Successor liability and CERCLA: the runaway doctrine of continuity of enterprise.

• Author: Baumann, Christopher J.

1. INTRODUCTION II. CERCLA, SUCCESSOR LIABILITY, AND THE EPA INTERPRETATION III. PRODUCT LIABILITY AND CERCLA--ALTERNATIVE EVOLUTIONS OF THE

   SUCCESSOR LIABILITY DOCTRINE

   1. Setting the Stage: The Traditional Doctrine and Its Evolution

   2. Towards Abandoning Cost Internalization

   3. The Choice of Law Dilemma

   4. The Absence of the Innocent Tort Plaintiff

   5. Spreading the Risk: The Lack of Environmental Liability Insurance.

   6. Goodwill or Bad Luck?

   7. The Causation Dilemma IV. RECENT TRENDS IN THE APPLICATION OF SUCCESSOR LIABILITY

      UNDER CERCLA

   1. United States v. Keystone Sanitation Co.

   2. Gould, Inc. v. A & M Battery and Tire Service

   3. North Shore Gas Co. v. Salomon, Inc. V. CONCLUSION

1. INTRODUCTION

   The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA)(1) was enacted in a legislative flurry that left courts and affected industries with little guidance for dealing with many of the unique problems which have since arisen. One major issue that is still being developed in state and federal courts is the scope of successor liability. The statute itself is silent with regard to whether corporations that purchase the assets of a company which has polluted should also acquire the environmental liabilities of the predecessor. Where the asset purchaser has taken possession of the polluted real estate, then the matter is of less importance because section 107(a)(1) of CERCLA already extends to owners of property.(2) However, where a corporation purchases only assets unrelated to the CERCLA liability, the imposition of successor liability becomes more tenuous. In this case, courts use successor liability to try to pin liability on the successor of either a transporter of waste, one who arranged for the disposal of waste, or a past owner of the land which is currently contaminated.(3) The successor corporation may have purchased all assets except those directly related to the environmental liability, leaving behind a corporate shell existing only to satisfy these debts.(4) Or perhaps the successor corporation may have purchased only a division of a company,(5) or select assets,(6) ignorant of the predecessor's environmental liability which it may then be asked to bear when the predecessor elects to dissolve.

   Almost all courts have found successor liability to be applicable in the CERCLA context by relying on some sparse legislative history and a few landmark cases that embellish upon the "remedial nature" of CERCLA and speak to the strong federal interest in having quick responses and later equitable apportionment of liability among those responsible for the contamination.(7) However, the issue of exactly what form of successor liability applies remains unclear, and the law in this area has developed in an irregular and seemingly unpredictable fashion.(8)

   The traditional doctrine of successor liability states that an asset purchaser does not normally assume the liabilities of a predecessor corporation.(9) Over the years, this traditional doctrine has been modified by four exceptions which remedy certain patently inequitable situations, including: 1) where the purchaser expressly agrees to assume the liabilities of the predecessor, 2) where the facts of the case show that there is a de facto merger of the two corporations, 3) where the purchaser is found to be a mere continuation of the predecessor corporation, and 4) where there has been a fraudulent conveyance structured solely to avoid the liability of the predecessor corporation.(10) While a majority of state courts have limited the exceptions of the successor liability doctrine to these four traditional exceptions in product liability cases,(11) there appears to be an increasingly popular trend in federal courts to apply a further exception, called the continuity of enterprise exception, when developing federal common law in cases arising under CERCLA.(12) EPA expressly adopted this doctrine in a 1984 memorandum, stating that it was in accord with public policy considerations and legislative history, but without offering any rationale for extending a doctrine created in the field of product liability law to the CERCLA context.(13) The inequitable and unpredictable results of several recent decisions have begun to show that this expansion of the traditional doctrine of successor liability in the CERCLA context may not be supportable by the text or legislative history of CERCLA, and in some cases may be entirely unwarranted.(14)

   This Comment analyzes the dynamic struggle evolving in the federal courts which must balance the policy behind CERCLA on the one hand against the competing public interest in the alienability of assets and promotion of commerce on the other hand to determine whether to apply this new continuity of enterprise exception. Part II of this Comment examines the statutory language of CERCLA and its legislative history, discussing the position of the EPA in the context of its 1984 memorandum. The legislative goals embodied in CERCLA, to enable prompt cleanups with later equitable apportionment and to ensure that polluters pay for their environmental contamination, are explored in order to determine whether these goals are compatible with the often tenuous liability associated with the application of the continuity of enterprise exception. Part Ill examines the traditional successor liability doctrine and the expanded liability exception referred to as the continuity of enterprise or substantial continuity exception. The policy rationales behind the continuity of enterprise exception are explored, beginning with its product liability conception. This policy is then contrasted with the policy behind the enactment of CERCLA, exploring its remedial purpose and uncovering many differences suggesting that the application of the continuity of enterprise exception in the context of CERCLA is unwarranted. Particular attention is given to the policy of internalizing costs which is inherent in the successor liability doctrine. Further, an examination of both the choice of law issue, which still has an uncertain outcome, and of the effects of tenuous causal connections on the balancing of equities under the successor liability doctrine will help to suggest that the continuity of enterprise exception should be abandoned in favor of a uniform federal common law rule patterned after the majority rule in the states. Adoption of the traditional rule of law of the majority of states would be beneficial because of its ease of administration and because of the body of existing case law defining its scope. Part IV examines the recent trend in applying the continuity of enterprise exception which has led to unpredictable and highly inequitable results. The cases analyzed show that where it has been applied, the continuity of enterprise exception does not seem to provide a framework that is practical to implement or capable of producing uniform results. Finally, Part V concludes that the traditional successor liability doctrine goes far enough to satisfy the remedial purposes of CERCLA, and that in applying federal common law, courts should limit themselves to the traditional doctrine.

2. CERCLA, SUCCESSOR LIABILITY, AND THE EPA INTERPRETATION

   The text of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is silent with regard to the liability of successor corporations for the environmental liabilities of their predecessors. There are four categories of entities that are expressly made liable under the statute: current owners, owners at the time of contamination, those who arrange for disposal, and transporters of waste.(15) The word "person" as used in the statute to define the above categories includes corporations, but does not discuss the fate of successor corporations.(16) As a result, courts must interpret the statute in light of its scant and inadequate legislative history when deciding whether to include successor corporations within the penumbra of regulated and liable entities.

   It is clear from the legislative history that the drafters of CERCLA had two main goals in mind. First, the statute aims to protect human health by promoting rapid cleanup responses and allowing for later allocation of liability.(17) Second, the statute is intended to make those responsible for the pollution liable for the costs of the CERCLA program.(18) This second goal, referred to as the "polluter pays" principle, is frequently used to defend the extension of successor liability to the context of CERCLA.(19) In recent years, the apparent departure of CERCLA from the polluter pays tenet, has held many entities with little nexus to the contamination liable for the cleanup in contribution actions and has received much criticism.(20)

   Liability under CERCLA is strict, joint, and several. There is no causation requirement expressed in either the statute or the legislative history.(21) Yet, in several contexts, such as the liability of interim owners, courts have interpreted the statute to require some nexus between the entity and the contamination.(22) Recently, several courts faced with successor liability claims under the continuity of enterprise doctrine have required "substantial ties" between the successor and the predecessor before allowing a successful claim.(23) Although there is no causation requirement, the existence of some nexus between the successor and the contamination appears to be a factor that may determine whether the extension of successor liability is in accord with the goals of CERCLA. Part III of this Comment explores this issue further in addressing the need to evaluate the competing goals of CERCLA and corporate law.

   In 1984, the Environmental Protection Agency (EPA) set forth its own interpretation on how the doctrine of successor liability should be applied under CERCLA and included the product line and continuity of enterprise exceptions.(24) This decision was not the product of rational...