K.C.1986 Ltd. Partnership v. Reade Manufacturing ( 2007 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
____________________ *
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Nos. 05-2064 & 06-1944 *
____________________ *
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K.C. 1986 Limited Partnership, *
*
Plaintiff-Appellant, *
*
v. *
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Reade Manufacturing, A Division of * Appeals from the United States
Reactive Metals & Alloys Corp.; * District Court for the
Reactive Metals & Alloys Corp., * Western District of Missouri.
*
Defendants, *
* [PUBLISHED]
U.S. Borax, Inc., *
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Defendant-Appellee, *
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Hardee’s Food Systems, Inc.; *
Terracon Environmental, Inc., *
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Defendants. *
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Nancy Reade Forster, As the Personal *
Representative of the Estate of *
Charles F. Reade, *
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Third-Party Plaintiff, *
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U.S. Borax, Inc., *
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Third-Party Plaintiff- *
Appellee, *
*
v. *
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DeAngelo Brothers, Inc., DEH *
Merrywood Company; Habco *
International, Inc., *
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Third-Party Defendants, *
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Victor Horne, *
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Third-Party Defendant- *
Appellant, *
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Habco, Inc., *
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Third-Party Defendant, *
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Donald E. Horne, *
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Third-Party Defendant- *
Appellant, *
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Donald E. Boatright, *
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Third-Party Defendant. *
__________ *
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No. 05-2068 *
__________ *
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K.C. 1986 Limited Partnership, *
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Plaintiff, *
*
v. *
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Reade Manufacturing, A Division of *
Reactive Metals & Alloys Corp.; *
Reactive Metals & Alloys Corp., *
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Defendants, *
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U.S. Borax, Inc., *
*
Defendant-Appellee, *
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Hardee’s Food Systems, Inc.; *
Terracon Environmental, Inc., *
*
Defendants. *
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Nancy Reade Forster, As the Personal *
Representative of the Estate of *
Charles F. Reade, *
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Third-Party Plaintiff, *
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U.S. Borax, Inc., *
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Third-Party Plaintiff- *
Appellee, *
*
v. *
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DeAngelo Brothers, Inc., *
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Third-Party Defendant - *
Appellant, *
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DEH Merrywood Company; Habco *
International, Inc.; Victor Horne; *
HABCO, Inc.; Donald E. Horne; *
Donald E. Boatright, *
*
Third-Party Defendants. *
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Submitted: January 11, 2006
Filed: January 4, 2007
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Before MURPHY, HANSEN, and SMITH, Circuit Judges.
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HANSEN, Circuit Judge.
These consolidated appeals arise out of a contribution action brought pursuant
to the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA), 42 U.S.C. §§ 9601-9675. The final judgment requires Donald E. Horne,
Victor Horne, K.C. 1986 Limited Partnership (K.C. 1986) (collectively the Horne
Appellants), and DeAngelo Brothers, Inc. (DeAngelo) to pay U.S. Borax, Inc. (Borax)
90% of the past response costs incurred by Borax and to be responsible for 90%
collectively of the future response costs to clean up a superfund site in North Kansas
City, Missouri, known as the Armour Road Superfund Site (the Site). We affirm in
part and reverse and remand in part.
I.
The Armour Road Superfund Site has two owners. A portion of the Site has
been owned or leased at all relevant times by the Burlington Northern and Santa Fe
Railway Company (BNSF) or its predecessor railroads, most notably the Chicago,
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Burlington & Quincy (CB&Q). The remainder of the Site, the property at 2251
Armour Road in North Kansas City, Missouri, has been owned or leased by a series
of companies that manufactured, formulated, and blended herbicides on the property
for more than 55 years. The leasehold and ownership list for this property can be
divided into the Reade Era (1929-1963), the Borax Era (1963-1968), the Habco Era
(1968-1986), and the K.C. 1986 Era (1986-present).
As early as 1929, the Reade Manufacturing Company (Reade) conducted
herbicide blending and packaging operations at 2251 Armour Road using substantial
amounts of arsenic, among other hazardous chemicals, and offering herbicide spraying
services to railroad companies across the country, including the BNSF and its
predecessors. The Site was significantly contaminated by arsenic during the Reade
Era.
From 1963 to 1968, Borax leased the property from Reade. Borax continued
to operate a herbicide blending facility there, and additional arsenic contamination
occurred at the Site.
In 1968, Habco, Inc. (Habco) purchased the property. Habco was first jointly
owned by Donald Boatright and Donald Horne until 1976 and then owned principally
by Donald Horne thereafter. Habco's plant manager was Donald Horne's brother,
Victor. Victor was responsible for implementing Donald's decisions but was not
authorized to make decisions involving substantial amounts of money absent Donald's
approval. Like Reade and Borax, Habco mixed and repackaged herbicides at the
property, using large volumes of hazardous substances including arsenic, and provided
spraying services to railroad companies until 1986. Spills of both granular and liquid
chemicals that periodically occurred were not properly collected or disposed. Habco
used in-ground mixing vats to blend chemicals and above-ground storage tanks to
store chemicals. Over the years, with Donald Horne's approval, Habco removed all
but one of the above-ground storage tanks. Donald also authorized an in-ground vat
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to be drained and backfilled rather than removed because filling it in was cheaper, and
he was fearful of what lay beneath it if it were removed. Victor oversaw the project.
In 1973, the company settled a lawsuit brought by a neighboring green house alleging
that its plants were damaged by herbicide contamination caused by Habco. When
Habco transferred the real estate in 1986, only one above-ground tank and two of the
three in-ground mixing vats remained.
In 1986, Habco, after deciding to dissolve, sold all of its operating assets
(except for the Armour Road real property) to a new company named Habco-Loram,
Inc., for approximately $2.6 million. Donald Horne was not a stockholder or a
director of Habco-Loram. Habco-Loram paid the purchase price partly in cash
($500,000) and partly by giving Habco its promissory notes secured by the granting
of a security interest in certain of its assets to Habco. When Habco dissolved as a
corporation, it distributed the notes (and the accompanying security interest) among
Habco's shareholders. Donald Horne was the principal stockholder in Habco with
approximately 93% of its stock, and he later acquired the other stockholders' (by then
noteholders') interests as well. Donald Horne signed a three-year employment
agreement with Habco-Loram and served as its president for one year. Habco-
Loram's operations, employees, customers, and contracts were essentially identical to
what Habco's had been, but it moved its business to a different location. In 1988, two
years after its origin, Habco-Loram, apparently unable to meet its obligations, agreed
to convey all of the pledged assets to Donald Horne as part of a voluntary foreclosure
and in satisfaction of its notes. Donald Horne then formed Habco International, Inc.,
of which he was the sole stockholder, officer, and director, and using the assets
conveyed to him and to his new corporation from Habco-Loram, continued the
business operations that Habco-Loram had conducted, which were substantially the
same operations conducted by the original Habco, except that Habco International,
like Habco-Loram before it, did not own, lease, or use the Site for its herbicide
formulation and spraying business.
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On March 19, 1997, Neal and Paul DeAngelo, as individuals, purchased the
stock of Habco International. Habco International continued its same operations. In
October 1998, Habco International merged into DeAngelo Brothers, Inc. (DeAngelo),
in accordance with Pennsylvania's corporate merger statute by which DeAngelo took
all of Habco International's assets and liabilities. By that time, the district court had
determined that Habco International was a successor corporation to Habco for the
purposes of this litigation. The district court later concluded that DeAngelo was a
successor corporation to Habco International and to Habco.
At the same time that it was selling its operating assets to Habco-Loram, the
Board of Directors of Habco agreed to transfer the Armour Road real estate to K.C.
1986 Limited Partnership, a holding company formed by Donald Horne for the
express purpose of taking title to the property as its only asset. K.C. 1986 is still the
current owner of the real estate. When Habco dissolved, its 99% interest as the
limited partner in K.C. 1986 was distributed among Habco's shareholders. Eventually,
Donald Horne as an individual acquired all of the 99% limited partner interest in K.C.
1986, and he still holds that interest. The remaining 1% interest is owned by DEH
Merrywood Corporation, formed by Donald Horne solely to act as the general partner
of K.C. 1986. He is the sole shareholder, officer, and director of DEH Merrywood,
and as such, he retains full and exclusive decision-making authority over the
management and control of the property. Donald Horne was aware that leftover
herbicides remained on the property, but the property has not been actively used for
herbicide manufacturing or blending since 1986.
K.C. 1986 immediately sought potential buyers and lessees for the property.
Hardees, a prospective lessee, hired Terracon Consultants to perform environmental
testing at 2251 Armour Road. Terracon observed an above-ground storage tank at the
site that still contained a liquid material, but when it returned for continued
assessment, the tank was gone and a large spill had occurred from the removed tank.
Donald Horne had authorized the tank's removal. Testing of the spill area revealed
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heavy concentrations of hazardous substances including arsenic. Terracon notified
K.C. 1986 in the fall of 1989 that test results indicated the property was contaminated,
but Donald Horne did not report the contamination to the Missouri Department of
Natural Resources (MDNR).
In 1991, the State of Missouri learned from Terracon that the soil and
groundwater at the Site were heavily contaminated with hazardous substances,
including arsenic. The EPA became involved and declared it a superfund site. The
dispute involving the cleanup of the Site was first brought to federal district court in
1993 by K.C. 1986. That case was dismissed by a stipulation without prejudice in
1998 pending an administrative determination of how best to remedy the
contamination.
K.C. 1986 filed the current CERCLA litigation in 2002, seeking a determination
of liability for the cleanup costs between and among the various parties. Borax
admitted CERCLA liability but filed cross-claims and counterclaims for contribution
pursuant to CERCLA, 42 U.S.C. § 9613(f), seeking reimbursement for the cleanup
costs it had already incurred as well as future costs. It was undisputed that substantial
additional future response costs will be incurred to clean up the site.
The district court issued an order on May 7, 2004, granting and denying various
summary judgment motions related to liability. Following a bench trial, the district
court entered an Allocation Order on January 7, 2005. The court considered several
equitable factors in determining how best to allocate the response costs,
acknowledging the difficulty of determining exactly how each party either increased
or decreased the actual contamination at the Site. The district court found that "[t]he
Site was so contaminated during the Reade Era that the remediation plan approved by
the EPA would have been required even if Habco, Borax, K.C. 1986, and the Hornes
had never set foot on the property. On the other hand, each of these parties
substantially contributed to the contamination of the Site by their own independent
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actions." (Horne Appellants' Add. at A-87.) The district court allocated responsibility
for the $1,160,673.171 of response costs incurred by Borax as of March 1, 2004, as
well as any future response costs, in the following proportions: Donald Horne–40%;
K.C. 1986–20%; Victor Horne–15%; DeAngelo–15%; and Borax–10%. The district
court also awarded prejudgment interest to Borax, but Borax had not yet submitted the
documentation necessary to calculate the interest. The Allocation Order stated that
it was not the final judgment in the case and that final judgment would be entered
when the prejudgment interest calculation was complete.
Prior to the entry of the final judgment, Donald and Victor Horne, K.C. 1986,
and DeAngelo requested the district court to amend the Allocation Order by applying
pretrial settlements as credits to offset the judgment and preclude any prejudgment
interest award, because the $1,160,673.17 total of Borax's response costs did not
reflect the fact that Borax had obtained pretrial settlements from other parties in
amounts that had been either paid or promised to Borax. The district court denied the
motion to amend in a final order dated April 4, 2005, concluding that the parties had
failed to bring the settlement credits to the court's attention in a timely fashion.
Additionally, the district court awarded Borax $98,664.36 in prejudgment interest.
The Horne Appellants assert on appeal that the district court erred by (1)
refusing to apply the settlement credits to the final judgment, (2) awarding
prejudgment interest to Borax, (3) finding that Donald Horne had knowledge of
contamination prior to 1986, and (4) entering summary judgment against Donald
1
Due to an error in Borax's calculation of costs incurred, the Allocation Order
lists a slightly different amount of $1,164,597.62. There is no dispute that this amount
was due to a mistaken calculation by Borax and that the correct response cost total as
of March 1, 2004, is $1,160,673.17. The district court corrected its Allocation Order
to reflect this in an amended judgment filed on March 31, 2006. Because the appeal
of the corrected judgment (No. 06-1944) involves issues identical to those identified
in the appeals of the Allocation Order (Nos. 05-2068 and 05-2064), we consolidated
all three in this appeal.
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Horne on the issue of operator liability during the Habco Era. DeAngelo appeals,
arguing that the district court erred in neglecting to specify that no recovery from
DeAngelo would be permitted until all other sources were exhausted and in finding
that Habco International is liable as Habco's successor in interest.
II.
A. The Horne Appellants' Arguments
1. Settlement Credits
We first consider whether the district court abused its discretion in refusing to
amend the Allocation Order before final judgment was entered to credit the pretrial
settlements obtained by Borax from the EPA and private entities against the judgment.
The district court refused even to consider the issue, concluding that it was untimely
raised in a motion for reconsideration after entry of the Allocation Order. We agree
that the issue should have been presented to the district court in a more timely matter.
Nevertheless, we conclude that the district court abused its discretion by refusing to
consider the settlement credits issue because CERCLA requires such consideration,
and final judgment had not yet been entered.
There is no question that a Federal Rule of Civil Procedure 59(e) motion to alter
or amend the judgment may not be used to raise for the first time arguments or issues
that could and should have been made to the district court prior to the entry of final
judgment. Bannister v. Armontrout, 4 F.3d 1434, 1440 (8th Cir. 1993), cert. denied,
513 U.S. 960 (1994). The district court expressly provided in the Allocation Order,
however, that "this Order does not constitute final judgment in this case; final
judgment will be made once the Court has awarded Borax the prejudgment interest to
which it is entitled." (Horne Appellants' Add. at A-98.) The district court left the
record open to receive additional evidence regarding prejudgment interest. See Dieser
v. Cont'l Cas. Co., 440 F.3d 920, 924 (8th Cir. 2006) (noting that an order which
expressly left unresolved the amount of prejudgment interest and called for further
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submissions from the parties to determine the method of calculation and the amount
of prejudgment interest could not reasonably be believed to be a final order).
Instead, the Horne Appellants' motion to amend purported to be brought
pursuant to Rule 54(b), which provides that when fewer than all claims are resolved,
the district "court may direct the entry of a final judgment as to one or more" claims
or parties, but in the absence of such a direction, any other form of decision "which
adjudicates fewer than all the claims . . . is subject to revision at any time before the
entry of [final] judgment." "The district court has the inherent power to reconsider
and modify an interlocutory order any time prior to the entry of judgment." Murr
Plumbing, Inc. v. Scherer Bros. Fin. Servs. Co., 48 F.3d 1066, 1070 (8th Cir. 1995).
Construing the motion to amend the Allocation Order in light of Rule 54(b) and
the district court's inherent power, we review for an abuse of discretion the district
court's refusal to consider the Horne Appellants' arguments regarding the settlement
credits. See Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers &
Lybrand, LLP, 322 F.3d 147, 167 (2d Cir. 2003) (reviewing for abuse of discretion
the district court's denial of a Rule 54(b) motion to reconsider an interlocutory order).
The abuse of discretion standard dictates that we consider whether the district court
(1) failed to consider "a relevant factor that should have been given significant
weight;" (2) considered and gave significant weight to "an irrelevant or improper
factor;" or (3) considered "all proper factors, and no improper ones," but in weighing
those factors, committed a "clear error of judgment." Kern v. TXO Prod. Corp., 738
F.2d 968, 970 (8th Cir. 1984). By failing to consider the effect of the settlements as
required by CERCLA, the district court failed to consider a relevant factor that should
have been given significant weight. CERCLA provides that a judicially approved
government settlement, such as Borax's settlement with the EPA, "does not discharge
any of the other potentially liable persons unless its terms so provide, but it reduces
the potential liability of the others by the amount of the settlement." 42 U.S.C.
§ 9613(f)(2). The district court was aware of and had approved the government
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settlement prior to March 1, 2004, and therefore abused its discretion by refusing to
take the government settlement into consideration in the allocation determination to
reduce the potential liability of the other responsible parties.
The private party settlements, including Borax's settlement with the BNSF,
were also relevant to the allocation determination. Although § 9613(f)(2) governs
only the effect of settlements with the government, not private parties, general
equitable principles remain in play. In resolving contribution claims in general,
CERCLA directs the court to "allocate response costs among liable parties using such
equitable factors as the court determines are appropriate." Id. § 9613(f)(1). In
determining which equitable factors are appropriate, the policies articulated in
CERCLA cannot be ignored. Importantly, CERCLA articulates a policy against
double recovery. See 42 U.S.C. § 9614(b) (prohibiting duplicate recovery for the
same removal costs). Crediting the amount of the settlements reached with private
parties is necessary to avoid double recovery by one party. The district court was
aware that pretrial settlements had occurred as it granted dismissals of the settling
parties based on those settlements. Additionally, crediting the settlements reached
prior to trial against the judgment for response costs incurred prior to March 1, 2004,
would not require the revision of any findings or conclusions made in the Allocation
Order, only a recalculation of the amount of the judgment. Accord Azko Nobel
Coatings, Inc. v. Aigner Corp., 197 F.3d 302, 308 (7th Cir. 1999) (requiring district
court on remand to determine how much was collected in settlements and adjust the
judgment accordingly). CERCLA plainly requires that the district court take these
settlements into its equitable consideration in the allocation process. The district court
neither credited the settlements against the judgment nor articulated an equitable
reason for not doing so other than the timeliness of the request. We conclude that the
request was not so untimely in this case so as to override CERCLA's policy against
permitting a double recovery. While the appellants would have been well advised to
raise such issues in the most expedient manner, the district court could not have been
surprised by the existence of settlements in this case. Because the settlement credits
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present a significant allocation factor under CERCLA and the issue was raised prior
to the entry of a final judgment, the district court should have exercised its discretion
to consider them when calculating the amount of the judgment. We vacate the
monetary judgment and remand the case for the district court to consider in the first
instance the issue of offsetting the judgment with settlement credits.2
2. Prejudgment Interest
The Horne Appellants also challenge the district court's award of prejudgment
interest. Our decision to remand for consideration of settlement credits may result in
the district court's need to reconsider and to recalculate the prejudgment interest
award. However, while the interest amount may necessarily be recalculated in the
light of any settlement credits the district court determines appropriate, we conclude
that the district court did not abuse its discretion in determining that any prejudgment
interest awarded will accrue from the dates of the demands made in Borax's Rule 26
disclosures and third-party complaints.
"An award of prejudgment interest – whether in a joint and several liability
action under § 107 or a contribution action under § 113 of CERCLA – is mandatory
. . . ." GenCorp Inc. v. Olin Corp., 390 F.3d 433, 450 (6th Cir. 2004), cert. denied,
126 S. Ct. 420 (2005); 42 U.S.C. § 9607(a)(4) (stating that "[t]he amounts recoverable
in an action under this section shall include interest on the amounts recoverable")
(emphasis added); see also Bancamerica Comm. Corp. v. Mosher Steel of Kansas
City, 100 F.3d 792, 801 (10th Cir.), as amended, 103 F.3d 80 (1996). Prejudgment
2
We grant Borax's motion to strike portions of the Horne Appellants' Reply
Brief wherein they assert a new argument that Borax's past response costs are not
recoverable in light of Cooper Indus. v. Aviall Servs., Inc., 543 U.S. 157 (2004). "It
is well settled that we do not consider arguments raised for the first time in a reply
brief." Navarijo-Barrios v. Ashcroft, 322 F.3d 561, 564 n.1 (8th Cir. 2003).
Additionally, we deny Borax's motion to supplement the record.
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interest "shall accrue from the later of (i) the date payment of a specified amount is
demanded in writing, or (ii) the date of the expenditure concerned." 42 U.S.C.
§ 9607(A)(4). We review the district court's decision on prejudgment interest for an
abuse of discretion. See Bancamerica Comm., 100 F.3d at 801 (holding district court
abused its discretion in concluding that the third amended complaint did not meet the
demand requirements where it asserted response costs in excess of $1 million against
two defendants).
We respectfully reject the Horne Appellants' assertion that neither Borax's third-
party complaints nor its Rule 26 disclosures were specific enough to meet the statutory
requirement for the accrual of prejudgment interest. Relying on United States v.
Consolidation Coal Co., they assert that the written demands were insufficient because
Borax did not demand specific amounts from each defendant. 345 F.3d 409, 416 (6th
Cir. 2003) (rejecting a third-party complaint as not a sufficiently specific written
demand where it alleged damages of "over $47 million" against 59 third-party
defendants, as well as various unidentified parties, and did not specify the amount
demanded from each defendant). We conclude that their reliance on Consolidation
Coal Co. is misplaced. The case before us involves only a handful of third-party
defendants, most of which are related in some way to each other. The district court
noted that Borax named specific amounts in the third-party complaints and the Rule
26 disclosures. (See Appellants' App. at 256-57.) While these demands did not
separate out the specific amounts sought from each third-party defendant, the district
court stated that there is no question that "the parties in this case had full knowledge
of their contaminating activities which gave rise to the response costs." (Id. at 257.)
The degree of specificity the Horne Appellants would require can only be achieved
in this case after liability has been proven and an allocation order entered. See
Bancamerica Comm. Corp., 100 F.3d at 802 (noting that "it may be impossible for
parties to provide accurate calculations prior to the court's allocation of response cost
liability" and that "[t]he district court has considerable discretion in apportioning
equitable shares of response costs") (internal marks omitted). On this record, we
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conclude that the district court did not abuse its discretion in concluding that these
demands were sufficiently specific to put the parties on notice of the amounts at issue
and the accrual of prejudgment interest.
We therefore remand the prejudgment interest issue for potential recalculation
by the district court, but we find no abuse of discretion in the district court's
determination of the prejudgment interest accrual dates.
3. Donald Horne's Knowledge
The Horne Appellants argue that the district court clearly erred in finding that
"Donald Horne was well-aware that the Site was contaminated long before he formed
K.C. 1986 to purchase the Site." (Horne Appellants' Add. at A-62.) We review the
district court's fact-findings for clear error. United States v. Gurley, 43 F.3d 1188,
1194 (8th Cir. 1994) (citing Fed. R. Civ. P. 52(a)), cert. denied, 516 U.S. 817 (1995).
We see no clear error. While there is no direct evidence of Donald Horne's
knowledge, the district court as fact finder was free to rely upon circumstantial
evidence to establish knowledge. See Coleman v. Parkman, 349 F.3d 534, 538 (8th
Cir. 2003) ("But, like always, a plaintiff can prove knowledge through circumstantial
evidence."). The finding that Donald Horne was aware of contamination at the Site
prior to 1986 was a reasonable inference drawn from all of the evidence, and the
district court supported this finding with eight specific facts from the record. (See
Horne Appellants' Add. at A-62-64.) Further, the district court's allocation decision
did not turn on the sole question of whether Donald Horne had actual knowledge of
contamination prior to 1986. Rather, his share of the response costs also reflected
equitable factors such as his exercise of control over the hazardous substances and his
subsequent reluctance to cooperate with the cleanup effort. We see no clear error in
the fact-findings regarding Donald Horne's knowledge.
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4. Donald Horne's Operator Liability
The Horne Appellants argue that the district court erred in its summary
judgment ruling that Donald Horne was liable as an operator during the Habco Era,
from 1968 to 1986. We review de novo a district court's grant of summary judgment,
viewing the record in the light most favorable to the nonmoving party. McClure v.
Career Sys. Dev. Corp., 447 F.3d 1133, 1135 (8th Cir. 2006). Summary judgment is
proper only if the evidence shows "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).
"Liability for the release of hazardous substances may be imposed on 'any
person who at the time of disposal of any hazardous substance owned or operated any
facility at which such hazardous substances were disposed of.'" Gurley, 43 F.3d at
1192 (quoting 42 U.S.C. § 9607(a)(2)). When considering an individual's liability as
an operator, "'[i]t is the authority to control the handling and disposal of hazardous
substances that is critical under the statutory scheme.'" Id. (quoting United States v.
Ne. Pharm. & Chem. Co., 810 F.2d 726, 743 (8th Cir. 1986)). We have held that an
individual may be liable as an operator if he "(1) had authority to determine whether
hazardous wastes would be disposed of and to determine the method of disposal and
(2) actually exercised that authority, either by personally performing the tasks
necessary to dispose of the hazardous wastes or by directing others to perform those
tasks." Id. at 1193. "[U]nder CERCLA, an operator is simply someone who directs
the workings of, manages, or conducts the affairs of a facility," as long as this
management includes "operations specifically related to pollution, that is, operations
having to do with the leakage or disposal of hazardous waste, or decisions about
compliance with environmental regulations." United States v. Bestfoods, 524 U.S. 51,
66-67 (1998).
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The district court stated that the defendants had conceded that Donald Horne
was "directly responsible for devising the procedures for the use and disposal of
hazardous waste, as well as for directing Victor Horne to carry out those procedures."
(Horne Appellants' Add. at A-36.) The summary judgment record indicated that
Donald Horne did not dispute that his approval was necessary for any decisions
involving large expenditures, that he had approved procedures such as rinsing out
truck tanks containing herbicides, and that he was responsible for making decisions
regarding compliance with environmental laws. The undisputed facts support the
district court's conclusion that Donald Horne is liable as an operator of the facility,
including those operations having to do with the leakage or disposal of hazardous
waste and decisions about complying with environmental regulations. See Bestfoods,
524 U.S. at 66-67.
B. DeAngelo's Arguments
1. Habco International's Successor Liability
DeAngelo challenges the district court's conclusion that it is liable under
CERCLA as a successor corporation to Habco. The district court's September 10,
1997, summary judgment ruling from the bench concluded that Habco International
was liable as a successor corporation to Habco, despite Habco-Loram's intervening
purchase and ownership of the operating assets of Habco. Subsequent to that ruling
holding Habco International liable, DeAngelo merged with Habco International,
assuming all of its liabilities, and Borax sought summary judgment in the current
proceedings against DeAngelo, as a successor to Habco International. In the district
court's May 7, 2004, summary judgment ruling on DeAngelo's liability, the district
court refused to reconsider its 1997 ruling on Habco International's liability because
DeAngelo had raised no new arguments. On the basis of that prior ruling, the district
court then held DeAngelo liable as a successor corporation to Habco because it had
merged with Habco International.
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We review the district court's summary judgment ruling de novo, applying the
same standard as the district court. Dico, Inc. v. Amoco Oil Co., 340 F.3d 525, 528-
29 (8th Cir. 2003). Summary judgment is appropriate if there is no genuine issue as
to any material fact and the moving party is entitled to judgment as a matter of law.
Id. at 529; Fed. R. Civ. P. 56(c). The traditional common law rule of corporate
successor liability applicable in most states provides that where one corporation
purchases the assets of another, the purchasing or successor corporation takes free of
the liabilities of the first corporation unless one of four limited exceptions applies: (1)
the successor expressly or impliedly agrees to assume the liabilities; (2) a de facto
merger or consolidation occurs; (3) the successor is a mere continuation of the
predecessor; or (4) the transfer to the successor corporation is a fraudulent attempt to
escape liability. United States v. Mex. Feed and Seed Co., 980 F.2d 478, 487 (8th Cir.
1992); see also New York v. Nat'l Servs. Indus., 352 F.3d 682, 685 (2d Cir. 2003).
The district court did not discuss the evidence in light of these traditional exceptions
but instead appears to have found Habco International, and in turn DeAngelo, liable
as corporate successors to Habco under the broader doctrine of "substantial
continuity" articulated in Mexico Feed and Seed.
DeAngelo argues that the district court erred as a matter of law, asserting that
the substantial continuity test is now invalid in light of the subsequently decided
United States Supreme Court case of Bestfoods, 524 U.S. at 63 (discussing the
CERCLA liability of a parent corporation for the activities of its subsidiary, and
clarifying that CERCLA does not purport to rewrite well-settled rules of corporation
law). While the Court in Bestfoods does not specifically address corporate successor
liability under CERCLA, DeAngelo argues that Bestfoods clearly indicates that
CERCLA does not authorize the federal courts to replace traditional principles of state
corporation law with the federally created substantial continuity test of successor
liability as stated in Mexico Feed and Seed Co.
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In Mexico Feed and Seed, this court considered the applicability of the
substantial continuity test in the CERCLA context, noting that the substantial
continuity approach to successor liability was originally created by federal courts
(including the Supreme Court) to further public policy in the context of labor law.
980 F.2d at 487-88. We concluded that, similarly, the policy objectives of CERCLA
would justify imposing successor liability in appropriate cases under this broader
standard by extending liability to a successor corporation which, although a bona fide
purchaser, had acquired assets "with knowledge that the wrong remains unremedied."
Id. In the CERCLA context, this test could be applied to prevent responsible parties
from evading CERCLA liability through subsequent transactions. Id. at 488. We
ultimately concluded, however, that the circumstances present in Mexico Feed and
Seed did not meet the substantial continuity test because the purchaser did not know
of the dirty assets "and thus could not have known that its asset purchase might affect
the government's ability to have the responsible parties pay the clean-up costs." Id.
at 490. Thus, the purchasing corporation in Mexico Feed and Seed escaped CERCLA
liability because it met neither the traditional common law exceptions to the
nonliability of a purchasing successor corporation nor the broader substantial
continuity test.
We acknowledge that the continuing viability of the substantial continuity
theory of corporate successor liability as a creation of federal common law has been
seriously questioned following the Supreme Court's pronouncement in Bestfoods that
nothing in CERCLA purports to rewrite the settled rules of state corporation law
simply because the cause of action is based upon a federal statute. 524 U.S. at 63.
See United States v. Gen. Battery Corp., 423 F.3d 294, 309 (3d Cir. 2005) (holding
"'substantial continuity' is untenable as a basis for successor liability under
CERCLA"), cert. denied, 127 S. Ct. 41 (2006); Nat'l Servs. Indus., 352 F.3d at 687(concluding that the substantial continuity doctrine is not part of traditional
corporation common law and thus should not be used to determine CERCLA liability
following Bestfoods); United States v. Davis, 261 F.3d 1, 54 (1st Cir. 2001) (noting
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that "to justify the creation of a federal rule, there must be a specific, concrete federal
policy or interest that is compromised by the application of state law") (internal marks
omitted). While we may disregard the decision of another panel of this court on the
basis of an intervening Supreme Court precedent that undermines or casts doubt on
the earlier panel decision, see Patterson v. Tenet Healthcare, Inc., 113 F.3d 832, 838
(8th Cir. 1997) (noting a Supreme Court decision had "effectively overruled" our prior
holding), we conclude it is not necessary to do so at this time. Bestfoods does not
directly address corporate successor liability, and consequently, there may yet be
contexts in which the substantial continuity test could survive. See Nat'l Servs. Indus.,
352 F.3d at 687-88 (Leval, J., concurring). We need not decide that question today
because, even assuming the test survives Bestfoods in appropriate circumstances, the
facts in this record do not satisfy the substantial continuity test.
Proper application of the substantial continuity test (which is itself an offshoot
of the traditional "mere continuation" test) to protect the policy concerns of CERCLA
first requires a consideration of whether the successor corporation retains the same
employees, the same supervisory personnel, the same production facilities in the same
location, the same product, the same name, a continuity of assets and general business
operations, and holds itself out as a continuation of the previous enterprise. See
United States v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir. 1992) (listing
these eight factors, as well as additional concerns). Additional factors that courts
consider integral to this test include whether the transfer to the successor corporation
was an attempt to avoid CERCLA liability, see id., and whether the successor had
knowledge of the unremedied contamination, see Mex. Feed and Seed, 980 F.2d at
488. See also Nat'l Servs. Indus., 352 F.3d at 693 (Leval, J., concurring) ("The courts'
ultimate decisions whether to impose successor liability [under the substantial
continuity test] have turned on additional factors involving whether failure to impose
liability on the successor would undermine the objective of [CERCLA] to impose
liability on responsible parties."); Atchison, Topeka & Santa Fe Ry. v. Brown &
Bryant, Inc., 159 F.3d 358, 364 (9th Cir. 1998) (noting that "altering the traditional
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'mere continuation' exception to encompass the broader 'substantial continuation'
exception adds little in the end. In the cases in which the broader exception has been
applied to hold an asset purchaser liable, there has usually been some fraudulent intent
and collusion present, in which case the purchaser would have likely already been
liable under another traditional exception – the fraudulently-entered transaction
exception."). Ultimately, the proper application of the substantial continuity test
requires a consideration of whether "CERCLA-defeating conduct" is present. Nat'l
Servs. Indus., 352 F.3d at 694 (Leval, J., concurring).
While not expressly considering each of the factors listed above, the district
court articulated the basis for imposing successor liability on Habco International as
follows:
I am basing that decision primarily on the continuity of assets,
continuation of product line, similarities in management, employees. I
am also taking into account the equitable ownership that Habco had in
Habco Loram in the sense of the assets which were the major part of
Habco Loram. . . . I think this is a very unique situation and it is because
Habco International basically ends up with the same assets as Habco,
Inc. and that Donald Horne is consistently identified in each one of these
organizations either as an owner or president, having some interest.
(DeAngelo's Add. at 292-93.) This ruling relies solely on the general continuity of the
purchased business, its assets and employees, and the personal involvement of Donald
Horne. Importantly, however, with regard to one of the requirements of the
substantial continuity test as it is articulated in Mexico Feed and Seed, 980 F.2d at
487-88, the district court made no finding that the purchase by Habco-Loram was an
attempt to avoid CERCLA liability on the part of Habco-Loram or that Habco-Loram
took the clean assets with knowledge of the unremedied contamination at the Armour
Road Site. No investigation of the Site had been previously conducted at the time
Habco-Loram purchased Habco's operating assets and began to conduct its business
at a different location. In fact, the record reflects no dispute over the fact that the sale
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of the operating assets from Habco to Habco-Loram was a bona fide, arm's length
transaction. Borax's attorney admitted the following at the 1997 summary judgment
hearing: "I don't have any evidence that there was anything tricky going on[,] that
Habco Loram was anything other than an arm's-length transaction. But we don't think
that is relevant." (DeAngelo's Add. at 276.) The record regarding the transaction
between Habco and Habco-Loram provides no basis on which to find an intent by
Habco-Loram to circumvent the purposes of CERCLA, or any knowledge of
contamination on the part of Habco-Loram. Habco-Loram was not sued in this case,
and Donald Horne will not escape liability for the Habco-era contamination if in fact
Habco International is determined not to be a successor corporation to Habco.3
Borax attempts to focus our inquiry on the continuity of assets and similarity
of operation between Habco and Habco International, asserting that the intervening
sale to Habco-Loram is irrelevant. We respectfully disagree. The arm's length nature
of the transaction between Habco and Habco-Loram severed the operating assets of
the business from the contaminated real property. Habco-Loram never purchased or
leased the Site but purchased only the operating assets and moved its operation
elsewhere, though it did continue the business, and Donald Horne served as its
president for a time. See Nat'l Servs. Indus., 352 F.3d at 693 (Leval, J., concurring)
("If a seller's CERCLA liability could be imposed on a purchaser of assets merely
because it continued in substantially unchanged form the operations of the seller, the
rule would result in disastrously unfair consequences, which furthermore would be
harmful to the economy as a whole."). There is no evidence that Donald Horne
expected those operating assets, sold to Habco-Loram for their full value of $2.6
3
By contrast, the district court expressly found that Mr. Horne, who created and
solely controls K.C. 1986 and DEH Merrywood, had knowledge of the unremedied
contamination and refused to cooperate in the cleanup efforts. Mr. Horne and K.C.
1986 are held liable, and pursuant to the district court's ruling concerning orphan
shares within an era, the Hornes will be liable for Habco's share if DeAngelo is not.
(See Jan. 7, 2005, Allocation Order, DeAngelo's Add. at 248 n.7.)
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million, to end up with him at some future date so that he could continue to be in the
herbicide business shed of the contaminated Site and that the sale to Habco-Loram
was so structured. The secured assets of Habco-Loram did not come into his hands
until two years later, when Habco-Loram's business venture became unprofitable, was
shutting down, and a default in payment of the notes he held was anticipated. (See
Borax's App. at 3479.) Habco-Loram's unsecured assets were then transferred to the
corporate entity of Habco International, without any lingering connection or
reconnection to the Armour Road Site. Habco-Loram had no dirty assets to convey.
Habco International never owned or operated the Site, and Donald Horne remains
liable for the contaminated real property. On this undisputed record, CERCLA
liability did not flow through Habco-Loram as a substantial continuation of Habco,
and we will not overlook the arm's length, bona fide business transaction between
Habco and Habco-Loram.
The district court expressed concern about Mr. Horne having retained an
"equitable ownership" interest in Habco-Loram through his holding of the secured
notes and the transfer to him and to Habco International of Habco-Loram's assets
following Habco-Loram's failure. We are mindful that the present case is
complicated, to say the least, by Donald Horne's renewed involvement with these
assets following Habco-Loram's arm's length purchase and ultimate business failure.
As Habco-Loram's asset purchase was originally structured, however, Mr. Horne had
no personal equitable interest in Habco-Loram because the notes were issued to, held
by, and belonged to Habco. We do not think it unusual that a seller would agree to
finance and carry part of the purchase price. The notes were later distributed to
Habco's four shareholders when Habco dissolved, and subsequently, when Habco-
Loram failed, Mr. Horne acquired the other noteholders' interests and accepted Habco-
Loram's offer to convey the secured assets to him personally (together with a
$400,000 cash payment) in satisfaction of the unpaid balance on the notes that he held.
As we understand the record, it is undisputed that Habco-Loram initiated the voluntary
foreclosure. Borax's attorney admitted on the record at the 1997 summary judgment
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hearing that Mr. Horne did not have an equity interest in Habco-Loram. (DeAngelo's
Add. at 277 (the attorney also states, "we don't think that is relevant").)
Despite Donald Horne's subsequent personal re-involvement with the operating
assets, we cannot say that this is a situation where a corporation was permitted "to
evade [its] responsibility by dying [a] paper death[], only to rise phoenix-like from the
ashes, transformed, but free of [its] former liabilities." Mex. Feed and Seed, 980 F.2d
at 487. Had DeAngelo purchased the assets directly from Habco-Loram, there would
be no question of CERCLA nonliability, because it is undisputed that Habco-Loram's
asset purchase was an arm's length deal and no trickery was involved. The secured
assets did not become magically re-entangled with the contaminated property (long
since transferred to K.C. 1986) by reason of Habco-Loram's business failure. We
conclude that even if the substantial continuity test survives Bestfoods, DeAngelo is
not a corporate successor for CERCLA liability purposes on this record using that test.
Borax also argues that DeAngelo remains liable under the traditional exceptions
for imposing successor liability. Our review of the record convinces us otherwise.4
First, there was no express or implied agreement by Habco-Loram to assume the
liabilities of Habco. (See Borax's App. at 3197 (the asset purchase agreement
expressly states that "Buyer is not assuming and under no circumstances shall be
4
Because there is no assertion that the applicable state corporation law would
be any different from traditional common law principles with regard to successor
liability in this case, we have no occasion to decide whether CERCLA requires the
displacement of state law in favor of a national rule. Compare New York v. Nat'l
Serv. Indus., 460 F.3d 201, 206-09 (2d Cir. 2006) (favoring the nondisplacement of
state law but concluding that resolving the issue was not necessary in that case), and
Davis, 261 F.3d at 54 (applying state law provided it is not hostile to the federal
interests underlying CERCLA), with Gen. Battery Corp., 423 F.3d at 298-305(adhering to federal common law in order to preserve uniformity, and noting "that
CERCLA incorporates, but does not expand upon, 'fundamental' common law
principles of indirect corporate liability" (citing Bestfoods, 524 U.S. at 62-64)).
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deemed to have assumed . . . any debt, liability or other obligation of the Seller of any
kind").)
Second, there was no continuity of shareholders between Habco and Habco-
Loram, which is a key element in determining whether there has been a de facto
merger. See Gen. Battery Corp., 423 F.3d at 307 (noting de facto merger requires
some continuity of ownership). There was a continuity of enterprise and employees
between Habco and Habco-Loram to the extent Habco-Loram continued operating
essentially the same business but at a different location, and Donald Horne was
Habco-Loram's president for a time, but this factor will not carry the day for a de facto
merger where there is no continuity of ownership. See id. at 306 (noting "continuity
of shareholders" "is designed to identify situations where the shareholders of a seller
corporation retain some ownership interest in their assets after cleansing those assets
of liability"). There was no continuity of shareholders between Habco and Habco-
Loram, or between Habco-Loram and Habco International. We conclude that it is
inappropriate to skip over the arm's length sale of the operating assets to Habco-Loram
in an attempt to stretch CERCLA liability to include Habco International.
Third, the mere continuation theory fails on this record for the reasons already
articulated. See Davis, 261 F.3d at 53 (listing five traditional factors to consider in
mere continuation analysis: (1) the divesting corporation's transfer of assets, (2)
payment by the buyer of less than fair market value, (3) continuation by buyer of the
divesting corporation's business, (4) common officer instrumental in the transfer, and
(5) an inability of the divesting corporation to pay its debts after the asset transfer).
Specifically, the arm's length transaction between Habco and Habco-Loram broke the
chain of successor liability under this theory. See id. at 54-55 (concluding that an
arm's length sale of assets precludes a finding of liability as a successor under the
mere continuation test). Because Habco-Loram was not a mere continuation of
Habco, it was incapable of transferring CERCLA liability to Habco International, or
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DeAngelo, because Habco-Loram itself had no CERCLA liability to pass along or to
share.
Finally, Borax argues that the facts fit the fraudulent transfer doctrine, but again
we respectfully disagree. In Mexico Feed and Seed, we indicated that a situation
where the purchasing corporation "bought only 'clean' assets, and knowingly left 'dirty'
assets behind with an insufficient asset pool to cover any potential liability" would be
covered by the fraudulent transaction exception. 980 F.2d at 489-90 & n.14.
Additionally, "the sufficiency of the consideration given for the sale also plays a large
factor in determining whether the sale was fraudulent." Atchison, Topeka & Santa Fe
Ry., 159 F.3d at 365. There is no evidence in the record to indicate that Habco-Loram
purchased only the clean assets while knowingly leaving the dirty assets behind with
an insufficient asset pool. Borax has pointed to no evidence showing that, at the time
of the sale, Habco-Loram knew of any potential CERCLA liability (let alone its
extent) on the part of Habco, or that Habco's remaining assets would be so insufficient
as to render it unable to satisfy its creditors. Neither is there any evidence that Habco-
Loram was set up to be a sham or a pass-through entity. Further, Habco-Loram paid
full consideration for the assets in an admittedly arm's length transaction.
Accordingly, we conclude that the district court erred as a matter of law in
granting summary judgment against DeAngelo and holding it liable as a successor
corporation to Habco. We remand for entry of judgment in accordance with this
opinion and for reallocation of DeAngelo's share to the Hornes as articulated in
footnote 7 of the district court's January 7, 2005, Allocation Order. (DeAngelo's Add.
at 248 n.7.)
2. Inconsistent Orders by the District Court
DeAngelo argues that we must reconcile the inconsistency between two orders
entered by the district court – in the 1997 bench order, the district court stated that it
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would not permit any judgment to be pursued against Habco International until all
other sources of payment of the judgment have been pursued, but then in the January
7, 2005, Allocation Order, the district court allocated 15% of all response costs to
DeAngelo, as successor to Habco International and Habco, without any such
limitation. Our conclusion as a matter of law that Habco International and DeAngelo
are not successor corporations to Habco, and ordering reallocation of DeAngelo's
share to the Hornes, renders it unnecessary to address the merits of this issue.
III.
We reverse and remand in part for further proceedings to permit the district
court to consider the application of any settlement credits against the judgment, to
reconsider the prejudgment interest award based on any application of settlement
credits it may see fit to make, and to reallocate DeAngelo's share to the Hornes in
accordance with footnote 7 of the district court's January 7, 2005, Allocation Order.
In all other respects, we affirm the judgment of the district court.
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