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KEMP INDUS. v. SAFETY LIGHT CORP.

June 27, 1994

KEMP INDUSTRIES, INC. and APOLLO ASSOCIATES, LTD., Plaintiffs,
v.
SAFETY LIGHT CORP., USR INDUSTRIES, INC., USR CHEMICALS, INC., USR LIGHTING INC., USR METALS, INC., U.S. NATURAL RESOURCES, INC., THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND JOHN DOES I-X, Defendant.



The opinion of the court was delivered by: LECHNER

 LECHNER, District Judge

 This is an action by Kemp Industries ("Kemp") and Apollo Associates, Ltd. ("Apollo") (collectively the "Plaintiffs") against Safety Light Corporation ("Safety Light"), USR Industries, Inc. ("USR Industries"), USR Chemicals, Inc. ("USR Chemicals"), USR Lighting, Inc. ("USR Lighting"), USR Metals, Inc., ("USR Metals"), U.S. Natural Resources, Inc. ("USNR") and The Prudential Insurance Company of America ("Prudential") (collectively the "Defendants") for declaratory, injunctive and monetary relief under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. §§ 9601 et seq., and the New Jersey Spill Compensation and Control Act (the "Spill Act"), N.J.S.A. §§ 58:10-23.11 et seq.

 On 21-22 March 1994, a bench trial was held to resolve the preliminary issue of whether Prudential is a responsible party under either CERCLA or the Spill Act. *fn1" For the reasons stated below, Prudential is found not to be a responsible party under either CERCLA or the Spill Act.

 Procedural History

 On 15 January 1992, Plaintiffs filed a seven-count complaint (the "Complaint") against Safety Light demanding that Safety Light be compelled to "commence removal and remedial action" with respect to environmental hazards on Plaintiffs' property, as well as other declaratory and monetary relief. The Complaint alleged that Safety Light's predecessor-in-interest, United States Radium ("USR"), "utilized unsafe and improper methods to dispose of large quantities of liquid and solid waste." Complaint, P 10.

 Count one of the Complaint ("Count I") alleged that these illegal acts entitled Plaintiffs to declaratory, injunctive and monetary relief under CERCLA. Id, PP 16-27. Count two of the Complaint ("Count II") sought relief under the Spill Act. Id., PP 28-36. Count three ("Count III") sought recovery under Federal common law. Id., PP 37-42. Count four ("Count IV") sought to hold Safety Light strictly liable for the damages and cleanup costs and responsibilities associated with Plaintiffs' property. Id., PP 43-50. Count five ("Count V") sought recovery on the theory of negligence. Id., PP 51-54. Count six ("Count VI") sought recovery on the theory of nuisance. Id., PP 55-65. Finally, count seven ("Count VII") sought recovery on the basis of alleged fraud and deceit on the part of Safety Light. Id., PP 67-70.

 On 26 August 1992, Plaintiffs amended the Complaint to include Prudential as a defendant (the "Amended Complaint"). The Amended Complaint was in all other respects substantially identical to the Complaint. On 1 June 1993, Plaintiffs filed a second amendment (the "Second Amended Complaint"), adding USR subsidiaries USR Industries, USR Chemicals, USR Lighting, USR Metals and USNR as defendants. In all other respects, the Second Amended Complaint is substantially identical to the Complaint and the Amended Complaint.

 In December 1993, Prudential moved for summary judgment on Counts II, III, IV, V and VI of the Second Amended Complaint. By opinion and order, dated 25 January 1994, Prudential was granted summary judgment on Counts III, IV, V and VI on the ground that these counts were time-barred as to Prudential. See Kemp Industries, Inc. v. Safety Light Corp., F. Supp. , slip op. (D.N.J. 25 Jan. 1994). Prudential was also granted summary judgment on part of Count II. Id. As a result, only Count I, Plaintiffs' CERCLA claim, a portion of Count II, Plaintiffs' Spill Act claim, and Count VII, Plaintiff's claim for fraud and deceit, remain in the Second Amended Complaint.

 At a status conference, held 7 March 1994, Prudential contended that a substantial issue existed as to whether Prudential could be deemed a responsible party under either CERCLA or the Spill Act. Accordingly, a bench trial was commenced on 21 March 1994 to determine this preliminary issue.

 Findings of Fact2

 2. Apollo is a limited partnership organized and existing under the laws of the state of New Jersey and has a place of business in Morristown, New Jersey. See id., P 6. Apollo is the owner of lands adjacent to the Hanover Site. Id., P 8. Apollo is also prospective purchaser of the Hanover Site. Id., P 6.

 3. USR was a corporation existing under the laws of Delaware, engaged in, among other things, the production of phosphors. See Stipulation, PP 16-17. In or about 1980, USR underwent corporate restructuring. As a result of the reorganization, USR formed Safety Light, USR Industries, USR Chemicals, USR Lighting, USR Metals and USNR. See Second Amended Complaint, P 8A. Before 21 December 1950, USR owned Lot 13.

 4. Prudential is a mutual insurance company organized and existing under the laws of New Jersey. See Stipulation, P 1. Prudential held title to Lot 13 from 21 December 1950 until 24 July 1964. See Stipulation, P 27; Exs. J-16, J-17.

 5. During World War II, Prudential invested its assets primarily in war bonds. See Stipulation, P 2. Following the War, in or about 1946, Prudential began to transfer assets from war bonds into other investments. Id., P 3.

 6. At this time, income tax rates were high and there was a great deal of uncertainty as to the future of the United States economy. Id., P 3; Tr. at 76. Interest rates and inflation were minimal. See Tr. at 76. This economic climate led to a conservative attitude toward investments. Id. at 77.

 The Property Purchase Program

 7. In this economic climate, Prudential embarked on a plan to redistribute its assets so as to guarantee a fixed but steady return on its investments. See Stipulation, P 8. Accordingly, in or about 1946, Prudential adopted "a modest program for the purchase of carefully selected income properties and also the purchase of some unimproved property for development . . . ." Id., P 9. This program was referred to as the "Industrial Loan and Property Purchase Program" (the "Program"). Tr. at 74.

 8. Pursuant to the Program, Prudential's Mortgage Loan Department was expanded to provide financing for one-story industrial properties. Id. The financing method utilized by the Program was the 'sale-leaseback.' Id. at 79.

 9. The sale-leaseback emerged as a financing method in the late 1940s. Id. at 122. It is neither a loan nor a sale, but rather a "hybrid financing device" whereby the debtor 'sells' property to the creditor in exchange for the amount the debtor requires to acquire the property, and the creditor simultaneously leases the property to the debtor for the debtor's continued use. Id. at 122, 126. "Under this arrangement, the seller receives cash from the transaction and the buyer is assured a tenant and a fixed return on the investment." The Dictionary of Real Estate Appraisal 318 (3d ed. 1993).

 10. In a sale-leaseback, the buyer/creditor takes title to the subject property, *fn3" but the seller/debtor retains the primary benefits of ownership, such as "long-term occupancy and control over the property." Tr. at 122. The benefits of such an arrangement to the debtor are that there is little or no capital investment required and the debtor may obtain financing closer to the value of the collateral -- the leased property -- than in a conventional loan. Id. For example, whereas a lender may not feel comfortable loaning a mortgagor more than 75% of the value of the mortgaged property, the buyer in a sale-leaseback generally provides financing in an amount up to 100% of the value of the subject property. See Tr. at 129; Ellwood Tables for Real Estate Appraising and Financing (the "Ellwood Tables") 115 (2d ed. 1967) ("Despite its all cash nature, the philosophy and economics of purchase-leaseback are little different than those of the level periodic installment, full-amortization mortgage investment. Imagine if you will this type of mortgage investment at 100% of purchase price and you have the most important, initial characteristic of the typical purchase-leaseback transaction."). Prudential's industrial mortgage loans typically provided the mortgagor with only two-thirds of the value of the mortgaged property. Tr. at 74.

 11. Because of the increased risk posed by the sale-leaseback configuration, Prudential expected to obtain a return of 1/2% to 3/4% more from such transactions than it could obtain in a conventional mortgage loan. Tr. at 82. In 1950, the average yield on mortgage loans made by Prudential's Mortgage Loan Department in New Jersey was 4.07%. See 1950 Review at 9.

 12. "Typical buyers [in sale-leasebacks] are life insurance companies and pension trusts [which] are interested primarily in long-term income at a fixed rate of return commensurate with that obtainable from well secured mortgage investments." Ellwood Tables 116; Tr. at 130. "Institutional buyers normally are not in [a] position to, or at least do not wish to provide real estate management. Consequently, the leases are usually written on an absolutely net basis with the tenant providing all the management and paying all the bills." Ellwood Tables 116.

 13. In instituting the Program, Prudential was interested not in owning or operating industrial properties, but in obtaining a fixed rate of return on its investments. See Tr. at 86-87. Accordingly, Prudential, after obtaining the deeds to properties acquired in the Program, "had very little involvement with these properties, other than to do periodic ride-by inspections to determine if the properties were being maintained satisfactorily." *fn4" Id. at 86. Prudential did not supervise the management of any of these properties. Id. at 86-87.

 14. In evaluating a proposed sale-leaseback, the primary consideration to the financing institution is generally the creditworthiness of the 'seller'

 
Although type, quality and condition of the real estate are afforded due consideration, the financial responsibility of the tenant and his prospects for continued success for a long period of future years are of great importance. He will be subjected to the same investigation and be expected to meet the same qualifications as if he were applying for long-term debenture financing.

 Ellwood Tables 116.

 15. Prudential evaluated prospective participants in the Program in similar fashion. There were two key criteria in evaluating applicants: the creditworthiness of the applicant and the value of the property as security. *fn5" Tr. at 75-76. An industrial company that approached Prudential seeking financing through the Program was required to provide Prudential with operating statements and other credit history over the previous ten years. Id. at 78-79. Prudential would then appraise the subject property "to establish the security [it was] getting for the financing [it was] extending." Id. at 79-80. "Only companies on which Prudential could qualify their credit" were accepted into the Program. Id. at 74.

 16. As title owner of the properties in the Program, Prudential was entitled to, and typically did, take a depreciation on the properties for tax purposes, in accordance with Internal Revenue Service ("IRS") regulations. Id. at 74; see Deposition of Russell Apgar (the "Apgar Dep."), submitted into evidence as Ex. P-42, at 48.

 18. This policy, moreover, was intended to preserve certain tax benefits to sellers. Id. Specifically, in 1950, rental payments made by the seller/tenant in a sale-leaseback would be fully deductible under Federal tax laws. Id. at 143-44. The inclusion of a repurchase option in a sale-leaseback would have caused the IRS to view the transaction as a conditional sale and refuse these tax benefits to sellers. Id.

 The USR Leaseback

 19. In the late 1940s, USR decided to construct a facility on Lot 13 to accommodate anticipated expansion of its phosphor production operations. See Stipulation, PP 18-19. USR's vice president located Lot 13 and recommended it to USR as an appropriate site for expansion. Id., P 20. USR required financing for the project and approached Prudential to secure such financing. USR also proposed to construct, according to its own specifications, a building on Lot 13 (the "USR Building"). See Deposition of John Davenport (the "Davenport Dep."), submitted into evidence as Ex. D-20, at 8-9.

 20. Prudential evaluated USR's proposal as it did any other proposal from an applicant to the Program. Tr. at 85. In an internal memorandum to Prudential's Finance Committee, dated 2 May 1950 (the 2 May 1950 Memo"), the Mortgage Loan Department recommended acceptance of USR's proposal. See 2 May 1950 Memo, submitted into evidence as Ex. J-3, at 1. The 2 May 1950 Memo recommended that Prudential purchase Lot 13 from USR for a price not to exceed $ 179,000, an amount representing 95.5% of the appraised value of Lot 13 and the proposed USR Building. *fn6" Id. (stating appraised value of Lot 13 and USR Building was $ 197,000); see Tr. at 135.

 21. The 2 May 1950 Memo recommended an initial lease term of twenty-five years, with four ten-year renewal options. See 2 May 1950 Memo at 1. The Mortgage Loan Department recommended a net annual rent of $ 15,322.40, representing 8.56% of the purchase price, for the first fifteen years of the initial term and $ 4,528.70, representing 2.53% of the purchase price, for the remaining ten years of the initial term. Id. The recommended annual rent for the first two renewal terms was $ 4,475.00, representing 2.5% of the purchase price. The recommended annual rent for the final two renewal terms was $ 3,580.00, representing 2.0% of the purchase price. Id.

 22. Based on these rents, the 2 May 1950 Memo stated the USR Building "will be amortized in approximately 14 2/3 years and the land and building in approximately 15 years at 3 1/2% interest." Id. The 2 May 1950 Memo further predicted the "yield with complete recovery of investment over 25 years will be 5%." Id.

 23. The terms "amortize" and "interest" are most commonly used in connection with security transactions and not in connection with purchases of property for the purpose of ownership. See Tr. at 184.

 24. The 2 May 1950 Memo recommended that USR be obligated "to pay all taxes, assessments, water charges, insurance and utilities" and that USR be further required to submit audited financial statements "annually within 90 days after the end of each fiscal year." 2 May 1950 Memo at 2. The 2 May 1950 Memo concluded:

 
[USR] agrees if the total cost of the proposed project exceeds the sum of $ 197,000 by not more than 10%, it shall pay such excess out of its corporate funds. However, if said costs shall be exceeded by more than 10%, [Prudential] may at its option cancel any commitment issued by it unless such funds over said 10% are provided for by new capital or from net earnings of [USR] transferred to surplus, subsequent to January 1, 1950.

 Id.

 25. The 2 May 1950 Memo demonstrates that Prudential viewed the proposed transaction with USR primarily as a financing and not as a purchase of property. Tr. at 183. Prudential viewed its interest in Lot 13 as a guarantee of USR's obligations and returns on the proposed transaction as interest on its initial commitment. Id. at 184-85. This finding is further supported by Prudential's interest in the creditworthiness of USR and the cost to USR of the proposed USR Building. Id. at 184.

 26. On 10 July 1950, USR and Prudential entered into an agreement (the "Leaseback Contract") whereby Prudential would acquire title to Lot 13 from USR for a price of $ 179,000.00 and simultaneously lease the property back to USR. Stipulation, PP 24-26; see Leaseback Contract, submitted into evidence as Ex. J-5.

 27. After execution of the Leaseback Contract, USR hired Wm. Blanchard Co. (the "Contractor") to construct a production facility, the USR Building, on Lot 13. Davenport Dep. at 8. Construction was completed in December 1950, at a total cost of $ 187,670.19. See Sworn Statement of Cost, dated 21 December 1950 (the "Cost Statement"), submitted into evidence as Ex. J-11. Of this total cost, $ 3,500.00 represented the cost to USR of acquiring Lot 13 itself. Id.

 28. On 21 December 1950, USR conveyed title to Lot 13 and the USR Building to Prudential through transfer a deed, dated 21 December 1950 (the "1950 Deed"). See Stipulation, PP 27, 29; 1950 Deed, submitted into evidence as Ex. J-6, at 1. The 1950 Deed is marked with $ 196.90 in revenue stamps. Id. Simultaneous with delivery of the 1950 Deed, Prudential and USR entered into the lease contemplated by the Leaseback Contract (the "Lease") Stipulation, P 28.

 29. Pursuant to the Lease, USR, along with its "successors and assigns" were conveyed the right "to have and to hold" Lot 13 for an initial term of twenty-five years at a net annual rental of $ 15,322.40 until 1 December 1965 and $ 4,528.70 thereafter. Lease, submitted into evidence as Exhibit J-7, at 2.

 30. The rental payments under the Lease were structured so as to amortize the amount committed by Prudential in the Leaseback Contract over the useful life of the property. Id. at 88-89, 140. Such a structuring of rental payments is consistent with the treatment of mortgage loans. Id.

 31. Also pursuant to the Lease, USR agreed to pay

 
all real estate taxes, assessments, water rates and charges, and other governmental charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature whatsoever, including but not limited to assessments for public improvements or benefits which shall during the term hereby demised be laid, assessed, levied, or imposed upon or become due and payable and a lien upon the demised premises or upon any part thereof . . . .

 Lease, Art. III, § 1. Rent under the Lease could not be offset by any such payments, "it being the intention of the parties [to the Lease] that the basic rent . . . shall be paid to [Prudential] absolutely net without deduction of any nature whatsoever except as in the Lease . . . ." Id., Art. III, § 2.

 32. The Lease provided USR with "the right to contest the amount or validity of any such imposition [of taxes or governmental assessments] by appropriate legal proceeding Id., Art. III, § 5. Prudential was not required to join any such proceeding "unless it shall be necessary for it to do so in order to properly prosecute such proceeding and [Prudential] shall have been fully indemnified to its satisfaction against all costs and expenses in connection therewith . . . ." Id., Art. III, § 6.

 33. Under the Lease, USR was required, at its "sole cost and expense, [to] keep all buildings erected upon [Lot 13] and the fixtures therein, insured . . . in an amount which shall be sufficient to prevent [Prudential or USR] from becoming a coinsurer of any loss . . . ." Id., Art. IV, § 1. Pursuant to this requirement, USR was responsible for obtaining insurance against

 Id.

 34. USR was further required, at its sole cost and expense, to maintain "general public utility insurance against claims for personal injury, death or property damage occurring on or about [Lot 13] . . .; steam boiler insurance on all steam boilers, pressure boilers or other such apparatus . . .; and . . . war damage insurance . . . ." Id., Art. IV, § 2. All insurance policies obtained by USR pursuant to the provisions of the Lease were to be payable to USR and Prudential "as their respective interests may appear." Id., Art. IV, § 3. Premiums from insurance policies in force at the termination of the Lease were to be apportioned between Prudential and USR. Id., Art. IV, § 6.

 35. Under the Lease, USR was required to submit to Prudential, no later than 120 days after the end of each fiscal year, "profit and loss and income statements of [USR] for such year and a balance sheet . . . certified by independent certified public accountants of recognized standing selected by [USR] and satisfactory to [Prudential]." Id., Art. XXIV. USR was also obligated to provide Prudential with "copies of all such financial statements, reports and returns as it shall send to its stockholders." Id.

 36. USR was further required, at its sole expense, "to take good care of [Lot 13 and the USR Building] . . . and to keep the same in good order and condition." Id., Art. VI. The Lease also provided USR was to "promptly at [its own] cost and expense make all necessary repairs, interior and exterior, structural, ordinary as well as extraordinary, foreseen as well as unforeseen." Id. USR was further required to "keep and maintain all portions of [Lot 13] and the sidewalks adjoining same in a clean and orderly condition, free of accumulation of dirt, rubbish, snow and ice." *fn7" Id.

 37. By the Lease, USR also covenanted to perform all "structural repairs and alterations" necessary to "comply with all laws and ordinances and the orders, rules, regulations and requirements of all Federal, state and municipal governments and appropriate departments, commissions, boards and officers thereof . . . ." Id., Article VII, § 1. All such structural alterations were subject to prior approval by Prudential and a surety bond was to be posted in Prudential's favor for alterations whose cost exceeded $ 15,000.00. Id., Art. VIII.

 38. Subject to these and certain other restrictions, *fn8" USR had the right, at any time, "to make such changes and alterations, structural or otherwise, to the [USR Building and Lot 13] as [USR] shall deem necessary or desirable in connection with the requirements of its business . . . ." Id.

 39. The right of Prudential to approve major structural changes made by USR is consistent with the rights of a mortgagee in a traditional mortgage loan agreement. Tr. at 96.

 41. During the entire term of the Lease, Prudential was authorized to enter Lot 13 during business hours and "to exhibit the same for the purposes of sale or hire . . . ." Id., Art. XI, § 2. During the final eleven months of the final renewal term of the Lease, Prudential was "entitled to display on [Lot 13] in such manner as not [to] unreasonably interfere with [USR's] business the usual 'For Sale' or 'To Let' signs . . . ." Id.

 42. Pursuant to the Lease, USR had the right to "assign or transfer" its rights under the Lease or "sublease the whole or any part of [Lot 13]" without consent of Prudential, provided that USR remain ultimately liable to Prudential for its obligations under the Lease. Id., Art. XII. If USR had exercised its rights under this provision, it would have reaped the benefit of any appreciation in the value of Lot 13. Tr. at 143.

 43. USR agreed to pay "all charges for gas, electricity, light, heat or power, telephone or other communication serviced used" on Lot 13. Lease, Art. XIV. In connection with this obligation, it was USR's responsibility to "procure [and pay for] any and all necessary permits, licenses or other authorizations required for the lawful and proper installation and maintenance upon [Lot 13] of wires, pipes, conduits, tubes and other equipment and appliances for use in supplying any such service to and upon [Lot 13]." Id.

 44. Under the Lease, USR agreed to "indemnify and hold harmless" Prudential against all claims "arising from the conduct or management of or from any work or thing whatsoever done in or about the demised premises." Id., Art. XV, § 1. In addition, USR agreed to indemnify Prudential against all claims arising from the condition of adjoining property as a result of USR's conduct on Lot 13. Id.

 45. In the event that all of Lot 13 were taken as eminent domain, the Lease would expire and "all right, title and interest of [USR]" thereunder would cease. Id., Art. XVII, § 1. In such event, Prudential would be entitled to the entire award in the eminent domain proceeding. Id. If less than all but more than 20% of Lot 13 were taken as eminent domain, USR had the right to terminate the Lease. Id., Art. XVII, § 2. In such event, Prudential would still be entitled to the entire award from the eminent domain proceeding. Id. If less than 20% of Lot 13 were taken in an eminent domain proceeding, USR would not have the right to terminate the Lease, but Prudential would be obligated to apply the amount of any eminent domain award to the cost of restoring that portion of the USR Building which was damaged as a result of the eminent domain taking. Id., Art. XVII, § 3.

 46. The eminent domain provisions of the Lease were consistent with the conservatism of lenders in 1950 and do not make the Lease unconventional in the context of early leaseback transactions. Tr. at 115. In any event, condemnation was considered an unlikely prospect for industrial properties in 1950. Id.

 47. If USR were to breach or default on its obligations under the Lease, Prudential would have the right to dispossess USR of Lot 13 and collect any unpaid rent to the end of the current term of the Lease, "less the net avails of reletting, if any." Lease, Art. XX, § 3.

 48. Under the Lease, USR would have the right to extend the term of the Lease for four successive periods of ten years each. Id., Art. XX, § 1. The rent for the first two such renewal terms was set at $ 4,475.00 per year. Id. The rent for the remaining renewal terms was $ 3,580.00 per year. Id. The rent payments for these renewal terms were nominal. *fn9" Tr. at 140. The stepped-down rent schedule provided in the Lease rendered the value of Prudential's reversionary interest insignificant. Id.

 49. The Lease did not contain a repurchase option. Sale-leasebacks executed in the 1950s typically did not contain such an option. Id. at 143. At that time, a repurchase provision was not deemed significant by parties in a sale-leaseback. Id. at 185; see Ellwood Tables at 117 ("The influence of the reversion on yield was not given much thought in the early years of institutional investment . . . .").

 50. In 1950, there was no expectation of residual value in industrial property. Tr. at 134. As indicated, the inflationary rate was close to zero and there was little probability that industrial property would appreciate in value. Id. Accordingly, Prudential and USR expected that the value of the USR Building and Lot 13 at the end of the renewal terms would be insignificant. Id. at 138-39 (value of ...


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