SmithKline Beecham Corp. v. Rohm and Haas Co.

• Decision Date: 17 July 1996
• Docket Number: No. 95-1644,95-1644
• Citation: 89 F.3d 154
• Parties: SMITHKLINE BEECHAM CORPORATION v. ROHM AND HAAS COMPANY v. BUCKEYE PIPE LINE COMPANY, Rohm and Haas Company, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 154

89 F.3d 154

42 ERC 2032

SMITHKLINE BEECHAM CORPORATION v. ROHM AND HAAS COMPANY v. BUCKEYE PIPE LINE COMPANY, Rohm and Haas Company, Appellant.

No. 95-1644.

United States Court of Appeals, Third Circuit.

Argued March 13, 1996.

Decided July 17, 1996.

John G. Harkins, Jr., (argued) Harkins Cunningham, Philadelphia, Pennsylvania, for Appellant.

David P. Bruton (argued) Drinker, Biddle & Reath, Philadelphia, Pennsylvania, for Appellee, SmithKline Beecham Corporation.

Before: STAPLETON, SCIRICA and COWEN, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

Plaintiff SmithKline Beecham Corp. ("SKB") brought this declaratory judgment action against the defendant, Rohm and Haas Co. ("R & H"), seeking equitable apportionment of the costs of the clean-up of a contaminated site in Myerstown, Pennsylvania under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. §§ 9601-75 (1988 & Supp. V). Alternatively, SKB sought apportionment of the clean-up costs in accordance with the indemnification provisions of a Purchase Agreement between SKB and R & H.

In 1978, SKB purchased Whitmoyer Laboratories, Inc. ("New Whitmoyer") from R & H under a Purchase Agreement containing certain indemnification provisions. Although R & H and SKB discharged toxic wastes, most of the contamination at the Myerstown site occurred before 1964, when the site was owned by R & H's predecessor ("Old Whitmoyer").

The able and experienced district court held the indemnifications in the Purchase Agreement covered CERCLA liability arising from R & H's ownership of the site. In addition, the court held the doctrine of corporate successor liability by de facto merger brought CERCLA liability arising from the conduct of Old Whitmoyer within the scope of the indemnity clauses of the Purchase Agreement. Consequently, the court allocated all of the clean-up costs for CERCLA liability arising from the conduct of Old Whitmoyer to R & H. R & H brought this appeal.

On appeal, we must determine whether the contractual indemnity provisions of the Purchase Agreement were intended to allocate the environmental liability of Old Whitmoyer, the original owner of the property. Because the Purchase Agreement does not indemnify for CERCLA clean-up costs arising prior to New Whitmoyer's ownership of the Myerstown site, we will reverse the district court. In addition, we believe that under the facts of this case the doctrine of de facto merger cannot be used to modify an indemnity provision drafted by two sophisticated corporations.

I. Facts

In 1931, Dr. Clarence W. Whitmoyer founded a veterinary feedstock and pharmaceutical business based in Myerstown, Pennsylvania. Incorporated as "Whitmoyer Laboratories, Inc." in 1934, the corporation went public in 1961 ("Old Whitmoyer"). From 1957 to 1964, Old Whitmoyer deposited large quantities of arsenic-laden hazardous waste on the grounds of its Myerstown plant.

In 1964 defendant Rohm and Haas ("R & H") created W-L, Inc., a Delaware corporation, as a wholly owned subsidiary. W-L Inc. purchased the assets of Old Whitmoyer and assumed certain specified balance sheet liabilities in exchange for 50,000 R & H shares. Subsequently, Old Whitmoyer changed its name and took steps to dissolve, distributing the R & H stock to its shareholders. R & H did not know of the contamination at the Myerstown site when its subsidiary purchased the assets of Old Whitmoyer.

W-L Inc., took the name Whitmoyer Laboratories, Inc. ("New Whitmoyer") and continued to run the business of Old Whitmoyer. New Whitmoyer retained the same CEO as Old Whitmoyer, manufactured the same products under the same name, and sold those products to the same customers. From 1964 to 1978, New Whitmoyer disposed of additional arsenic-contaminated waste at the Myerstown site. But New Whitmoyer also undertook efforts to remediate groundwater contamination. Shortly after acquisition, it supplied bottled water to over twenty neighbors of the plant whose wells had been contaminated with arsenic. In 1965, New Whitmoyer removed over three million pounds of contaminated wastes and soil skimmings from the existing waste lagoon and stored them in a concrete vault built specially for that purpose. In addition, New Whitmoyer devised a method to monitor and remove arsenic waste from the groundwater. Between 1965 and 1971, almost 450,000 pounds of arsenic were removed from the groundwater at the site.

On March 31, 1978, R & H sold its entire animal health products business, including all the stock of New Whitmoyer, to Beecham Inc., a predecessor of the plaintiff SmithKline Beecham Corporation. ¹ Before completing the transaction, R & H notified SKB of the bottled water obligation, showed SKB executives the vault and told them it contained arsenic wastes, and gave them free access to all records at New Whitmoyer.

The Purchase Agreement that governed the sale between SKB and R & H ("1978 Purchase Agreement") contains a broad indemnification clause in which R & H indemnified SKB against "[a]ll material liabilities relating to the conduct of the Business prior to the First Closing Date." In addition, SKB agreed to indemnify R & H for all losses and liabilities "resulting from the operation of the Business by the Buyer after the First Closing Date." During SKB's ownership of New Whitmoyer, arsenic-laden waste continued to be released into the environment at the Myerstown site.

Congress enacted CERCLA in 1980. Two years later, SKB sold New Whitmoyer to Stafford Laboratories, Inc. ("Stafford"). Stafford was a small, undercapitalized company with limited assets and no experience in chemical manufacturing operations. Its president was a felon with two prior convictions for grand theft and embezzlement. Stafford has since filed for bankruptcy and has not been named as a party in this action.

In 1986, the federal government placed the Myerstown site on the Superfund National Priorities List under § 105 of CERCLA. 42 U.S.C. § 9605. Both R & H and SKB were deemed "potentially responsible parties" liable for the contamination at the Myerstown site under CERCLA. In 1992, the United States settled its CERCLA liability claims against R & H and SKB, resulting in the entry of a consent judgment. United States v. Rohm and Haas Co., Civ. No. 92-CV-1295 (M.D.Pa.). Although Old Whitmoyer caused the majority of the contamination before New Whitmoyer owned the Myerstown site, under the consent decree R & H and SKB are jointly and severally liable for the entire cost of its remediation because of their successive ownership of New Whitmoyer. Estimated clean-up costs total $123 million.

SKB brought this action against the R & H seeking an equitable apportionment of clean-up costs under sections 107(a) and 113(f) of CERCLA, 42 U.S.C. §§ 9607(a) and 9613(f), and enforcement of the indemnity provisions of the 1978 Purchase Agreement.

On cross-motions for summary judgment, the district court held R & H liable for clean-up of wastes dumped during the period when New Whitmoyer was an R & H subsidiary--1964 to 1978--based on the indemnification provision of the 1978 Purchase Agreement. SmithKline Beecham Corp. v. Rohm and Haas Co., 854 F.Supp. 1201, 1214-15 (E.D.Pa.1994). But it did not allocate liability for Old Whitmoyer's share of clean-up costs because "at this stage of the proceedings, the court cannot find as a matter of law that [the indemnification] includes conduct of [Old] Whitmoyer Laboratories before R & H purchased it in 1964." Id. at 1214.

The district court took testimony on the indemnification provision in the 1978 Purchase Agreement. It found it unnecessary to determine whether the indemnification expressly included Old Whitmoyer's contamination because it determined New Whitmoyer was liable for Old Whitmoyer's contamination as its corporate successor under Pennsylvania's de facto merger doctrine. It then found the indemnification provision required R & H to indemnify SKB for all New Whitmoyer's pre-closing liabilities, including successor liability for Old Whitmoyer's conduct. Smithkline Beecham Corp. v. Rohm and Haas Co., No. 92-5394, 1995 WL 117671 (E.D.Pa. March 17, 1995).

On appeal, R & H argues the indemnity provision of the 1978 Purchase Agreement does not indemnify against environmental liabilities arising under CERCLA. Even if the provision covers CERCLA liability, R & H contends it does not indemnify SKB for Old Whitmoyer's conduct. Finally, R & H claims the district court should not have applied the de facto merger doctrine to make R & H liable for Old Whitmoyer's contamination of the Myerstown site.

We exercise plenary review of the district court's construction of the 1978 Purchase Agreement. Vanguard Telecommunications, Inc. v. Southern New England Tel. Co., 900 F.2d 645, 650 (3d Cir.1990). We also have plenary review of the district court's interpretation and prediction of Pennsylvania's de facto merger doctrine. Wiley v. State Farm Fire & Casualty Co., 995 F.2d 457, 459 (3d Cir.1993). We have jurisdiction to review the district court's final judgment under 28 U.S.C. § 1291 (1994).

II. Discussion

A. The Indemnity Covers CERCLA

1.

Under § 107(e)(1) of CERCLA, parties may provide indemnifications for environmental response costs. Section 107(e)(1) provides:

No indemnification, hold harmless, or similar agreement or conveyance shall be effective to transfer from the owner or operator of any vessel or facility or from any person who may be liable for a release or threat of release under this section, to any other person the liability under this section. Nothing in this subsection shall bar any agreement to insure, hold harmless, or indemnify a party to such agreement for any liability under this section.

42 U.S.C. § 9607(e)(1). We have reconciled these apparently inconsistent provisions by interpreting them to mean "agreements to indemnify or hold harmless are enforceable between the parties but not against the...