The United States District Court for the Eastern District of Michigan has rejected claims that Chrysler Corporation (Chrysler) is subject to successor liability for cleaning up the Willow Run Creek Site based on the actions of a subsidiary of a company whose assets Chrysler purchased.
Kaiser-Frazer Corporation (KFC) produced motor vehicles at the Willow Run Manufacturing plant in Ypsilanti, MI from 1946 to 1953. In order to qualify for defense contracts with the federal government, KFC formed a new entity, Kaiser Manufacturing Corporation (KMC), whose assets and profits could be insulated from its financially troubled parent. KMC was formed simply as a tool for KFC to secure federal government contracts and private credit. To enable the financial survival of KFC, KMC later purchased the Willys-Overland Corporation (Willys), changed its name to Willys Motors Corporation and subsequently purchased KFC's assets and assumed its "existing" liabilities in a reorganization in 1956. After the reorganization, KMC sold its stock in Willys to American Motors Corporation (AMC) and Chrysler later purchased AMC.
In 1995, Chrysler filed a lawsuit against several parties (Defendants) who had entered into a consent decree to implement a remedial action plan for the Willow Run Creek Site. Although Chrysler had received a potentially responsible parties (PRP) notice from the United States Environmental Protection Agency (EPA), Chrysler was not a party to the consent decree. Chrysler sought a declaratory judgment that it was not liable for cleanup costs under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or the former Michigan Environmental Response Act (now Part 201 of the Michigan Natural Resources and Environmental Protection Act, Mich. Comp. Laws § 324.20101 et seq. ("Part 201")), because of its 1987 purchase of AMC. Chrysler maintained that although it was the successor to AMC and KMC, KMC had not "owned," "operated," or "arranged" for disposal of hazardous substances at Willow Run as defined by CERCLA or Part 201. Defendants filed a counterclaim asserting that Chrysler is liable as the successor to KFC and KMC and is also directly liable as a result of Chrysler's activities at the Willow Run Airport. Defendants also asserted theories of public nuisance and unjust enrichment. In this opinion, the court restricted itself to consideration of the question of Chrysler's successor liability.
Defendants argued that KMC was, in effect, the alter-ego of KFC and sought to "pierce the corporate veil" between KMC and KFC to hold Chrysler, as the acknowledged successor to KMC, liable for all hazardous substances released by KFC. The court first addressed the "one determining question" of alter-ego liability, which was the existence of fraud or wrongdoing. In addition to a unity of interest and ownership such that the separate corporate personalities cease to exist, some form of culpable conduct is required to "pierce the corporate veil." Therefore, the court stated that the "claimed functional integration of KMC and KFC . . . could not be sufficient to pierce the corporate veil unless there was an additional showing that this was done for a wrongful purpose." The court held that the intentions of KMC and KFC were fully lawful, and were, indeed, approved by the federal government, creditors and shareholders. There was no improper purpose apparent in the subsequent relations between the parent and the subsidiary, the court found. Because there was no evidence that the corporate form was abused, there was no justification to pierce the corporate veil and, therefore, no basis for holding KMC responsible for hazardous substances released by KFC before being purchased by Chrysler.
Defendants next argued that the joint venture between KMC and KFC before the Chrysler purchase made KMC liable for waste produced at KFC's Willow Run facility. The court ruled, however, that the necessary elements for a joint venture were not present in this case. Those elements are: (1) an agreement indicating an intention to undertake a joint venture; (2) a joint undertaking; (3) a single project for profit; (4) a sharing of profits, as well as losses; (5) contribution of skills or property by the parties; (6) community interest and control over the subject matter of the enterprise. Although Defendants' joint venture argument was based on KMC's contract for production of aircraft and KMC's subcontracts with KFC for performance of this production, the court held that the subcontracts were explicitly on a no-profit, no-loss basis and the companies acted not as partners in a common enterprise but as contractor and subcontractor.
The agreement entered into when KMC purchased the assets of KFC in 1956 included an assumption by KMC of "all liabilities of [KFC] existing on the closing date of every nature whatsoever, whether absolute or contingent." Defendants argued that the assumed liabilities included CERCLA liabilities because KFC had already released the hazardous substances that in the future would give rise to liability and, therefore, constituted an "existing" contingent liability. The court rejected this argument, however. "The KMC asset purchase from KFC took place decades before federal environmental enforcement became a reality. Neither the language nor the implied intentions of the parties indicates any reference to environmental costs whatsoever. . . . Neither is there any indication that the enforcement of state environmental law against KFC was an existing contingency at the time of the 1956 sale." In addition, when KMC and KFC entered into the agreement, neither party understood that the contingent liability that KMC was assuming would include environmental liabilities. The court concluded, therefore, that KMC did not acquire KFC's environmental liability by virtue of the 1956 asset sale.
Defendants' last argument was that the 1956 purchase of assets constituted a de facto merger of KFC and KMC, creating an alternative basis for successor liability. Under Michigan law, the requirements for a de factor merger are: "(1) continuation of the enterprise of the seller corporation, with continuity of management, personnel, physical location, assets, and general business operations; (2) continuity of shareholders, resulting from the purchasing corporation's use of its own stock to purchase the acquired assets; (3) the seller corporation must cease ordinary business operations, liquidate, and dissolve as soon as legally and practically possible; and (4) the purchasing corporation must assume the liabilities and obligations of the seller necessary for the uninterrupted continuation of normal business operations of the seller." The court also rejected Defendants' argument on this basis. The court noted that the purpose of the de facto merger doctrine is to "prevent one company from transferring its assets to a second company and dissolving, thus sheltering its assets from creditors, and then continuing its former business as the second company." The court held that this was not the intent or effect of the 1956 sale. In addition, the sale of assets did not bring about a continuity of KMC and KFC operations. It was irrelevant in this case, ruled the court, that KMC and KFC shared directors and managers and integrated operations because the relationship between the two was governed by joint operating agreements. KMC and KFC were maintained as separate entities after the sale.
The court concluded that Chrysler is not the successor in interest of KFC and, therefore, is not liable for remediation costs at the Willow Run site attributable to KFC under CERCLA or Part 201, nor for any claims of public nuisance or unjust enrichment.
Chrysler Corp. v. Ford Motor Co., --- F. Supp. ---, 1997 WL 487058 (E.D. Mich. 1997).
This article was prepared by Christopher J. Dunsky, a partner in our Environmental Department, and previously appeared in the October 1997 edition of Michigan Environmental Compliance, a monthly newsletter written by Honigman Miller Schwartz and Cohn on environmental regulatory developments in Michigan and published by M. Lee Smith Publishers. To subscribe, contact the publisher by either phone at 1-800-274-6675; email at custserv@mleesmith.com; the internet at http://www.mleesmith.com; or by mail at M. Lee Smith Publishers LLC, 5201 Virginia Way, P.O. Box 5094, Brentwood, TN 37024-5094.