Corporate “Successor” Liability

Most corporate executives and counsel know now that when their company acquires a business, real estate or assets from another company, the acquiring company may knowingly or unknowingly become liable for environmental problems created by the seller.  A recent federal court decision in Ohio^[1] sheds some additional light on the circumstances in which a buyer may be liable for the environmental liabilities of a seller.  Interestingly, in its recent decision, the Ohio federal court decided that the buyer was not responsible for the problems caused by the seller (a rare comforting environmental judicial decision).

By way of background, courts have long held that The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) is a remedial environmental statute that should be interpreted broadly to place the cost of swift and effective response to hazardous waste sites on those responsible for creating or maintaining the hazardous condition.  Similarly, courts have long understood that liability under CERCLA extends to corporate successors.  Congress did not intend for corporations to be able to evade their responsibility by dying paper deaths, “only to rise phoenix like from the ashes, transformed, but free of their former liabilities.”^[2]

This story began in 2010 when Garrett Day, a limited liability company, purchased the site of a former paper mill in Dayton.  The mill had been operated by a series of companies.  Garrett Day soon learned the property was contaminated by hazardous substances that, Garrett Day believed, were released into the environment on the property as a result of the old paper mill operations.  Garrett Day sought to hold each of the former operators — or the successors of the former operators that were no longer around — responsible for the costs of cleaning up the contamination.  One of the operators that was no longer in existence was Badger Paper Mills, Inc., which operated the mill in 1992 and 1993.  Garrett Day claimed that Badger Paper Mills dissolved in 2010, was “reformulated” as BPM, Inc., and was therefore the successor to Badger Paper Mills.

BPM Paper stated that BPM, Inc. was formed in fact in 2005 to acquire certain assets of Badger Paper Mills, which, by then, was in receivership.  BPM Paper was formed in 2011 under the name Badger Paper Mills, Inc. In 2013, the newly formed Badger Paper Mills, Inc. changed its name to BPM Paper, Inc. and merged with BPM, Inc.  The surviving corporation was BPM Paper, Inc.

Generally courts have determined that the issue of whether a corporation is a “successor” to another corporation is a matter to be determined under state law.^[3]  The Garrett Day court adopted that view as well and analyzed the question of whether BPM Paper was successor to Badger Paper Mills under Ohio law of corporate successor liability.  Under Ohio law, the purchaser of a corporation’s assets is not liable for the debts and obligations of the seller.  The court noted four exceptions to this rule.  A successor corporation may be liable when:

1. the buyer expressly or implicitly agrees to be liable,
2. the transaction amounts to a de facto merger,
3. the buyer is “merely a continuation” of the seller^[4] or
4. the transaction is entered into fraudulently.^[5]

In Garrett Day, Garrett Day argued only that sale of assets to BPM, Inc. constituted a de facto merger. Under Ohio law, the courts examine four factors to determine whether a de facto merger has occurred.  Courts evaluate whether any or all of the following occurred:

1. continuation of the same business activity with the same personnel,
2. a continuity of shareholders resulting from the sale of assets in exchange for stock,
3. the prompt dissolution of the seller, and
4. the assumption by the purchaser of all the liabilities and obligations necessary to continue business such as payables, leases and other day-to-day business contracts.

Courts have typically held that more than one, but not all four of these factors must be present to determine that a de facto merger has occurred.  In Garrett Day, the court found that the seller owned and operated the site from 1992 to 1993, and was dissolved in 2010.  The court found that following the purchase of assets, BPM, Inc. continued all previous activities of Badger Paper Mills, absorbing the same customers and retaining the same employees.  More importantly to the court, though, the buyer did not employ any of the seller’s former officers or directors.  (The court acknowledged that strict continuity of management level personnel is not necessary when there is clear continuity of business activity.)  The court noted that there was no transfer of assets in return for stock in the BPM transaction.  The court found it particularly important that in prior cases where buyers had been held liable, the selling corporation was absorbed and became a division of the buying corporation. That did not occur in the BPM transaction.  The sole stockholder of the buyer owned only one-quarter of the shares of seller.  The court determined there was no substantial continuity of shareholders.  The court found that the dissolution in 2010 after the 2005 sale of assets was not a “prompt” dissolution of the seller.  The court held that under Ohio’s four-pronged test, therefore, BPM Paper was not liable for any contamination caused by Badger Paper Mills.

Although the Garrett Day court did not discuss the issue, the analysis of whether a corporation is a “mere continuation” of a prior corporation involves a remarkable similar analysis to that undertaken by the Garrett Day court. The circumstances that are evidence that a corporation is a “mere continuation” of another are:

1. retention of the same employees,
2. retention of the same supervisory personnel,
3. retention of the same production facilities,
4. production of the same product or service,
5. retention of the same name,
6. continuity of assets,
7.  continuity of general business operations, and
8. whether the successor holds itself out as a continuation of the previous enterprise.

Not all circumstances need be present for a court to impose “mere continuity” liability on a buyer, but more than one must exist.^[6]

Any time a company buys assets from another company (especially if it buys all of the assets of the seller), it should conduct a thorough analysis of the potential environmental liabilities of the seller.  As is apparent from a review of the factors courts consider under the “de facto merger” and “mere continuity” tests, those circumstances will very often be present in the course of an acquisition of a significant portion of a seller’s assets.  The buyer should be prepared for a court to determine that it is the successor of the seller’s liabilities.

An Unrelated Aside

Although it is not related to the analysis of successor liability, the case Krause v. City of Omaha, No. 15-2985 (8th Cir. 2016) is worth noting as an example of the extremely open nature of the United States judiciary system.  Mr. Krause brought a citizen suit against the City of Omaha pursuant to the Resource Conservation and Recovery Act, or “RCRA,” the federal statute governing the handling and disposal of hazardous and solid waste.  Mr. Krause alleged that Omaha’s use of road salt constituted an improper disposal of waste (the salt itself) in violation of RCRA. Both the United States District Court for the District of Nebraska and the Eighth Circuit Court of Appeals held that road salt is not a waste because (obviously, one might have thought), the salt is not discarded, but is serving a useful purpose, keeping streets clear of snow and ice.  Perhaps the moral of this story is that while one can take substantive action to make certain one might prevail in potential litigation, there is no action one can take to make certain that litigation will not occur.

^[1] Garrett Day LLC, et al. v. International Paper Co., et al., 3:2015cv0036- #141 (S.D. Ohio 2016)

^[2] U.S. v. Mexico Feed and Seed Co., Inc., 980 F.2d 478 (8th Circuit 1992).

^[3] Note, though, that some courts rely (and attempt to develop, federal common law to analyze CERCLA liability questions. See, e.g.,  U.S. v. Gen. Battery Corp., Inc., 423 F.3d 294, 300 (3d Cir. 2005); N. Shore Gas Co. v. Salomon, Inc., 152 F.3d 642, 651 (7th Cir. 1998).

^[4] See below for a discussion of how courts determine whether a corporation is a “mere continuation” of another corporation.

^[5] Most states adopt those or similar exceptions to the rule.

^[6] U.S. v. Carolina Transformer Co., 978 F.2d 832, 838, (4^th Cir. 1992).