A.A.A. Realty Co., 935 F. Supp. 1354 (D.N.J. 1996); Gould Inc. v. A&M Battery and Tire Service, 901 F. Supp. 906 (M.D. Pa. 1995), New Castle County v. Halliburton Nus Corp., 903 F. Supp. 771 (D. Del. 1995); Plaskon Electronic Materials v. Allied-Signal 904 F. Supp. 644 (N.D. Ohio 1995).
In Borough of Sayreville, 923 F. Supp. at 680, Judge Lechner addressed and rejected the identical argument that has been advanced by the plaintiff in this case based upon Key Tronic, noting that the issue of whether a PRP could sue another PRP under Section 107 was not before the Supreme Court in Key Tronic. Indeed, as Judge Lechner points out, any question of "joint and several" liability had been resolved in the district court when the parties "stipulated to the quantum of liability for [the contested response costs]." Key Tronic Corp. v. United States, 766 F. Supp. 865, 868 n.1 (E.D. Wash. 1991). I am persuaded by the logic of the numerous cases which conclude that it was not the Supreme Court's intention in Key Tronic to comment on the viability of a PRP's action under Section 107.
Plaintiff also relies upon United States v. Kramer, 757 F. Supp. 397 (D.N.J. 1991), in which Chief Judge Gerry allowed the United States of America, in the circumstances of that case a PRP, to maintain an action under Section 107, reasoning that allowing such a cause of action would create an incentive for private parties to clean up hazardous waste sites expeditiously, in order to enjoy the temporary windfall provided by Section 107's provision for "joint and several" liability. Id. at 416-17. Although the search for incentives to promote aggressive clean-ups of toxic waste certainly accords with the overall goals of CERCLA, many courts have criticized the Kramer holding on the grounds that this Section 107(a) "windfall" is far too ephemeral to have any meaningful effect on the behavior of PRPs. After all, any PRP who recovers a share of response costs which, by rights, he should have paid himself, will face a Section 113 action by the defendant from whom he collected this "windfall." See Borough of Sayreville, 923 F. Supp. at 679 n.12; Kaufman and Broad-S. Bay v. Unisys Corp., 868 F. Supp. 1212, 1215 n.2 (N.D. Cal. 1994)) ("The problem with [the Kramer ] argument is that the 'windfall' incentive is illusory."). Indeed, a PRP who recovers such a "windfall" could conceivably face a return volley under Section 107 by the defendant who has overpaid. One district court has opined that the Kramer approach "guarantees inefficiency, potential duplication, and prolongation of the litigation process." T H Agric, & Nutrition Co. v. Aceto Chem. Co., 884 F. Supp. 357, 361 (E.D. Cal. 1995).
Three recent cases in this district provide further support for the defendants' interpretation of CERCLA. In SC Holdings, Inc. v. A.A.A. Realty Co., Judge Brown collected numerous cases limiting PRPs to an action under Section 113, and ultimately chose to follow what he termed "the majority rule." Id., 935 F. Supp. at 1362. Likewise, in Caldwell Trucking PRP Group v. Spaulding Composites Company, Inc., 1996 U.S. Dist. LEXIS 8994, No. 94 Civ. 3531, 1996 WL 608490(D.N.J. April 22, 1996), the court dismissed the plaintiffs' Section 107 claim and limited the defendant's potential liability to contribution under Section 113. In General Electric Co. v. Buzby Bros. Materials Corp., No. 87-4263, mem. order (D.N.J. June 20, 1996), Judge Rodriguez followed Caldwell Trucking and other recent cases in dismissing Section 107(a) claims brought by a PRP.
It is noteworthy that cost recovery actions under Section 107(a) carry a six-year statute of limitations, while contribution actions under Section 113(f) carry a three-year limitation period. It is unlikely that Congress would have intended that a PRP could avoid the three-year limitation contained in Section 113(f) by recasting its contribution action as a cost recovery action under Section 107(a). See United Technologies, 33 F.3d at 101 (An "expansive reading of section 9607 . . . would completely swallow section 9613(g)(3)'s three-year statute of limitations associated with actions for contribution.").
Ironically, both sides in the debate over whether Section 107(a) provides a cause of action for cost recovery to PRPs claim to be serving the "plain meaning" of CERCLA. Some courts focus on Section 107(a)(4)(B), refusing to "engraft" the word "innocent" on to the phrase "any other person." See, e.g., Adhesives Research Inc. v. American Inks & Coatings Corp., 931 F. Supp. 1231, 1239 (M.D. Pa. 1996) ("The court finds no reason to give the phrase 'any other person' other than its plain meaning."). Other courts concentrate on Section 113, asking why the word "contribution" in that section should not include all actions between parties with shared liability. See, e.g., United Technologies, 33 F.3d at 103 ("The word 'contribution' for purposes of 42 U.S.C. § 9613(f) should be given its plain meaning."); see also In the Matter of Reading Co., 900 F. Supp. 738, 748 (E.D. Pa. 1995) (same).
Some district courts, even though perhaps unmoved by Kramer's "windfall" argument, still adopt the view that Section 107(a) provides a cause of action for cost recovery to PRPs, in part, because they believe that cleanups "'may be discouraged'" if a PRP "'knows that, where the harm is indivisible, its only recourse for reimbursement is contribution from solvent PRPs.'" Companies for Fair Allocation v. Axil Corp., 853 F. Supp. 575, 579 (D. Conn. 1994) (quoting Allied Corp. v. Acme Solvents, 691 F. Supp. 1100, 1118 (N.D. Ill. 1988)).
The concern expressed by these courts is that a PRP would not undertake a voluntary cleanup if faced with the risk of being unable to recover cleanup costs expended beyond its equitable share and attributable to absent or insolvent PRPs, so-called "orphan shares." See Adhesives Research, 931 F. Supp. at 1244 (citing Pinal Creek Group v. Newmont Mining Corp., 926 F. Supp. 1400, 1408 (D. Ariz. 1996)). This is essentially the same argument advanced by Stearns & Foster. See Plaintiff's Brief in Support of Summary Judgment at 44.
To arrive at this conclusion, however, courts stretch the meaning of "plain meaning." For example, in Pinal Creek, having adopted the view that a PRP may sue under Section 107(a), the court opined that it might, nevertheless, be proper to deny standing to a PRP who brought an action under Section 107 "merely to circumvent contribution protection granted by the government to another party pursuant to Section 113(f)(2), or to avoid the shorter statute of limitations for contribution actions." Pinal Creek, 926 F. Supp. at 1409. However, the court found that the plaintiffs in the case before it were not attempting "to circumvent contribution protection or to avoid the shorter limitations period," but were merely seeking to "shift many of the legal and financial risks associated with their cleanup." Id. This, in effect, amounts to saying that the "plain meaning" of Section 107(a)'s "any other person" language does not mean "any other innocent person," but instead, means "any other person who is not attempting to avoid the contribution protection or statute of limitations provisions of Section 113."
Moreover the danger that a PRP will be unable to recover the "orphan shares," absent Section 107's provision for joint and several liability, is a statutory "paper tiger." Several courts have recognized that the powers provided by § 113(f)(1) allow district courts "to allocate any 'orphan shares' among viable PRPs, with the result that each viable PRP's allocable share may include a portion of whatever 'orphan shares' there are." Town of New Windsor v. Tesa Tuck, Inc., 919 F. Supp. 662, 681 (S.D.N.Y. 1996). Similarly, in Caldwell Trucking, Judge Bassler noted that the apportionment of "orphan shares" was "an equitable issue that is more relevant to the quantum of [defendant's] liability than the fact of it." Caldwell Trucking, slip op. at 3 n.2.
Certainly, the position urged by the defendants will mean that Section 107(a) private party plaintiffs will be few and far between. Truly innocent private party plaintiffs would be limited to, for example, a neighbor of a contaminated site who has acted to stem threatened releases for which he is not responsible, see Akzo, 30 F.3d at 764, or a party who can claim one of the complete defenses set forth in 42 U.S.C. § 9607(b).
Few others would escape CERCLA's strict liability scheme.
I agree with the majority position. The residual power granted to a district court in Section 113 to apportion liability according to equitable principles more than adequately protects a PRP who undertakes a clean-up of another party's toxic legacy. Moreover, it seems fundamentally unfair to allow one PRP to burden all the other PRPs, as named defendants in its Section 107(a) action, with joint and several liability for the entire harm unless those defendants can demonstrate that the harm is divisible, a difficult proposition at best, simply because the first PRP won the race to the courthouse door. For all the reasons set forth in this opinion, therefore, I conclude that Stearns & Foster may not proceed with an action under Section 107(a) unless it can demonstrate that it is an "innocent" party.
B) Operator Liability Under CERCLA
In order to prevail on its claim for contribution under Section 113, Stearns & Foster must fit each defendant within one or more of the four categories of "responsible parties" set forth in the statute. See 42 U.S.C. § 9607(a). Stearns & Foster alleges that Franklin, M&T and Rand are liable as "operators" of a "facility" during the time of the disposal under § 9607(a)(2). More specifically, Stearns & Foster alleges that the Investor Group's dealings with Stop Fire-DE and Stop Fire-NJ between 1973 and 1978 render each of them liable as "operators" under CERCLA.
Stearns & Foster does not seek to impose derivative liability on any of the Investor Group as "owners." In order to do so, Stearns & Foster would need to show that the circumstances warranted "piercing the corporate veil." As the Third Circuit has stated:
"[A] corporation may be held liable as an owner for the actions of its subsidiary corporation in situations in which it is determined that piercing the corporate veil is warranted. Operator liability, in contrast, is generally reserved for those situations in which a parent or sister corporation is deemed, due to specifics of its relationship with its affiliated corporation, to have had substantial control over the facility in question."
Lansford-Coaldale Water Auth. v. Tonolli Corp., 4 F.3d 1209, 1220 (3d Cir. 1993). It is the latter standard, also known as the "actual control" standard, which Stearns & Foster contends is applicable to the facts of this case, i.e., that the various corporate investors are "operators" within the meaning of CERCLA.
The inquiry into "substantial control" requires this court to "look to the extent of the defendant[s]' . . . participation in the alleged wrongful conduct." Riverside Market Development Corp. v. International Bldg. Products, Inc., 931 F.2d 327, 330 (5th Cir.), cert. denied, 502 U.S. 1004 (1991). In this case, the court must assess whether the defendants' level of involvement in the day-to-day management of the Stop Fire entities in which they invested warrants a finding that the defendants were "operators" within the meaning of CERCLA. Stearns & Foster has added a novel twist to this inquiry by seeking to impose liability upon defendants, M&T and Rand, regardless of their level of actual involvement with the Stop Fire companies, based upon agency principles. Under this theory, Stearns & Foster contends that Franklin was an agent for M&T and Rand, and therefore, M&T and Rand are equally responsible, as principals, for the actions of their agent.
(2) The Actual Control Standard
In United States v. Kayser-Roth Corp., 910 F.2d 24, (1st Cir. 1990), cert. denied, 498 U.S. 1084 (1991), the First Circuit explained the two theories under which a parent corporation, or sibling corporation, may be held responsible for the CERCLA liability of its related company. The first theory is that the "safe harbor" provisions for secured creditors contained in § 9601(20)(A), by using the phrase "without participating in the management of a . . . facility," imply that a person who holds indicia of ownership, e.g., a stockholder, as in Kayser-Roth, may be held liable without regard to its involvement in the entire operation, if it participated in the management of the facility at issue. Kayser-Roth's second theory is that any person or entity associated with a facility, whether holding indicia of ownership or not, may be deemed an "operator" if that person or entity actually controlled the facility's operation and management.
In Lansford-Coaldale, the Third Circuit rejected the so-called "authority to control" test for imposing CERCLA "operator" liability, under which a related company would be liable if it "had the capability to control, even if it was never utilized." Id. at 1221. Instead, the Third Circuit adopted the second Kayser-Roth theory, the "actual control" standard, which requires "'actual participation and control' over the other corporations's [sic] decision-making." Id. at 1222 (quoting CPC Int'l v. Aerojet-General Corp., 777 F. Supp. 549 (W.D. Mich. 1991)).
A defendant lender bears the burden of securing a berth in the safe harbor created by § 9601(20)(A)'s "without participating in management" language, whereas it is plaintiff's burden to demonstrate that "operator" liability should attach to a related company because of its "actual control" of the subject entity. Although "participating in management" seemingly implies less involvement than "actual control" over management and operations, it is not clear that this distinction can be reasonably drawn from the statute. Indeed, it would seem more likely, given the Congressional concern that CERCLA liability imposed on lenders would adversely impact the availability of capital, that a stricter test would apply to lender liability than to the liability of a related company.
Regardless of the Congressional intent, however, by adopting the "actual control" standard in Lansford-Coaldale, the Third Circuit has eliminated any meaningful distinction which might exist, for example, in a circuit which applies an "authority to control" standard to related companies, but must still apply a "participation in management" standard to secured lenders seeking an exemption under § 9601(20)(A). Accordingly, I conclude that a secured creditor, which establishes that it has not "participated in management," cannot be held liable under the Lansford-Coaldale "actual control" standard. Similarly, those cases which discuss the criteria for "participation in management" under § 9601(20)(A), also implicitly inform this court's inquiry into what constitutes "actual control" of a related company.
For at least some part of the time period at issue, 1973-1978, the members of the Investor Group acted only as secured creditors of one or more of the Stop Fire entities. Indeed, M&T moves for summary judgment and opposes Stearns & Foster's motion for summary judgment, by contending that it fits within the secured creditor exemption set forth in § 9601(20)(A).
(3) Franklin's Operator Liability
Stearns & Foster asserts that Franklin is liable as an "operator," of both Stop Fire-DE and Stop Fire-NJ. Franklin contends that its actions in relation to the Stop Fire entities do not amount to "actual control" under the standard enunciated in Lansford-Coaldale. To unravel this dispute, this court is required to decide whether Franklin's actions, at any time during its relationship with Stop Fire-DE or Stop Fire-NJ, constituted actual and substantial control over the relevant Stop Fire entity, and, if so, for what period of time.
The "actual control" determination "requires an inherently fact-intensive inquiry, involving consideration of the totality of the circumstances presented." Lansford-Coaldale, 4 F.3d at 1222 (citation omitted). This court must "focus on the extent of the defendant's involvement in the [Stop Fire entities'] day-to-day operations and its policy-making decisions." Id. In this regard, actual control over the "environmental decisions" of the Stop Fire entities is not necessary to incur CERCLA liability, "as long as there exist other factors which sufficiently demonstrate pervasive control." Id. at 1222 n.13 (citing Kayser-Roth, 910 F.2d at 27 n.8).
On November 21, 1973, Franklin invested $ 350,000.00 in Stop Fire-DE which formed part of the capital used to purchase the assets of Union Parts and Stop Fire-NY.
In return for its investment, Franklin received a security interest in equipment, certain warrants to purchase stock, and one seat on the seven member Board of Directors of the newly-formed Stop Fire-DE.
Stearns & Foster alleges that, for approximately the next two years, Franklin attended board meetings at Stop Fire's plant, and elsewhere, and periodically hosted board meetings at its headquarters. As evidence of "actual control," Stearns & Foster alleges that, at a December 3, 1975, meeting, the three investor companies "unilaterally determined to place [Stop Fire-DE] into bankruptcy." Plaintiff's Brief at 52. A resolution of the Board of Directors approved the bankruptcy filing on December 9, 1975.
On January 13, 1976, Franklin and M&T exercised their warrants, becoming shareholders in Stop Fire-DE. The shareholders then reconstituted the Board of Directors to include only Joseph J. McGuire, President of Stop Fire-DE, Harold Small, President of M&T, Martin S. Orland, Executive Vice-President of Franklin, and Donald A. Ross, President of Rand. The new board removed all the existing officers except the President, made McGuire both President and Treasurer, and elected Martin S. Orland as Secretary and Vincent Protano as Assistant Secretary.
Franklin continued to infuse fresh capital into Stop Fire-DE, including new financing for materials, legal services, and insurance, as well as accounts receivable financing. Finally, on June 4, 1976, Franklin and M&T created Stop Fire-NJ, to which they assigned the assets of Stop Fire-DE which had been purchased by Franklin and M&T from the bankruptcy estate.
Stearns & Foster contends that the decision to place Stop Fire-DE into bankruptcy, the decision to purchase the assets from the bankruptcy estate, and the decisions regarding the make-up of the Board and Officers of Stop Fire, all demonstrate Franklin's involvement with Stop Fire's business. Indeed, Stearns & Foster contends that the Investor Group made an "independent evaluation of the future business opportunities of [Stop Fire]." This assertion, although supported by the record, does not demonstrate "actual control" within the meaning of Lansford-Coaldale. This court's concern must be to identify actions which were inconsistent with the investment relationship. See Lansford-Coaldale, 4 F.3d at 1222. Even "complete ownership and the concomitant general authority or ability to control that comes with ownership" is insufficient to impose "operator" liability. Kayser-Roth, 910 F.2d at 27. Franklin, both as an investor and as a member of the Board of Directors of Stop Fire-DE, acted in a manner which it calculated, incorrectly as it turned out, would maximize the return on its investment. In discussing whether a lender's actions might amount to "participation in management," the Ninth Circuit stated that:
Creditors do not give their money blindly, particularly the large sums of money needed to build industrial facilities. Lenders normally extend credit only after gathering a great deal of information about the proposed project, and only when they have some degree of confidence that the project will be successful. A secured creditor will always have some input . . . and, by the extension of financing, will perforce encourage those projects it feels will be successful. If this were "management," no secured creditor would ever be protected.
In re Bergsoe Metal Corp., 910 F.2d 668, 672 (9th Cir. 1990).
However, Franklin undoubtedly became more involved with Stop Fire-NJ than it had been with Stop Fire-DE. Franklin allegedly participated in interviewing and hiring a Comptroller for Stop Fire in mid-1976. See Certification of Thomas Johnson, P 3.
In March, 1977, McGuire was ousted as President of Stop Fire-NJ, following a dispute about money he was alleged to have personally owed to Stop Fire. McGuire was succeeded by Martin S. Orland. Although Orland also retained his position as Executive Vice-President of Franklin, he spent a considerable amount of his time at the Stop Fire facility in South Brunswick. How much time he spent there is difficult to determine from the summary judgment record. Orland continued as both President of Stop Fire-NJ and Executive Vice-President of Franklin until December, 1977, when Michael Gioseffi was hired as President and CEO of Stop Fire-NJ.
Franklin contends that these actions are insufficient to demonstrate "pervasive" control. In short, Franklin contends that its involvement with Stop Fire-NJ, through Orland, was of short duration and, in effect, was necessitated by external events, not motivated by a desire to control Stop Fire-NJ. It is noteworthy, in this regard, that those cases that deny summary judgment to an affiliated company uniformly involve a parent or sibling corporation which is engaged in the same business as the subject company.
In Bancamerica Commercial Corp. v. Trinity Indus., 900 F. Supp. 1427 (D. Kan. 1995), the companies concerned were all involved in the production of structural steel. In Vineland Construction v. Universal-Rundle Corp., Civ. Action No. 92-3115 (D.N.J. Dec. 30, 1994), the court found the record inadequate to grant summary judgment in favor of Sears, which was an owner, at the relevant time, of a majority interest in Universal-Rundle, a company which, at that time, provided Sears with eighty (80) percent of its cast iron and vitreous china needs. Id., slip op. at 5. In Lansford-Coaldale, the allegation was that Tonolli Canada, a company engaged in lead smelting and metal reclamation, was an "operator" of its sister corporation, Tonolli PA, another lead smelting operation. Id., 4 F.3d at 12-08-09. The related companies in John S. Boyd Co. v. Boston Gas Co., 992 F.2d 401 (1st Cir. 1993), were utilities. In Kayser-Roth, the parent company, Kayser-Roth, had been in the textile manufacturing business for several years prior to its acquisition of the Stamina Mills subsidiary, the subject of the CERCLA action. Kayser-Roth had substantial knowledge concerning the textile business, and placed its own personnel in positions as directors and officers of Stamina Mills in order to effectuate its policies. See United States v. Kayser-Roth Corp., 724 F. Supp. 15, 17-19 (D.R.I. 1989).
When considering evidence offered in support of "actual control" of a subsidiary company, the Eleventh Circuit has noted that:
It is particularly important that the record contain such evidence in a case . . . where the parent company . . . is in an entirely different business than that of the subsidiary. Certain isolated bits of evidence in the record may have greater meaning if attributed to a parent engaged in a similar endeavor such that a greater level of direct involvement and control by the parent could be presumed.
Jacksonville Elec. Auth. v. Bernuth Corp., 996 F.2d 1107, 1111 (11th Cir. 1993). The importance of this observation lies in its recognition that the "actual control" test, rather than being some talismanic formula, is a framework for uncovering the kind of pervasive control by a related company that so blurs the distinctions created by the corporate form that the parent or sibling no longer deserves to be insulated from the environmental liability of its related company. This court's decision regarding the "operator" liability of Franklin must be made against this background. Clearly, at least in some circumstances, the act of placing an officer of one corporation in a position as an officer of a related corporation may be less an exercise of "pervasive control" than a mere reaction to events as they have unfolded.
The facts of Jacksonville Electric are instructive. There, the district court found that there was insufficient evidence to demonstrate that Tufts University, an institution of higher education, was an "operator" of Eppinger & Russell Co., a creosoting plant of which Tufts was the majority shareholder. The court made this finding, which was upheld on appeal, despite allegations that Tufts and Eppinger had common directors and officers, that Tufts received regular financial status reports on Eppinger and that Tufts hired an engineer to do a survey and report, who later became a director of Eppinger, as well as its Vice-President and General Manager. Jacksonville Elec. Auth. v. Eppinger and Russell Co., 776 F. Supp. 1542, 1548-49 (M.D. Fla. 1991).
This case presents a closer question, but only because Martin Orland acted as President of Stop Fire-NJ for approximately seven months in 1977. Were it not for this period of employment as an officer of Stop Fire-NJ, during which Orland remained employed as Executive Vice-President of Franklin, this case would closely parallel Jacksonville Electric. The court in Jacksonville Electric concluded that the Trustees of Tufts University held Eppinger for its investment value, not because they were interested in operating a creosoting plant. Likewise, a Small Business Investment Corporation, like Franklin, presumably makes investments in a given manufacturing enterprise because it seeks a return on its investment, not because it hopes to operate a fire extinguisher manufacturer. I conclude that, contrary to the assertions of Stearns & Foster, the mere fact that Orland assumed the interim presidency of Stop Fire does not automatically imply that Franklin exercised "actual control" of Stop Fire. In order to show "actual control" by Orland, and thus, by Franklin, Stearns & Foster must demonstrate Orland's pervasive involvement in decision-making during his tenure at Stop Fire.
In support of its motion for summary judgment Stearns & Foster points to the fact that a Stop Fire plant foreman, George Balint, testified that he reported to Orland while Orland functioned as president of the company. Balint Dep. at 60. Yet Balint also testified that Orland "had nothing to do with . . . the manufacturing part of it." Id. Balint identified Orland as "the money man." Id. at 61.
On June 28, 1977, Orland reported to Franklin's Board of Directors that he "was spending most of his time working at Stop Fire and that new controls had been implemented and efforts were continuing towards restoring the company to a profitable basis." Minutes of the Annual Meeting, attached as exhibit 65 to Bruno Certif. Several other corporate memoranda confirm that Orland spent considerable time at Stop Fire. In one document relied upon by Stearns & Foster, which appears to be a memo to the file from George Rand, President of Rand Corporation, Orland is described as having "found that Stop Fire's inventory is badly out of balance" and reported to be "laying off 10 people" and as "firing Paul Nurkiewicz," and Orland is said to be spending "five to six days per week" at Stop Fire. Bruno Certif., ex. 60. In contrast, Orland testified with regard to this document that:
. . . if a discovery [regarding the inventory] was made it would have been brought to my attention.
Q. And who would have made that discovery?