Chaveriat v. Williams Pipe Line Co.

• Decision Date: 21 December 1993
• Docket Number: No. 93-1652,93-1652
• Citation: 11 F.3d 1420
• Parties: 24 Envtl. L. Rep. 20,217 Harry F. CHAVERIAT, Jr., et al., Plaintiffs-Appellants, v. WILLIAMS PIPE LINE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1420

11 F.3d 1420

24 Envtl. L. Rep. 20,217

Harry F. CHAVERIAT, Jr., et al., Plaintiffs-Appellants, v. WILLIAMS PIPE LINE COMPANY, Defendant-Appellee.

No. 93-1652.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 25, 1993.

Decided Dec. 21, 1993.

James T.J. Keating (argued), Richard M. Kuntz, Dennis A. Berg, Chicago, IL, for plaintiffs-appellants.

Kathleen M. Hennessey, Mayer, Brown & Platt, Washington, DC, Percy Angelo (argued), Mark R. Ter Molen, Sheila D'Cruz, Mayer, Brown & Platt, Chicago, IL, for defendant-appellee.

Before POSNER, Chief Judge, MANION, Circuit Judge, and GRANT, District Judge. ^*

POSNER, Chief Judge.

The plaintiffs in this diversity suit seek damages for a nuisance caused by petroleum contamination. Illinois law controls. In 1931 Great Lakes Pipe Line Company, the defendant's predecessor, constructed a six-inch pipeline under a 208-acre tract of farmland in DuPage County. In 1944 the pipeline broke and spilled 30,000 gallons of unleaded gasoline which soaked into the ground and could not be recovered. The land was owned by Thaddeus Milfeld and farmed by his daughter and son-in-law. Great Lakes paid the daughter and son-in-law for the damage caused by the spill, obtaining a release from the son-in-law. The daughter and her siblings later inherited the land and sold it to the plaintiffs' predecessor in title. In 1956 Great Lakes built a second, larger (twelve-inch) petroleum pipeline under the land. Ten years later Great Lakes sold all its pipeline assets to the defendant, expressly retaining all liabilities not listed on its balance sheet. Actual or contingent liabilities arising from damage to land through which the pipelines ran were therefore retained. In 1985 the defendant sold the six-inch pipeline to a fiber optics company and it ceased being used to carry petroleum products.

We come now to the immediate antecedents of the suit. In 1986, the plaintiffs sold an option to a real estate developer to buy the land for the creation of an industrial park. The developer, who eventually exercised the option for some $7 million, made soil borings which revealed petroleum contamination. The plaintiffs retained a contractor named Eiler to clean up the contamination. Eiler in turn retained Testing Service Corporation to take soil samples, and TSC hired NET Midwest to test the samples. After subjecting the samples to chromatographic analysis, NET reported to TSC, which reported to Eiler, that the only petroleum product in the samples was unleaded gasoline. But NET did not give TSC, Eiler, or the plaintiffs the actual chromatograms on which NET's conclusion concerning the nature of the contamination was based.

Satisfied that the contamination had been caused by the unleaded gasoline spilled in 1944, Eiler so represented to the Illinois Environmental Protection Agency, which approved a cleanup plan designed and executed by Eiler at a cost to the plaintiffs of more than $1 million. This suit, filed in July 1989, seeks to recover that cost. Although the complaint alleges petroleum contamination without specifying the type of petroleum product or the date of the break or leak that caused the contamination, pretrial discovery brought to light no indication of any break or leak other than the break that had occurred in 1944. In response to the defendant's discovery request for "all documents referring to, reflecting or relating to any contamination of the Property," the plaintiffs did not hand over the chromatograms, as they had never been in their possession, or Eiler's, or even TSC's.

Discovery, other than of prospective expert witnesses, closed in April 1991. The following month the plaintiffs moved to amend their complaint to add a new claim of contamination, based on the discovery of diesel fuel in two stormwater retention ponds. The judge denied the motion, ruling that it could be made the basis of a new suit if the plaintiffs wanted. The discovery of the diesel fuel had prompted the plaintiffs in March 1991 to arrange for the taking of additional soil samples, which were subjected to chromatographic tests that revealed the presence of diesel fuel. In July, the plaintiffs' expert, Ball, obtained from NET the chromatograms that the laboratory had prepared at TSC's request back in 1989, and according to Ball these chromatograms, too, reveal the presence of diesel fuel in the soil. If Ball is correct, NET had either failed to analyze the chromatograms fully back in 1989 or failed to communicate its analysis fully to TSC.

The plaintiffs submitted copies of the 1989 chromatograms to the defendant forthwith (it had already submitted copies of the 1991 ones to them), only to be met by a motion to exclude the chromatograms from evidence as a sanction for the plaintiffs' having failed to produce them in response to the original document request; for they had been in existence then. The district judge granted the motion--and excluded the 1991 chromatograms to boot. He thought the plaintiffs' failure to have produced the 1989 chromatograms in 1989 was inexcusable; that the plaintiffs were estopped by their representations to the defendant and to the Illinois Environmental Protection Agency to change the theory of their case from a 1944 gasoline spill to a fairly recent (date unknown) spill of diesel fuel; that the new evidence was weak; and that it was too late for the plaintiffs to change the theory of their case. The last must have been the reason the judge excluded the 1991 chromatograms as well--they were pertinent only to a claim of contamination by diesel fuel. With the case now confined to the 1944 spill, the judge granted summary judgment for the defendant on the ground that the defendant bore no liability as the successor to Great Lakes, the owner of the pipeline in 1944.

The easy issue is the correctness of the judgment with respect to the 1944 spill. That was long before the defendant became the owner of the pipeline. The general rule in Illinois as elsewhere is that the purchaser of assets does not acquire the seller's liabilities unless he agrees to do so. Nilsson v. Continental Machine Mfg. Co., 251 Ill.App.3d 415, 190 Ill.Dec. 579, 581, 621 N.E.2d 1032, 1034 (1993); Myers v. Putzmeister, Inc., 232 Ill.App.3d 419, 173 Ill.Dec. 130, 596 N.E.2d 754 (1992). If the liabilities always went with the assets, it would be difficult to sell assets because the purchaser would not know what he was getting. He might be "buying" a lawsuit the expected cost of which exceeded the value of the asset purchased, yet it would be too late for him to back out of the sale or renegotiate the price. Manh Hung Nguyen v. Johnson Machine & Press Corp., 104 Ill.App.3d 1141, 60 Ill.Dec. 866, 872, 433 N.E.2d 1104, 1110 (1982).

The rule permitting assets to be sold separately from liabilities is part of a large family of rules aimed at facilitating transactions by clearing clouds on titles. Another member of the family is the rule that a bona fide purchaser for value takes free of certain claims against the seller in respect to the good sold. See, e.g., UCC Sec. 2-403. If, however, the "sale" is simply a corporate reorganization that leaves real ownership unchanged, the liabilities go with the assets. Nilsson v. Continental Machine Mfg. Co., supra; State ex rel. Donahue v. Perkins & Will Architects, Inc., 90 Ill.App.3d 349, 45 Ill.Dec. 696, 699, 413 N.E.2d 29, 32 (1980); Plaza Express Co. v. Middle States Motor Freight, Inc., 40 Ill.App.2d 117, 189 N.E.2d 382, 385 (1963). And when one corporation is merged into another, the acquiring corporation gets the liabilities of the acquired one along with the assets. Robinson v. KFC National Management Co., 171 Ill.App.3d 867, 121 Ill.Dec. 721, 725, 525 N.E.2d 1028, 1032 (1988); 805 ILCS 5/11.50(a)(5). If it did not, the transaction would be a sale of assets rather than a merger.

We confess to some puzzlement as to why liabilities are retained when the assets sold constitute an entire business, a "going concern." A seller who is exiting from a business doesn't want to be plagued by lawsuits afterward and may not even retain the organizational capacity to defend against them. It is true that a disclaimer of liability is good only against the purchaser, not against a nonconsenting third party. Assignment makes the assignee another obligor; it does not let the assignor off the hook. But it reduces the probability that he will be sued. A further consideration in the case in which the entire business is sold is that the buyer is likely as a matter of ordinary prudence to have investigated the business's history before buying it and through that investigation to have discovered the seller's contingent liabilities, and he is therefore less likely to be surprised by a subsequent lawsuit than the purchaser of a particular asset would be. Of course not all contingent liabilities are foreseeable. The requirements for cleaning up polluted land have become much more stringent since 1966, when Great Lakes sold its pipeline business to the defendant; and it is unlikely that the parties anticipated the political and legal changes that are responsible for that greater stringency.

Still another consideration is that when an entire business is sold the seller may no longer be able to pay a judgment. This is clearest in the case where after the sale of all its assets a corporate seller distributes the proceeds of the sale to the shareholders and dissolves. If the purchaser is not liable, the transaction will have externalized the costs of the seller's acts that gave rise to liability. This consideration may help explain why liabilities are retained rather than transferred when a business operated as a proprietorship rather than in the corporate form is sold, even though all the assets used in the proprietorship are sold. James J. White & Robert S. Summers, Uniform Commercial Code Sec. 19.1, p. 755 (2d ed. 1980). Unlike a corporation that sells its entire business and...