B. Corporate and Liability Consequences of Acquiring Environmentally Sensitive Properties

Stanley M. Spracker

Editors' Summary: Although NEPA requires the preparation of an EIS for every major federal action significantly affecting the environment, federal agencies often decide in particular cases that compliance with NEPA is satisfied by preparation of EAs. The decision not to prepare an EIS is usually based on a finding of no significant impact. When an agency's threshold NEPA decision is challenged in court, what is the appropriate standard of review? The federal courts of appeals answer this question in at least two different ways: some circuits use the "arbitrary and capricious" standard, while others inquire into the "reasonableness" of the agency's decision. Several courts have expressed doubt that there is any genuine distinction between the rival standards, and the Supreme Court has so far declined to settle the issue. The author of this Article surveys the federal case law on this question, exploring the approach of each circuit and taking issue with those who maintain that the difference between the standards is illusory. The vital difference, the author argues, is that courts using the reasonableness standard are more likely to substitute their own judgment for that of the agency, while courts adopting the arbitrary and capricious standard tend not to second-guess an agency's decision. Because he sees an important difference between these two approaches, the author urges the Supreme Court to grant certiorari to resolve the circuit split.

Stanley M. Spracker is an attorney with Weil, Gotshal and Manges, in Washington, DC.

[18 ELR 10364]

In a case now in litigation, United States v. Chemical and Pigment Co., the United States is for the first time attempting to establish a federal rule imposing liability for CERCLA¹ cleanup costs on successor corporations (those that acquire the assets of another). The proposed rule attempts to codify a policy that the Environmental Protection Agency (EPA) has enforced under CERCLA for several years.

The proposed rule goes well beyond the traditional common law approach governing liability of successor corporations. Furthermore, adoption of the proposed rule would liberalize the already generous causation standard under CERCLA so that generators in some instances would face a standard of absolute liability. Companies who acquire ownership interest in hazardous waste sites, however, would continue to face liability under the statute irrespective of the proposed rule. Moreover, the practical effect of the rule would be to add to the due diligence burden of companies planning acquisitions or the purchase of real estate.

Let me provide some background on the Chemical and Pigment case. The site is a chemical plant owned by Chemical and Pigment Company that produced zinc and copper [18 ELR 10365] from 1960 to 1979. The shares of that company were acquired by ESI Chemicals in 1979 with an explicit assumption of liability. Several years later, ESI sold the assets, including this site, to a new corporation that was renamed Chemical and Pigment Company. It had the same management as its predecessor but a new board of directors.

In this case, the government is arguing for extension of the product-line theory of successor liability to the new Chemical and Pigment Corporation. The product-line theory, first articulated in Ray v. Alad Corp.,² holds that liability will be imposed where a successor corporation continues to manufacture the same product previously manufactured by the acquired entity. The effect of that rule, as applied to Chemical and Pigment Corporation, would be to hold the new corporation responsible for the environmental harm caused by its predecessor because it continued the operations of its predecessor.

In support of this rule, the government relies on the Ray decision and contends that the successor is in the best position to bear and spread the costs of risks created by its predecessor. As a corollary, the successor has acquired the benefit of the predecessor's goodwill and so should assume its burdens. Furthermore, the product-line theory protects defenseless victims of manufacturing defects. Finally, the government has argued that a federal rule is appropriate here because of the need for uniform enforcement and the development of cleanup requirements under federal law.

In my view, the government's attempts to analogize CERCLA cases to products liability cases are inapposite. First, the Ray court emphasized that imposing liability on a successor continuing the same product line was warranted because a plaintiff in all likelihood would have no other remedy. Also, in that particular case, a private plaintiff was suing a successful, viable corporation.

Under CERCLA, the facts are somewhat different. First, the United States, not an individual, brings its enforcement authority as plaintiff against one or possibly hundreds of companies, many of whom are very small. In many instances, the corporate defendant will have contributed a small share and yet face liability for the full costs of cleanup. The government is hardly disadvantaged in its relationship toward such defendants.

Second, the United States does have other remedies available if a successor corporation is not available to shoulder the costs of cleanup at a given site. For example, the United States may be able to sue other responsible parties. Also, it has a fund that represents a judgment by Congress that the public can and should bear some of the costs of these cleanups. The new amendments to CERCLA,³ in my view, represent a direction from Congress to spend some of that money. Thus, unlike product liability or nuisance actions, there exists an alternative source of funds to finance a cleanup where necessary.

It is also worth noting that the rule is unnecessary in some instances and overreaches in others. For example, where the successor corporation owns the site, it may already be liable under Section 107 as the owner, as is true of the Chemical and Pigment case.

Let us examine the rule from the viewpoint of the generator. There are at least two cases in which the imposition of the rule is unfair. In the first case, a successor acquires all of the assets of a corporation except for Site X. Site X eventually appears on the national priorities list and becomes a subject of a Superfund enforcement action. At this point, the successor is notified by the government that it is a responsible party as a successor corporation under the rule that they are proposing in the Chemical and Pigment case. The problem is that the successor has no connection whatsoever with the site.

A second case in which the rule overreaches is where a predecessor sells a division of a corporation but stays in business. Perhaps it sells its chemical division. If a predecessor is still in existence, however, it seems to me that it should bear the responsibility for the environmental problems that it has caused.

A third problem with this rule is that it would expand the already generous causation test applied in CERCLA cases, and would in effect remove the requirement that the government show any connection between a potentially responsible party and the site. By itself, the statute requires imposition of liability on parties who arrange for disposal. Under the liberal formulations of that test, the government's burden is to show that the waste of a particular defendant arrived at the site. It does not necessarily have to show that that waste caused the harm; it need only show that there is some tangential connection between the defendant's waste and the site in question. The proposed Chemical and Pigment rule might eliminate that obligation completely, because a successor would be responsible for wastes that he did not send to the site. In essence, it would change the standard of liability from the already harsh strict liability standard to virtual absolute liability.

Let me raise two other points before I conclude. First, CERCLA is intended to strike a balance between competing statutory goals, a point that is sometimes forgotten. In United States v. A & F Materials Co., Inc.⁴, the court recognized that, in addition to ensuring that sites are cleaned up, there is another statutory goal: ensuring that the costs of these cleanups are allocated equitably. In my view, this principle suggests that where a company's connection to the site is remote or its share is small, the allocation of costs should reflect this fact.

My last point relates to the justification offered at the outset for creating the product-line rule of successor liability — namely, that the successor is in a better position to assess and bear the risks of cleanup costs. The result of this rule and other facets of the new Superfund law will be an increasing duty of investigation for purchasers of corporate assets or real estate. In some cases, they will have to clean up these sites as part of their due diligence prior to closing the transaction. This burden requires the assessment of largely unknown conditions and equally uncertain liabilities under often tight time constraints. In some instances, the effect of such a duty could lead to a breakdown of negotiations, vitiating the transaction.

There is at least one court that has tried to adopt a balance. In New Jersey Dept. of Environmental Protection v. Ventron Corp.,⁵ the New Jersey Court of Appeals held a successor corporation liable for environmental harm caused by a predecessor, but put a cap on liability and required the [18 ELR 10366] state under its Superfund to assume the balance of the cleanup cost. This approach is not a rule, but rather an option left to the equitable judgment of the court. If successors are to become part of the Superfund liability scheme, surely this approach yields a more equitable result.

1. Comprehensive Environmental Response, Compensation and Liability Act (Superfund), 42 U.S.C. §§ 9601-9657, ELR STAT. 41941.

2. 136 Cal. 574, 19 Cal. 3d 22, 560 P.2d 3 (Sup. Ct. Cal. 1977).

3. Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100 Stat. 1613 (1986).

4. 582 F. Supp. 842 (S.D. Ill. 1984).

5. 468 A.2d 150, 94 N.J. 473 (Sup. Ct. N.J. 1982).