Opinion
Civil Action No. 1:CV-93-1482.
August 22, 1996.
MEMORANDUM
Memorandum Regarding Waste Management's Successor Liability to Keystone Sanitation Company
I. Introduction
Before the court are Waste Management's, the Original Generator Defendants' and Third-Party Defendants' cross-motions for summary judgment on the issue of Waste Management's successor liability to Keystone Sanitation Company, Inc. The motions have been briefed and are ripe for disposition.
The Original Generator Defendant group consists of C J Clark America, Inc., The ESAB Group, Inc., The Genlyte Group, Inc., Hanover Bronze Aluminum Foundry, Inc., Kemper Industries, Inc., Quebecor Fairfield Graphics, Inc., R.H. Sheppard Co., Inc., and SKF USA, Inc.
The court will refer to the Original Generator Defendants and Third-Party Defendants as "the Generator Defendants" throughout this memorandum in accordance with their representation to the court in their joint memorandum of law in response to Waste Management's motion for summary judgement. (See Joint Memorandum of Law in Response to Waste Management of Pennsylvania, Inc.'s Motion for Summary Judgment on the Issue of Successor Liability at 1 n. 1.)
II. Factual Backcrround
This case arises out of the Keystone Landfill ("the Landfill") located in Adams County, Pennsylvania. On September 27, 1993, the United States commenced the present action pursuant to Section 107(a) of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") against eleven potentially responsible parties ("PRPs"). These eleven PRPs include Kenneth and Anna Noel and Keystone Sanitation Company, Inc. ("Keystone"), joined pursuant to §§ 107(a)(1),(2) and/or (3), and the eight Original Generator Defendants. The Original Generator Defendants subsequently instituted a Third-Party Action against approximately 180 Third-Party Defendants for response costs pursuant to § 107(a) of CERCLA, as well as contribution pursuant to § 113(f). The Original Generator Defendants also filed a Third-Party Complaint against Waste Management of Pennsylvania, Inc. ("Waste"), claiming that Waste succeeded to the liabilities of Keystone as owner and operator of the Landfill, is jointly and severally liable pursuant to §§ 107(a)(1), (2), and (4) of CERCLA and for contribution under § 113(f). The Original Generator Defendants also allege that Waste is a responsible person under the Pennsylvania Hazardous Sites Cleanup Act ("HSCA"), and, therefore responsible for the release or threatened release of hazardous substances at the Landfill within the meaning of Pa. Stat. Ann. tit. 35, § 6020.701(a). The Third-Party Complaint also avers that Waste is strictly liable for response costs pursuant to § 702(a) of HSCA.
In 1991, the highest entity in the Waste Management corporate hierarchy was Waste Management, Inc. ("WMI"). The second tier in the corporate hierarchy was Waste Management of North America, Inc. ("WMNA"), a wholly-owned subsidiary of WMI. Waste Management of Pennsylvania, Inc., the third tier in WMI's corporate structure, was a wholly-owned subsidiary of WMI. In or about 1992, WMI underwent a corporate restructuring. WMI is now Waste Management International ("WMX"), and WMNA became known as WMI.
From approximately 1968 until 1990, Keystone operated as a family-run commercial, residential and municipal waste collection, hauling, and disposal business. Since its incorporation, Kenneth and Anna Noel have been Keystone's sole shareholders, as well as its sole officers and directors. The Noels operated the business from their home at 355 Clouser Road, Hanover, Pennsylvania. Throughout its existence, Keystone collected and hauled waste from customers located in Adams and York Counties, disposing of trash at the Landfill, which Keystone operated. The Noels own the real property on which the Landfill is located, which is adjacent to their home on Clouser Road. Keystone leased the Landfill site from the Noels.
Keystone also operated the Adams Sanitation Company ("ADSCO") Landfill. The ADSCO Landfill is not at issue in the present litigation.
Waste originally indicated interest in acquiring Keystone and the Landfill in or about June of 1986. The Environmental Protection Agency ("the EPA") had been investigating the Landfill for possible inclusion on the National Priorities List ("NPL") since 1984. Waste was aware that the Landfill was under consideration by the EPA for NPL placement. Waste decided against purchasing either the Landfill or Keystone at that time. In July of 1987, the EPA added the Landfill to the NPL. The EPA has since estimated the final cost of cleaning up the Landfill to be approximately $11.9 million.
On or about March 14, 1990, Eric Sentz, Waste's controller for its York division, recontacted the Noels about purchasing Keystone. Discussions about the proposed transaction took place over the course of the next year. In April of 1990, Keystone ceased operating the Landfill. Keystone's sole revenues subsequent to the closing of the Landfill derived from the collection and transportation of waste.
On June 18, 1991, Waste and Keystone entered into an "Agreement for the Exchange of Stock of Waste Management, Inc. For Certain of the Assets of Keystone Sanitation Company, Inc. ("the Agreement"). Waste purchased Keystone's assets with Waste Management stock valued at $3.1 million. Specifically excluded from the acquisition were Keystone's Landfill related assets and liabilities. The Agreement included an indemnification provision by which Keystone and the Noels agreed to indemnify Waste for any acts or omissions of the Noels or Keystone relating to the operation and/or ownership of the Landfill.
The Generator Defendants maintain that despite Waste's attempt to label the purchase as a sale of assets, Waste acquired Keystone's business and should be held liable as Keystone's successor. Waste argues that it obtained certain of Keystone's hauling assets unrelated to the Landfill long after the Landfill ceased operating and, therefore, it cannot be held liable as the successor to Keystone's Landfill related liability.
III. Summary Judcrment Standard
The court will consider the instant cross-motions under the well accepted standards governing the determination of summary judgment motions.
Summary judgment may be entered if "the pleadings, deposition, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is "genuine" only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, [248,] 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); Equimark Comm. Finance Co. v. C.I.T Financial Serv. Corp., 812 F.2d 141, 144 (3d Cir. 1987). If the evidence is "merely colorable" or "not significantly probative, " summary judgment may be granted. Anderson, 106 S.Ct. at 2511; Equimark, 812 F.2d at 144. Where the record, taken as a whole, could not "lead a rational trier of fact to find for the nonmoving party, summary judgment is proper." Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).Hankins v. Temple Univ., 829 F.2d 437, 440 (3d Cir. 1987). The standards governing the court's consideration of Rule 56(c) crossmotions are the same as those governing motions for summary judgment, although the court must construe the motions independently, viewing the evidence presented by each moving party in the light most favorable to the nonmovant. Raymond Proffitt Found. v. U.S. Environmental Protection Agency, 1996 WL 182813, *7 (E.D. Pa. April 16, 1996) (citations omitted).
IV. Keystone's Owner, ODerator and/or Transporter Liability
The parties contend that in ruling on the issue of Waste's successor liability, the court must necessarily determine the underlying basis for Keystone's CERCLA liability. The Third-Party Complaint alleges only that Waste is the successor to Keystone's owner and/or operator liability and not to its liability as a transporter to the Landfill. Waste argues that it cannot be held liable for Keystone's liability as an owner of the Landfill, because Keystone never owned the real property on which the Landfill is located.
In response, the Generator Defendants assert that as Keystone's successor, Waste is jointly and severally liable for Keystone's entire liability at the Landfill. Labelling this liability as owner, operator, or transporter liability, is irrelevant and inconsistent with CERCLA's scheme of liability. The Original Generator Defendants concede the correctness of Waste's position with regard to their failure to allege a cause of action against Waste as a successor to Keystone's transporter liability. They urge the court, pursuant to Federal Rule of Civil Procedure 15, to amend the pleadings to conform with the evidence before it. The Generator Defendants also note that the court's Third-Party Case Management Order provides that Third-Party Defendants are deemed to have asserted all relevant counter-claims and cross-claims against all other parties. Therefore, Third-Party Defendants have asserted a cause of action against Waste as a successor to Keystone's owner, operator, and transporter liability.
The court finds that the issue of whether Keystone will ultimately be held liable pursuant to § 107(a) as an operator, owner, or transporter is irrelevant to its determination of the motions before it. If the court concludes that Waste is Keystone's corporate successor, Waste will be liable for Keystone's CERCLA liability regardless of the basis upon which Keystone is ultimately determined liable. This is in keeping with general principles of corporate successor liability where a corporation that has merged or consolidated with its predecessor is deemed liable for the debts and liabilities of the former company regardless of the basis upon which those liabilities were imposed. Therefore, to the extent that the parties' cross-motions seek a ruling from the court regarding the basis upon which Keystone is liable for its activities at the Landfill, the court declines to decide that issue at this time.
Once it is found liable as a successor, a corporation may avail itself of the defenses to liability that were available to its predecessor. Smith Land Improvement Corp. v. Celotex Corp., 851 F.2d 86, 91 (3d Cir. 1988), cert. denied, 488 U.S. 1029 (1989).
V. Successor Liability Under CERCLA
CERCLA imposes liability on "person(s)" who owned or operated facilities at the time hazardous waste was disposed, or arranged for the transportation of waste to a site. 42 U.S.C. § 9607(a)(2), (3). Congress has defined "person(s)" to include corporations. 42 U.S.C. § 9601(21). CERCLA is silent on the issue of whether successor corporations may be held liable. The Third Circuit, as well as numerous other circuit courts, has held that corporate successors may be held liable under CERCLA. Smithkline Beecham Corp. v. Rohm Haas Co., 89 F.3d 154, 163 (3d Cir. 1996) (citing Smith Land, 851 F.2d 86); accord Kleen Laundry Dry Cleaning v. Total Waste Management, 817 F. Supp. 225, 233 (D.N.H. 1993) (Kleen Laundry I) (citing cases). Imposing liability on successor corporations is necessary in order to effectuate CERCLA's "primary aim" which is "to correct . . . hazardous condition(s)."Smith Land, 851 F.2d at 91. Liability under the Act is meant to be remedial, rather than punitive. Id. The Third Circuit has not had occasion to address the full range of circumstances under which successor corporations may be held liable under CERCLA. See id. at 91 n. 2. It is well-settled, however, that under traditional notions of successor liability, a corporation does not succeed to the liabilities of its predecessor merely by purchasing its assets. Philadelphia Elec. Co. v. Hercules, Inc., 762 F.2d 303, 308 (3d Cir.), cert. denied, 474 U.S. 980 (1985). There are four exceptions to this established rule of nonliability for asset purchasers.
The Third Circuit has held that the issue of corporate successor liability pursuant to CERCLA is governed by federal law. Smith Land, 851 F.2d at 92.
[W]here (1) the purchaser of assets expressly or impliedly agrees to assume the obligations of the transferor; (2) the transaction amounts to a consolidation or de facto merger; (3) the purchasing corporation is merely a continuation of the transferor corporation; or (4) the transaction is fraudulently entered into to escape liability. . . .Id. at 308. The Generator Defendants argue that fraud, the de facto merger theory, and an expanded version of the mere continuation doctrine, the substantial continuity theory, are applicable to the present case and that each provides an independent basis upon which the court may hold Waste liable as Keystone's successor. The de facto merger doctrine and the substantial continuity theory are similar in many respects, and the court will discuss the components of each in tandem.See In re Acushnet New Bedford Harbor Proceedings re: Alleged PCB Pollution, 712 F. Supp. 1010, 1019 n. 15 (D. Mass. 1989) ("[T]he distinction between the [de facto merger and substantial continuity exceptions] seems more apparent than real.") The court finds that under either test, Waste is liable as Keystone's successor. In addition, there are other factors in the present case which warrant discussion and which the court has considered in reaching its conclusion.
The facts of the instant case lend themselves to a "`more common sense'" analysis, rather than a "`restricted look'" at the transaction between the parties. Kleen Laundry I, 817 F. Supp at 233 (quoting United States v. Distler, 741 F. Supp. 637, 642 n. 4 (W.D. Ky. 1990)).
A. De Facto Merger and Substantial Continuation Doctrines
Courts have employed the de factor merger doctrine in the CERCLA context to impose liability on corporations when the parties have obtained all the results of a merger without complying with the statutory requirements for a de jure merger. Acushnet River, 712 F. Supp. at 1015. The following four factors are considered in assessing whether a sale of assets amounts to a de facto merger:
(1) There is a continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations.
(2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation.
(3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible.
(4) The purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.Hercules, 762 F.2d at 310 (citations omitted). No one of the factors outlined above is either necessary or sufficient to finding the existence of a de facto merger. United States v. Atlas Minerals and Chemicals, Inc., No. 91-5118, 1995 WL 510304, *90 (E.D. Pa. August 22, 1995) ("Atlas III"); Acushnet River, 712 F. Supp. at 1015 (citations omitted). However, a key element to finding that a de facto merger has occurred is the transfer of stock, thus indicating some degree of continuity of ownership. Atlas III, 1995 WL *90. The Third Circuit recently cautioned that courts should decline to apply the de facto merger exception where to do so would "contravene CERCLA's remedial purpose."Smithkline, 89 F.3d at 164.
The mere continuation doctrine is the second relevant exception to the traditional rule against imposing successor liability on asset purchasers. The mere continuation theory requires "identity of officers, directors and stock between the selling and purchasing corporations." United States v. Mexico Feed and Seed Co., Inc., 980 F.2d 478, 487 (8th Cir. 1992) (internal quotations omitted). However, courts have developed a broadened mere continuation test, substantial continuity, in contexts "where the public policy vindicated by recovery from the implicated assets is paramount to that supported by the traditional rules delimiting successor liability." Id. Numerous courts have recognized the applicability of the substantial continuity theory in the CERCLA context. See id. at 487-90; see also United States v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir. 1992); Distler, 741 F. Supp. at 642-43. Courts consider the following factors in determining whether to impose successor liability on asset purchasers based on the substantial continuity theory:
The "substantial continuity" doctrine is also known as the "continuity of enterprise" theory. United States v. Atlas Minerals, 824 F. Supp. 46, 50 (E.D. Pa. 1993) ("Atlas I").
(1) retention of the same employees;
(2) retention of the same supervisory personnel;
(3) retention of the same production facilities in the same location;
(4) production of the same product;
(5) retention of the same name;
(6) continuity of assets;
(7) continuity of general business operations; and
(8) whether the successor holds itself out as the continuation of the previous enterprise.Carolina Transformer, 978 F.2d at 838 (citations omitted). In addition to the factors outlined above, "[i]f the transfer to the new corporation was part of an effort to continue the business of the former corporation yet avoid its existing or potential state or federal environmental liability . . . that should be considered also." Id. see also United States v. Atlas Minerals, 1993 WL 482952, *3 (E.D. Pa. September 11, 1993) ("Atlas II") (application of continuity of enterprise theory is appropriate where purchaser had knowledge that seller had incurred potential CERCLA liability); Atlas I, 824 F. Supp. at 50 ("[C]ontinuity of enterprise exception is designed to prevent strategic behavior by corporate actors who know or anticipate CERCLA problems.") (internal quotations omitted).
1. Continuation of Keystone's Enterprise
a. Managerial and Supervisory Personnel
It is undisputed that after the acquisition, Waste hired Keystone's former general manager Billy Bryant and Jude Noel, a former Keystone supervisor, and entered into a consulting agreement with the Noels. Waste employed Jude Noel in the same capacity in which she had been employed at Keystone. The same cannot be said for Bryant. At Keystone, Bryant was responsible for acquiring new businesses, hiring and firing of employees, and ensuring the continuity of Keystone's daily customer service. Waste employed Jon Yinger and Jim Hiltner as general managers at Waste Management of York and Community Refuse Disposal respectively, and therefore, had no need to employ Bryant in the same capacity as he had been employed by Keystone. However, for the first few weeks after the acquisition, Bryant continued his general supervisory duties and assisted in facilitating a smooth transition. He worked out of the Clouser Road facility and oversaw Keystone's daily operations just as he had prior to the sale. His employment by Waste in this manner was integral to Waste's ability to provide continuous uninterrupted service to former Keystone customers after the acquisition.
The Noels' consulting agreement is discussed infra at § A(6)(b).
b. Employees
Although Waste did not retain all of Keystone's former managerial and supervisory personnel, it hired nearly all of Keystone's former employees in the same capacity as they were employed by Keystone, as drivers and laborers. The Agreement between the parties provided that Keystone would make available all of its employees to Waste for employment. The availability of former Keystone employees was essential to ensuring uninterrupted service to Keystone's former customers. (See Keith Murdoch, Waste's Human Resource Manager 1990-92, Dep. at 151-53; Dennis Van Every, WMNA Regional Operations Vice President 1990-92, Dep. at 11; Rosalind Burbank, WMNA Acquisitions Counsel 1982-1992, Dep. at 371-72.) To date, Waste continues to employ a substantial number of former Keystone employees.
Waste claims that it hired Keystone's former employees on a probationary basis, subject to their passing Waste's driving and drug examinations. Waste also contends that one year after the acquisition, only 35% of Keystone's former employees remained employed by Waste. These points do not alter the fact that the Agreement guaranteed that Keystone's former employees would be available to Waste immediately after the sale for employment and that Waste in fact employed them in order to ensure a smooth transition after the purchase.
c. Assets
Pursuant to the terms of the Agreement, Waste purchased all of Keystone's operating assets. (Acquisition Agreement ¶ 1.1.) Waste acquired the trucks, vehicles, and refuse containers used by Keystone to conduct its waste hauling and disposal business, the only business Keystone was engaged in at the time of the sale. Waste also acquired Keystone's approximately 16,000 customer accounts, customer account contracts, accounts receivable, all operating data, books, files, including copies of insurance policies, financial, accounting and credit records, marketing information and correspondence. The Agreement provided that Waste would be entitled to all payments received after the closing generated from the rendering of services prior to the date of sale. Waste acquired the goodwill associated with Keystone's operating assets and became the beneficiary under Keystone's insurance policy.
Waste did not acquire any of Keystone's assets relating to its former operation of the Landfill. Also not purchased were tools and supplies, including fuel, lubricants, tires, office equipment and billing system. Waste did not obtain any of Keystone's cash, cash equivalents or investments on hand at the time of the purchase. Waste did not acquire the Keystone trade name.
d. Location and Production Facilities
For approximately two to three weeks subsequent to the acquisition, Waste continued to service Keystone's former customers from the Clouser Road facility. Former Keystone employees continued to report to work at Clouser Road and drivers departed from and returned to Clouser Road each day. After this initial period of time, Waste vacated Keystone's former office and garage and moved all the acquired vehicles and unused waste containers to its facilities at Waste Management of York and Community Refuse. Waste's use of Keystone's former business location for this limited period of time was necessary in order to ensure that Waste would be able to provide uninterrupted service to Keystone's former customers immediately following the sale.
e. Business Operations
After the acquisition, Waste retained most of Keystone's former customers. Waste completed the transition smoothly and without any interruption in service to Keystone's former customers. Immediately following the sale, former Keystone drivers, driving former Keystone trucks, picked up trash from former Keystone customers, utilizing the same customer routes. During this period of time, the trucks and refuse containers used by Waste to service former Keystone customers retained the Keystone name and logo. Within days of the acquisition, however, Waste took steps to integrate Keystone's former operations into its existing operations at its York and Community Refuse facilities. Waste began to divide the purchased assets and customer accounts between the two plants and conducted audits of former Keystone customer routes. Several former Keystone employees were terminated due to Waste's alteration of former Keystone customer routes. In many instances, Waste used the purchased assets interchangeably with its own. In other instances, when it was convenient, expedient and profitable, Waste continued to use Keystone's former equipment to service Keystone's customers. Most importantly, Waste made no changes in Keystone's former operations which negatively affected its ability to provide continuous uninterrupted service to Keystone's former customers. To date, Waste concedes, there are some former Keystone drivers who continue to pick up trash from former Keystone customers and some former Keystone refuse containers used by former Keystone customers.
At deposition, Yinger testified that a route audit involved an assessment of the costs associated with servicing a particular customer and comparing that with the revenue generated by that account. (Yinger Dep. at 139-42.)
In addition to incorporating Keystone's former operations into its own operations at the York and Community Refuse facilities, within the first few days after the acquisition, Waste began affixing Waste Management signs and logos to its newly purchased Keystone vehicles. Within one month of the sale, Waste commenced painting Keystone's former trucks and containers Waste's burgundy color. In some instances, however, Waste's efforts to repaint former Keystone refuse containers and trucks took up to six months, and there is some evidence that the transition in this regard continued into March of 1992.
There is also some suggestion in the record that Waste would not have wanted to remove Keystone's name from the trucks and refuse containers during the revenue guarantee period. (See Burbank Dep. at 495.)
f. Production of Same Product
After the sale, Waste produced the same product as Keystone had prior to the sale — waste collection and hauling. The changes Waste implemented after the acquisition, securing written contracts from former Keystone customers and raising prices, were not changes that altered the nature of the service being provided. Indeed, Waste made every effort to ensure there would be no interruption in the service provided to Keystone's former customers.
2. Continuity of Shareholders
The Agreement provided for 72,339 shares of WMI stock to be paid to Keystone in two installments: 68,467 shares on June 18, 1991, and 3,872 shares on June 10, 1992. Keystone sold 30,000 shares publicly, and more than one year after the transaction, 2,190 shares each to Kenneth and Anna Noel. The Noels' shares represented .0009% of WMI's 494,915,659 outstanding shares on February 1, 1992.
Waste contends that its purchase of Keystone's assets achieved through the use of its parent corporation's stock negates the conclusion that there has been continuity of shareholders. This argument has been rejected by at least one other district court. See Acushnet River, 712 F. Supp. at 1016-1017. The court finds the Acushnet River court's reasoning persuasive.
[N]o logical reason exists for requiring that the shares exchanged for the seller's assets be only those of the purchasing corporation. Where, as here, the purchasing corporation is a wholly-owned subsidiary, the result achieved is virtually the same.
* * * *
[T]he Court holds that the requirement of continuity of shareholders is satisfied where the "purchasing corporation" exchanges shares of its parent corporation for the assets of its transferor.
* * * *
[T]o hold otherwise would effectively gut the de facto merger doctrine. To avoid successor liability, a purchasing corporation would merely need to create a wholly-owned subsidiary to formally acquire the assets of a corporation and pay for those assets with its own stock. Such a result is neither requisite nor wise.712 F. Supp. at 1017.
Waste also maintains that the transferred stock was in Keystone's possession, not the Noels', and therefore, there was no continuity of shareholders between the two corporations. In another context, it is possible that the court might be persuaded by Waste's argument. However, in the present instance, where the Noels are Keystone's sole shareholders, officers and directors, Waste's narrow view of this prong of the de facto merger test is misplaced. The rationale for requiring continuity of shareholders between a selling and purchasing corporation is to ensure that there is some continuity of ownership and/or control acquired by the shareholders of the selling corporation. That requirement is met in this case. The Noels, through their control and ownership of Keystone, owned and controlled a significant amount of Waste Management stock.
The court recognizes that in many instances, continuity of shareholders between the seller and purchaser is clearly contemplated by the acquisition agreement between the parties. In these cases, the agreement itself may require the seller to dissolve as quickly as possible and to distribute the stock to its shareholders. See Knapp v. North American Rockwell Corp., 506 F.2d 361, 363 (3d Cir. 1974), cert.denied, 421 U.S. 965 (1975); Acushnet River, 712 F. Supp. at 1012. Although the Agreement between Waste and Keystone does not provide for such distribution, this does not preclude the court from finding that in essence continuity of shareholders exists between the two corporations.
At least one court has found a purchaser of assets liable as a successor in the absence of an exchange of stock. Kleen Laundry Dry Cleaning v. Total Waste Management, 867 F. Supp. 1136 (D.N.H. 1994) (Kleen Laundry II); Kleen Laundry I, 817 F. Supp. at 232-33 (applying de facto merger and mere continuation tests in a more flexible manner in order to promote CERCLA's broad remedial policies).
3. Keystone's Cessation of Ordinary Business Operations
The de facto merger doctrine requires that the seller cease its ordinary business operations, liquidate and dissolve as soon as legally and practically possible. The court finds that in essence, this aspect of the de facto merger test is met in the present case. It is undisputed that at the time of the sale, Keystone's sole business was waste collection and hauling. Keystone sold all of its operating assets to Waste and no longer possessed the equipment to run a waste collection and hauling business. After the acquisition, Keystone ceased its business operations. (See Dennis Grimm, President of Waste Management's Northeast Region 1989-93, Dep. at 227 ("Q: Please state for the record any way that the Noels or Keystone Sanitation Company, Inc. could conduct the same hauling business that they conducted prior to the execution [of the Agreement]? A: They sold their business and they signed a noncompete so they could not. The contract speaks to that."); see also Noels' Dep. at 1469 ("Q: Is it fair to say, Mr. and Mrs. Noel, that you sold virtually everything of value that the company had to Waste Management of Pennsylvania? A: (by Kenneth Noel): I'd say so.").)
Waste contends that Keystone has not formally dissolved and that this fact precludes a finding by the court that a de facto merger has occurred. However, where the seller exists merely as an insubstantial corporation, courts have found this prong of the de facto merger test to be met. See, e.g., Knapp, 506 F.2d at 368-69; Kleen Laundry II, 867 F. Supp. at 1142; Acushnet River, 712 F. Supp at 1011-18. At deposition, the Noels testified that Keystone exists merely to defend the present litigation. (See also Noels' Dep. at 1482 ("Q: What operations, if any, does Keystone Sanitation Company currently conduct? A: (by Kenneth Noel) Not too much of anything, really.").) Since the sale, the only activity that Keystone has engaged in other than defending the instant case, is auctioning off landfill related equipment that Waste did not purchase. The court finds that for all practical purposes, Keystone no longer exists as a viable corporate entity.
4. Assumption of Keystone's Ordinary Business Obligations
Waste assumed the obligations necessary for the uninterrupted continuation of Keystone's normal business operations. The Agreement provided that Waste agreed to "assume and discharge when lawfully due those liabilities, contracts, commitments and other obligations" of Keystone. In fact, as the court has already found, Waste successfully provided uninterrupted service to Keystone's customers after the sale.
5. Representations to the Public
Prior to the date of the acquisition, neither Waste nor Keystone notified Keystone's customers of the impending sale. After the purchase, Waste sent three letters to former Keystone customers which represented either that Keystone's waste collection and hauling business had merged with Waste's or been purchased by Waste. On or about July 2, 1991, Hiltner and Yinger sent a letter to all former Keystone customers stating that "[e]ffective . . . June 18, 1991, Keystone Sanitation Company, Inc. was purchased by Waste Management, Inc. Waste Management . . . will continue the same quality and professional service." On or about July 11, 1991, Waste sent a second letter notifying Keystone's former customers that "[o]n June 18, 1991, Community Refuse Disposal, a Division of Waste Management of Pennsylvania, Inc., purchased the trash disposal service of Keystone Sanitation. Our main objectives are to minimize any disruption or inconvenience to you and to maintain the dependable professional service that Keystone has provided you with." On or about July 16, 1991, Waste sent a letter to all former commercial customers of Keystone announcing the "recent merger of Keystone Sanitation, Inc. with Waste Management, Inc." The court considers these letters as evidence that Waste desired Keystone's former customers to view the acquisition as one in which Waste had purchased, and would continue, Keystone's waste collection and hauling business.
The court also notes that on or about June 21, 1991, Kenneth Noel sent a letter to Keystone's former customers informing them that "[o]n June 18, 1991, Keystone Sanitation Company, Inc. was sold to Waste Management, Inc. Possession was taken by Waste Management, Inc. at the close of business on June 18, 1991. All of Keystone Sanitation Company employees have been retained by Waste Management, Inc. and I assure you that the same quality of professional service will be continued." The court views Noel's letter not as further evidence of Waste's intention to portray the transaction as a business acquisition as urged by the Generator Defendants, but as evidence that the parties to the sale viewed it as such.
6. Other Relevant Factors
Although the court has found that pursuant to the de facto merger and substantial continuity tests the undisputed facts before the court merit the conclusion that Waste is Keystone's successor, there are facts which although relevant to the issue before the court do not conform easily to either doctrine. For instance, it is clear from the evidence before the court that prior to the sale, both Waste and the Noels were aware of the likelihood of impending CERCLA litigation relating to the Landfill. At deposition, several of Waste's officers and directors conceded that Waste attempted to structure the acquisition in order to minimize its liability for Keystone's Landfill related activities. (See Thomas Crummy, Financial Vice-President of Waste Management, Inc. Northeast Region 1991-92, Dep. at 96; Van Every Dep. at 335-37; Jerome Girsh, Chief Financial Officer WMNA 1986-1991, Dep. at 94-95); see also Noels' Dep. at 1496 "Q: Was the reason you did not sell the landfill itself because Waste Management didn't want to assume any liability for the site? A: (by Kenneth Noel) Yes, sir.") In addition, it is clear from the record that Waste and Keystone's intention and understanding was that Waste was purchasing Keystone's business as it existed at the time of the sale. A close reading of the Agreement as well as the deposition testimony of numerous Waste employees supports this conclusion. Probably most important, Waste and Keystone successfully structured I the sale of assets to ensure the uninterrupted provision of refuse collection and hauling services to Keystone's former customers. The parties to the Agreement took every step to ensure that Waste carried on Keystone's business after the sale. These factors provide additional justification for the court's decision that Waste is Keystone's successor.
The court feels obliged to address the applicability of the Third Circuit's recent decision in Smithkline to the facts of this case. InSmithkline, Rohm and Haas ("R H"), the seller, and Smithkline Beecham ("SKB"), the purchaser, had included in their purchase agreement an indemnification provision by which R H agreed to indemnify SKB for all liabilities relating to its business activities prior to the closing date. 89 F.3d at 160. The language of the agreement expressly excluded R H's duty to indemnify SKB for the liabilities of its predecessor. Despite this fact, the district court used the de facto merger doctrine to hold that R H was the successor to its predecessor's liabilities and therefore, was required to indemnify SKB for liabilities not contemplated by the parties. The Third Circuit reversed, stating that "where two sophisticated corporations drafted an indemnification provision that excluded the liabilities of a predecessor corporation, we will not use the de facto merger doctrine to circumvent the parties' objective intent." Id. at 163.
The court does not read the Third Circuit's decision in Smithkline as prohibiting the application of the de facto merger doctrine in the instant case despite the fact that the Agreement contains both a clause excluding Waste's liability for any of Keystone's or the Noels' Landfill related liability and an indemnification provision. The court's use of the de facto merger doctrine is consistent with its obligation to ascertain the true nature of the transaction between the parties, despite their attempts to label the sale an asset purchase. Had the court found that the Agreement between Waste and Keystone involved merely a sale of assets, Waste's attempt to avoid liability for Keystone's Landfill related liability would stand. As discussed above, an asset purchaser does not succeed to the liabilities of its predecessor in the absence of one of the four exceptions to this general rule. Moreover, an asset purchaser is free to explicitly disclaim the assumption of its predecessor's liabilities. However, the court's determination that the transaction between the parties amounts to a de facto merger invalidates Waste's attempt to limit its liability. See Acushnet River, 712 F. Supp. 1016 (finding de facto merger and succession to all liabilities, including liabilities expressly excluded in sale agreement);see also Menacho v. Adamson United Co., 420 F. Supp. 128, 132 (D.N.J. 1976) (applying New Jersey law, disclaimer of liability by purchaser will not prevent transfer of liability if de facto merger has occurred). Nothing in the Third Circuit's decision in Smithkline suggests that where a court properly determines that a corporation has de facto merged with its predecessor, the successor may continue to rely on provisions in the sale agreement negating its succession to certain liabilities. Smithkline does not preclude courts from finding the existence of a de facto merger in the presence of a liability exclusion clause in an agreement of sale. To permit parties to a de facto merger to exclude the transfer of certain enumerated liabilities would defeat the purpose of applying the doctrine in the first instance.
The court also does not find that to apply the de facto merger doctrine in the present context "would contravene CERCLA's remedial purpose."Smithkline, 89 F.3d at 164. CERCLA's provisions are designed "to encourage clean-up by any responsible party." Id. at 163 (internal quotations omitted). As Keystone's successor, Waste is a responsible party. "Even in cases of good faith, a bona-fide successor reaps the economic benefits of its predecessor's use of hazardous disposal methods and, as the recipient of those benefits, is responsible for the costs of those benefits." Mexico Feed Seed Co., 980 F.2d at 487.
The discussion that follows details the additional factors that the court considered in reaching its conclusion that Waste purchased Keystone's business and is liable as Keystone's successor.
a. Language of the Agreement
Although the Agreement states that Waste is purchasing "certain of the assets" of Keystone, other language in the Agreement suggests that the Waste was acquiring Keystone's existing business. The Agreement stated that "[i]t is the intent of the parties . . . that Purchaser shall take over service with respect to the Customer Accounts at the Time of Closing." (Agreement at 8.2.) The Agreement included a guarantee by Keystone that it held no liabilities or obligations except "liabilities incurred in the ordinary course of business." (Id. ¶ 2.3.) Keystone warranted that there was no "labor dispute, strike or work stoppage which may affect the business of (Keystone) or which may interfere with [Keystone's] continued operation." (Id. ¶ 2.16(b).) The Agreement listed all "[a]greement(s), contract(s), or commitment(s) to which (Keystone) is a party or by which it is bound and which [are] either (i) material to the operation of (Keystone's) business or (ii) cannot be terminated without liability on 30 days notice or less." (Id. ¶ 2.10(a)(2).) Keystone further warranted that it was not "a party to, nor is it or any of its property bound by, any other agreement or instrument which is material to the continued conduct of its business as now being conducted or with respect to which a default might materially and adversely affect its properties, business or financial condition." (Id. ¶ 2.10(b).)
The Agreement also provided the following:
Except as disclosed in Exhibit 2.14, since the last date of the Last Balance Sheet: (a) there has been no material adverse change in the business, property, employee relations, financial condition or results of operations of [Keystone]; (b) no shares of [Keystone's] capital stock have been purchased or redeemed; (c) no bonus or increase in the rate of compensation has been given to any of (Keystone's) employees; (d) [Keystone] has not sold or transferred any of its assets other than in the ordinary course of business; (e) [Keystone] has not made or obligated itself to make any material capital expenditures; (f) no material obligations or liabilities (including any indebtedness) have been incurred and no material transactions have been entered into otherwise than in the ordinary course of business, except for this Agreement and the transactions contemplated hereby; and (g) [Keystone] has not suffered any theft, damage, destruction, casualty loss or other change, which has or could materially and adversely affect the Purchased Assets or the business, prospects, operations, liabilities, earnings or condition of [Keystone].
(Id. ¶ 2.14.) Furthermore, Keystone guaranteed that:
From and after June 18, 1991, and until the Time of Closing, except as otherwise provided by written consent of [Waste Management], [Keystone] will have conducted and will conduct its business and operations in the manner in which the same have traditionally been conducted, and it will use its best efforts to (a) preserve its business organization intact, (b) keep available to [Waste Management] the services of its officers, employees, agents and distributors, and (c) preserve its relationship with its customers and suppliers.
(Id. ¶ 4.1.) Finally, the Agreement provided that Waste would become the beneficiary of Keystone's insurance policy, and provided Waste with the authority to endorse checks and drafts payable to Keystone relating to the servicing of Keystone's former customers.
b. Noncompetition and Consultation Agreement
That Waste and the Noels and Keystone entered into a noncompetition agreement also indicates that Waste purchased Keystone's business. Pursuant to the terms of the Agreement, the Noels and Keystone agreed "for a period of five years from and after the Time of Closing" not to "engage (as an individual or as a stockholder, trustee, partner, financier, agent, employee or representative of any person, firm, corporation or association), or have any interest, direct, or indirect, in any business in competition with the business of [Keystone] as that business is constituted at the Time of Closing . . . in any area within a 50-mile radius of any place of business of [Keystone] . . ." (Agreement ¶ 4.8(a).) Furthermore, the consultation agreement signed by the Noels and Waste provided that for a period of seven years the Noels would "not engage . . . or have any interest, direct or indirect, in any business in competition with the business of the (sic) Keystone as that business is constituted at the time of execution of this Agreement." (Agreement Ex. 1.6(d) ¶ 8(b).) Jerome Girsch testified at deposition that typically, Waste entered into noncompetition Agreements in order to "protect [Waste] from having the sellers come back into the market for some reasonable period of time and take away the business from us that we had spent so much money acquiring." (Girsch Dep. at 247.) With regard to Waste's noncompetition agreement with Keystone and the Noels, Rosalind Burbank testified at deposition to the following:
Q: What is the purpose of that section, section 4.8, the covenant not to compete agreement?
A: Well, the day after the transaction, we don't want the seller to go out and start up another company in competition with the one we've just purchased from the seller.
Q: And does that have any importance to Waste Management?
A: Yes, it does.
Q: What is that? Why is that important?
A: Because we want to service the customers and generate the stream of income. If the seller has expertise in the area and knows the customer base and all that goes out and sets up another business in competition with us, conceivably they could take some of the customers or some of the business away from us, or you know, generate new business that we could — we want to go out and sell those customers and get them to take Waste Management services.
(Burbank Dep. at 379-80.)
Waste and the Noels also entered into a consultation agreement whereby the Noels agreed to "devote such time as necessary and use their best efforts to advance the business and welfare of [Waste], its subsidiaries and affiliates, and to discharge any other duties assigned to them hereafter." (Agreement Ex. 1.6(d) ¶ 4.) The terms of the consultation agreement provided that the Noels would receive annual payments of $50,000 for five years in return for their services. Waste consulted the Noels approximately ten times within the first few months after the acquisition. Jerome Girsch testified at deposition that the purpose of the typical Waste Management consultation agreement was to:
provide access to the former owners in the case of situations where we were in need of their involvement related to contract renewals with cities or large customers or employment issues with key people that might stay with the business which were not part of the ownership group, just to have access to these former owners to assist in anything that might be important in the ongoing operation of the business as we went through a transition period subsequent to acquisition.
(Girsch Dep. at 249-50; see also Burbank Dep. at 389 ("Q: "Does such a consultation agreement have some sort of importance to Waste Management? A: "Yes. I just said we would, you know, would want the assistance of the seller to transition the business, to help operate the business, to give us advice, tell us what they know about you know, operating the business in that area.").)
c. Revenue Guarantee
The Agreement also included a revenue guarantee pursuant to which Keystone guaranteed that Waste would receive the same revenues for roll-off and commercial customers as Keystone had been receiving, on average, prior to the purchase for three months after the sale. If Waste did not receive comparable revenues, stock withheld by Waste would be used to cover the damages. If, however, the loss in revenue was due to Waste's "verified poor service", neither Keystone nor the Noels would be penalized for lost revenues. (Agreement ¶ 2.18.)
The purpose of the revenue guarantee was to ensure that the business Waste purchased, based on the Noels' and Keystone's representations, existed after the sale. (Grimm Dep. at 224.) As Dennis Van Every testified:
The sellers of the business had made representations to us during the course of negotiations and at closing that there were certain revenues that had historically been generated from that business. And revenue guarantee was a way for us to — to have some type of control, that the revenues that they had represented were in fact the revenues that we could enjoy in the future months and years.
Q: And why was that important?
A: That's what we were buying. We were buying customers and the equipment to collect customers. We — the assumptions we had made relative to the acquisition of the business were based on — were based on the fact that there was going to be revenues generated and that we were going to maintain those revenues.
(Van Every Dep. at 340-41.) Rosalind Burbank also testified at deposition as follows:
[W]hy is Section 2.1(a), the Revenue Guarantee, important?
* * * *
A: A significant part of a transaction is purchasing the customer accounts. You can go to a store and buy trucks. We want to have a stream of business. We want those customers, and we want to be sure that when we purchase customer accounts that the seller has been servicing those customer accounts, that he hasn't pulled a number out of the air for what the revenue is for that — for those customer accounts. We want to know what the dollar figures are and what we can expect to derive for, you know, performing those services and billing those customers.
(Burbank Dep. at 376-77.)
d. Understanding of the Parties
Additional testimony by Waste employees suggests that despite Waste's protestations to the contrary, it intended to purchase Keystone's existing business at the time of sale. With regard to the reason for hiring former Keystone employees, Van Every testified, "[w]e acquired a business, we had to operate it; so we had to have people operate it." (Van Every Dep. at 327.) Rosalind Burbank testified at deposition that hiring Keystone's former employees was important "[b]ecause we're purchasing the business to derive the revenue from hauling garbage so someone has to go out and haul the garbage, so that we can — you know, we can build (sic) the customers." (Burbank Dep. at 372.) Finally, Dennis Grimm testified that Waste had acquired Keystone's "hauling company." (Grimm. Dep. at 237.)
B. Fraud
Because the court finds that the Generator Defendants have not offered any facts in support of their claim that Waste and Keystone fraudulently entered into the Agreement in order to avoid Keystone's liability for the Landfill, the court will not discuss further the merits of this position.
VI. Conclusion
The court finds that no genuine issue of material fact exists which warrants a trial on the issue of Waste Management's liability as a successor to Keystone Sanitation, Inc. Accordingly, the court will grant the Original Generator Defendants' and Third-Party Defendants' motions for summary judgment on the issue of Waste's successor liability. Waste's motion for summary judgment will be denied. However, because the de facto merger and substantial continuity doctrines are equitable in nature,Acushnet River, 712 F. Supp. at 1015, the court will require Keystone's assets to be looked to first to satisfy its portion of CERCLA liability.
An appropriate order will be entered by the court.
Order Regarding Waste Management's Successor Liability to Keystone Sanitation Company ORDER
In accordance with the foregoing memorandum of law, IT IS HEREBY ORDERED THAT:(1) Waste Management of Pennsylvania's motion for summary judgment on all claims asserted, or deemed asserted, against it in this action on theories of successor liability to Keystone Sanitation Company, Inc. for the Keystone Landfill is DENIED;
(2) The Original Generator Defendants' motion for summary judgment that Waste Management is the successor to Keystone Sanitation, Inc.'s CERCLA liability is GRANTED.
(3) The Third-Party Defendants' motion for summary judgment that Waste Management is the successor to Keystone Sanitation, Inc.'s CERCLA liability is GRANTED.
(4) The Clerk of Court shall defer the entry of the judgments granted above until the conclusion of this case.