Environmental Litigation: Piercing the

Corporate Veil, Alter Ego and Successor

Liability

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THURSDAY, FEBRUARY 21, 2019

Presenting a live 90-minute webinar with interactive Q&A

Daniel Riesel, Principal, Sive Paget & Riesel, New York

Thomas R. Smith, Member, Bond Schoeneck & King, Syracuse, N.Y.

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Piercing the Corporate

Veil, Alter Ego, and

Successor Liability

Daniel Riesel, Esq.

5

SIVE, PAGET & RIESEL P.C.driesel@sprlaw.com

Daniel Riesel, Esq.

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SIVE, PAGET & RIESEL P.C.

Dan Riesel started practicing environmental law andlitigation in 1970, when he founded the environmentalprotection unit in the U.S. Attorney's Office for the SouthernDistrict of New York – the first of its kind. He has been amember of the New York City environmental and litigationfirm Sive, Paget & Riesel since 1973. He recently concluded a10-year veil-piercing litigation with a win in the SecondCircuit Court of Appeals. Dan has been consistentlyrecognized by Chambers SuperLawyers, and Best Lawyers asa 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 original 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

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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.

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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 one 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

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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)

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).

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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

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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 of 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 officer 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

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 notundercapitalized.

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, organization, 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 Pufahlbrothers 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).

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New York State Elec.

& Gas Corp. v. FirstEnergy Corp.

overlap 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.

overlap 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

on 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.

20Piercing 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.

21Piercing the Corporate Veil A Comparison in the Second Circuit

Key Dominance Factors, with examples

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 of 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))

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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 nexusbetween 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]ecausePlaintiffs 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.

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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 operation 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 ostensibly 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 butthe 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 of . . . 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.

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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.

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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

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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.

27

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.

28

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.

29

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.

30

Successor Liability

for

Environmental

Claims

Strafford CLE

February 21, 2019

Thomas R. Smith, Esq.

smithtr@bsk.com

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 represents

clients in federal and state courts, before administrative

agencies and in arbitrations and mediations. He handles

litigation over remediation costs, damages and penalties

related to releases of hazardous substances and petroleum

and concerning the proper management of hazardous or

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 defends toxic tort claims, including claims for personal

injury or illness, fear of future harm and medical monitoring,

and claims for property damage or 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).

32

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

33

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

34

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

35

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 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

36

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?

37

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

38

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 perpetuate a

fraudE.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 at *12 (E.D. Ca. 2007)

39

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

obligations

• 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

40

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

open

• 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).

41

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

contract, applying state contract law

• 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 on 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, 701 F. Supp. 466 (E.D.N.Y. 1989)

42

De Facto MergerFactors 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)

43

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)

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

44

Mere ContinuationFactors 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).

45

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)

46

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)

47

After Bestfoods, many circuits have revisited the issue and gone back

to the traditional “mere continuation” test either as a matter of state law

or 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); Texas 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).

48

W.R. Grace v. Zotos International

• 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

49

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

50

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

obligation 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

51

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

52

Hypothetical Revisited

Corp. A merger Corp. X

Asset sale Asset sale

Corp. B Corp. Y

merger merger

Corp. C Corp. Z

53