Keywell Corp. v. Weinstein, 1208

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation33 F.3d 159
Docket NumberD,No. 1208,1208
Parties, 24 Envtl. L. Rep. 21,476 KEYWELL CORPORATION, Plaintiff-Appellant, v. Daniel C. WEINSTEIN and Anthony Boscarino, Defendants-Appellees. ocket 93-7994.
Decision Date23 August 1994

Stuart A. Smith, New York City (Alfred Ferrer III, Piper & Marbury, Joseph G. Finnerty, Jr., Charles P. Scheeler, of counsel) for plaintiff-appellant.

Thomas E. Lippard, Pittsburgh, PA (Craig E. Frischman, Thorp Reed & Armstrong, of counsel) for defendant-appellee Weinstein.

Jeremiah J. McCarthy, Buffalo, NY (Phillips, Lytle, Hitchcock, Blaine & Huber, of counsel) for defendant-appellee Boscarino.

Before: WALKER, JACOBS, Circuit Judges and CARMAN, * Judge.

JACOBS, Circuit Judge:

Keywell Corporation ("Keywell") has incurred costs for environmental cleanup at an industrial facility that it purchased in 1987 from Vac Air Alloys Corporation ("Vac Air"). Defendants-Appellees Daniel C. Weinstein ("Weinstein") and Anthony Boscarino ("Boscarino") were shareholders, officers and directors of Vac Air prior to the purchase and at the time of the transaction, and were signatories to the Purchase Agreement. Keywell has brought suit against Weinstein and Boscarino, (i) alleging that they induced Keywell to buy the property by making misrepresentations bearing upon the environmental risks at the premises, and (ii) alleging that, as owners and operators of Vac Air, they are strictly liable to Keywell for their equitable share of response costs pursuant to Secs. 107(a) and 113(f) of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). 42 U.S.C. Secs. 9607(a) and 9613(f). Following the parties' submission of cross-motions for summary judgment, the district court dismissed Keywell's claims, finding as a matter of law that Keywell could not have reasonably relied on the allegedly fraudulent misrepresentations, and that Keywell had contractually released its right to sue defendants under CERCLA.

We affirm the dismissal of the CERCLA claims on the ground that the parties allocated the risk of CERCLA liability in their Purchase Agreement, the terms of which establish that such risk now falls on Keywell. However, we reverse the dismissal of the diversity fraud claims and remand for further proceedings.

BACKGROUND

The facts, drawing all justifiable inferences in favor of the non-movant Keywell, are as follows. Weinstein founded Vac Air in 1966 and, until the time Keywell purchased certain Vac Air assets in December 1987, was a principal shareholder, president, chief executive officer, and member of the board of directors of the company. Boscarino joined Vac Air in 1971 as an assistant to the secretary/treasurer, and by 1978 he had become a stockholder, director, and vice-president of the company. Both Weinstein and Boscarino took an active part in conducting the business of Vac Air, which included the operation of a metals recycling plant located in Frewsburg, New York (the "Frewsburg plant").

From the time Vac Air was founded in 1966 until Keywell's acquisition of assets in December 1987, the Frewsburg plant recycled scrap metal--a process that entailed the In 1985, during an unrelated excavation on the property, workers unearthed decomposed remnants of storage drums that had apparently once been filled with a TCE-infused waste product and buried. Weinstein and Boscarino were aware of this discovery, and, upon the advice of counsel, sent a fragment of one of the drums to an independent laboratory for a chemical analysis. That analysis suggested that the buried materials did not pose an environmental problem for Vac Air.

use of trichloroethylene ("TCE"), a chemical now categorized as a hazardous substance by the Environmental Protection Agency (the "EPA"). Two by-products of the recycling process are TCE sludge and TCE oil. During the 1970s, workers at the Frewsburg plant placed TCE sludge in ponds or pits on the property. In addition, they sometimes spread the sludge directly on the ground, where it would dry into a more manageable consistency that could then be moved off site. During the same period, TCE oil was occasionally dispersed on the plant's roads to act as a dust-suppressant. Both Weinstein and Boscarino were aware of at least some of these practices, which ceased in the late 1970s after Vac Air hired a firm to dispose of TCE waste off site.

Two years later, on November 10, 1987, Keywell entered into an agreement with Vac Air to purchase certain assets, including the Frewsburg plant (the "Purchase Agreement"). Following execution of the Purchase Agreement (but before the closing on December 16, 1987), Keywell retained the environmental consulting firm of Conestoga-Rovers and Associates ("CRA") to conduct a due diligence environmental audit of the Frewsburg plant. As part of the audit, CRA inspected the site and interviewed Vac Air employees, including Boscarino. The trial testimony of CRA representative Alan Van Norman suggests that Boscarino was asked about waste disposal, and responded that there had been no on-site dumping of hazardous materials.

Upon completion of its audit, CRA issued a report to Keywell. CRA warned that, simply by virtue of the metal recycling that took place there, the Frewsburg plant might be identified by the EPA as a possible source of environmental contamination. CRA's report also contained the following relevant findings and warnings. TCE was present in drainage water samples. Although the nature of past off site disposal of TCE sludge was undetermined, Vac Air personnel had assured CRA that no on-site disposal of waste materials had been made. The proximity of the Frewsburg plant to the municipal water supply justified concern about TCE contamination in the groundwater, for while the possibility of contamination was low, the potential cost could be high. CRA therefore recommended that Keywell conduct additional tests of the groundwater.

Keywell decided not to conduct the further testing that CRA recommended and proceeded to close the sale with Vac Air. The Purchase Agreement provided that "[t]he representations and warranties of [Vac Air] and the Management Stockholders [including Weinstein and Boscarino] herein contained shall be true at and as of the Closing Date, shall be made again at and as of the Closing Date, and shall be true as so made again...." Purchase Agreement p 6.1. In the Purchase Agreement, Vac Air and its management made the following representation bearing upon environmental exposures:

Environmental Matters. There has been no storage, disposal or treatment of solid wastes or hazardous wastes by [Vac Air] at any of the leased or owned property included in the Assets [including the Frewsburg plant] in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit. There has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto the properties to be purchased under this Agreement, or into the environment surrounding such properties, of any toxic or hazardous substances as defined under any local, state, Federal or foreign regulations, laws or statutes, other than those releases permissible under such regulations, laws or statutes or allowable under applicable permits.

Purchase Agreement p 2.14. By way of enforcing such representations, the Purchase Agreement provided that Vac Air and its management would

indemnify and hold harmless [Keywell] from and against any and all damages, losses and expenses caused by or arising out of (a) any breach of warranty or representation by [Vac Air or its management stockholders], or any non-fulfillment of any agreement or covenant on the part of Seller under this agreement, [or] (b) any liabilities or obligations of Seller ... which are not listed [in the Purchase Agreement].

Purchase Agreement p 8.1. These representations and warranties would survive for two years, "except that the representations, warranties and agreements incorporated in or set forth in the Indemnity Agreement shall survive to the extent provided therein." Purchase Agreement p 8.

Under the separate Indemnity Agreement, Vac Air undertakes for a period of thirty years to "indemnify and hold Keywell harmless from any loss, damage, cost or expense relating to or arising from the Assets or the Business ... if the occurrence, event or state of facts which led to such loss, damage, cost or expense arose or existed prior to [December 16, 1987]." Indemnity Agreement p 1. These indemnity obligations, however, are solely the undertakings of Vac Air; the Indemnity Agreement explicitly provides that they "shall be non-recourse to the stockholders, directors and officers of Vac Air [including Weinstein and Boscarino], and shall only be recourse to [certain assets of Vac Air]." Indemnity Agreement p 2.

After Keywell's acquisition of the Frewsburg plant, Weinstein and Boscarino stayed on as managers in Keywell's employ. Prior to the date on which the representations and warranties were due to expire under the Purchase Agreement, various disputes (unrelated to this case) arose between Keywell and the former management of Vac Air. These disputes were resolved on August 11, 1989, by an agreement that the parties intended would "preserve harmony among Keywell's stockholders and promote Keywell's continued success." In this agreement (the "Release"), Keywell unconditionally released the members of Vac Air's Management Group--including Weinstein and Boscarino--from "any claims, liabilities, actions and causes of action Keywell may have under the Purchase Agreement...." Excluded from this Release were certain tax liabilities not relevant to the present dispute.

In June 1990, almost a year after the Release was executed, Keywell learned that a...

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