Successor liability under CERCLA: it's time to fully embrace state law.

• Author: Carter, Michael

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) (1) is the primary federal remedial statute governing hazardous waste contamination sites. In the most publicly recognizable feature of the statute, the federal government funds cleanup of hazardous waste sites through the Superfund program. (2) But, CERCLA also imposes liability for cleanup and associated costs on parties found responsible for hazardous waste releases. (3)

The assignment of preexisting CERCLA liability from one party to another is of the utmost importance for corporations and other business entities. This Comment addresses a circuit split that has developed over the rules governing the successor liability of a corporation that purchases the assets of another firm that is liable under CERCLA for hazardous waste contamination. Ultimately, Supreme Court precedent and general conflict of laws principles require that asset purchasers be held liable as successors to parties liable under CERCLA only if the law of the state containing the hazardous release site so provides.

Part I of this Comment outlines the general statutory scheme of CERCLA. As noted above, CERCLA imposes private liability on parties responsible for hazardous waste releases. At the same time, Congress recognized that private responsible parties will not always be identifiable, and thus created the Superfund to pay for federal cleanup of such sites.

Additionally, Part I demonstrates the economic importance of successor liability under CERCLA. In total, private parties have paid nearly $24 billion under CERCLA for remedial activities, which suggests the high stakes a corporation faces if found liable as a successor to a responsible party. (4) Moreover, changes in federal funding for CERCLA imply that private liability will become even more important as a funding source for CERCLA cleanups. Special industry taxes designed to replenish the Superfund trust were allowed to expire in 1995, and by 2004 federal funding for CERCLA cleanups was limited to money appropriated from the general budget. (5)

Part II describes successor liability law and its application to CERCLA. CERCLA does not explicitly extend liability to the corporate successors of parties that face existing private liability. However, as a matter of statutory construction, the courts of appeals that have addressed the question have unanimously held that CERCLA liability can extend to successors of responsible parties. (6)

Given the unanimous conclusion that CERCLA liability can extend to successors of responsible parties, combined with the absence of any rules for successor liability within the text of CERCLA, the federal courts must engage in federal common law rulemaking (7) to determine the scope of CERCLA successor liability. (8) As a matter of federal common law, the courts of appeals have held--in recognition of a universal rule of corporate law--that asset purchasers are not generally liable as corporate successors. (9) However, there are four widely recognized equitable exceptions to this general rule: (1) assumption of liability, (2) de facto merger, (3) fraud, and (4) mere continuation. (10) Additionally, a minority of states have also recognized two broader exceptions to asset purchaser nonliability: the product line and the substantial continuity exceptions. (11)

In fashioning federal common law rules of decision regarding the applicability under CERCLA of the various exceptions to asset purchaser nonliability, the courts of appeals are split over whether the adoption of state law or the judicial creation of a federal rule is appropriate. (12) In United States v. Kimbell Foods, Inc. and its progeny, the Supreme Court developed a general framework to determine whether federal courts engaged in federal common law rulemaking (in the context of statutory gap-filling) should incorporate state law or judicially create a rule "according to their own standards." (13) According to Kimbell Foods, the federal courts should create their own rule if (1) the federal program "must be uniform in character throughout the Nation," (2) "application of state law would frustrate specific objectives" of the federal program, and (3) application of a federal rule would not "disrupt commercial relationships predicated on state law." (14)

As Part II makes clear, resolution of the second and third Kimbell Foods factors requires analysis of the law of the specific state(s) involved in the hazardous waste release. (15) However, in many cases the asset purchaser may be incorporated in a state different than the state in which the hazardous release occurred. (16) While few federal courts have even addressed this issue, those that have disagree over whether the state of incorporation or the state of the hazardous release site should provide the applicable exceptions to the general rule of non-liability for asset purchasers. (17) Similarly, legal commentators have also failed to identify the appropriate state law. (18)

Parts III and IV of this Comment attempt to resolve the conflict of laws underlying the instant circuit split. Although counterintuitive, the Kimbell Foods federal-versus-state-law analysis can only be conducted after a court has identified the appropriate state law. Thus, Part III answers the preliminary conflict of whether--when the asset purchaser is a corporation foreign to the state in which the release occurred--the law of the state of incorporation or the state of release governs. Under general conflict of laws principles, the law of the state containing the hazardous waste site should generally govern. In most cases, that state will bear the most significant relationship to, and hold the most significant interest in, the occurrence at issue.

Finally, applying Kimbell Foods and its progeny, Part IV argues that the federal common law rules of decision for CERCLA liability of an asset purchaser should incorporate state law. Neither side in the current circuit split has adequately applied these precedents. The circuits that have judicially created federal rules to govern successor liability under CERCLA have failed to heed Supreme Court doctrine that requires the presence of a significant conflict between federal policy and incorporation of state law before a federal court may create its own rules to fill a statutory gap. (19) While other circuits have appropriately incorporated state successor liability rules into the federal common law of CERCLA successor liability, these courts have often failed--as Supreme Court precedent requires--to apply those rules as they have developed in the particular state at issue.

Turning explicitly to the Kimbell Foods analysis, Part IV demonstrates that the national uniformity and state law commercial relationship factors provide, at most, ambiguous support for federal courts to create their own rules of decision in this instance. Moreover, Supreme Court cases subsequent to Kimbell Foods have argued that cases for which the federal courts should create a rule are "'few and restricted,' limited to situations where there is a 'significant conflict between some federal policy or interest and the use of state law.'" (20)

Thus, the second Kimbell Foods factor--whether application of state law would frustrate the federal program--assumes primary significance. As Part IV demonstrates, there is no clear conflict (to say nothing of a "significant conflict") between use of state law and the purposes or operation of CERCLA. Given the absence of strong support for judicially created federal rules of decision from the other two Kimbell Foods factors, coupled with the absence of a significant conflict between federal policy and state law, the law of the state in which the hazardous release occurred should provide the rules of decision for CERCLA successor liability.

1. CERCLA

   CERCLA's structure suggests that Congress intended to balance stringent private liability for hazardous waste releases with a recognition that a financially viable responsible party could not always be found. The resolution of these competing policies has major economic consequences for corporations and other business entities engaged in asset purchases.

   1. CERCLA Policy

      CERCLA combines strict liability for private parties responsible for hazardous waste releases with public funding for cleanup. Private liability is central to the CERCLA statutory scheme. It creates incentives for the prevention of hazardous waste releases in the first instance. It also creates incentives for private clean up activities." (21)

      Generally, a private party may face CERCLA liability if "there has been (1) a release or threatened release; (2) of hazardous substances; (3) from a facility or vessel; (4) that caused the incurrence of response costs ... ; and (5) the defendant falls within one of the [four classes of potentially responsible parties (PRPs)]." (22) PRPs are (1) current owners and operators of a facility at which hazardous wastes were disposed of, (2) former owners and operators of such a facility at the time of disposal, (3) generators of hazardous substances, and (4) transporters of hazardous substances. (23) The courts have generally held that CERCLA imposes joint and several liability for hazardous waste contamination caused by multiple responsible parties. (24)

      As the preceding elements demonstrate, CERCLA imposes strict liability on all responsible parties. For example, the current owner or operator of a facility may be liable for cleanup costs under CERCLA even if that entity did not contribute to the hazardous release. Note, however, that the statute does limit the classes of private parties that may be held liable. (25) On the other hand, there is no statutory limit on damages under CERCLA. (26) Indeed, private parties have paid for about seventy percent of all long-term cleanup costs under CERCLA. (27)

      The federal government has paid for most of the remaining cleanup costs. Congress...