The Comprehensive Environmental Response, Compensation and Liability Act, 42U.S.C. §§9601- 9675 ("CERCLA"), was enacted in 1980 to address the problems posed by past disposal of hazardous substances. CERCLA established a system under which "persons responsible" for waste disposal are held liable for the costs incurred by either the government or other private parties for the investigation and remediation of contaminated sites.
Liability for Successor Corporation or Business Entity
Under CERCLA, the definition of a "person" who may be held responsible for the costs of remediation at a site includes an individual, a business entity, an association or a government entity. Specifically, a "person" is defined under CERCLA to include corporations. 42 U.S.C. §9601(21). Because CERCLA retroactively imposes liability for activities which may have occurred decades earlier, in many instances the corporate entity which engaged in the activity giving rise to liability either no longer exists or exists in a different form. When this happens, the government or private parties seeking to allocate or recover the costs of remediating sites will attempt to impose this liability on a successor corporation or business entity.
Courts have uniformly interpreted CERCLA to permit the imposition of CERCLA liabilities on successor corporations. Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86 (3d Cir. 1988), cert. denied, 488 U.S. 1029 (1989); B.F. Goodrich v. Betkoski, 99 F.3d 505 (1996), reh'g denied, 112 F.3d 88 (2d Cir. 1997); United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992); Anspec Co. v. Johnson Controls, Inc., 922 F.2d 1240 (6th Cir. 1991); United States v. Mexico Feed and Seed Co., 980 F.2d 478 (8th Cir. 1992); Louisiana-Pacific Corp. v. Asarco, Inc., 909 F.2d 1260 (9th Cir. 1990).
In imposing CERCLA liability on successor corporations, courts not only have relied upon general principles of corporate law under which a surviving corporation, after a merger or consolidation, succeeds to the liabilities of the former corporation, but they also have relied on the notion that Congress, aware of this universal rule, intended the term "corporation" to have its usual meaning. Anspec Co. v. Johnson Controls, Inc., 922 F.2d at 1245.
Determining if a Corporation is the Successor
This uniformity by the courts has not extended to answering the basic questions which must be decided in determining whether a particular corporation is the successor to the "person responsible" under Section 107 of CERCLA. For example, courts have reached different conclusions on:
- whether state law or a uniform federal common law should govern issues of successor liability under CERCLA;
- whether an asset purchaser is entitled to assert the traditional exceptions to the rule that an asset purchaser does not assume the liabilities of its seller unless the transaction constitutes a de facto merger or the "mere continuation" of the seller's business;
- whether an expanded "continuity of enterprise theory" of successor liability should be applied to an asset purchaser who "substantially continues" the seller's business, absent an identity of shareholders;
- whether an asset purchaser who had no knowledge of the potential CERCLA liabilities or the liability-creating activities of the seller should be the "successor" to such liabilities; and
- whether successor liability can be imposed on more than one corporation.
This paper will explore the fundamentally different answers courts have reached in resolving these questions. It also will highlight how the choice of federal circuit or district court in which an action is commenced may determine whether an existing corporation will be found to have succeeded to the CERCLA liabilities of another corporation.
Choice of Law
Having determined that CERCLA authorizes the imposition of liability on successor corporations, courts were quickly faced with the question of whether state law or federal common law should be used to limit or define "successor liability." Four of the eleven circuit courts of appeals have directly decided this question. With the exception of the Sixth Circuit, the circuit courts have held that a uniform system of federal common law should govern successor liability issues under CERCLA. Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86 (3d Cir. 1988), cert denied, 488 U.S. 1029 (1989); B.F. Goodrich v. Betkoski, 99 F.3d 505 (1996), reh'g denied, 112 F.3d 88 (2d Cir. 1997); United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992); Louisiana-Pacific Corp. v. Asarco, Inc., 909 F.2d 1260 (9th Cir. 1990).
In reaching this conclusion, these courts have found that there is an overriding federal interest in developing a nationally uniform body of federal common law in determining who shall be a "responsible person" under CERCLA. In the absence of a universal rule, these courts concluded that "CERCLA's aims may be evaded easily by a responsible party's choice to arrange a merger or consolidation under the laws of particular states which unduly restrict successor liability." Smith Land & Improvement Corp., 851 F.2d at 91; B.F. Goodrich v. Betkoski, 99 F.3d at 515. Despite this quest for uniformity, there remains a lack of consistency in the application of "federal common law."
The minority view, adopted by the Sixth Circuit, is that state law, rather than federal common law, should be applied to determine whether a corporation succeeded to the liabilities of a "person responsible" under Section 107 of CERCLA. Anspec Co. v. Johnson Controls, Inc., 922 F.2d 1240 (6th Cir. 1991). The majority opinion in Anspec Co. addressed the question of whether the term "person" under Section 101(21) of CERCLA included successor corporations. After concluding that successor corporations were included within CERCLA's definition of a person, the court, without further discussion, remanded the case and directed the district court to "follow Michigan law in its application of successor liability. . . ." Anspec Co., 922 F.2d at 1248.
In a concurring opinion, Judge Kennedy explained why state law should be applied in determining successor liability under CERCLA. First, he emphasized that corporations are "artificial creations" dependent upon state law to define their powers, rights and liabilities. Second, since there is substantial uniformity among the fifty states with respect to successor liability, Judge Kennedy found that there was no evidence that applying state law would pose a threat to "any identifiable federal policy interest." Finally, Judge Kennedy found that "[p]rivate parties have relied on state corporation law when making corporate acquisitions and in forming and dissolving corporations. . . [and that] the creation of a federal common law in this area will create uncertainty in future commercial transactions." Anspec Co., 922 F.2d at 1247-1250.
To date, the district courts that have directly addressed this question have adopted the majority approach. Ninth Avenue Remedial Group v. Allis-Chalmers Corp., 195 B.R. 716 (N.D. Ind. 1996); North Shore Gas Co. v. Salomon Inc., 963 F. Supp. 694 (N.D. Ill. 1997; Hunt's Generator Committee v. Babcock & Wilcox Co., 863 F. Supp. 879 (E.D. Wis. 1994). Similarly, other district courts, while not expressly deciding this issue, appear to have applied "federal common law" rather than state law. See Kleen Laundry & Dry Cleaning Services Inc. v. Total Waste Management Inc., 867 F. Supp. 1136 (D.N.H. 1994); Ekotek Site PRP Committee v. Self, 948 F. Supp. 994 (D. Utah 1996).
Which State Law Applies
In Chrysler Corp. v. Ford Motor Co., 972 F. Supp. 1097 (E.D. Mich. 1997), the question was not whether to apply federal common law or state corporation law principles, but rather which state's law would govern. The choice of law presented was between the state of incorporation and which of three other states had the greatest interest in and connection to the events at issue. Citing the Supreme Court's decision in First Nat'l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 621 (1983), the district court found that "[i]n matters of internal corporate governance, the law of the state of incorporation will ordinarily govern; while in matters external to the corporation, more general choice of law rules apply." Chrysler Corp., 972 F. Supp. at 1102.
The district court found that the state in which a CERCLA action is instituted may have interests outweighing those of the incorporating state. For example, because a single CERCLA lawsuit may affect a large number of entities or persons, including potentially responsible parties and the federal and state governments, the interests at stake exceed questions of internal corporate matters or governance. Additionally, the interests of the citizens residing in the state in which a contaminated site is located are greater than those of the citizens residing in the incorporating state. The district court, therefore, held that under the facts presented, the law of the state of incorporation was not entitled to preference on the issue of successor liability. The district court also noted that because the complaint included claims under the Michigan Environmental Response Act and under theories of public nuisance and undue enrichment, further complication would result if another state's law governed the successor issue under CERCLA.
If a uniform federal common law were applied, there would be no need to address these choice of law issues. Absent adherence to a uniform federal common law, however, the differences between state and federal common law may, in some instances, be determinative of whether a particular corporation succeeds to CERCLA liabilities of its alleged predecessor. Moreover, the courts relying on federal common law have tended to adopt an expanded "continuity of enterprise" theory of liability, which may result in an asset purchaser assuming the CERCLA liabilities of the seller. United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992). In contrast, the Sixth Circuit has held that, at least under Michigan law, successor liability will not be imposed on asset purchasers under a continuity of enterprise theory of liability. See City Management Corp. v. United States Chemical Co., 43 F.3d 244 (6th Cir. 1994).
Liability of Asset Purchasers Under Traditional Corporate Law: The De Facto Merger And Mere Continuation Doctrines
Under traditional principles of corporate law, an asset purchaser:
does not take the liabilities of the predecessor corporation from which the assets were acquired unless one of four generally recognized exceptions are met:
- the successor expressly or implicitly agrees to assume the liabilities of the predecessor;
- the transaction may be considered a de facto merger;
- the successor may be considered a "mere continuation" of the predecessor; or
- the transaction was fraudulent. Carolina Transformer Co., 978 F.2d at 838; Louisiana-Pacific Corp., 909 F.2d at 1263; John S. Boyd Co., 992 F.2d at 408; Ametek, Inc. v. Pioneer Salt & Chemical Co., 709 F.Supp. 556 (E.D. Pa. 1988).
This section explores how courts have applied the de facto merger and "mere continuation" exceptions in the context of determining successor liability under CERCLA. No court to date has imposed successor liability under CERCLA based solely on the fourth exception, fraud, and it is not addressed in this paper.
Does an Asset Purchase Amount to a De Facto Merger?
The standard applied to determine whether an asset purchase amounts to a de facto merger in the context of CERCLA does not differ materially from the standard courts apply in other contexts. In general, courts will look beyond the form of the transaction as an asset sale and determine whether in substance the transaction was a merger or consolidation. "If the parties have not observed the statutory requirements for a de jure merger, but have nonetheless achieved virtually all the results of a merger, a court may hold the surviving corporation liable for the conduct of the transferor corporation as if the merger were de jure." In Re Acushnet River & New Bedford Harbor Proceedings, 712 F.Supp. 1010, 1015 (D. Mass. 1989) (citation omitted). Typically, a de facto merger is found when:
- there is a continuation of the enterprise of the seller in terms of continuity of management, personnel, physical location, assets and operations;
- there is a continuity of shareholders;
- the seller ceases operations, liquidates and dissolves as soon as legally and practically possible; and
- the purchasing corporation assumes the obligations of the seller necessary for uninterrupted continuation of business operations. See Louisiana-Pacific Corp., 909 F.2d at 1264; In Re Acushnet River, 712 F. Supp. at 1014; Ametek, 709 F. Supp. at 559.
Under the "mere continuation" doctrine a very similar test is applied, leading one court to conclude that "the distinction between the two exceptions seems more apparent than real." Acushnet River, 712 F. Supp. at 1019 n.15.
Courts disagree as to whether all four factors must be present in order for successor liability to attach. See New York v. Panex Industries Inc., No. 94-CV-0400E, 1996 WL 378172 (W.D.N.Y. Jun. 24, 1996) (holding that all four factors must be present); Acushnet River, 712 F. Supp. at 1014 (holding that "no one of these factors is either necessary or sufficient to establish a de facto merger"). Despite this disagreement, courts consistently have held that identity of shareholders, by some measure, is essential to demonstrating a de facto merger. Indeed, no court has found a de facto merger absent an identity of shareholders.
However, a complete identity of shareholders between the buyer and seller is not required for a court to find that an asset purchase constituted a de facto merger. Instead, the focus is on whether the selling shareholders retained either an ownership interest in the assets or control over the assets following a sale. For example, payment in the form of stock in the buying corporation or shares in the buyer's parent corporation may be sufficient to meet the requirement that the shareholders of the seller continued to retain an ownership interest in the assets. See Louisiana-Pacific Corp., 909 F.2d at 1260; Acushnet River, 712 F. Supp. at 1010; U.S. v. Atlas Minerals, 851 F. Supp. 639 (E.D. PA.1995).
When the buyer and seller are related corporations, such as a parent and subsidiary, courts examine whether the same shareholders "controlled first one organization and then another." HRW Systems, Inc. v. Washington Gas Light Co., 823 F.Supp. 318, 331 (D. Md. 1993) (finding a continuity of shareholders where the buyer already held 99.9% of the stock in the seller). However, the fact that the buyer and seller are under common ownership may not be sufficient in and of itself to establish that an asset purchase was a de facto merger. Finally, if other parts of the four-part test are not satisfied, particularly the requirement that the seller cease doing business and dissolve, then a de facto merger may not be found. Chrysler Corp. v. Ford Motor Co., 972 F.Supp. 1097 (E.D. Mich. 1997) (sale of assets to a subsidiary not a de facto merger where the parent company continues to survive as a holding company with substantial assets); see also B.F. Goodrich v. Betkoski, 99 F.3d at 516; Carolina Transformer Co., 978 F.2d at 838.
Whether the Selling Corporation is Dissolved
The simple failure of the selling corporation to dissolve will not, however, defeat a claim of successor liability. The relevant inquiry is whether the selling corporation continues to conduct business. If the seller conducts no business, then the requirement that only one corporation remains will be satisfied. Acushnet River, 712 F.Supp. at 1010 (the fact that the seller was revived for purposes of the litigation does not defeat application of the de facto merger doctrine).
In determining whether the asset purchaser continued the principal business of the seller, the main consideration is whether there is a "continuity of management, personnel, physical location, assets and operations." Louisiana-Pacific Corp., 909 F.2d at 1264. Courts also may consider use of the same name or trade name, and continuity of customers. Anderson v. City of Minnetonka, No. CV3-90-312, 1993 WL 95361 (D.Minn. Jan. 27, 1993). Generally, these factors are evaluated by comparing the operation of the business just prior to and after the asset sale. In some instances, the focus is on the principal businesses of the buyer and seller; however, the de facto merger doctrine may be applicable even if the buyer ceases some aspects of the seller's business.
Tax Treatment of the Asset Sale a Factor
One final factor courts may consider is the tax treatment of the asset sale. This was noted where, as a condition of the asset sale, the parties required a letter from the Internal Revenue Service stating that the sale would be treated as a tax-free reorganization under the Section 368 of the Internal Revenue Code ("IRC"). Acushnet River, 712 F.Supp. at 1018 (finding that "it was a bargained for precondition of the sale that the financial world view the transaction as a 'mere pooling of interests'"). Another court, however, found that the treatment of an asset sale as a tax-free reorganization under the IRC would "carry no weight" in a determination of whether or not the asset sale constituted a de facto merger. Chrysler Corp., 972 F. Supp. 1097 (E.D. Mich. 1997) (finding that the continued existence of two corporations each with substantial assets and business interests precluded the application of the de facto merger doctrine). Consequently, the tax treatment of an asset acquisition alone would not likely be sufficient to establish a de facto merger or consolidation. However, the tax treatment may be evidence of the parties' understanding as to the nature of the transaction.
As previously noted, the de facto merger and mere continuation doctrines are rooted in traditional principles of corporate law. As a result, once a court determines that an asset sale was in substance a merger or consolidation, the buyer assumes all of the liabilities of the seller. In at least one instance, the de facto merger doctrine was applied despite the fact that the seller had discontinued the operations which gave rise to CERCLA liability prior to the asset sale. HRW Systems, Inc., 823 F. Supp. at 330-31.
Expansion of the Traditional Limits on Assumption of Liabilities by Asset Purchasers: The Continuity of Enterprise Doctrine
The government and other private parties seeking to allocate the substantial costs of remediating sites have urged the courts to expand successor liability of asset purchasers to include a purchaser who substantially continues the business of the seller, despite a lack of shareholder continuity.
The Second, Third, Fourth and Eighth Circuit Courts of Appeals have held that, in certain circumstances, the continuity of enterprise doctrine of successor liability can be applied to hold an asset purchaser liable for the seller's CERCLA liabilities. See B.F. Goodrich v. Betkoski; Carolina Transformer Co.; Mexico Feed & Seed Co. Not surprisingly, the Sixth Circuit, applying Michigan law, declined to adopt the continuity of enterprise theory in the context of CERCLA. City Management Corp. v. United States Chemical Co., 43 F.3d 244 (6th Cir. 1994). The Third Circuit has declined to adopt the continuity of enterprise theory in product liability actions. Polius v. Clark Equipment Co., 802 F.2d 75 (3d Cir. 1986). Despite this precedent, several district courts within the Third Circuit have adopted the continuity of enterprise theory in CERCLA actions. Atlantic Richfield Co. v. Blosenski, 847 F. Supp. 1261 (E.D. Pa 1994); Elf Atochem North America v. United States, 908 F. Supp. 275 (E.D. Pa. 1995); Gould v. A&M Battery and Tire Serv., 950 F. Supp 653 (M.D. Pa. 1997). The Ninth Circuit declined to apply the continuity of enterprise theory, based upon the facts in the case before it, without expressly ruling whether it might be applicable in other circumstances. Louisiana-Pacific Corp., 909 F.2d 1260.
Continuity of Enterprise Theory
The courts which have adopted the continuity of enterprise theory of successor liability generally evaluate "a series of factors in determining whether one corporation is the successor to another," including: "
- retention of the same employees;
- retention of the same supervisory personnel;
- retention of the same production facilities
- production of the same product;
- retention of the same name
- continuity of assets;
- continuity of general business operations; and
- whether the successor holds itself out as the continuation of the previous enterprise." Carolina Transformer Co., 978 F.2d at 838; see also B.F. Goodrich v. Bekoski, 99 F.3d at 516; United States v. Mexico Feed & Seed Co.; Elf Atochem North America; New York v. N. Storonske Cooperage Co., 174 B.R. 366 (N.D.N.Y. 1994).
In many respects this test is similar to the first prong of the de facto merger test.
Evaluation of these factors entails a fact-intensive inquiry consisting of a comparison of the business operations, employees, customers and physical assets of the buyer to those of the seller. Such a comparison is used to determine whether the buyer simply continued the seller's business without interruption or whether the buyer engaged in its own distinct activities.
In applying these factors, courts have placed varying degrees of emphasis on the presence or absence of certain factors, but no single factor has proven to be determinative. For example, in Gould v. Alter Metal Co., No. 91-C-20371, 1994 WL 406576 (N.D. Ill. Aug. 1, 1994), the district court concluded that there was no continuity of enterprise where the asset purchaser did not continue the operations and had not been an officer or director of the seller. In American Nat'l Can Co. v. Kerr Glass Mfg. Corp., No. 89-C-0168, 1990 WL 129657 (N.D. Ill. Aug. 30, 1990), the court found that there were issues of fact as to whether the purchaser substantially continued the business of the seller when, after the asset sale, the seller made several changes in the manufacturing process and removed the buyer's markings from the product.
In contrast, in United States v. Distler, 741 F. Supp. 637, 643 (W.D. Ky. 1990), the court held the that the asset purchaser was the successor to the seller under the continuity of enterprise theory where the changes in the manufacturing process took place several years after the asset purchase and were in response to changing market conditions. Similarly, courts have placed varying degrees of emphasis on that part of the test which focuses on the retention of employees. In Distler, the court found that where key management personnel formed a new corporation to acquire the assets of their former employer, the continuity of enterprise theory was applicable. In Elf Atochem, the court found no continuity of management personnel where the buyer brought in its own supervisory personnel.
The Role of Knowledge in Establishing Liability Under the Continuity of Enterprise Doctrine
While courts almost universally agree that the eight factors enumerated in Carolina Transformer Co. and Mexico Feed & Seed Co. should be considered in determining whether to apply the continuity of enterprise theory of successor liability, there is disagreement on whether two additional factors, knowledge of the potential CERCLA liability and continuation of the polluting activity, also should be required before the continuity of enterprise theory will be imposed under CERCLA. The Carolina Transformer Co. and Mexico Feed & Seed Co. cases showcase the debate which has arisen.
Knowledge of Potential CERCLA Liability
In Carolina Transformer Co., the government sought to recover the cost of remediating a site owned and operated by Carolina Transformer. After the discovery of PCB contamination at the site, the sole shareholder sold all of the assets of the company, except for the contaminated site, to a corporation known as Fay Tran Co. The son of Carolina Transformer's sole shareholder was a shareholder and officer in Fay Tran Co. and also was an officer of Carolina Transformer. After the asset sale, Carolina Transformer ceased doing business at the site. Finding that the de facto merger doctrine did not apply because there was a lack of shareholder continuity, the court found that Fay Tran Co. was a successor to Carolina Transformer under the continuity of enterprise theory of successor liability.
Prior to the asset purchase, Fay Tran Co. conducted almost no business and had only one employee. Following the asset purchase, the employees and management of Carolina Transformer became the employees and management of Fay Tran Co. Additionally, Fay Tran Co. conducted the same operations and had the same customers as Carolina Transformer. In rejecting the argument that Fay Tran Co. had not retained the same physical plant as Carolina Transformer, the court concluded that the asset sale was conducted "against the backdrop of Carolina Transformer's emerging environmental problems" and that it was "unwilling to hold that merely by splitting off the particular part of its operation that resulted in its environmental problems and shifting the remainder of its assets, employees, management, customers, accounts and production methods to another corporation, an otherwise responsible corporation could all but completely wash its hands of its environmental liabilities." Carolina Transformer Co., 978 F.2d at 840.
Mexico Feed & Seed Co. involved the remediation of property which had been leased during the 1970s by Pierce Waste Oil Service ("PWOS"), a waste-oil recycler. PWOS placed four waste-oil tanks on the property which it leased and used for storage of used waste oil. PWOS discontinued using the tanks in 1976. In 1983, PWOS sold its assets to a competitor, Moreco. The majority shareholder in PWOS retired following the sale and never worked for Moreco, although the son of the shareholder became an employee of Moreco. The customers and employees of PWOS became customers and employees of Moreco, and Moreco continued to use the PWOS name for several years after the sale.
The Eighth Circuit, applying the continuity of enterprise theory, concluded that Moreco was not the successor to PWOS. It found significant that Moreco was a pre-existing business which consisted of more than the assets of PWOS. Furthermore, the court found that there was no claim that less than fair consideration had been paid, and that "Moreco had stopped using the 'dirty assets' well before the sale." Mexico Feed & Seed Co., 980 F.2d at 489. And without expressly stating that knowledge was a required element, the court also concluded that unlike Carolina Transformer Co., the facts did not reveal "a case where a purchasing corporation either in collusion with the seller, or independently, bought only 'clean' assets, and knowingly left dirty assets behind with an insufficient asset pool to cover any potential liability." Id.
In the wake of these decisions, courts have debated whether the buyer's knowledge of potential CERCLA liabilities is a prerequisite to imposition of CERCLA liability under the continuity of enterprise theory. The result is that there is significant disagreement, both among the district courts and among judges within the same district, as to whether successor liability under the continuity of enterprise theory of liability should be imposed absent a buyer's knowledge of potential CERCLA liability.
Some Courts Hold Knowledge Not Required
Several district courts have held that knowledge is not a required element for imposing successor liability under the continuity of enterprise theory. Notably, in at least two instances, these courts have found that either the buyer had actual knowledge of potential CERCLA liabilities or that the buyer should have known about potential for CERCLA liabilities.
While finding that knowledge is not required, some courts nevertheless have concluded that it is an important factor to be considered with respect to successor liability. See United States v. Peirce, No. 83-CV-1623, No. 91-CV-0039, No. 92-CV-0562, 1995 WL 356017 (N.D.N.Y. Feb. 21, 1995); Gould v. A&M Battery and Tire Serv., 950 F. Supp. 653 (opining that knowledge played a vital role in the Eighth Circuit's holding in Mexico Feed & Seed Co., but was not determinative). These courts have tended to infer knowledge based on the retention of key management personnel and employees, and at least one court opined that the appearance of knowledge may be created "due to the factors of the continuity of enterprise theory." Gould v. A&M Battery and Tire Serv., 950 F. Supp. at 658. Yet others impose a duty on asset purchasers to conduct a reasonable inquiry about potential CERCLA liabilities. See Atlantic Richfield v. Blosenski, 847 F. Supp. at 1287. Consequently, courts which find knowledge to be an important factor are likely to conclude that either the asset purchaser knew or should have known of the potential CERCLA liabilities, particularly when other factors establishing continuity of enterprise are present.
Some courts which do not require knowledge to impose successor liability under the continuity of enterprise theory have held that knowledge is not relevant to a finding of liability. Those courts have interpreted CERCLA broadly, finding that "[t]he idea that a successor must have knowledge of a potential for CERCLA liability before liability will attach to it is illogical considering CERCLA's policies of strict liability and retroactive liability." Washington v. United States, 930 F. Supp. at 481, 482. These courts tend to emphasize the economic benefit of past waste disposal received by the enterprise, which benefit arguably was then passed on to the asset purchase through the value of the acquired assets. Id. at 482.
A significant number of other district courts, however, have found that knowledge is a required element in establishing successor liability under the continuity of enterprise theory. They reason that the continuity of enterprise theory "was never intended . . . [to] replace the traditional [de facto merger] test. Instead, the continuity of enterprise theory should be applied only when the application of traditional corporate law principles would frustrate the remedial goals of CERCLA. . . ." Atlas Minerals, 824 F. Supp. at 49. Others reason that "if the mere purchase and subsequent use of assets always give rise to successor liability, no company could ever purchase another company's machines and plant . . . without becoming liable for all the obligations of the selling company." Elf Atochem, 908 F. Supp. at 282.
Tests for Requisite Knowledge
In evaluating whether the seller possessed the requisite knowledge, these courts have applied two approaches. Under the more restrictive approach, the question is whether the sale more closely resembles the sale in Carolina Transformer Co. or the sale in Mexico Feed & Seed Co. The specific factors considered under this approach include:
- whether the asset sale was between closely related individuals or entities or between competitors;
- whether adequate consideration was received; and
- whether the buyer or seller had actual knowledge of potential CERCLA claims at the time of the sale.
When this restrictive approach is applied, knowledge is inferred where the asset purchaser was "willfully blind" or the transaction involves collusion between the buyer and seller. See Atlas Minerals, 1995 WL 510304, at *90; Elf Atochem, 908 F. Supp. at 282; Allied Corp. v. Acme Solvents Reclaiming, 812 F. Supp. at 129.
The more liberal approach examines whether knowledge can be inferred from the retention of key management personnel who would likely have had knowledge of the potential for CERCLA liabilities. See N. Storonske Cooperage, 174 B.R. 366 (finding that corporate officer of both buyer and seller knew of CERCLA liabilities). This approach is similar, albeit not identical, to the approach adopted by the courts which find knowledge to be important, but not determinative. See Kleen Laundry & Dry Cleaning Serv., 867 F. Supp. 1136.
It is likely that courts will continue to find that successor corporations are responsible for their predecessors' CERCLA liabilities. What is less certain is how far they will be willing to extend the traditional exceptions to corporate law principles which protect asset purchases from the seller's liabilities.