Daily Development for
Tuesday, March 10, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

HAZARDOUS SUBSTANCES; CERCLA; CONTRIBUTION; "AS-IS" CLAUSE: To allocate CERCLA liability between a buyer and seller, a sale agreement must have explicit language of indemnification, clearly manifesting the parties' intent to transfer environmental liability; an "as-is" clause serves only to bar state law actions for breach of warranty and otherwise does not allocate CERCLA contribution liability.

M&M Realty Company v. Eberton Terminal Corporation, 1997 F.Supp. 683 (M.D.Pa. 1997).

Buyer acquired the subject property from its owner pursuant to a purchase agreement that contained an "environmental contingency" clause. The clause addressed the possibility of environmental contamination at the property. It gave the buyer the right to obtain a Phase I Environmental Audit and if the buyer approved the audit, the buyer agreed to accept and approve any hazardous waste conditions at the property. Furthermore, the buyer had the right to declare the purchase agreement null and void if the property did not meet governmental environmental standards. Most important, the buyer agreed that if it closed title, it was doing so based solely on its own investigation and not in reliance on any recommendation from the seller "regarding any matter or condition, including without limitation, any environmental condition, and BUYER accepts the property in "as-is" condition."

The buyer obtained a re-inspection of the property from the consultant that earlier had prepared assessment reports for the seller. After receiving a positive report from that consultant, the buyer purchased the property. Five months later, the buyer discovered the soil and water on the property to be contaminated with petroleum and various hazardous chemicals. The buyer sued the seller, the seller's predecessor, the broker, and the environmental consultant.

The interesting aspect of the Court's opinion deals with the Seller's use of the "as-is" clause and the contract's provision that the buyer did not rely on any representation from the seller, as a defense to a variety of claims raised against it in the action. The district court, after reviewing Pennsylvania law and finding no precedent, applied what it called the view of the "majority of federal courts" and concluded that an "as-is" clause is not a defense to an allegation of CERCLA liability, although it would bar state law actions for breach of warranty. The buyer's counts for common law claims from the contribution were found to be preempted by CERCLA and particular claims for "indemnification" were found by the Court as being, in reality, merely an attempt to obtain contribution. Therefore, they were also preempted by CERCLA. When the buyer agreed that it was purchasing the property "based on its own investigation and not on reliance ... of or through SELLER" it lost its claim for fraud based on the purchase agreement or the actual sale of the property. Similarly, the buyer's claim for a breach of the implied warranty of good faith and fair dealing was barred by the language of the environmental contingency clause.

Comment: It appears that we have now reached the point at which waivers of contribution liability are valid under CERCLA, but note that avoidance of contribution liability doesn't help you with the federal government. If the indemnifying private party is out of money, and you otherwise have CERCLA liability, you're stuck. .

HAZARDOUS SUBSTANCES; CERCLA; CORPORATE SHAREHOLDERS: Close corporation shareholders who did not exercise day-to-day control over the activities of their corporation are not liable as "owners or operators" under CERCLA when wastes are found on property the corporation owned, but a buyer of their stock who also contractually agreed to assume all of the liabilities and obligations of the corporation will have CERCLA liability even though the transaction took place well before CERCLA was enacted.

Aluminum Company of America v. Beazer East, Inc., 124 F.3d 551 (3rd Cir. 1997).

In 1954, Beazer East, Inc. ("Beazer") bought 95% of the outstanding stock of a company from its owners. Shortly thereafter, Beazer bought the remaining 5% of the company and assumed all rights and liabilities of the company. Years later, environmental damage was discovered at numerous sites where the company had operated. Beazer notified its sellers that they could be responsible for the costs of cleanup. The sellers initiated litigation seeking a declaratory judgment that they were not operators of the sites, and therefore not liable for cleanup costs. The District Court concluded that the sellers were not liable as "operators" under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), and that Beazer was solely liable for the cost of cleanup as a successor entity. Beazer appealed.

The Third Circuit of the United States Court of Appeals first considered whether the sellers were liable under CERCLA as "owners or operators of facilities where hazardous substances were disposed." If so, they would be jointly and severally liable for costs of cleaning up the hazardous waste sites. However, in order to be held liable under CERCLA, the sellers had to be found to have actual, substantial control over the activities of the company. The Appeals Court affirmed the District Court finding that the sellers did not have actual, substantial participation in the company's day-to-day business, and therefore were not liable as "owners or operators" under CERCLA. Similarly, the legislative history of CERCLA indicates an intent to hold a corporation liable only if it controls daily operating decisions or exercises "pervasive control" over policies. Even though the sellers together had the power to appoint a majority of the company's board of directors, the board was not involved in day-to-day management, plant operations or waste management practices. Furthermore, the Court found that the company managed its own operations separately in over 18 different locations and made policy decisions independent of its owners and sellers. Additionally, any involvement by the sellers was merely that of investor oversight. The Court refused to replace the actual control standard with an "authority to control" standard, as urged by Beazer, since such a standard would impose liability on any large shareholder with the capacity to influence decisions, regardless of whether such influence was actually exerted.

Next, the Appeals Court considered whether Beazer was liable as a successor owner. At common law, a successor company does not succeed to the liabilities of its predecessor. Two exceptions to this rule arise when the purchaser expressly or impliedly assumes the liabilities of the predecessor and when the transaction is a de facto merger. Although CERCLA does not address successor liability, prior Third Circuit decisions have applied this common law rule and its exceptions. In this case, the District Court found a de facto merger to have taken place.

The Appeals Court also found that Beazer assumed all of the company's liabilities. Either way, Beazer was liable. However, since the purchase of the company was before CERCLA was enacted, the Court had to determine whether any provision of the purchase agreement was general enough to encompass all environmental liability. Although there were no environmental provisions in the purchase agreement, Beazer assumed "all of the liabilities and obligations of [the company] of whatsoever nature." The Court found this to be broad enough to hold Beazer liable as an "owner" under CERCLA.

Comment: The editor finds the comparison between this case and M&M Realty Company v. Eberton Terminal Corporation, above, particularly interesting. Note that M&M found that a generally worded waver of liability was ineffective, even though there was a pretty good argument that the parties had in mind government liability claims in the nature of CERCLA claims, as well as others. But in the instant case, a generally worded assumption of liabilities was quite effective enough to stick Beazer with CERCLA liability even though it is quite possible that at least some forms of CERCLA liability - particularly those involving "liability without fault" - would go far beyond any of the liabilities that Beazer could have comprehended were possible prior to CERCLA.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.