carter Jones Lumber Co. V. LTV Steel Co., 237 F.3d 745, 749 (6th Cir. 2001).

16

Passalacqua Facts



Plaintiff Passalacqua entered into a contract with Defendant Resnick Developers South to construct a project in Florida



Disputes arose during construction, and Passalacqua sought arbitration and obtained a final judgment of over $1.7MM



Plaintiffs brought suit in NY for equitable relief seeking, inter alia, to pierce the corporate veil



Alleging that Resnick Developers was dominated by other corporations and that the Resnick family members used it to pursue their own ends



Resnick family real estate businesses were various partnerships & corporations, all controlled either directly or indirectly by family members

17

Passalacqua Dominance Analysis



Developers did not observe corporate formalities by: not issuing timely shares, having no employees, not holding regular meetings, not electing officers and directors per the terms of its certificate of incorporation, not having a separate office.



But, Developers did keep separate books and maintain separate bank accounts and filed separate tax returns, except when consolidated legally with other Resnick-controlled companies



Developers were severely undercapitalized by: having only $10 in capital paid by another Resnick-controlled entity; all other capital came from loans from other Resnick-controlled entities, and a bank loan of $9MM which was secured by a mortgage on the property and personally guaranteed by Jack and Burton Resnick, whose guarantees did not cover payment

• f amounts owed to contractors working on the project



Funds were intermingled among corporate entities without regard for business purpose, and used to pay personal expenses of officers and employees



Developers had overlapping officers with other Resnick family businesses



There were also blurred-lines between officer roles at different Resnick-controlled entities (e.g. Irving Katz, Treasurer of Resnick & Sons, Inc., signed letters as Controller of Developers, but was not an employee or

• fficer of Developers)



Corporations did not deal at arm's length with each other - when Developers was purchased by another Resnick family company for $10, the anticipated profit of the development was $3MM



Corporations were not treated as individual profit centers – profit calculations were compiled

18

Key Dominance Factors,

with examples in cases



Looting and/or intermingling funds



Wachovia Securities LLC v. Banco Panamericano, Inc., 674 F.3d 743, 753 (7th Cir. 2012) - decision to pierce the veil supported by shareholders having raided the dominated company of its assets.



Rochester Gas & Elec. Corp. V. GPU, Inc., No. 00-CV-6369, 2008 WL 8912083, at *6 (W.D.N.Y. Aug. 8, 2008), aff'd, 355 Fed. App'x 547 (2d Cir. 2009) - parent company used a pyramid structure to siphon revenues from subsidiary and give them to other related entities within the structure.



Absence of corporate formalities



Except for small-closely held companies (E.g., Crane v. Green & Freedman Baking Co., 134 F.3d 17, 25 (1st

• Cir. 1998))



Rice v. First Energy Corp., 339 F.Supp.3d 523 (W.D. Pa. 2018) – SEC filings stating that subsidiary was a division

• f parent for state and federal income tax purposes, that parent loaned subsidiary money at below market

rates, and that parent had some involvement in the decision to deactivate power stations were not sufficient to pierce the corporate veil.



Failure to Perform Arm's Length Transactions



FirstEnergy Corp., 766 F.3d at 226 – subsidiary did not have legal representation in negotiations between parent & subsidiary



Passalacqua – deals between related entities were imbalanced (e.g., $10 paid for subsidiary with expected return of $3 million to related entity)



Undercapitalization



Passalacqua, 933 F.2d at 139 - dominated entity was undercapitalized because related entity only paid $10 for 100% of its shares and all other funds available were in the form of loans made or secured by other related entities.



However, Plaintiff's knowledge of undercapitalization precludes this factor from consideration (Brunswick

• Corp. v. Waxman, 459 F. Supp. 1222, 1232 (E.D.N.Y. 1978), aff'd, 599 F.2d 34 (2d Cir. 1979))

19

Prong 2: Fraud/Wrong



A plaintiff asserting corporate veil-piercing must prove that adhering to the fiction of the defendant subsidiary's separate corporate existence would result in a fraud, promote injustice, or allow some other inequitable result



In practice, the egregiousness of the corporate parent's dominance tends to overlap with the court's analysis of this second prong



In CERCLA cases, courts have held that there must be some nexus between the corporate parent's dominance and the release of contamination:



New York State Elec. & Gas Corp. v. FirstEnergy Corp. - given the extent of domination, the court found it impossible to distinguish the parent from the subsidiary, thus "establishing a 'direct nexus' between [the parent's] domination and the operation of the … facilities, which resulted in the contamination at issue." 808 F. Supp. 2d at 499.



Next Millennium Realty, L.L.C. v. Adchem Corp. - holding that "[b]ecause Plaintiffs present no evidence connecting corporate domination to the Site contamination, the Court finds that there is no genuine dispute of material fact and Plaintiffs' veil-piercing claims must be dismissed." 2015 WL 11090419 at *22.

20

Piercing the Corporate Veil

A Comparison in the Second Circuit

New York State Elec. & Gas Corp.

• v. FirstEnergy Corp. (2014)



AGECO, a public utility holding company, was the parent of NYSEG (the product of a merger of certain AGECO subsidiaries). NYSEG acquired the MGPs at issue in this case from AGECO. Between 1922 and 1940, AGECO was controlled by Howard C. Hopson and John I. Mange. FirstEnergy Corp. is the successor of AGECO. Domination



whether corporate formalities were observed: not expressly addressed by the court.



inadequate capitalization: NYSEG was not undercapitalized.



whether funds are put in and taken out of the corporation for personal rather than corporate purposes: Hopson freely transferred funds in and out of AGECO and its subsidiaries, including NYSEG

Next Millennium Realty, L.L.C. v. Adchem Corp. (2017)



Plaintiffs claimed that NSR Co., a lessee of the contaminated property, was liable for the operations of another company, Lincoln, on the property under a “single enterprise” theory (a single set of brothers were involved in both companies) Domination (note: facts below were taken from the court below, 2015 WL 11090419 (E.D.N.Y. March 31, 2015), aff’d in case above)



whether corporate formalities were observed: the corporations maintained separate incorporations,

• rganization, bylaws, corporate seals, tax filings, stock and

stock redemptions, retirement plans, and officer election/resignation proceedings. Further, the corporations held separate meetings and separate votes.



inadequate capitalization: Each of the corporations was separately and sufficiently capitalized. Where they had consolidated financial statements, they were prepared in accordance with generally accepted accounting principles.



whether funds are put in and taken out of the corporation for personal rather than corporate purposes: Though the Pufahl brothers borrowed money from Lincoln, it was through an arrangement available to all Lincoln employees that required repayment (with interest if not within a certain time period).

21

New York State Elec. & Gas Corp. v. FirstEnergy Corp.



• verlap in ownership, officers, directors, and

personnel: e.g., Mange was the president of AGECO and a director of NYSEG from 1922- 1940; Hopson was on the NYSEG board from 1927-1934.



common office space, address, and telephone numbers: board meetings for NYSEG were held at or near AGECO’s office, which was also the primary location of Hopson’s accounting and financial organization that rendered assistance to AGECO as well as NYSEG and other subsidiaries.



the amount of business discretion displayed by the allegedly dominated corporation: terms of service contract left the subsidiaries with “no vestige of independent authority or control.”



whether the related corporations deal with the dominated corporation at arms length: no one represented NYSEG or the other subsidiaries in service contract negotiations with AGECO.

Next Millennium Realty, L.L.C.

• v. Adchem Corp.



• verlap in ownership, officers, directors, and personnel:

Though both corporations had common ownership and management, that alone is insufficient to pierce the veil. However, NSR Co. did not have any employees of its own, and Lincoln employees did perform administrative functions

• n NSR Co.’s behalf.



common office space, address, and telephone numbers: The corporations all had separate phone numbers and where they shared buildings, the rent was shared proportionally amongst them according to use, as determined by third party accountants. Note that having the same office or phone number weighs less in favor of veil piercing for closely held corporations.



the amount of business discretion displayed by the allegedly dominated corporation: there was no evidence showing that either corporation’s business decisions were impaired or influenced by the other.



whether the related corporations deal with the dominated corporation at arms length: the corporations conducted separate businesses with distinct products, processes, customers, and machinery.

22

Piercing the Corporate Veil

A Comparison in the Second Circuit

New York State Elec. & Gas Corp. v. FirstEnergy Corp.



whether the corporations are treated as independent profit centers: not expressly addressed in opinion; however, free transfer of funds between parent and subsidiaries cuts against AGECO.



the payment or guarantee of debts of the dominated corporation by other corporations in the group: AGECO loaned money to NYSEG and guaranteed debts by others to NYSEG.



whether the corporation in question had property that was used by other of the corporations as if it were its own: not expressly addressed in opinion

Next Millennium Realty, L.L.C.

• v. Adchem Corp.



whether the corporations are treated as independent profit centers: the corporations had separate bank accounts, had separate tax ID numbers, and made separate tax filings with separately recorded profits.



the payment or guarantee of debts of the dominated corporation by other corporations in the group: While certain life insurance policy beneficiaries were changed from Lincoln to NSR Co., NSR Co. assumed payment upon the enactment of this change and the policies lapsed prior to the holders’ deaths. However, several employees were paid in cash by the same person for both corporations.



whether the corporation in question had property that was used by other of the corporations as if it were its own: Though there was shared office space, each corporation paid rent in proportion to its share of space/use.

23

Piercing the Corporate Veil

A Comparison in the Second Circuit

Piercing the Corporate Veil in the Sixth Circuit

Duke Energy Florida, LLC v. FirstEnergy Corp., 731 Fed.Appx. 385 (2018)



Contamination at issue was released by two manufactured gas plants in Florida from 1929 to 1943.

 FirstEnergy is the successor to the owner/operator of those

manufactured gas plants.



The parties stipulated that direct liability was not at issue, so the Court focused its analysis on veil piercing.



The Sixth Circuit acknowledged that NY Courts had twice decided CERCLA cases based on contamination from FirstEnergy’s predecessor’s manufactured gas plants, but noted that state law governs veil-piercing standards.

24

Piercing the Corporate Veil Under FL State Law



Florida courts are reluctant to pierce the corporate veil and take such action only in severely limited circumstances, and only with three elements are met:

 the shareholder dominated and controlled the corporation to

such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation;

 the corporate form must have been used fraudulently or for an

improper purpose; and

 the fraudulent or improper use of the corporate form caused

injury to the claimant.

25

Duke Energy Florida, LLC v. FirstEnergy Corp., 731 Fed.Appx. 385 (2018)

Piercing the Corporate Veil in the Sixth Circuit

Duke Energy Florida, LLC v. FirstEnergy Corp., 731 Fed.Appx. 385 (2018)



The Court considered factors similar to those identified in Passalacqua:

 Parent owned the majority of the subsidiary’s stock, but this

factor alone is not dispositive

 Parent and subsidiary shared common officers and directors,

but again, this factor alone is not dispositive

 District court found that parent and subsidiary were

incapable of acting independently



The Court concluded that Duke Energy had shown by a preponderance of the evidence that the first prong of the corporate veil-piercing analysis was met.

26

Piercing the Corporate Veil in the Sixth Circuit

Duke Energy Florida, LLC v. FirstEnergy Corp., 731 Fed.Appx. 385 (2018)



Prong 2 – Fraud/Improper Use of Corporate Form

 No evidence that parent had extracted exorbitant funds from or otherwise

abused subsidiary

 No evidence of undercapitalization  Plaintiff’s theory follows NY precedent – that the very act of producing coal

tar involved releasing hazardous substances, and that in itself should be sufficient to meet the second prong



Held: “The facts … do not show that [the parent] was purposefully avoiding environmental liability or cutting costs at the expense of the

• environment. This waste was released decades before most major

environmental legislation, including CERCLA, was passed. The record does not contain evidence tending to show that AGECO officials were even aware of the environmental costs of their business model.”



The Court noted that the parent may be liable under a direct liability theory, but such argument was not before the court.

27

Direct Liability

“[A] corporate parent that actively participated in, and exercised control over, the operations of its subsidiary’s facility may be held directly liable in its own right under § 107(a)(2) as an operator of the facility.” U.S. v. Bestfoods, at 55.



"If, however, direct liability for the parent's operation of the facility is to be kept distinct from derivative liability for the subsidiary's own operation, the focus of the enquiry must necessarily be different under the two tests. The question is not whether the parent operates the subsidiary, but rather whether it operates the facility, and that

• peration is evidenced by participation in the activities of the facility, not the subsidiary." Id. at 68 (internal

citations omitted).



With respect to G.R.D. Williams, a CPC official who the District Court found had a "significant role in shaping Ott II's environmental compliance policy," Id. at 59: "[W]e observed that a dual officer or director might depart so far from the norms of parental influence exercised through dual officeholding as to serve the parent, even when

• stensibly acting on behalf of the subsidiary in operating the facility. See n. 13, supra.

Yet another possibility, suggested by the facts of this case, is that an agent of the parent with no hat to wear but the parent's hat might manage or direct activities at the facility. . . .The critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary's facility."



"There is, in fact, some evidence that CPC engaged in just this type and degree of activity at the Muskegon plant. The District Court's opinion speaks of an agent of CPC alone who played a conspicuous part in dealing with the toxic risks emanating from the operation of the plant. G.R.D. Williams worked only for CPC; he was not an employee, officer, or director of Ott II . . . and thus, his actions were of necessity taken only on behalf of CPC. The District Court found that CPC became directly involved in environmental and regulatory matters through the work

• f . . . Williams, CPC's governmental and environmental affairs director. Williams . . . became heavily involved in

environmental issues. He actively participated in and exerted control over a variety of Ott II environmental matters, and he issued directives regarding Ott II's responses to regulatory inquiries." Id. At 72.

28

Direct Liability



The Second Circuit summarized Bestfoods' three circumstances under which a parent can be held liable as a direct operator of a subsidiary's facilities:



(1) “when the parent operates the facility in the stead of its subsidiary or alongside the subsidiary in some sort of a joint venture”;



(2) when “a dual officer or director ... depart[s] so far from the norms of parental influence exercised through dual officeholding as to serve the parent, even when ostensibly acting on behalf of the subsidiary”; and



(3) when “an agent of the parent with no hat to wear but the parent's hat ... manage[s] or direct[s] activities at the facility.” FirstEnergy Corp., 766 F.3d at 222.



Other Subsequent Cases



U.S. v. Kayser-Roth Corp., 272 F.3d 89 (1st Cir. 2001) – Parent corporation liable where parent participated in subsidiary’s environmental decision- making; required all of its subsidiaries to notify parent’s legal department of agency/court contact regarding environmental matters



Atlanta Gas Light Co. v. UGI Utilities, Inc., 463 F.3d 1201 (11th Cir. 2006) – Parent corporation not liable where parent was not actively managing the subsidiary’s facility itself.

29

Third Circuit Parent Corporation Liability Analysis

Facts



Defendant Greenlease operated a plant to build and repair railcars



Use resulted in heavy metals, paint waste, and VOC contamination



Greenlease became subsidiary of defendant Ampco in 1983



Plaintiff Trinity purchased the property in 1986 and sold it in 2004



In 2006, PA charged Trinity with felonies and misdemeanors for environmental violations at the site



Trinity entered into a consent decree requiring ~$9M remediation

30

Trinity Industries, Inc. v. Greenlease Holding Co., et al. 2018 WL 4324261 (2018)

Trinity Industries Parent Corporation Liability Analysis

Direct Liability



Ampco not liable as an operator because Ampco’s involvement at the Greenlease plant did not exceed the normal relationship between parent and subsidiary



Greenlease employees were responsible for all day-to-day operations at the plant



Greenlease employees coordinated disposal with outside contractors



Greenlease employees communicated with PA DEP on environmental matters



Ampco did not employ any engineers or persons with technical experience in manufacturing that could make decisions for Greenlease with respect to environmental compliance or waste management



Ampco employed only a professional staff, e.g. accountants, actuaries, lawyers



The Third Circuit found that even if Ampco advised Greenlease on legal compliance with environmental laws, such articulation of policies and procedures is consistent with a normal parent subsidiary relationship and did not give rise to parent corporation liability.

31

Trinity Industries Parent Corporation Liability Analysis

Indirect Liability



Greenlease was not undercapitalized and Ampco did not siphon funds from Greenlease



Greenlease issued $50M in dividends to Ampco in the years following the plant’s closure, but the Court found no basis in the record that Greenlease was undercapitalized while operating the plant, and no evidence that the dividends were issued with awareness of the liability to Trinity



Greenlease and Ampco’s relationship was a typical parent-subsidiary relationship



Greenlease & Ampco had 3 overlapping board members and 1 overlapping officer, but Greenlease ran the plant and hired all of the employees.



Ampco’s role in approving large decisions consistent with normal parent-subsidiary relationship.



Greenlease operated with autonomy on decisions relating to manufacturing, environmental compliance and disposal of waste.



Third Circuit cited to Bestfoods in finding that “‘duplication of some or all of the directors or executive officers’ is not fatal to maintaining legally distinct corporate forms.” at *22.

32

Trinity Industries Parent Corporation Liability Analysis

State Law & Public Policy



Trinity argued that PA law requires veil-piercing “whenever justice or public policy demands” (citing Ashley v. Ashley, 393 A.2d 637, 641 (1978))



Third Circuit disagreed, finding that PA veil-piercing law requires a showing that the subsidiary is operated as a robot or puppet by the controlling shareholders.



“The record is devoid of evidence that Ampco misused separate corporate entities for some nefarious purpose. To pierce the corporate veil would thus fly in the face of Pennsylvania’s strong presumption…against piercing the corporate veil.” at *22 (internal citations omitted).



Trinity’s “polluter pays” public policy argument failed.



“Because evidence does not suggest that there was fraud or an attempt to use a corporate façade as an alter ego, public policy first favors upholding the integrity of the corporate form. Trinity has not presented any public policy consideration sufficiently compelling to overcome the strong presumption against veil-piercing.” at *23.

33

Conclusion



These are not ordinary CERCLA cases; they involve significant economic analysis and corporate forensic work.



Key factors for determining corporate dominance include:

 Whether the subsidiary was subject to looting and/or

intermingling of funds with other related corporations

 Whether corporate formalities were observed  Whether the subsidiary and related corporations dealt with

each other at arm's length

 Whether the subsidiary is undercapitalized



CERCLA-specific takeaway:

 Beware the level of involvement in the operation of the

subsidiary's facility by an environmental coordinator who wears the parent's hat (in Bestfoods parlance); too much vertical integration could lead to direct liability.

34

Successor Liability for Environmental Claims

Strafford CLE March 4, 2020 Thomas R. Smith, Esq.

Thomas R. Smith, Esq.

• Mr. Smith has more than 40 years of experience in civil

litigation, dispute resolution and risk management counseling, representing large and small businesses, universities and colleges and individuals. He has represented clients in federal and state courts, before administrative agencies and in arbitrations and mediations. He has handled litigation over remediation costs, damages and penalties related to releases of hazardous substances and petroleum and concerning the proper management of hazardous

• r

toxic materials. He has litigated environmental cases involving federal statutes such as CERCLA, RCRA and the Clean Water Act and the Clean Air Act, and New York statutes such as Environmental Conservation Law, Navigation Law (petroleum spills) and Labor Law (asbestos handling), as well as claims arising under common law. He also has defended toxic tort claims, including claims for personal injury or illness, fear of future harm and medical monitoring, and claims for property damage

• r

diminution in property value arising from

• contamination. He has been recognized by Super Lawyers

and Best Lawyers for environmental litigation, including Best Lawyers-Syracuse Litigation- Environmental Lawyer of the Year (2013, 2017, 2019). 36

Types of Successor Liability

A corporation may be liable as a “successor” in two different contexts:

1. a corporate merger or consolidation 2. a sale of assets

37

Merger or Consolidation

• In a merger or consolidation under state law applicable to corporations, the

surviving corporation takes on all assets and liabilities of the constituent corporations 15 Fletcher Cyclopedia of the Law of Corporations §7041 Ladjevardian v. Laidlaw- Coggeshall, Inc., 431 F.Supp. 834, 838 (S.D.N.Y. 1977) U.S. v. Pioneer Natural Resources Co., 309 F.Supp.3d 923, 930 (D.

• Col. 2018)
• Shareholders of the constituent corporations become shareholders of the

merged corporation

38

Merger or Consolidation

• Simple in concept, often more complicated in

practice

• Because environmental liabilities, particularly

under CERCLA, might derive from activities decades in the past, successor liability may need to be traced through multiple mergers

39

Example: NYS Electric & Gas Corp. v. FirstEnergy Corp., 766 F.3d 212 (2d Cir. 2014); Rochester Gas & Electric

• Corp. v. GPU, Inc., 355 Fed Appx. 547 (2d Cir. 2009)
• NYSEG formed by merger of multiple subsidiaries of Associated

Gas & Electric Company (“AGECO”); NYSEG a subsidiary of AGECO

• RG&E an indirect subsidiary of AGECO
• AGECO (the parent of both NYSEG and RG & E) merges with

AGECORP; through name changes, becomes GPU, Inc.

• GPU, Inc. merges with FirstEnergy, after spinning off NYSEG and

RG&E

• FirstEnergy is the successor to AGECO
• The former subsidiaries of AGECO sue FirstEnergy

40

Hypothetical Merger Sequence

• Corp. A (source of release) Corp. X
• Corp. B (new subsidiary; Corp. Y

becomes owner of facility)

• Corp. C
• Corp. Z

Are Corp. C and Corp. Z both liable as successors?

41

Sale of Assets

General Rule – an asset purchaser does not assume the liabilities of the selling corporation or become responsible for its debts or obligations

42

Exceptions to the Rule

• 1. Purchaser expressly or impliedly assumes the liabilities of

the seller

• 2. The transaction amounts to a “de facto merger”
• 3. Purchaser is a “mere continuation” of the seller
• 4. The transaction was entered into to perpetrate a fraud

E.g. Schumacher v. Richards Shear Co., Inc. 59 N.Y.2d 239, 244 (NY 1983); PCS Nitrogen, Inc. v. Ashley II of Charleston, LLC, 714 F.3d 161, 173 (4th Cir. 2013); Cal. Dept. of Toxic Substances Control v. California- Fresno Inv. Co., 2007 U.S. Dist. LEXIS 37314 (E.D. Ca. 2007); Easter v. Contech Constr. Prods., 2019 U.S. Dist. LEXIS 170181 (W.D. Va. 2019)

43

Does Federal or State Law Apply?

• Many courts have held that where the potential liability is

based on federal law (e.g., CERCLA), federal common law should determine successor liability issues.

• Some courts have reasoned that state law should apply,

as corporations are creatures of state law, and state law generally applies to their organization, operation, and

• bligations
• U.S. v. Bestfoods – left question open, but appeared to

apply general corporate law rules (“fundamental principles of corporate law”); Congress did not indicate any need to create CERCLA-specific rules

44

State of New York v. National Service Industries, Inc. 460 F.3d 201 (2d Cir. 2006)

• “Strictly speaking,” federal common law applies
• But, in determining the content of federal law, court could

incorporate state law or create a nationwide federal rule

• Court decided there would be no difference between New

York law and traditional common law, so left the question

• pen
• See Atchison Topeka & Santa Fe v. Brown & Bryant, 159 F.3d

358 (9th Cir. 1997) (finding no need to choose between state law and federal common law).

45

Liability Assumed by Buyer

• Determined by reference to the language and context of the parties’

contract, applying state contract law. E.g., Columbia Falls Aluminum

• Co. LLC v. Atl. Richfield Co., 2019 U.S. Dist. LEXIS 62702 (D. Mont.

2019)

• Be aware of the state rules of construction, burden of proof, and

application of parol evidence rule

• Is language broad enough to encompass environmental liability based
• n laws enacted after the date of the contract? Compare Commander

Oil Corp. v. Advance Food Service Equip., 991 F.2d 49 (2d Cir. 1993) with Olin Corp. v. Consolidated Aluminum Corp., 5 F.3d 10 (2d Cir. 1993)

• “As is, where is” language may not be sufficient to transfer liability to

purchaser; this language has been held only to disclaim warranties, e.g., Int’l Clinical Labs v. Stevens, 710 F. Supp. 466 (E.D.N.Y. 1989)

• An assumption of liabilities may be implied from the facts without an

express agreement. E.g. Shaoxing Daqin Imp. & Exp. Co. v. Notations, Inc., 2019 U.S. Dist. LEXIS 208593 (S.D.N.Y. 2019).

46

De Facto Merger

Factors considered by courts:

• 1. continuity of ownership, typically accomplished by paying

for assets with stock

• 2. cessation of ordinary business and dissolution of selling

corporation

• 3. assumption by the buyer of the liabilities ordinarily

necessary for the uninterrupted continuation of business

• 4. continuity of management, personnel, physical location,

assets and general business operations Arnold Graphics Indus., Inc. v. Independent Agent Ctr., Inc., 775 F.2d 38, 42 (2d Cir. 1985)

47

De Facto Merger, cont’d.

Continuity of ownership is an essential element of a de facto merger.

State of N.Y. v. Nat’l. Serv. Indus. Inc., 460 F.3d 201, 212 (2d Cir. 2006); 105

• Mt. Kisco Assoc., LLC v. Carozza, 2017 U.S. Dist. LEXIS 47855 (S.D.N.Y.

2017) Easter v. Contech Const. Prods., 2019 U.S. LEXIS 170181 (W.D. Va. 2019)

Typical Scenario:

• Corp. B acquires substantially all of the assets of Corp. A and pays

with stock of Corp. B.

• Corp. A dissolves and distributes the shares of Corp. B to its

shareholders Former shareholders of Corp. A are now shareholders of Corp. B, which continues the business of Corp. A

48

Mere Continuation

Factors considered:

• whether and to what extent there is an identity of ownership
• how the nature and scope of the business of the successor corporation

compares to the predecessor (such as products, customers)

• whether the asset transfer was for less than adequate consideration
• whether the two separate entities still remain after the transaction
• whether the new corporation continues attributes of the old business, such

as name, same address, same facilities, same phone number, same management, same employees

• how the two companies’ assets compare

E.g., Dixon Lumber Co. v. Austinville Limestone Co., 256 F.Supp.3d 658, 674 (W.D. Va. 2017); U.S. v. Davis, 261 F.3d1, 53 (1st Cir. 2001); Norfolk Southern

• Ry. V. Gee Co., 2001 U.S. Dist. LEXIS 10784, *78 (N.D. Ill, 2001); TexTin
• Corp. v. U.S., 2006 U.S. Dist. LEXIS 26782, *22 (S.D. Tex. 2006).

49

Mere Continuation, cont’d.

• Requires not only the continuation of the business of the

selling corporation, but also a continuation of aspects of the corporation itself; i.e., common directors and shareholders

• Only one corporation exists after the transfer; the selling

business must completely cease doing business

Schumacher, 59 N.Y . 2d at 245 Ladjevardian v. Laidlaw- Coggeshall, Inc., 431 F. Supp. 834, 839 (S.D.N.Y . 1977)

50

Substantial Continuity Test

Prior to U.S. v. Bestfoods, a number of circuits adopted a rule of successor liability for CERCLA cases, that was a relaxed application of the mere continuation test, referred to as “substantial continuity”

E.g., B.F. Goodrich v. Betkoski, 99 F.3d 505 (2d Cir. 1996); U.S. v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992); U.S. v. Mexico Feed & Seed Co., 980 F.2d 478 (8th Cir. 1992)

51

After Bestfoods, many circuits have revisited the issue and gone back to the traditional “mere continuation” test either as a matter of state law

• r federal common law.

E.g., State of New York v. Nat’l Serv. Industries, Inc., 352 F.3d 682 (2d

• Cir. 2003); U.S. v. Davis, 261 F.3d 1 (1st Cir. 2001); see Action Mfg. Co.
• v. Simon Wrecking Co., 387 F. Supp. 2d 439, 448 (E.D. Pa. 2005)

(discussing national trend to reject substantial continuity test). But, some circuits still might apply substantial continuity test. See K.C. 1986 LP v. Reade Mfg., 472 F.3d 1009 (8th Cir. 2007); Tex Tin Corp v, United States, 2006 U.S. Dist. LEXIS 26782 (S.D. Tex. 2006) (analyzing facts under both mere continuation and substantial continuity tests in absence of 5th Circuit guidance).

52

W.R. Grace v. Zotos International

• Both plaintiff and defendant argued the other had successor

liability

• Evans Chemetics, Inc. (ECI) and Sales Affiliates, Inc. (SAI)

were sister corporations, both owned by the Evans family

• ECI owned and operated a plant in Waterloo that (1)

manufactured bulk chemicals and (2) manufactured and packaged hair care products

• SAI performed sales and marketing for ECI’s hair care
• products. Its operations were primarily in NYC, but it ran a

shipping department and salvage operation in Waterloo

• The plant disposed of waste at an offsite landfill owned by

ECI

53

W.R. Grace v. Zotos International, cont’d.

• 1963- ECI moves hair care operations to Geneva
• 1967- SAI takes over hair care manufacturing in

Geneva, changes name to Zotos

• 1978- W.R. Grace acquires assets of ECI, paid for with

stock

• ECI changes name to ECI Liquidating, dissolves and

distributes stock to ECI shareholders

• Grace undertakes remediation of site, sues Zotos
• Grace argues Zotos is successor to ECI hair care

business under substantial continuity test

• Zotos argues Grace is a successor to ECI by de facto

merger

54

Fraud

• Not invoked as often as other exceptions
• Circumstances must suggest that the transfer of assets

to the new entity was intended to avoid satisfying an

• bligation to a creditor.

NCC Sunday Inserts v. World Color Press, 759 F. Supp. 1004 (S.D.N.Y. 1991), citing Panther Pumps & Equip. Co. v. Hydrocraft, Inc. 566 F.2d 8 (7th Cir. 1977) cert. denied, 11 35 U.S. 1013 (1978)

• Lack of fair consideration is evidence of fraud

55

Factors Likely to Result in No Successor Liability

• Sale of assets, not merger
• Language in Asset Purchase Agreement excluding liabilities of seller
• Purchase of only some, not all assets
• Seller remains in business
• Separate officers and directors for the acquiring corporation
• Shareholders of seller do not become shareholders of buyer

56

Hypothetical Revisited

• Corp. A merger Corp. X

Asset sale Asset sale

• Corp. B Corp. Y

merger merger

• Corp. C
• Corp. Z

57

Successor Liability of Shareholders

Marsh v. Rosenbloom, 499 F.3d 165 (2d Cir. 2007)

• NYSDEC argues that shareholders of a dissolved corporation (Panex) were

liable under CERCLA

• Court rejected common law trust fund doctrine and applied the applicable

state statute regarding corporate dissolutions

• Under the applicable Delaware statute, claims had to be made within 3

years after dissolution, and a judgment had to be first obtained against the corporation, neither of which occurred

• Leaves open the possibility of shareholder liability depending on the

specifics of state corporate law

• Under NY Business Corporate Law § 1007, claims of creditors may be

barred if the corporation gives at least 6 months’ notice of a bar date; but the bar date does not apply to claims by the state or federal governments

58

Successor Liability of Estate Beneficiaries

Asarco LLC v. Goodwin, 756 F.3d 191 (2d Cir. 2014)

• Asarco entered into CERCLA settlements with the United States, State of

Washington and Port of Everett for the cleanup of sites in Washington

• Asarco sued the trustees of trusts established under the will of John D. Rockefeller,

who died in 1937. Rockefeller had been the principal shareholder of corporations that owned and operated the sites between 1903 and 1912

• Court assumed Rockefeller would be liable if he were alive
• Court declined to adopt trust fund theory as a matter of federal common law
• Court decided case would be governed by section of N.Y. E.P.T.L that holds

beneficiaries liable for “debts” of a decedent

• Applicability of statute depended on whether CERCLA liability – which did not exist at

time of Rockefeller’s death but which is retroactive, is a “debt” within the statute

• Court didn’t decide this question, because it found the CERCLA claim would be

barred by the CERCLA statute of limitation

59