Atchison, Topeka and Santa Fe Ry. Co. v. Brown & Bryant, Inc.

Decision Date14 October 1998
Docket NumberNo. 96-15529,96-15529
Citation159 F.3d 358
Parties28 Envtl. L. Rep. 20,463, 98 Cal. Daily Op. Serv. 7767 ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY; Southern Pacific Transportation Company, a Delaware Corporation, Plaintiffs-Appellants, v. BROWN & BRYANT, INC., Defendant, and PureGro Company, a California corporation, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Robert M. Lichtman, Banchero & Lasater, San Francisco, California, for plaintiffs-appellants.

Francis J. Balint, Jr., Bonnett, Fairbourn, Friedman & Balint, P.C., Phoenix, Arizona, April V. Pearson, in-house counsel for PureGro Company, Diane E. Shell, Shell & Associates, for defendant-appellee.

Jerry L. Anderson and Gregory C. Sisk, Drake University Law School, Des Moines, Iowa, for amicus curiae.

Appeal from the United States District Court, Eastern District of California; Oliver W. Wanger, District Judge, Presiding. D.C. No. CV-92-05068-OWW.

Before: HUG, Chief Judge, GOODWIN and HAWKINS, Circuit Judges.

MICHAEL DALY HAWKINS, Circuit Judge:

The Atchison, Topeka & Santa Fe Railway Company and Southern Pacific Transportation Company (the "Railroads") are responsible parties under CERCLA 2 for soil contamination on property they leased to Brown & Bryant ("B & B"), an agricultural chemical company. The Railroads brought this action against PureGro, a B & B competitor that purchased many of B & B's assets, alleging that PureGro is the successor-in-interest to B & B and thus liable for contribution to the Railroads under CERCLA.

In this appeal, the Railroads ask us to exercise our powers under federal common law to expand successor corporate liability under CERCLA. PureGro, on the other hand, would have us reexamine existing Ninth Circuit precedent in light of intervening Supreme Court decisions and hold that there is no need for a federal common law of successor liability under CERCLA, and that state law supplies the rule of decision in this area. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm the district court's grant of summary judgment in favor of PureGro.

Facts

B & B operated an agricultural chemical business on property it owned and on adjacent property it leased from the Railroads. B & B was a family enterprise, whose sole shareholder was John Brown. By the mid-1980's, two B & B sites were under investigation by California and federal environmental agencies. When B & B could not complete cleanup activities by itself, the Environmental Protection Agency ("EPA") issued an Administrative order to the Railroads, requiring them as owners of parts of the sites to undertake response activities. By 1988, Brown realized B & B could not afford to comply with agency cleanup orders and decided to sell his business. B & B retained a broker, who had B & B's property appraised and then contacted a number of B & B's competitors in the area, including PureGro.

Paying the appraised value for the equipment, PureGro bought about half of B & B's equipment pursuant to an Equipment Sale Agreement. The agreement specified that it was not to be construed as a purchase of B & B's business and that PureGro would not be considered de jure or de facto a successor to B & B. The Equipment Sale Agreement also included environmental indemnity provisions and conditioned the transaction on obtaining a release from the EPA and the California Department of Health Services, absolving PureGro from any environmental liability. Ultimately, this release was not available, but PureGro decided to close the deal nonetheless.

In a second agreement, PureGro purchased tanks and trailers from Brown that had been used by B & B but owned individually by Brown and his ex-wife. PureGro paid the appraised value for this equipment as well. Finally, there was a Consulting Agreement between PureGro and Brown, in which PureGro retained Brown to help acquire and maintain the prior B & B customers and to assist in soliciting new business for PureGro.

PureGro hired all of B & B's Pest Control Advisors ("PCAs"). PCAs work closely with farmers and develop a close client relationship, so that most farmers buy their chemicals from the retailer with whom the PCA is affiliated. In total, PureGro employed about 60% of the employees who were still left at B & B in 1988. Neither Brown nor any of the B & B employees were given management positions or stock ownership in PureGro. PureGro did not acquire any interest in B & B's accounts receivable or existing contracts with suppliers or customers. For a short while after the asset sale, B & B continued to run a dry fertilizer operation, and PureGro occasionally purchased fertilizer from B & B, by purchase order.

Post-transaction, PureGro took over B & B's phone numbers. Brown sent a letter to his mailing list explaining that he had accepted a position with PureGro and that PureGro would "employ our personnel, lease our equipment and service your account in the tradition you have come to expect." The local paper carried an article entitled "Brown and Bryant, PureGro join" accompanied by a photo of Brown shaking hands with PureGro's president in front of two trucks bearing the logo of the two companies.

The Railroads sued PureGro as B & B's successor-in-interest, seeking private cost recovery, contribution and declaratory relief under CERCLA and numerous state claims. The Railroads recognized the rule that asset purchasers do not ordinarily incur successor liability, and thus sought to impose liability on PureGro under two exceptions to this general rule: the "fraudulently-entered transaction" exception, and the "continuing business enterprise" exception (also called the "substantial continuation" exception). In an extension of this circuit's law, the district court applied the continuing business enterprise exception, but found that, as a matter of law, the exception was inapplicable to the facts of this case and granted summary judgment to PureGro on that exception. As to the fraudulent transaction exception, the district court noted that there was no evidence that PureGro purchased B & B's "clean" assets for insufficient consideration, and granted summary judgment to PureGro on this exception as well. The Railroads appeal.

Standard of Review

A grant of summary judgment is reviewed de novo. Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir.1996).

Discussion
I. Successor Liability Under CERCLA

In Louisiana-Pacific Corp. v. Asarco, Inc., 909 F.2d 1260 (9th Cir.1990), we adopted the Third Circuit's rationale that CERCLA authorizes successor liability and that the parameters of this successor liability are to be fashioned by federal common law. Id. at 1262-63 (citing Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 91-92 (3d Cir.1988)). We then went on to create federal common law rules of successor liability by drawing on the traditional rules of successor liability in operation in most states. Louisiana-Pacific, 909 F.2d at 1263. Thus, we recognized that asset purchasers are not liable as successor corporations unless:

(1) The purchasing corporation expressly or impliedly agrees to assume the liability;

(2) The transaction amounts to a "de-facto" consolidation or merger;

(3) The purchasing corporation is merely a continuation of the selling corporation; or

(4) The transaction was fraudulently entered into in order to escape liability.

Id.

In this case, the Railroads concede that the first three exceptions do not apply to PureGro. Rather, the Railroads contend that PureGro is liable under the fraudulently-entered transaction exception (discussed in Part III, below) or that PureGro is liable under a broader deviation of the "mere continuation" exception, sometimes referred to as the "substantial continuation" or the "continuing business enterprise" exception. Louisiana-Pacific specifically left open the availability of this broader exception, id. at 1266, and the exception has not since been adopted in this circuit.

At this juncture, the "federal common law" rules for successor liability under CERCLA in this circuit mirror the traditional successor liability rules of most states, including California. (California law applies to the contracts between PureGro and B & B.) The Railroads would have us exercise our powers under federal common law to expand CERCLA liability by adding an additional successor liability exception, which, they contend, would encompass PureGro as a successor-in-interest to B & B. PureGro, however, argues that this expansion under federal common law is not permissible, as recent Supreme Court decisions have undermined Louisiana-Pacific 's holding that federal common law governs successor liability under CERCLA. 3

II. Louisiana-Pacific

PureGro argues that the Supreme Court's decisions in O'Melveny & Myers v. FDIC, 512 U.S. 79, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994), and Atherton v. FDIC, 519 U.S. 213, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997), call into question the ease with which Louisiana-Pacific created a set of federal rules for successor liability under CERCLA. Although O'Melveny and Atherton involve a different federal statute, the underlying analysis is applicable in any situation in which it is necessary to determine whether state law should be supplanted by judicially created federal rules of decision. These cases counsel that the need for such special federal rules will be only in "few and restricted" instances. Atherton, 117 S.Ct. at 673; O'Melveny, 114 S.Ct. at 2055. Atherton and O'Melveny also clarify the heavy burden that a party bears in proving the need for uniformity or proving that state rules conflict with federal policy. See, e.g., Atherton, 117 S.Ct. at 671-74; O'Melveny, 114 S.Ct. at 2055-56. Indeed, in these cases, the Court rejected many of the very arguments that Louisiana-Pacific accepted in deciding CERCLA necessitated a set of uniform federal rules...

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