Amicus Curiae Brief — Zollo Drum Co. v. B. F. Goodrich Co.

f

No. 97-241 ¢ ,

SEP 5 1997

IN THE

SUPREME COURT OF THE UNITED STATES “<**

October Term, 1996

ZOLLO DRUM COMPANY, INC. and

NRS CARTING COMPANY, INC.,

Petitioners,

v.

B.F. GOODRICH; UPJOHN CO.; DOW CORNING CORP.;

HOECHST CELANESE CORP.; REYNOLDS ALUMINUM

BUILDING PRODUCTS Co.; UNIROYAL CHEMICAL CO., INC.;

WHITE CONSOLIDATED INDUSTRIES and

UNITED STATES of AMERICA,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

AMICUS CURIAE BRIEF OF THE

NATIONAL SOLID WASTE MANAGEMENT

ASSOCIATION IN SUPPORT OF

PETITIONERS ZOLLO DRUM CO., INC. AND

NRS CARTING CO., INC.

Robert D. Fox

Counsel of Record

John F. Gullace

Manko, Gold & Katcher

401 City Avenue — Suite 500

Bala Cynwyd, PA 19004

(610) 660-5700

Attorneys for Amicus Curiae

National Solid Waste Management

Association

PACKARD PRESS® / APPELLATE DIVISION, 1617 JFK BOULEVARD, PHILA, PA. 19103 (215) 563-9000 V

TABLE OF CONTENTS

Page

INTEREST OF AMICUS CURIAE................... 2

SUMMARY OF ARGUMENT. ............ccccccccee 3

PAPE os Wed es AiR bcc ce ee ee 4

I. THE SECOND CIRCUIT MISAPPLIED THIS

COURT’S PRECEDENTS IN ADOPTING A

FEDERAL COMMON LAW RULE ON THE

IMPORTANT ISSUE OF SUCCESSOR LIABIL-

eee 8S ow Beas Sore oe ena 4

A. The Second Circuit Failed to Properly Evalu-

ate CERCLA’s Language in Determining that

Federal Law Governs Successor Liability

SAY Mico 8% bho co Lewd hve Seowad 5 4

B. The Second Circuit Misapplied the Kimbelil

Foods Test in Determining that Federal Law

Governs Successor Liability Under CERCLA 5

1. There is no need for a national uniform

federal common law rule of successor

Mability under CERCLA. .......0.csc00-: 6

II.

2. Application of the state law of successor

liability would not frustrate the policies of

INNES $s S056 EN uke eine nas c2b455 5.0

3. Application of a federal common law rule

of successor liability under CERCLA

would disrupt commercial relationships

predicated on existing state law...........

THE SECOND CIRCUIT’S MISAPPLICATION

OF THIS COURT’S PRECEDENT IN ADOPT-

ING A FEDERAL COMMON LAW RULE OF

SUCCESSOR LIABILITY UNDER CERCLA

HAS CREATED A SQUARE CONFLICT

AMONG THE COURTS OF APPEALS.........

TABLE OF CONTENTS — (Continued)

Page

Ill. THE SECOND CIRCUIT’S MISAPPLICATION

OF THIS COURT’S PRECEDENT IN ADOPT-

ING A FEDERAL COMMON LAW RULE OF

SUCCESSOR LIABILITY UNDER CERCLA

HAS CREATED UNACCEPTABLE UNCER-

TAINTY IN PAST AND FUTURE COMMER-

CIAL TRANSACTIONS AND IN PENDING

RECRUIT 60 cnbcb ictus cevanks dnadeateowsees 14

CRI hb 0 6.0 bckdwaed busedeyss eon onbensauets 17

AE CE TS PRI MONET

TABLE OF AUTHORITIES

Cases: Page

Anspec Co., Inc. v. Johnson Controls, Inc., 922 F.2d 1240

SE ee ok cu vac nauhon sia asnncdwes 6, 7, 12

Atchison, T. & S.F. Ry. Co. v. Brown & Bryant, Inc., No.

96-15524 (9th Cir. argued May 8, 1997) ............ 12

Atherton v. FDIC, 117 S. Ct. 666 (1997)................ 5

Beazer East, Inc. v. Mead Corp., 34 F3d 206 (3d Cir.

1994), cert. denied, 514 U.S. 1065 (1995) ........... 13

Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451 (11th

EE G8 dieing bin bb <a ok oa bb-vnnkeue onda a oes 8

Burks v. Lasker, 441 U.S. 471 (1979)..............0005. 6

Citizens Elec. Corp. v. Bituminous Fire & Marine Ins.

Co, 66 Rod 1016 (7th Cir. 1995) ...... ccc cc cnees 12

City Management Corp. v. U.S. Chem. Co., Inc., 43 F.3d

I Moos us Gn ow hwes scans casnaewe 7,12

Cyr v. B. Offen & Co., Inc., 501 F.2d 1145 (ist Cir.

RR eRe Bi Sina e ets ack nes yo as aaaa eee ve 9

Fail River Dyeing & Finishing Corp. v. NLRB, 482 US.

ee eh ana hae kesh sees anks pa tdeces 10

Grand Labs., Inc. v. Midcon Labs of lowa, 32 F.3d 1277

I a 7,8

John S. Boyd Co. v. Boston Gas Co., 992 F.2d 401 (ist

ied eee Vis wee \ eh 'an wee wee 12, 13

Joslyn Mfg. Co. v. T.L. James & Co., 893 F.2d 80 (Sth Cir.

1990), cert. denied, 498 U.S. 1108 (1991) ........... 14

Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991)... 6

Lansford-Coaldale Joint Water Auth. v. Tonolli Corp., 4

Ns nig psicdcsucaueuntsesss 14

Leannais v. Cincinnati, Inc., 565 F.2d 437 (7th Cir. 1977) 8

Levin Metals Corp. v. Parr-Richmond Terminal Co., 817

ee te I Ga BD bos bso n'vs usec wld evcoves 13

lll

TABLE OF AUTHORITIES — (Continued)

Cases: Page

Louisiana-Pacific Corp. v. Asarco, Inc., 909 F.2d 1260 (9th

Ce RU 5 i iva Sa Reece ene VER OU EE a os 12

Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454 (9th

CAe SED ose Seb irs whkc dao eeebes heeemenrabeees 13

Mozingo v. Correct Mfg., Corp., 752 F.2d 168 (Sth Cir.

RO ho aaa ee eek wae nds eae ee Ge a 9

Northwest Airlines, Inc. v. Transport Workers Union, 451

RAR OF COORD bp G25 dG0) cise eee ee 4

Olin Corp. v. Consolidated Aluminum Corp., 5 F.3d 10

COR SI Bees ssci panes cnbantcieveseuse eae 13

O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994)... 3, 4, 5, 7

Polius v. Clark Equip. Co., 802 F.2d 75 (3d Cir.

RUGS bic buvdecéns cacuesceiaybetekineny 9, 10, 11, 16

Redwing Carriers, Inc. v. Saraland Apartments, 94 F.3d

SO EUR Ce TO iio ei asia eee tees 7; oo

Schiavone v. Pearce, 79 F.3d 248 (2d Cir. 1996).......... 14

Smithland & Improvement Corp. v. Celotex Corp., 851

F.2d 86 (3d Cir. 1988), cert. denied, 488 U.S. 1029

CRUE eile ak bas EKRK ER Oe OK oes ee 12

Sylvester Bros. Dev. Co. v. Burlington N. R.R., 772

me: OES UTD. WEES AO a os csi ceo ss cere oe eeeas 9

Turner v. Bituminous Casualty Co., 244 N.W.2d 873

COI, Ties 50s ek 0 Pees seins cy ie cena Nokes ed: A

United States v. Carolina Transformer Co., 978 F.2d 832 |

CE pee Ap per o Re ens Se ys reat re Rema ae 12

United States v. Cordova Chem. Co., 113 F.3d 572 (6th

oe. 4 PORE Pe eee TT POET eee CPC Oe RU Ey yor iee 14

United States v. Gilman, 347 U.S. 507 (1954). ........... 4

United States v. Hardage, 985 F.2d 1427 (10th Cir. 1993).. 13

iv

a

TABLE OF AUTHORITIES — (Continued)

Cases: Page

United States v. Kayser-Roth Corp., 910 F.2d 24 (ist Cir.

1990), cert. denied, 498 U.S. 1084 (1991) ........... 14

United States v. Kimbell Foods, Inc., 440 U.S. 715

ENNIS 0-25 enka kas vero uk hee ekos Lewoe kink 3, 4, 6

United States v. Northeastern Pharmaceutical & Chem.

Co., Inc., 810 F.2d 726 (8th Cir. 1986), cert. denied,

ae Wee Rs 6 oh co dso ok ew 13

Statutes and Regulations:

CERCLA § 113(f)(1), 42 U.S.C. § 9613(f)(1)............ 5

EPA Proposal for Municipality and MSW Liability Relief

at CERCLA Co-Disposal Sites, 62 Fed. Reg. 37231

(1997) (proposed July 11, 1997) .................. 2

Other:

Alfred R. Light, Product Line and Continuity of Enter-

prise Theories of Corporate Liability Under CER-

CLA, 11 Miss. C.L. REV. 63 (1990) ............... 9

15 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE

CORPORATIONS § 7123.06 (perm. ed. 1996) ........ 9

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1996

ZOLLO DRUM COMPANY, INC. and

NRS CARTING COMPANY, INC.,

Petitioners,

v.

B.F. GOODRICH; UPJOHN CO.; DOW CORNING CORP.;

HOECHST CELANESE CORP.; REYNOLDS ALUMINUM

BUILDING PRODUCTS Co.; UNIROYAL CHEMICAL Co., INC.;

WHITE CONSOLIDATED INDUSTRIES and

UNITED STATES of AMERICA,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

AMICUS CURIAE BRIEF OF THE

NATIONAL SOLID WASTE MANAGEMENT

ASSOCIATION IN SUPPORT OF

PETITIONERS ZOLLO DRUM CO., INC. AND

NRS CARTING C9O., INC.

Pursuant to Supreme Court Rule 37, the National Solid

Waste Management Association (“NSWMA”) files this amicus

curiae brief in support of Petitioners’ Writ of Certiorari in the

2

above-captioned case.! The written consents of Petitioners,

Respondents and the United States to the filing of this brief

have been filed with the Clerk.

INTEREST OF AMICUS CURIAE

The NSWMA is a voluntary association consisting of over

800 members nationally, and 115 members within the Second

Circuit, all of whom are engaged in the business of providing

waste handling, transportation and disposal services to munici-

pal, residential and commercial customers. The NSWMA is

especially interested in liability issues, particularly those under

the Comprehensive Environmental Response, Compensation

and Liability Act, 42 U.S.C. §§ 9601-9675 (““CERCLA” or

“Superfund”), which affect companies in the waste manage-

ment business. During the last two decades, as government

regulations have become more complex, there has been an

unprecedented consolidation of the waste management indus-

try. NSWMA members have acquired the assets of other com-

panies in the solid waste handling, transportation and disposal

business, thus increasing the sophistication and efficiency of

waste management in this country. Pursuant to the Second

Circuit’s expansive successor liability ruling, NSWMA mem-

bers now face significant, unanticipated, unbargained for and

expensive, potential CERCLA liability for the prior unrelated

actions of the business entities who sold their assets to these

individual NSWMA members.

The Second Circuit’s ruling is also particularly relevant to

NSWMA members because 250 (or 23%) of the sites ear-

marked for cleanup under CERCLA are landfills that

accepted waste from municipal, residential and commercial

customers. EPA Proposal for Municipality and MSW Liability

Relief at CERCLA Co-Disposal Sites, 62 Fed. Reg. 37231

(1997) (proposed July 11, 1997). In aggregate, the potential

1. As required by Supreme Court Rule 37.6, the NSWMaA states that

counsel for the parties did not author this brief in whole or in part and that

there are no other persons or entities, other than the NSWMA and its

members or counsel, who made a monetary contribution to the preparation

or submission of this brief.

|

liability for NSWMA members at these 250 sites and others,

many of which are now pending in litigation, well exceeds one

billion dollars. For these reasons, the NSWMA has a direct

and concrete interest in this Petition for Writ of Certiorari.

SUMMARY OF ARGUMENT

The Second Circuit’s ruling determined that evolving fed-

eral common law, rather than established state law, governs

questions of corporate successor liability under CERCLA.

The Second Circuit further decided that as a matter of federal

common law, questions of successor liability in asset transfers

under CERCLA will be determined pursuant to the expansive

“substantial continuity” test, which has been rejected by

nearly every state. The NSWMA supports the Petition for

Writ of Certiorari on the important issue of successor liability

under CERCLA for the following reasons.

First, the Second Circuit’s ruling misapplied this Court’s

controlling precedents, O’Melveny & Myers v. FDIC, 512 U.S.

79 (1994) and United States v. Kimbell Foods, Inc., 440 U.S.

715 (1979), which establish a strong presumption against the

creation of federal common law. Proper application of the

O’Melveny and Kimbell Foods test demonstrates that a federal

common law rule of successor liability under CERCLA is

unwarranted because: (1) Congress did not, in CERCLA,

direct the courts to create a federal common law rule of suc-

cessor liability; (2) there is no need for a national uniform rule

of successor liability; (3) the traditional state law of successor

liability is consistent with, and would not frustrate, CERCLA’s

policies; and (4) a federal common law rule adopting the dis-

credited “substantial continuity” test would supplant the long-

standing state corporate law of successor liability, and disrupt

established commercial relationships predicated on that state

law.

Second, by misapplying this Court’s precedent, the Sec-

ond Circuit has aggravated an existing conflict among the cir-

cuit courts, many of which have held that the issue of succes-

sor liability under CERCLA should be determined pursuant

to state law. The Second Circuit is also in conflict with the

majority of circuit courts that hold that state law, and not fed-

4

eral common law, applies to CERCLA liability questions

affecting state-created business entities, including such closely

related questions as the capacity of a dissolved corporation to

be sued, the liability of limited partners, the validity of an

inter-corporate contractual release of CERCLA liability, and

the liability of a parent corporation for the actions of its sub-

sidiary.

Third, by misapplying this Court’s precedent and adopt-

ing the expansive “substantial continuity” test to determine

successor liability under CERCLA, the Second Circuit has ret-

roactively upset the well-settled expectations of businesses

made in reliance on state corporate successor law, and created

uncertainty in both future commercial transactions and in

pending CERCLA litigation involving billions of dollars in

potential liabilities.

ARGUMENT

I. THE SECOND CIRCUIT MISAPPLIED THIS

COURTS PRECEDENTS IN ADOPTING A

FEDERAL COMMON LAW RULE ON THE

IMPORTANT ISSUE OF SUCCESSOR LIABILITY

UNDER CERCLA.

A. The Second Circuit Failed to Properly Evaluate

CERCLA’s Language in Determining that Federal

Law Governs Successor Liability Under CERCLA.

In O’Melveny and Kimbell Foods, this Court reinforced

the longstanding presumption against the creation of federal

common law. In all but the most extraordinary cases, federal

courts should not adopt court-made rules to supplement com-

prehensive and detailed federal regulatory programs, like

CERCLA. Within the federal system, the function of weighing

and appraising the various issues concerning the nature and

scope of liability to impose on various entities “is more appro-

priately for those who write the laws, rather than for those

who interpret them.” O’Melveny, 512 U.S. at 89 (quoting

Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S.

77, 98 n. 41 (1981) (quoting United States v. Gilman, 347 U.S.

5

507, 512-13 (1954))); Accord Atherton v. FDIC, 117 S. Ct. 666,

670 (1997). The threshold inquiry, therefore, is whether, in

CERCLA’s comprehensive statutory provisions, Congress

directed the federal courts to create federal common law to

resolve the issue of successor liability.

CERCLA contains only one directive to apply federal

law, on an issue entirely unrelated to corporate successorship.

Section 113(f) of CERCLA, 42 U.S.C. § 9613(f), permits a

liable party to bring a contribution action to recover costs

from another liable party. Section 113(f) of CERCLA specifi-

cally provides that:

Such claims shall be brought in accordance with this

section and the Federal Rules of Civil Procedure,

and shall be governed by Federal law.

42 U.S.C. § 9613(f)(1) (quoted in full in Petitioners’ Appendix

(“Pet. App.”) at 91a). Accordingly, in the context of contribu-

tion actions among parties determined to be liable, Congress

“weighed and appraised” the various issues, and unambigu-

ously provided that the procedures to be followed and the

method for allocating costs among those liable parties must be

determined by federal law.

In stark contrast, CERCLA’s detailed regulatory scheme

does not direct the federal courts to create federal common

law to define the scope of liability arising from business trans-

actions, including liability for alleged corporate successors.

Congress demonstrated its ability to direct that federal com-

mon law be used in resolving the procedures for contribution

actions under section 113(f). Thus, under O’Melveny, Con-

gress must have intended for state law to apply to other issues

for which it did not so direct the federal courts, including the

issue of corporate successor liability. For this reason alone, it

was improper for the Second Circuit to create a federal com-

mon law rule of successor liability under CERCLA.

B. The Second Circuit Misapplied the Kimbell Foods

Test in Determining that Federal Law Governs Suc-

cessor Liability Under CERCLA.

In the absence of an express Congressional directive,

there is a strong presumption against the creatior of federal

6

common law that displaces state law. This presumption can be

rebutted only in extraordinary cases after satisfying the follow-

ing three-part test: (1) whether there is a need for a national

uniform body of law; (2) whether application of state law

would frustrate the specific objectives of the federal program

in question; and (3) whether the application of a federal com-

mon law rule would disrupt commercial relationships predi-

cated on state law. Kimbell Foods, 440 U.S. at 728-29.

This Court has been especially reluctant to create federal

common law rules that preempt well-established rules of state

corporate law. In Kamen v. Kemper Fin. Servs., Inc., 500 U.S.

90 (1991), this Court reiterated that the presumption against

creating federal common law

is particularly strong in areas in which private par-

ties have entered legal relationships with the expec-

tation that their rights and obligations would be gov-

erned by state law standards. Corporation law is one

such area.

Id. at 98 (citations omitted). See also Burks v. Lasker, 441 U.S.

471, 478 (1979) (“Congress has never indicated that the entire

corpus of state corporate law is to be replaced simply because

a plaintiff’s cause .of action is based on a federal statute.”).

Corporations are creatures of state law, wholly dependent

on state law for their existence, rights, powers and liabilities.

Accordingly, only in the most extraordinary circumstances

should a federal court create a federal common law rule, such

as a rule of successor liability, that would preempt state corpo-

rate law. See Anspec Co., Inc. v. Johnson Controls, Inc., 922

F.2d 1240, 1245 (6th Cir. 1991). In light of this strong presump-

tion, the Second Circuit misapplied the three-part Kimmbell

Foods test in determining that federal law governs successor

liability under CERCLA.

1. There is no need for a national uniform federal com-

mon law rule of successor liability under CERCLA.

The Second Circuit provided as its primary rationale for

creating an expansive federal common law rule of successor

liability under CERCLA that:

7

a number of courts have recognized the importance

of national uniformity and applied traditional rules

of successor liability, rather than the successor liabil-

ity of a given state.

Opinion of Nov. 1, 1996 (“Opinion”), reproduced in Pet. App.

at 20a-2la (citations omitted). The Second Circuit’s reliance

on the argument that there is a need for a national uniform

rule, viewed as the most generic and insignificant federal inter-

est, O’Melveny, 512 U.S. at 88, ignores the virtual uniformity

of the successor liability doctrine under existing state law.

Indeed, the Sixth Circuit in Amspec stated that the United

States, the party charged with enforcing CERCLA, has

acknowledged that “the law in the fifty states on corporate

dissolution and successor liability is largely uniform.” Anspec,

922 F.2d at 1249 (Kennedy, J., concurrence). Accord Redwing

Carriers, Inc. v. Saraland Apartments, 94 F.3d 1489, 1501 (11th

Cir. 1996). The only area of potential non-uniformity in state

law arises from a more expansive rule of successor liability,

known as the “substantial continuity” test, adopted by fewer

than ten states, and applied exclusively in the products liabil-

ity coutext. See City Management Corp. v. U.S. Chem. Co.,

Inc., 43 F.3d 244, 252 (6th Cir. 1994); Grand Labs., Inc. v. Mid-

con Labs of Iowa, 32 F.3d 1277, 1283 (8th Cir. 1994); Turner v.

Bituminous Casualty Co., 244 N.W.2d 873, 877 (Mich. 1976).

Any concern that states in the future will alter their suc-

cessor liability rules to relieve corporations of CERCLA

liability is also unfounded. As Circuit Court Judge Kennedy

stated in her concurring opinion in Anspec:

Any fears that states will engage in a “race to the

bottom” in their effort to attract corporate business

and enact laws that limit vicarious liability are in my

opinion groundless. States have a substantial inter-

est in protecting their citizens and state resources.

Most states have their own counterparts to CER-

CLA and EPA and they share a complementary

interest with the United States in enforcement of

laws like CERCLA that are used to remedy envi-

ronmental contamination. I see no necessity to cre-

8

ate federal common law in this area to guard against

the risk that states will create safe havens for

polluters.

922 F.2d at 1250 (Kennedy, J., concurrence). In short, the pur-

ported need for national uniformity is illusory given the near

uniformity of existing state law.

2. Application of the state law of successor liability

would not frustrate the policies of CERCLA.

The Second Circuit correctly articulated the two primary

purposes of CERCLA. The first policy ensures “that those

responsible for any damage, environmental harm, or injury

from chemical poisons bear the cost of their actions.” Opinion,

Pet. App. at 9a (citations omitted). This is known as the “pol-

luter pays” policy. Second, CERCLA aims to facilitate effi-

cient and prompt responses to environmental harm. Jd. at 10a.

Contrary to the Second Circuit’s conclusions, use of state law

to determine successor liability would facilitate, not frustrate,

these CERCLA policies.

A fundamental difference between traditional state law

successor liability and the federal common law approach

adopted by the Second Circuit is that state law requires the

purchasing corporation to have some responsibility for or

nexus to the prior actions of the selling corporation for the

purchaser to be found liable. State law under the traditional

“mere continuation” and “de facto” merger tests ensures this

nexus by requiring that the purchasing corporation have com-

mon management, officers, directors and stockholders with

the selling corporation — ie., the purchaser is the same cor-

poration in a new corporate form. Grand Labs., 32 F.3d at

1282-83; Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451,

1458 (11th Cir. 1985); Leannais v. Cincinnati, Inc., 565 F.2d

437, 439 (7th Cir. 1977). The selling and purchasing corpora-

' tions are not wholly distinct, and the purchaser is held liable

not for the acts of another entity, but for its own acts during a

prior corporate life. Therefore, state successor liability rules

facilitate CERCLA policies by ensuring that the entity respon-

sible for the harm pays for the harm. Indeed, the Second Cir-

cuit apparently endorses this rule by stating that successor

liability is meant to prevent a predecessor from benefitting

9

from the illegal disposal of hazardous substances

and later evad[ing] responsibility for remediation

simply by changing the form in which it does busi-

ness, thereby subverting the Act’s purpose of hold-

ing responsible parties liable for cleanup costs.

Opinion, Pet. App. at 20a.

In contrast, the expansive “substantial continuity” test

adopted by the Second Circuit merely requires continuity of

business operations between buyer and seller, as opposed to a

continuity of the business entity itself. Mozingo v. Correct

Mfg., Corp., 752 F.2d 168, 175 (Sth Cir. 1985); Cyr v. B. Offen

& Co., Inc., 501 F2d 1145 (1st Cir. 1974); Turner, 244 N.W.2d

873. For these reasons, the majority of state courts routinely

reject the “substantial continuity” test as an unwarranted

extension of the successor liability doctrine. See Polius v.

Clark Equip. Co., 802 F.2d 75, 82 (3d Cir. 1986); Sylvester

Bros. Dev. Co. v. Burlington N. R.R., 772 F.Supp. 443, 449 (D.

Minn. 1990); 15 FLETCHER CYCLOPEDIA OF THE LAW OF

PRIVATE CORPORATIONS § 7123.06 (perm. ed. 1996). A pur-

chaser who continues to operate a similar business as the

seller could be held liable under the “substantial continuity”

test even when the purchaser’s ownership and management

had no involvement with or responsibility for the prior actions

of the seller that caused the environmental harm. This result

contravenes the “polluter pays” policy by imposing liability on

a corporation not responsible for any injury to the environ-

ment. As one commentator stated,

as between an entirely innocent successor and the

Superfund, paid for in the main by the oil, petro-

chemical, and other industry, it seems more equi-

table and consistent with the purpose of making the

“polluters” pay to have the congressionally desig-

nated class of polluters pay, rather than someone

unrelated to the risk.

Alfred R. Light, Product Line and Continuity of Enterprise

Theories of Corporate Successor Liability under CERCLA, 11

MIss. C.L. REV. 63, 78 (1990).

10

The Second Circuit also failed to demonstrate how impo-

sition of successor liability under the “substantial continuity”

test promotes CERCLA'’s goal of prompt cleanup of environ-

mental harm. To the contrary, the fact-dependent, totality of

circumstances “substantial continuity” approach created by

the Second Circuit is more likely to result in vigorous, time-

consuming litigation on these issues, which will delay rather

than expedite remediation. State law, on the other hand,

imposes more certain and settled liability principles under the

“mere continuation” or “de facto merger” tests, which focus

on salient criteria such as stock ownership and management. 2

3. Application of a federal common law rule of succes-

sor liability under CERCLA would disrupt commer-

cial relationships predicated on existing state law.

The purpose of the general rule of non-liability in asset

transfers is to promote predictability in corporate transactions

and free alienability and transferability of property. Polius,

802 F.2d at 83. In particular, “[p]redictability is vital in the cor-

porate field. ... Major economic decisions, critical to society,

are best made in the climate of relative certainty and reason-

able predictability.” Jd. Free alienability of property is an

equally important policy underpinning state successor liability

2. The Second Circuit’s primary rationale for adopting the discredited

“substantial continuity” test was because “[t]he Supreme Court has followed

this approach in the labor law context . . . .” Opinion, Pet. App. at 21a (cit-

ing Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27 (1987)). The

rationale for the successor liability rule adopted in Fall River is inapplicable

to CERCLA for two primary reasons. First, a successor liability test, such as

“substantial continuity,” which focuses on retention of employees and man-

agement is perfectly appropriate under the National Labor Relations Act,

where the primary purpose is to protect employee expectations. In contrast,

mechanically imposing a “substantial continuity” test under CERCLA con-

stitutes a retroactive abrogation of fixed business arrangements that would

disrupt, rather than protect, settled expectations. Second, Fall River merely

imposes a duty on the employer to bargain with the predecessor union; it

does not impose a duty to honor existing union contracts, let alone an

unknown, contingent monetary liability on a purchasing corporation. “Sub-

stantial continuity” under CERCLA, by contrast, would impose direct mon-

etary liability, of an unknown amount, on an asset purchaser.

11

law. To this end, the general rule of non-liability under state

law encourages desirable commercial transactions by reducing

the buyer’s risk of loss and uncertainty concerning the value of

the assets purchased, making buyers and sellers more willing

to enter into the asset transaction.

At the same time, traditional state corporate law recog-

nizes the need to protect creditors from corporate transactions

designed to avoid liability. For this reason, state successor

liability doctrine strikes an appropriate balance between these

competing policies by reinforcing the general rule of non-

liability in asset transactions and at the same time creating

narrow exceptions to this general rule where there is a need to

prevent a creditor from unjustly being left with no recourse.

For decades, NSWMA members and other asset purchasers

have engaged in asset acquisitions in reliance on this settled,

developed, easily discovered and applied traditional rule of

non-liability in asset transfers. Indeed, the price paid by the

buyers to the sellers in these transactions reflected the parties’

understanding of who would be responsible for the sellers’

liabilities.

In contrast, the Second Circuit’s creation of an expansive

new rule of successor liability under CERCLA using the “sub-

stantial continuity” test, which will be imposed retroactively

on transactions completed decades ago, undeniably disrupts

these prior commercial relationships predicated on established

state law. For example, an expansive rule of successor liability

violates the recognized policy that there is a need for certainty

in transactions because it increases the purchaser’s risk of

unanticipated liabilities. “The imposition of successor liability

on a purchasing company long after the transfer of assets

defeats the legitimate expectations the parties held during

negotiation and sale.” Polius, 802 F.2d at 83. CERCLA liabil-

ity creates particular uncertainty because of contingencies

regarding the extent and cost of cleanup, the allocation of

liability among responsible parties, and the presence of poten-

tial “orphan shares” attributable to insolvent and defunct enti-

ties. In short, the Second Circuit’s adoption of an expansive

federal rule of successor liability will displace and negate

12

decades of well-established state law on successor liability, on

which businesses properly have long relied.

Il. THE SECOND CIRCUIT’S MISAPPLICATION OF

THIS COURT’S PRECEDENT IN ADOPTING A

FEDERAL COMMON LAW RULE OF SUCCESSOR

LIABILITY UNDER CERCLA HAS CREATED A

SQUARE CONFLICT AMONG THE COURTS OF

APPEALS.

In choosing to create a federal common law of successor

liability under CERCLA, the Second Circuit also created a

square conflict among the courts of appeals on the issue of

successor liability and on a variety of closely-related CER-

CLA liability issues regarding state-created business entities.

Although the Second Circuit’s creation of a federal common

law of successor liability under CERCLA is consistent with

the opinions of three other courts of appeals,> it conflicts with

the decisions in the First and Sixth Circuits. John S. Boyd Co.

v. Boston Gas Co., 992 F.2d 401, 408-09 (1st Cir. 1993); Anspec,

922 F.2d 1240; City Management, 43 F.3d at 250. This split

among the circuit courts persists even after O’Melveny due to

the Second Circuit’s opinion and other opinions discussed

below.

The Second Circuit ruling also creates a square conflict

with the decisions of the courts of appeals on four closely-

related CERCLA liability issues concerning corporate law.

First, on the threshold issue of whether a business entity is

legally cognizable and subject to CERCLA claims, the courts

of appeals have consistently relied on state law. In particular,

the Seventh, Eighth and Ninth Circuits applied state corporate

law to determine the capacity of a dissolved corporation to be

sued under CERCLA. Citizens Elec. Corp. v. Bituminous Fire

3. United States v. Carolina Transformer Co., 978 F.2d 832, 837-38 (4th

Cir. 1992); Louisiana-Pacific Corp. v. Asarco, Inc., 909 F.2d 1260, 1263 (9th

Cir. 1990); Smithland & Improvement Corp. v. Celotex Corp., 851 F.2d 86,

91-92 (3d Cir. 1988), cert. denied, 488 U.S. 1029 (1989). The Ninth Circuit

recently heard oral argument on whether Louisiana Pacific is still good law

after O’Melveny. Atchison, T. & S.F Ry. Co. v. Brown & Bryant, Inc., No.

96-15524 (9th Cir. argued May 8, 1997).

aa wat bhai

13

& Marine Ins. Co., 68 F.3d 1016, 1019-20 (7th Cir. 1995); Levin

Metals Corp. v. Parr-Richmond Terminal Co., 817 F.2d 1448,

1451 (9th Cir. 1987); United States v. Northeastern Pharmaceu-

tical & Chem. Co., Inc., 810 F.2d 726, 746 (8th Cir. 1986), cert.

denied, 484 U.S. 848 (1987). In light of these opinions, the

Second Circuit’s ruling creates the anomaly that state law

determines whether a corporation has the capacity to be sued

in the first instance, but federal common law is determinative

on the issue of successor liability. By way of example, state law

applies to situations where a CERCLA claim is made against

a company that dissolved, but has not transferred its assets,

while federal common law applies where a claim is made

against a company that transfers its assets before dissolving.

Second, the Eleventh Circuit applied state law rather than

federal common law to determine the analogous issue whether

limited partners are liable for the acts of a limited partnership

under CERCLA. Redwing, 94 F.3d at 1501-02. In Redwing, a

case decided after O’Melveny, the Eleventh Circuit applied

the Kimbell Foods test and held that, given the popularity of

the limited partnership structure as a means of organizing

businesses, “we hesitate to upset the expectations investors

have under current state law rules by adopting a federal com-

mon law rule.” Redwing 94 F.3d at 1502. The exact same con-

cerns militate against the Second Circuit’s creation of a federal

common law rule of successor liability under CERCLA, which

would eviscerate the expectations of investors in perhaps the

most common business transaction in this country — asset

acquisitions and divestitures.

Third, courts of appeals have consistently relied upon

state law to determine the validity and interpretation of con-

tractual releases and indemnifications of CERCLA liability

contained in contracts between potentially responsible parties.

Beazer East, Inc. v. Mead Corp., 34 F.3d 206, 212 (3d Cir.

1994), cert. denied, 514 U.S. 1065 (1995); Olin Corp. v. Con-

solidated Aluminum Corp., 5 F.3d 10, 15 (2d Cir. 1993); John

S. Boyd Co., 992 F.2d at 406; United States v. Hardage, 985 F.2d

1427, 1433 (10th Cir. 1993); Mardan Corp. v. C.G.C. Music,

Lid., 804 F.2d 1454, 1457-60 (9th Cir. 1986). Since the corpo-

rate successor liability issue, like the contractual release issue,

14

frequently arises from contractual negotiations over the sale of

assets between private parties, the case for applying state law

to successor liability issues is as strong as for applying state

law to interpret release and indemnification provisions.

Fourth, the Second Circuit ruling threatens to aggravate

an existing conflict among the courts of appeals on whether to

create a federal common law rule of liability for a parent cor-

poration as the result of the actions of its subsidiary. The Fifth

and Sixth Circuits have refused to expand the liability of par-

ent corporations under CERCLA beyond that imposed under

existing, well-established, state law governing the piercing of

corporate veils. United States v. Cordova Chem. Co., 113 F.3d

572, 576-80 (6th Cir. 1997) (en banc) (cert. petition filed Aug.

8, 1997); Joslyn Mfg. Co. v. T:L. James & Co., 893 F.2d 80,

82-83 (Sth Cir. 1990), cert. denied, 498 U.S. 1108 (1991).4 Since

the issue of parent/subsidiary liability has traditionally been

determined by state corporate law, the Second Circuit’s ruling

creates further uncertainty whether federal common law will

displace these longstanding state corporate law principles.

Il. THE SECOND CIRCUIT’S MISAPPLICATION OF

THIS COURT’S PRECEDENT IN ADOPTING A

FEDERAL COMMON LAW RULE OF SUCCESSOR

LIABILITY UNDER CERCLA HAS CREATED

UNACCEPTABLE UNCERTAINTY IN PAST AND

FUTURE COMMERCIAL TRANSACTIONS AND

IN PENDING LITIGATION.

The Second Circuit’s ruling creates enormous uncertainty

in both past and present commercial transactions and in pend-

ing litigation. Asset acquisitions and divestitures are among

the most common commercial transactions. For decades prior

to the enactment of CERCLA, NSWMA members and other

parties to countless legitimate asset transfers predicated these

transactions on the well-settled, traditional state corporate law

4. But see Schiavone v. Pearce, 79 F.3d 248, 254 (2d Cir. 1996);

Lansford-Coaldale Joint Water Auth. v. Tonolli Corp., 4 F.3d 1209, 1221 (3d

Cir. 1993); United States v. Kayser-Roth Corp., 910 F.2d 24, 27 (1st Cir. 1990),

cert. denied, 498 U.S. 1084 (1991).

ein Pee

15

rule of non-liability in asset transfers, subject only to very lim-

ited, universally known, exceptions. Because CERCLA itself

imposes retroactive liability for activities that took place well

before its enactment, the Second Circuit’s adoption of an

expansive federal common law rule of successor liability under

CERCLA will unfairly deprive these very commercial actors

of their justified reliance on these traditional state corporate

law doctrines. The Second Circuit’s desire to increase the

number of responsible parties under CERCLA to defray

remediation costs simply does not justify eschewing these tra-

ditional state corporate law doctrines.

The Second Circuit’s ruling also wreaks havoc on the abil-

ity of businesses to structure future commercial transactions.

As stated infra, the states’ successor liability doctrine was

carefully crafted over decades, and is now virtually uniform.

For this reason, commercial actors structured their business

transactions against this settled state common law backdrop.

In direct contrast, state courts have discredited the expansive

federal common law rule of “substantial continuity” under

CERCLA endorsed by the Second Circuit. Moreover, those

federal courts that have adopted the “substantial continuity”

test have applied -it inconsistently. Profound disagreements

about the content of the federal common law of CERCLA

successor liability exists, and the lower courts directly contra-

dict each other on threshold issues regarding the scope and

predicates for successor liability under the “substantial conti-

nuity” test. Petition for Writ of Certiorari at 15-18 (discussing

cases). Using state successor liability doctrine as a guide, it will

be decades before there is a coherent and consistent body of

federal common law of successor liability under CERCLA.

Accordingly, commercial actors attempting to structure busi-

ness transactions in the future cannot knew what the federal

common law in a particular court will require and how it may

differ from state corporate law that will continue to govern all

other aspects of the proposed transaction. The end result is

that commercial transactions will either be made without the

ability to accurately assess potential future liability, or in many

cases, will be avoided.

16

Assuming, arguendo, that a consistent federal common

law rule of successor liability endorsing “substantial continu-

ity” is developed, this expansive rule of successor liability will

in and of itself have a chilling affect on asset transfers. A

rational prospective purchaser will be reluctant to acquire the

assets of a business because, as stated above, it will be

extremely difficult to predict or project with any degree of

accuracy the contingent liabilities of the seller at all locations

where it has ever in the past disposed of, treated or used haz-

ardous substances in any phase of its operations. Quite often

these contingent liabilities will exceed or even dwarf the value

of the purchased assets, thus rendering the assets worthless,

and making purchasers unwilling to consummate the transac-

tion. Similarly, under an expansive successor liability rule, a

company that desires to cease its operations and sell its assets

will have a difficult time locating a single buyer for all of its

assets at a favorable price. Instead, the selling company will be

forced to sell its assets piecemeal at a less advantageous price.

Polius, 802 F.2d at 83. The net result is that assets will not be

sold or purchased at their true value, and “the benefits of

alienability will be lost to commerce... .” Jd. Asset purchas-

ers will also be unwilling to acquire a fully integrated business

unit from a seller for fear of being saddled with successor

liability. Instead, valuable assets will be left to whither on the

vine, with a net loss to the seller who is unable to realize the

full value of its business unit in a sale. This in turn will result

in an economic loss to society.

Finally, the issue of successor liability arises in the vast

majority of pending CERCLA cases as a result of the ubiquity

of asset transfers and CERCLA’s retroactive reach. Billions of

dollars of remedial costs are at stake in these cases. Unless the

Second Circuit is overturned, the shadow of the Second Cir-

cuit’s expansive liability opinion will, at a minimum, require

extensive additional litigation and transaction costs regarding

this fact-dependent inquiry, and may improperly and finally

determine many of these successor liability issues.

SS ee ——————

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17

CONCLUSION

For the reasons stated above, the Petition for Writ of

Certiorari should be granted.

Respectfully submitted,

Robert D. Fox

Counsel of Record

John F. Gullace

Manko, Gold & Katcher

401 City Avenue - Suite 500

Bala Cynwyd, PA 19004

(610) 660-5700

Attorneys for Amicus Curiae

National Solid Waste Management

Association

Dated: September 5, 1997