New York v. National Service Industries, Inc.
Decision Date | 03 August 2006 |
Docket Number | Docket No. 05-4706-cv. |
Citation | 460 F.3d 201 |
Parties | The State of NEW YORK, Plaintiff-Counter-Defendant-Appellant, v. NATIONAL SERVICE INDUSTRIES, INC., Defendant-Counterclaimant-Appellee. |
Court | U.S. Court of Appeals — Second Circuit |
Benjamin N. Gutman, Assistant Solicitor General of the State of New York (Eliot Spitzer, Attorney General of the State of New York, on the brief; Michelle Aronowitz, Deputy Solicitor General, of counsel), New York, NY, for Plaintiff-Counter-Defendant-Appellant.
Patricia T. Barmeyer, King & Spalding, LLP (Beverlee E. Silva, Lewis B. Jones, on the brief) Atlanta, GA, for Defendant-Counterclaimant-Appellee National Service Industries, Inc.
Before FEINBERG, SOTOMAYOR, and HALL, Circuit Judges.
This appeal presents a question of successor liability under the Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. §§ 9601-9675 (2000). Specifically, the question before us is whether federal common law for purposes of determining corporate successor liability under CERCLA incorporates state law — in this case, New York law — or displaces state law in favor of a uniform national rule derived from traditional common-law principles. We must then determine whether, under the applicable governing law, defendant-counterclaimant-appellee National Service Industries, Inc. ("NSI") is liable as the legal successor to Serv-All Uniform Rental Corp. ("Serv-All"). For the reasons that follow, we find that we need not decide whether federal common law under CERCLA would displace state law because the claim of plaintiff-counter-defendant-appellant the State of New York ("the State") would fail under either New York or traditional common law. That is, we hold that New York follows the traditional common-law rules of successor liability, which would govern if state law did not provide the rule of decision, and which require some evidence of continuity of ownership to find the existence of a de facto merger, and thus, successor liability. For that reason, we also hold that the State's common-law unjust enrichment and restitution claims fail.
The facts underlying this appeal are undisputed and have been set forth in New York v. National Services Industries, Inc., 134 F.Supp.2d 275, 276-77 (E.D.N.Y.2001) ("NSI I") and New York v. National Service Industries, Inc., 380 F.Supp.2d 122, 123-26 (E.D.N.Y.2005) ("NSI III"), familiarity with which is presumed. We repeat only those facts necessary to understand this appeal.
From 1962 to 1988, Serv-All operated a uniform rental business that served customers on Long Island. It delivered its clients clean uniforms, and picked up and cleaned the soiled ones. Until the mid-1980s, Serv-All cleaned the uniforms itself using a dry-cleaning process. In 1978, it arranged to have several dozen drums of perchloroethelyne, a hazardous substance used in dry cleaning, disposed of at the Blydenburgh Landfill in Islip, New York. In soil, perchloroethelyne decomposes into several chemicals, including vinyl chloride. Both perchloroethelyne and vinyl chloride are considered hazardous substances under CERCLA. See 42 U.S.C. § 9602; 40 C.F.R. § 302.4 (2005). Since 1983, the Blydenburgh Landfill has been listed in the New York Registry of Hazardous Waste Sites and in 1987 was added to the National Priority List of contaminated sites. Because Serv-All arranged for the disposal of the perchloroethelyne, the parties do not dispute that Serv-All was a potentially responsible party under CERCLA. See 42 U.S.C. § 9607(a)(3).
In October 1988, Serv-All sold almost all of its assets, including its customer list, current contracts, trucks, good will, and the right to use its name to Initial Service Investments ("Initial") for approximately $2.2 million. Ralph Colantuni and William Lepido, Serv-All's owners, also signed a covenant not to compete with Initial in the area for seven years. Initial operated the uniform rental business in large measure as Serv-All had done before the sale. It used the Serv-All name and trucks, and employed some of Serv-All's management and support personnel and all but one of Serv-All's former drivers. Initial did not continue Serv-All's practice of dry-cleaning uniforms, however, but instead laundered them in water at one of its facilities.
After the transaction, Serv-All changed its name to C-L Dissolution Corporation and adopted a liquidation plan. On January 27, 1989, C-L Dissolution Corporation formally dissolved. In 1992, NSI bought all shares of Initial's stock. On August 31, 1995, Initial merged into NSI.
Meanwhile, the State conducted a cleanup of the Blydenburgh Landfill, for which it incurred response costs that, as of 2002, exceeded $12 million with interest.1
In 1999, the State sued NSI to recover its response costs under CERCLA § 107(a), 42 U.S.C. § 9607(a), and for unjust enrichment and restitution under state law. Although a corporation that purchases another corporation's assets generally is not liable for the debts of the seller, the State asserted that NSI was liable because it fit into one of the four exceptions to this rule. See New York v. Nat'l Serv. Indus., Inc., 352 F.3d 682, 683 (2d Cir.2003) ("NSI II"). Specifically, the State argued that NSI was the "mere continuation" of Serv-All pursuant to the "substantial continuity" test we adopted in B.F. Goodrich v. Betkoski, 99 F.3d 505 (2d Cir.1996). In Betkoski, we concluded that "the substantial continuity test [is] the appropriate legal test" for determining whether a corporation that purchased another's assets is a mere continuation of the prior business and thus liable for its debts. Id. at 519. The substantial continuity test was a CERCLA-specific rule that we held displaced the narrow and more restrictive state common-law rules for determining whether an asset purchaser is a mere continuation of the seller. Id.
Relying on our decision in Betkoski, the district court (Mishler, J.) held that NSI was the legal successor to Serv-All and therefore responsible for Serv-All's CERCLA liability. See NSI I, 134 F.Supp.2d at 280-81. It consequently entered judgment for the State. NSI filed a timely appeal, maintaining that the substantial continuity test adopted in Betkoski was not good law after the Supreme Court's decision in United States v. Bestfoods, 524 U.S. 51, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998). In Bestfoods, a case involving parent-subsidiary liability under CERCLA, the Supreme Court rejected the test that the district court had applied in that case because it "disregard[ed] entirely . . . time-honored common-law rule[s]." Id. at 70, 118 S.Ct. 1876. The Court held that nothing in CERCLA indicated that Congress intended to abrogate the common law, and thus a parent corporation could be charged with its subsidiary's wrongdoing only when the corporate veil could be pierced. Id. at 63-64, 70, 118 S.Ct. 1876. While the Supreme Court noted that "[t]here is significant disagreement among courts and commentators over whether, in enforcing CERCLA's indirect liability, courts should borrow state law, or instead apply a federal common law of veil piercing," it did not resolve the question. Id. at 63 n. 9, 118 S.Ct. 1876.
In considering NSI's first appeal, we took from the Supreme Court's decision in Bestfoods "the principle that when determining whether liability under CERCLA passes from one corporation to another, we must apply common law rules and not create CERCLA-specific rules." NSI II, 352 F.3d at 685. "Because the substantial continuity test in Betkoski departs from the common law rules of successor liability," we held, "Betkoski is no longer good law." Id. As we explained in NSI II, the traditional common-law rules provide that a corporation that acquires another corporation's assets assumes the latter's liabilities only if (1) the successor corporation expressly or impliedly agrees to do so, (2) the transaction may be viewed as a de facto merger, (3) the successor is the mere continuation of the predecessor, or (4) the transaction is fraudulent. Id. Accordingly, we vacated the district court's grant of summary judgment and remanded the case to the district court for further proceedings.
In doing so, we declined to decide whether courts should apply state law or create a federal rule based on traditional common-law principles for purposes of determining successor liability under CERCLA. See id. at 687 n. 1. Nevertheless, we observed in NSI II that, although we had chosen a federal rule in Betkoski, the analysis for determining whether federal common law would absorb or displace state law might produce a different result after Bestfoods. See id.
On remand, NSI moved for summary judgment on the ground that it was not the legal successor to Serv-All. The State responded that NSI was liable pursuant to the "de facto merger" theory of successor liability. See NSI III, 380 F.Supp.2d at 128-29. The de facto merger doctrine creates successor liability when the transaction between the purchasing and selling companies is in substance, if not in form, a merger.
In granting NSI's motion, the district court (Townes, J.), considered the choice-of-law question left open in NSI II: whether CERCLA requires the displacement of state law for purposes of determining successor liability. Id. at 128. The court concluded that it did not need to decide the question, however, because the State's claim would fail regardless of which law applies. Id. The court found that general common law principles require continuity of ownership before a de facto merger can be found to have occurred. Id. at 129-30. Although the New York Court of Appeals has not explicitly held that continuity of ownership is required to find a de facto merger, the district court predicted that it too would require continuity of ownership under state law. See id....
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