North Shore Gas Co. v. Salomon Inc.

• Decision Date: 05 August 1998
• Docket Number: No. 97-2485,97-2485
• Citation: 152 F.3d 642
• Parties: , 28 Envtl. L. Rep. 21,500 NORTH SHORE GAS COMPANY, Plaintiff-Appellee, v. SALOMON INC, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 642

152 F.3d 642

47 ERC 1001, 28 Envtl. L. Rep. 21,500

NORTH SHORE GAS COMPANY, Plaintiff-Appellee, v. SALOMON INC, Defendant-Appellant.

No. 97-2485.

United States Court of Appeals Seventh Circuit.

Argued Jan. 5, 1998.

Decided Aug. 5, 1998.

Laurence A. Silverman, Cahill, Gordon & Reindel, New York City, James H. Schink (argued), Kirkland & Ellis, Chicago, IL, for Plaintiff-Appellee.

Roberta M. Saielli, Richard J. Kissel, Gardner, Carton & Douglas, Chicago, IL, John D. Faught (argued), John Faught & Associates, Denver, CO, for Defendant-Appellant.

Before CUMMINGS, CUDAHY, and KANNE, Circuit Judges.

CUDAHY, Circuit Judge.

Who should assume responsibility for the cost of an environmental cleanup is the first messy question in what is generally a messy business. North Shore Gas Company filed suit in Illinois federal district court and sought a declaration that it was not liable for a remediation that was taking place in Colorado. After denying defendant Salomon Inc's motion to dismiss or transfer the case, the district court granted summary judgment in favor of North Shore Gas. On appeal, Salomon challenges the district court's decision to entertain this declaratory judgment action, and then raises arguments which require us to decide whether the equitable doctrine of successor liability applies in the context of CERCLA and how far the doctrine reaches. We affirm the denial of the motion to dismiss or transfer, but reverse the declaration that North Shore Gas cannot be held liable for cleanup costs under the doctrine of successor liability.

I. Background

Beginning in the early part of this century, the S.W. Shattuck Chemical Company (Old Shattuck) operated a mineral ore processing plant in Denver, Colorado (the Denver Site). In 1969, Salomon's predecessor-in-interest purchased Old Shattuck and renamed it the S.W. Shattuck Chemical Company, Inc. (New Shattuck). From 1969 to 1984, New Shattuck operated the Denver Site as a mineral processing facility. Unfortunately, the activities at the Denver Site were not without environmental costs. In 1983, the Environmental Protection Agency (EPA) placed the Site on its national priorities list. In 1992, the EPA ordered New Shattuck, the current owner of the Site, to remove certain hazardous substances. See 42 U.S.C. § 9613(f)(1). Salomon subsequently guaranteed the financial performance of New Shattuck, its wholly-owned subsidiary. At the time of this appeal, remediation costs had exceeded $20 million.

After the EPA charged New Shattuck with liability, the company embarked on a search for entities that might contribute to response costs. It discovered that from 1934 to 1942, North Shore Coke & Chemical Company (the Coke Company) owned 60% of Old Shattuck. In the mid-1930s, the Coke Company had formed North Continent Mines, which mined mineral ores containing vanadium and uranium. North Continent Mines regularly transported radium slimes--a waste product as hazardous as its name suggests--to the Denver Site for processing and disposal.

The Coke Company was incorporated in 1927 by William Baehr, the then-manager (and later president) of the North Shore Gas Company (the Gas Company), which supplied gas to communities around Waukegan, Illinois. In 1928, the Coke Company built a coke oven plant in Waukegan. The Coke Company sold all of the gas generated at the Waukegan plant to the Gas Company, furnishing more than 80% of the Gas Company's total supply. The Coke Company was also a source of coke for the Gas Company, as well as for other purchasers. The ore processed by Old Shattuck and North Continent Mines was not used to manufacture gas or coke.

From 1927 to 1942, the Coke Company and the Gas Company were closely related entities. Virtually all of the Coke Company's stock was owned by North Continent Utilities Corporation, a holding company that Baehr formed in 1922; North Continent Utilities also owned 100% of the Gas Company's common stock and 2.28% of its preferred stock. The financial reports of North Continent Utilities listed the Coke Company and the Gas Company as consolidated subsidiaries. And the Coke and Gas Companies had virtually identical officers and directors. ¹ The companies even issued joint bonds, which were secured by a lien on the assets of both companies. In 1940, a consultant deftly summarized the companies' connection:

The actual operations of the properties are interdependent. One is dependent on the other as a source of supply. One company is dependent on the other as a market for one of its primary products. Neither company, from a practical standpoint, can operate without the other. Broadly speaking, the two companies represent a single business enterprise.

....

As a consequence of the purchase and sale contract and the [bonds], each company is as concerned with the solvency of the other as it is with its own. Therefore, each is subject to a risk largely beyond the control of the Board of Directors of the particular company. Perhaps the success of this involved situation in the past is largely due to the fact that both companies are controlled by the same interests, operated by a single management, and considered from an operating viewpoint largely as a single business enterprise.

Duff & Phelps Rep. at 113-14 (Aug. 1, 1940). The Coke and Gas Companies thus shared far more than the typical arms-length relationship of most purchasers and suppliers.

This happy union began to unravel in 1940. The companies were facing financial difficulties, since they anticipated that they would be unable to redeem the joint bonds that were due to mature in 1942. In addition, the dividend requirements of the Gas Company's preferred stock were exceeding the company's earning ability. And a committee representing the preferred stockholders of the Gas Company had asserted various mismanagement claims against the Coke Company, North Continent Utilities and Baehr. The Coke Company had also run afoul of the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79(k), which sought to eliminate nonutility investments from the utility system. In an effort to address these difficulties, the Coke and Gas Companies submitted a "Plan of Reorganization" to the Securities and Exchange Commission in 1941 (the 1941 Plan). Under the Plan, the Coke Company sold all of its assets to the Gas Company--except the stock in North Continent Mines and Old Shattuck, certain debt owed to the Coke Company and $45,000 in cash--in exchange for shares of the Gas Company. The Coke Company transferred its interest in Old Shattuck and North Continent Mines to North Continent Utilities. The Plan also settled all mismanagement claims by the preferred shareholders, refunded the bonds issued by the Gas and Coke Companies, and recapitalized the Gas Company so that it had only a single class of stock (common).

When New Shattuck went looking for parties to contribute to CERCLA costs, it discovered that the Coke Company was liquidated in 1942, pursuant to the 1941 Plan. North Continent Utilities dissolved in 1954. So New Shattuck seized on North Shore Gas--the only company remaining from the once formidable triumvirate--and demanded that it help pay for the cost of cleaning up the Denver Site. Eventually North Shore Gas filed an action against Salomon in an Illinois federal district court, seeking a declaration that it was not liable for remediation costs associated with the Site. Salomon filed a motion to dismiss or, in the alternative, to transfer the case to Colorado. After the district court denied the motion, North Shore Gas and Salomon filed cross motions for summary judgment. The court granted North Shore Gas' motion and denied Salomon's.

II. Motion to Dismiss or Transfer Venue

The Declaratory Judgment Act provides that "any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). As is apparent from the use of the word "may," the Act does not obligate courts to issue declaratory judgments. Instead, district courts have wide discretion to decline to hear such actions. See In re VMS Securities Litigation, 103 F.3d 1317, 1327 (7th Cir.1996) (collecting cases). Salomon argues that the district court should have exercised this discretion and dismissed the complaint on the grounds that North Shore Gas raced to the courthouse and forum-shopped. We review de novo the district court's decision to allow the action to proceed. See id. (noting a split in the circuits over the proper standard and that the Seventh Circuit has settled on de novo review).

Salomon correctly argues that district courts should decline to hear declaratory judgment actions that have been filed in an attempt to manipulate the judicial process. See Tempco Elec. Heater Corp. v. Omega Eng'g, Inc., 819 F.2d 746, 750 (7th Cir.1987). However, this action cannot properly be characterized in such negative terms. On January 31, 1994, New Shattuck's attorney sent North Shore Gas a letter demanding reimbursement and indemnification for CERCLA cleanup costs. The letter explained that New Shattuck was Salomon's wholly-owned subsidiary and that Salomon had provided financial assurance to the EPA. Representatives of North Shore Gas, New Shattuck and Salomon then attended two settlement meetings--one on April 27, 1994, and the other on November 2, 1994. At the end of the second meeting, Salomon's attorney stated that litigation was inevitable, but did not say which entities would be involved or where the litigation would take place. Approximately one month later, North Shore Gas filed this action in Illinois. Notwithstanding Salomon's arguments to the contrary, North Shore Gas cannot be described as "racing to the courthouse." Settlement negotiations had reached an impasse after an eleven-month effort, and Salomon and New Shattuck had been...