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Department of Transportation v. PSC Resources

Decided: July 31, 1980.


Young, J.s.c.


The single issue submitted for determination is whether a corporation which purchases the assets of another corporation for cash is liable for damages arising from the environmental tort of its predecessor. Plaintiff Department of Transportation of the State of New Jersey (DOT) moves for summary judgment against defendant PSC Resources, Inc. (PSC) for damages to plaintiff's property caused by PSC's predecessor, codefendant Diamond Head Oil Refining Co., Inc. (Diamond Head). The facts are not in dispute, making the motion appropriate for disposition on the law. Judson v. Peoples Bank & Trust Co. of Westfield , 17 N.J. 67 (1954).

Plaintiff alleges that between February 1, 1946 and November 1, 1973 Diamond Head operated waste oil reprocessing and canning facilities at 1401 and 1427 Harrison Turnpike in Kearny, N.J. The facility at 1427 Harrison Turnpike was shut down in 1955 while operations continued at 1401 Harrison Turnpike. The complaint further alleges that in the operation of its facilities Diamond Head discharged oily wastes, sludge and contaminated waste water onto the adjacent property and into a body of

water known as Oil Lake. DOT acquired the property upon which Oil Lake was situated March 6, 1968.

Defendant PSC was incorporated as a subsidiary of Phillips Screw Company, Inc. under the laws of the State of Delaware as Phillips Resources Inc. on October 23, 1973 and received a certificate of authority to transact business in this State on October 31, 1973.*fn1 PSC was incorporated for the purpose of acquiring the stock and/or assets of Diamond Head. This purpose was effectuated on October 26, 1973 when PSC entered into a stock purchase agreement which resulted in the acquisition of 100% of the issued and outstanding stock of Diamond Head on November 1, 1973. The terms of the agreement required the officers and directors of Diamond Head to resign on November 1, 1973, while PSC's nominees, Arthur M. Vash, president and director of PSC, John J. Casey, treasurer and director of PSC, and Jerome E. Rosen, secretary and director of PSC, became the new directors and officers of Diamond Head. On the same date, within hours after their appointments, these new directors submitted a "Plan of Complete Liquidation and Dissolution" which PSC as sole stockholder adopted. After a certificate of dissolution was filed pursuant to N.J.S.A. 14A:12-2 the assets of Diamond Head, consisting of the plant and property located at 1401 Harrison Turnpike, Kearny, New Jersey, were transferred to PSC for less than $100.

From November 1, 1973 until November 3, 1976 PSC continued to operate the plant at 1401 Harrison Turnpike under the name "Diamond Head Oil Refining Company, Division of PSC Resources, Inc." DOT alleges that PSC continued Diamond Head's practice of pumping the accumulated waste water, which contained oil, solids, soluble organic compounds, heavy metals, sodium hydroxide and sodium silicate, from the low area of the facility into Oil Lake located on DOT's property. In June 1976

Michael Polito, the Chief of the Emergency Response and Inspection Branch of the United States Environmental Protection Agency, Region II, while tracing the source of an oil flow into the marshes surrounding Exit 15W of the New Jersey Turnpike, inspected the Diamond Head facility. Polito observed a brownish liquid being discharged through a pipe to a lagoon in the rear of the facility and a black liquid flowing from the bottom of the lagoon through a pipe with an open valve into Oil Lake on the adjacent property. This black liquid was also leaching from the lagoon into the lake.*fn2

On November 3, 1976 the Diamond Head facility was purchased by Ag-Met Oil Service, Inc., predecessor to Newtown Refining Corporation. Newtown is a codefendant in this action, but is not a party to the pending motion.

In 1977 plaintiff commenced the construction of a highway, Interstate 280. In the course of that construction, and as represented by plaintiff's counsel, under the direction and supervision of state and federal environmental authorities DOT had to remove and dispose of more than 10 million gallons of oil-contaminated water and more than 200,000 cubic yards of oily sludge from Oil Lake. Plaintiff alleges that the cost of such removal amounted to $4,918,436.

Suit was instituted by DOT against Diamond Head and PSC on September 14, 1977. Default was entered against Diamond Head on November 21, 1977. Several motions were raised by both sides to strike defenses and dismiss specific counts to the complaint, respectively. Those motions were disposed of in an opinion of Judge Geronimo reported at 159 N.J. Super. 154 (Law Div.1978). In June 1978 the complaint was amended to include Newtown as a codefendant. The complaint was amended a second time in June 1980 to permit the inclusion of alleged violations of various environmental statutes, among which are

the following: Water Quality Improvement Act, N.J.S.A. 58:10-23.1 et seq.; the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq.; the Environmental Rights Act, N.J.S.A. 2A:35A-4, which legislation permits any person to enforce state laws on pollution.

Corporate successor liability is dependent upon the structure of the corporate acquisition. Where a corporation is acquired by the purchase of all of its outstanding stock, the corporate entity remains intact and retains its liabilities, despite the change of ownership. A purchasing corporation will become liable for claims against the acquired company if the acquisition was in the form of a statutory merger or consolidation. Where, however, one entity "sells or otherwise transfers all of its assets to another company the latter is not liable for the debts and liabilities of the transferor, including those arising out of the latter's tortious conduct . . .." Jackson v. N.J. Mfrs. Ins. Co. , 166 N.J. Super. 448, 454 (App.Div.1979), certif. den. 81 N.J. 330 (1979); Jackson v. Diamond T. Trucking Co. , 100 N.J. Super. 186, 192 (Law Div.1968).

Notwithstanding the general rule of nonliability in asset acquisitions, a successor corporation will be liable if any one of the following four exceptions is met: (1) where the purchaser expressly or impliedly agrees to assume debts and liabilities; (2) where the transaction amounts to a consolidation or merger of the seller and purchaser; (3) where the purchasing corporation is merely a continuance of the selling corporation or (4) where the transaction is entered into fraudulently in order to evade liability for debts. Ibid. "A fifth exception sometimes incorporated as an element of one of the above exceptions is the absence of adequate consideration for the sale or transfer." McKee v. Harris-Seybold Co. , 109 N.J. Super. 555, 561 (Law Div.1970), aff'd on other grounds, 118 N.J. Super. 480 (App.Div.1972).

The DOT argues that PSC is liable for the tortious conduct of Diamond Head on application of the principles here summarized. A reading of the affidavits, depositions and various agreements

and documents before this court makes clear that the issue of successor liability is narrowed as to whether PSC is a continuation of Diamond Head. Although PSC acquired Diamond Head by obtaining all the outstanding shares, the officers and directors of Diamond Head and PSC, as sole shareholder, dissolved the corporate entity.*fn3 A paucity of evidence exists to substantiate a finding that with the transfer of assets PSC was effecting a merger, either statutory or de facto; that PSC had agreed to assume Diamond Head's debts or liabilities, or that PSC was intent upon defrauding Diamond Head's creditors.*fn4

Maintaining that PSC is a continuation of Diamond Head, the DOT relies on Judge Pindar's opinion in Jackson v. Diamond T. Trucking Co. There the judge concluded that Diamond T. Trucking was a mere continuation of Phillips Specials based on the finding that Phillips' assets were transferred to Diamond T. for nominal consideration, and that one Taylor, president, director and principal stockholder of both companies, was instrumental in effecting the transfer. Additionally, the judge determined that Taylor had knowledge of plaintiff's claim and imputed such knowledge to Diamond T. In reaching this conclusion, the judge reviewed five New Jersey cases dealing with successor liability: Couse v. Columbia Powder Mfg. Co. , 33 A. 297 (Ch.1895) (not officially reported); Parsons Mfg. Co. v. Hamilton Ice Mfg. Co. , 78 N.J.L. 309 (Sup.Ct.1909); Chorpenning v. Yellow Cab Co. , 113 N.J. Eq. 389 (Ch.1933), aff'd 115 N.J. Eq. 170 (E. & A. 1933); Aetna, etc., Co. v. International, etc., Corp. , 117 N.J. Eq. 190

(Ch.1934); Fox v. Radel Leather Mfg. Co. , 121 N.J. Eq. 291 (E. & A. 1936). Judge Pindar abstracted the common elements delineated in the following passage:

The DOT urges the court to apply strictly the five criteria to the transfer of Diamond Head's assets to PSC. It is clear that all five criteria are satisfied. Diamond Head transferred its assets for less than $100 to PSC, which continued the refining operations. At the time of the transfer both companies had the same officers and directors, who submitted a plan for the dissolution of Diamond Head and the transfer of assets to PSC. This plan, which was adopted by PSC as sole shareholder, rendered Diamond Head unable to pay the claims of its creditors. It should be noted, however, that in all the cases relied on by Judge Pindar in the Diamond T. opinion, as well as that opinion, the principals of each corporation were aware of an outstanding debt, as in Fox and Parsons , or an underlying obligation, as in Diamond T., Chorpenning, Aetna and Couse. Although a tort claimant becomes a creditor of the defendant on the date of the tort, Barbirecki v. Virgil , 97 N.J. Eq. 315 (E. & A. 1925), nothing before this court substantiates the assertion that PSC had knowledge, or should have known, of an underlying claim by DOT when the assets of Diamond Head were transferred. While knowledge of a contingent tort claim may be irrelevant to establish successor liability, such a factor was important in the Diamond T. decision, and the opinions cited therein.

Another distinction should also be noted. The Diamond T. Trucking Co. and its transferor, Phillips Specials, shared the same principals for almost one year. In the case at bar PSC and Diamond Head shared the same principals for, at most, a few hours. PSC acquired the assets of Diamond Head by a method known as a "two-step asset acquisition." Generally, a corporation

acquires all or most of the stock of another corporation, transfers the latter's assets, and then dissolves or liquidates that company.*fn5 In essence, the principals of Diamond Head, as appointed by PSC on November 1, 1973, were officers as a matter of form.

The distinctions drawn above between the facts in the case at bar and those in Diamond T. demonstrate the difficulty in applying the traditional principles to a tort claim. These exceptions to the general corporate rule of nonliability were developed to protect creditors and the rights of minority shareholders, as well as to determine liability in tax assessment cases. Comment, 61 Marquette Univ.L.Rev. 595, 598 (1978); Note, 44 Tenn.L.Rev. 905, 908 (1977). The corporate approach was not designed to apply to a cause of action in tort. One commentator has described the underlying policies of corporate law and tort law as "necessarily incompatible." Note, 10 Loy. of L.A. L.Rev. , 584, 612 (1977). When both areas overlap, the courts have been inclined to interpret broadly the various exceptions basing their approach on public policy considerations.

The incompatibility of the corporate approach to successor liability as applied to tort cases is illustrated in the law relating to product liability. Turner v. Bituminous Cas. Co. , 397 Mich. 406, 416, 417, 244 N.W. 2d 873, 877-878 (Sup.Ct.1976); See Fehl v. S.W.C. Corp. , 433 F. Supp. 939, 946, n.10 (D.Del.1977). The incongruity that exists with the juxtaposition of these areas in the law is demonstrated by a brief review of some relevant cases.

The traditional corporate approach was used in McKee v. Harris-Seybold Co. , 109 N.J. Super. 555 (Law Div.1970), aff'd on other grounds, 118 N.J. Super. 480 (App.Div.1972). There the court refused to find a de facto merger because one of the criteria ...

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