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In re Hazardous Discharge Site Remediation Fund Innocent Party Grant Application Cliflake Associates, LLC.

Superior Court of New Jersey, Appellate Division

May 22, 2013

IN THE MATTER OF HAZARDOUS DISCHARGE SITE REMEDIATION FUND INNOCENT PARTY GRANT APPLICATION CLIFLAKE ASSOCIATES, LLC.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued January 29, 2013

On appeal from the New Jersey Department of Environmental Protection.

George J. Tyler argued the cause for appellant Cliflake Associates, LLC (Tyler & Carmeli, P.C., attorneys; Mr. Tyler, of counsel and on the briefs; James Aversano III and Matthew J. Krantz, on the briefs).

Kimberly A. Hahn, Deputy Attorney General, argued the cause for respondent New Jersey Department of Environmental Protection (Jeffrey S. Chiesa, Attorney General, attorney; Melissa H. Raksa, Assistant Attorney General, of counsel; Ms. Hahn, on the brief).

Before Judges Alvarez and Waugh.

PER CURIAM

Cliflake Associates LLC (Cliflake or LLC) appeals the final administrative action of the New Jersey Department of Environmental Protection (DEP) denying its application for a Hazardous Discharge Site Remediation Fund Innocent Party Grant (innocent party grant) pursuant to the Brownfield and Contaminated Site Remediation Act (Brownfield Act), N.J.S.A. 58:10B-1 to -31. We reverse and remand for further consideration of Cliflake's application.

I.

We discern the following facts and procedural history from the record on appeal.

Cliflake owns an industrial and commercial property in Clifton. The property is in need of remediation of soil and groundwater contamination. It was previously owned by Cliflake Associates, LP (Cliflake LP or LP), which acquired it in June 1972. In 1999, the partners in the LP formed the LLC, becoming members of the latter entity, and the LLC acquired the assets of the LP. The deed transferring title to the property from the LP to the LLC was executed in July 1999.

Cliflake began remediating the property under a memorandum of agreement with DEP in October 1999. In 2010,

[a] remedial investigation of the Property . . . identified contamination caused by operations at the Property that occurred prior to Cliflake LP's acquisition of the property in 1972. Specifically, chlorinated volatile organic compound contamination was identified in soil and groundwater at the former warehouse area on the Property. Moreover, a vapor intrusion issue of Immediate Environmental Concern ("IEC") was identified at the Property.

The projected cost of remediating those conditions exceeds two million dollars.

Cliflake applied for the innocent party grant in January 2011. N.J.S.A. 58:10B-6(a)(4) establishes the following qualifications for the grant:

A person qualifies for an innocent party grant if that person acquired the property prior to December 31, 1983 and continues to own the property until such time as the authority approves the grant, the hazardous substance or hazardous waste that was discharged at the property was not used by the person at that site, and that person certifies that he did not discharge any hazardous substance or hazardous waste at an area where a discharge is discovered.

In March, the Director of DEP's Division of Responsible Party Site Remediation informed Cliflake that DEP's tentative decision was to deny the application because Cliflake did not own the property at issue prior to December 31, 1983.

Cliflake requested reconsideration of the preliminary denial on grounds that the LLC was essentially the same entity as the LP. In support of its position, Cliflake cited a section of the Industrial Site Recovery Act (ISRA), N.J.S.A. 13:1K-6 to -13, providing that "corporate reorganization not substantially affecting the ownership of the industrial establishment" does not constitute a "change in ownership." N.J.S.A. 13:1K-8. Cliflake represented that

[e]ach partner of Cliflake Associates, LP at the time of the change in the form of business entity became a member of Cliflake Associates, LLC and each individual retained the same ownership interest in Cliflake Associates, LLC with one exception not relevant here [one of the former partners divided her share amongst three children]. All of the assets held by Cliflake Associates, LP were transferred to Cliflake Associates, LLC. Therefore, the ability to remediate the Property was not hindered by the 1999 reorganization which did not affect ownership or control.

Based on those facts, it argued that the 1999 transaction between the LLC and LP "effectively altered only the name and business form of the [p]roperty owner."

DEP responded to the request for reconsideration in May, reiterating its intention to deny the application. DEP noted that the ISRA regulations supported its determination because the regulatory definition of "change in ownership" under ISRA includes "reorganization of a . . . limited partnership into a . . . limited liability company." N.J.A.C. 7:26B-1.4. It also asserted that, in any event, the definitions were not controlling for purposes of eligibility for innocent party grants because the two acts, the Brownfield Act and ISRA, are distinct.

DEP rejected Cliflake's contention that it stood in the shoes of the LP. Characterizing the "restructuring of Cliflake LP into Cliflake LLC" as "the exchange of one business form for another, " DEP found that

Cliflake LLC and Cliflake LP are separate legal entities formed under different statutes. Each has its attributes as a business entity, and a person selects one form or the other based on those attributes. Your letter does not indicate why the partners in the limited partnership decided to reorganize their business to a limited liability company, but presumably the change was made for liability and/or taxation reasons. Whatever the reason, the change occurred. The members of Cliflake LLC cannot claim for the purposes of the [innocent party grant] that the limited liability company is the same entity as the limited partnership that acquired the property in 1972, and at the same time reap the benefits that come with operating the business as a limited liability company.

DEP did not, however, assert that "the exchange of one business form for another" adversely affected its ability to require Cliflake to remediate the property or that the exchange adversely affected Cliflake's ability to perform the remediation.

Cliflake again requested reconsideration on grounds that it had effectuated a statutory merger with the LP, resulting in "continuous ownership of the property and continuous possession of a vested right to make an Innocent Party Grant application." Cliflake asserted that the LLC and the LP had effectuated a merger such that the LLC was entitled to "the rights, privileges and powers" of the LP under N.J.S.A. 42:2B-20(g). As in prior correspondence, Cliflake pointed to the statutory purposes underlying the provision of grants under the Act, arguing that the Legislature had not intended that "business reorganization resulting solely from the Limited Liability Company Law [would] preclude eligibility for a grant."

In July, DEP requested Cliflake to provide copies of "the Certificate of Merger/Consolidation filed with the Division of Recording, the Agreement of Merger/Consolidation, and evidence that the Agreement [of] Merger/Consolidation was approved by the members of Cliflake, LLC." In November, Cliflake replied that it could not find the requested documents. However, it argued that it had entered into a de facto merger with the LP.

By letter dated April 12, 2012, DEP informed Cliflake of its final agency action denying the application. It reiterated that the two entities were not the same, and found that Cliflake had failed to prove that it effectuated a statutory merger under the LLC Act, because it had not provided evidence of a Certificate of Merger/Consolidation filed with the Division of Recording, and also had not shown that "the agreement of merger had been approved by the members of Cliflake LLC."

DEP also found that Cliflake had not met the requirements for a de facto merger because

"the crucial inquiry [for a de facto merger] is whether there was an intent on the part of the contracting parties to effectuate a merger or a consolidation rather than a sale of the assets." Woodrick v. Jack J. Burke Real Estate, Inc., 306 N.J.Super. 61, 74 (App. Div. 1997)[, certif. granted, 153 N.J. 214, appeal dismissed, 157 N.J. 537 (1998)]. Thus, the facts must show that the intent of the contracting parties was for the surviving party to assume all of the benefits and burdens of the predecessor. The facts in this matter do not reveal that intent.
The intent behind Cliflake's change in business form can only be gleaned from statements made, or documents authored, contemporaneously with the 1999 transaction that resulted in the transfer of the Property from Cliflake LP to Cliflake LLC. The record is devoid of any such documents or statements. Instead, all that has been offered is a certification from Cliflake LLC now indicating that it was the intent of the parties in 1999 that Cliflake LLC would assume all of the benefits and burdens of Cliflake LP. Such a certification offered more than 12 years after the transaction occurred would not speak loudly as to the intent to merge in 1999. Indeed, if a merger truly was on the minds of the parties in 1999, it would have been easily accomplished because the LLC Act provided a framework for the merger of Cliflake LP into Cliflake LLC at the time Cliflake LLC was created. Each member of the limited liability company needed only to approve the merger and Cliflake LLC needed only to file a certificate of merger with the Secretary of State, now the Division of Recording, and there would have been no question of whether a merger occurred.
In sum, there is no evidence in the record that suggests that as of 1999, a desire to merge was behind Cliflake's change in business form from a limited partnership to a limited liability company. Instead, it is more likely than not that the change was accomplished for other reasons, such as a desire to obtain the liability protections and the favorable pass-through tax benefits afforded by the limited liability company business form.

This appeal followed.

II.

Cliflake argues on appeal that DEP's decision was "arbitrary, capricious and unreasonable" because there was a de facto merger between the LLC and the LP, as a result of which it was entitled to receive an innocent party grant. It further argues that the recently enacted Revised Uniform Limited Liability Company Act (Revised LLC Act), N.J.S.A. 42:2C-1 to -94, should be applied in this case.

Our scope of review of an administrative agency's final determination is limited. In re Carter, 191 N.J. 474, 482 (2007). We accord to the agency's exercise of its statutorily delegated responsibilities a "strong presumption of reasonableness." City of Newark v. Natural Res. Council, 82 N.J. 530, 539, cert. denied, 449 U.S. 983, 101 S.Ct. 400, 66 L.Ed.2d 245 (1980). The burden of showing the agency's action was arbitrary, unreasonable, or capricious rests upon the appellant. See Barone v. Dep't of Human Servs., Div. of Med. Assistance & Health Servs., 210 N.J.Super. 276, 285 (App. Div. 1986), aff'd, 107 N.J. 355 (1987).

The reviewing court "should not disturb an administrative agency's determinations or findings unless there is a clear showing that (1) the agency did not follow the law; (2) the decision was arbitrary, capricious, or unreasonable; or (3) the decision was not supported by substantial evidence." In re Application of Virtua-West Jersey Hosp. Voorhees for a Certificate of Need, 194 N.J. 413, 422 (2008); see also Circus Liquors, Inc. v. Governing Body of Middletown Twp., 199 N.J. 1, 9-10 (2009).

Although an appellate court is "in no way bound by the agency's interpretation of a statute or its determination of a strictly legal issue, " Mayflower Sec. Co. v. Bureau of Sec., 64 N.J. 85, 93 (1973), if substantial evidence supports the agency's decision, "a court may not substitute its own judgment for the agency's even though the court might have reached a different result." Greenwood v. State Police Training Ctr., 127 N.J. 500, 513 (1992).

We turn to the issue of whether DEP's decision under the law as then existing was arbitrary, capricious, or unreasonable. The issue is whether Cliflake satisfied the requirement, found in N.J.S.A. 58:10B-6(a)(4), that it have "acquired the property prior to December 31, 1983."

DEP denied the grant on the grounds that the LLC, the current owner of the property, did not own it prior to 1983 and had not succeeded to the rights of the LP, which did acquire the property prior to 1983. In doing so, DEP rejected Cliflake's argument that there was a de facto merger between the two, such that they should be considered the same entity for the purposes of N.J.S.A. 58:10B-6(a)(4).[1]

DEP took the position that, because there was no proof of a de facto merger dating from the time of the alleged merger, Cliflake cannot prove that one took place. It also asserts that a "de facto merger is relevant only in the limited context of corporate successor liability, " because courts have developed the theory as an exception to the rule of successor nonliability "to protect a consumer who would otherwise have no recourse for a tort occurring under the predecessor's watch."

We begin our discussion by outlining the legislative history of the innocent party grants, which were created by Sections 27 and 28 of L. 1993, c. 139. Chapter 139 made significant amendments to what had been known as the Environmental Cleanup Responsibility Act (ECRA), L. 1983, c. 330, and, in the process, changed the act's name to ISRA. See Des Champs Labs., Inc. v. Martin, 427 N.J.Super. 84, 96 (App. Div. 2012). In addition to amending and renaming ECRA, Chapter 139 contained new sections, including Sections 27 and 28, which were allocated to N.J.S.A. 58:10B-5 and -6, respectively. Pursuant to Section 1 of L. 1997, c. 278, Sections 23 through 43 and Section 45 of Chapter 139 were designated as the Brownfield Act. Consequently, ISRA and the Brownfield Act are part of a unified legislative strategy to address the remediation of contaminated sites.

With respect to changes in ownership of property, Chapter 139 contained the following definitional sections for the purposes of ISRA:

"Transferring ownership or operations" means:
(1) any transaction or proceeding through which an industrial establishment undergoes a change in ownership;
(2) the sale or transfer of more than 50% of the assets of an industrial establishment within any five-year period, as measured on a constant, annual date-specific basis;
(3)the execution of a lease for a period of 99 years or longer for an industrial establishment; or
(4) the dissolution of an entity that is an owner or operator or an indirect owner of an industrial establishment, except for any dissolution of an indirect owner of an industrial establishment whose assets would have been unavailable for the remediation of the industrial establishment if the dissolution had not occurred;

"Change in ownership" means:

(1) the sale or transfer of the business of an industrial establishment or any of its real property;
(2)the sale or transfer of stock in a corporation resulting in a merger or consolidation involving the direct owner or operator or indirect owner of the industrial establishment;
(3)the sale or transfer of stock in a corporation, or the transfer of a partnership interest, resulting in a change in the person holding the controlling interest in the direct owner or operator or indirect owner of an industrial establishment;
(4)the sale or transfer of title to an industrial establishment or the real property of an industrial establishment by exercising an option to purchase; or
(5) the sale or transfer of a partnership interest in a partnership that owns or operates an industrial establishment, that would reduce, by 10% or more, the assets available for remediation of the industrial establishment;

"Change in ownership" shall not include:

(1)a corporate reorganization not substantially affecting the ownership of the industrial establishment;
(2) a transaction or series of transactions involving the transfer of stock, assets or both, among corporations under common ownership, if the transaction or transactions will not result in the diminution of the net worth of the corporation that directly owns or operates the industrial establishment by more than 10%, or if an equal or greater amount in assets is available for the remediation of the industrial establishment before and after the transaction or transactions;
(3) a transaction or series of transactions involving the transfer of stock, assets or both, resulting in the merger or de facto merger or consolidation of the indirect owner with another entity, or in a change in the person holding the controlling interest of the indirect owner of an industrial establishment, when the indirect owner's assets would have been unavailable for cleanup if the transaction or transactions had not occurred;
(4) a transfer where the transferor is the sibling, spouse, child, parent, grandparent, child of a sibling, or sibling of a parent of the transferee;
(5) a transfer to confirm or correct any deficiencies in the recorded title of an industrial establishment;
(6) a transfer to release a contingent or reversionary interest except for any transfer of a lessor's reversionary interest in leased real property;
(7) a transfer of an industrial establishment by devise or intestate succession;
(8)the granting or termination of an easement or a license to any portion of an industrial establishment;
(9) the sale or transfer of real property pursuant to a condemnation proceeding initiated pursuant to the "Eminent Domain Act of 1971, " P.L. 1971, c. 361 (C. 20:30-1 et seq.);
(10) execution, delivery and filing or recording of any mortgage, security interest, collateral assignment or other lien on real or personal property; or
(11) any transfer of personal property pursuant to a valid security agreement, collateral assignment or other lien, including, but not limited to, seizure or replevin of such personal property which transfer is for the purpose of implementing the secured party's rights in the personal property which is the collateral[.]
[N.J.S.A. 13:1K-8 (emphasis added).]

Although these definitional sections are not among the parts of Chapter 139 that became the Brownfield Act, they nevertheless reflect the Legislature's concerns with respect to changes of ownership at the time the innocent party grants were established.

In construing a statute, "[w]e are required to 'effectuate the legislative intent in light of the language used and the objects sought to be achieved.'" Wendling v. N.J. Racing Comm'n, 279 N.J.Super. 477, 482 (App. Div. 1995) (quoting State v. Maguire, 84 N.J. 508, 514 (1980)). Courts "must give effect to the language employed by the legislative body." Dixon v. Gassert, 26 N.J. 1, 9 (1958).

Our review of the legislative history and the language of the statutes leads us to reject DEP's argument, which in essence would have us find that the de facto merger of an LP into an LLC would per se preclude the resulting entity from obtaining an innocent party grant. The grants were clearly intended to help the owners of contaminated property defray the costs of remediation if they were not responsible for the contamination and had acquired the property prior to enactment of ECRA in 1983, assuming they satisfied the other requirements. The definitional section concerning changes of ownership in N.J.S.A. 13:1K-8, especially with respect to what is not a change of ownership, reflects the Legislature's concern that there be a basic continuity of beneficial ownership between the two entities, retention of the prior entity's liability by the resulting entity, and preservation of the prior entity's available assets by the resulting entity to meet its remediation responsibilities. Nevertheless, ISRA allows for corporate mergers, inter-corporate transfers, gifts or inheritance among family members, and other types of transfers. In short, the Legislature appears to have been more concerned with the substance of ownership and continuity than the technicalities of the legal form.[2]

We also reject DEP's argument that, under New Jersey law, a de facto merger can only result in the acquisition of the prior entity's liabilities by the resulting entity and cannot result in the acquisition of the prior entity's rights. It is true that New Jersey's courts have applied the doctrine of de facto merger in defining one of the exceptions "to the general rule of corporate successor nonliability in asset acquisitions, " frequently in the context of tort liability. Ramirez v. Amsted Indus., Inc., 86 N.J. 332, 340-41 (1981). We are aware of no cases applying de facto merger for the benefit of the resulting entity. However, our courts have not held that the doctrine is only relevant to liabilities, and in fact have defined the doctrine more broadly. In Good v. Lackawanna Leather Co., 96 N.J.Super. 439, 451 (Ch. Div. 1967), the Chancery judge explained that a "merger is defined . . . as the absorption by one corporation of one or more usually smaller corporations, which latter corporations lose their identity by becoming part of the larger enterprise."

We have outlined the factors relevant to the determination of whether there has been a de facto merger as follows:

In determining whether a particular transaction amounts to a de facto consolidation or mere continuation, most courts consider four factors: (i) continuity of management, personnel, physical location, assets, and general business operations; (ii) a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; (iii) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and (iv) continuity of ownership/shareholders. (citations omitted).
"Not all of these factors need be present for a de facto merger or continuation to have occurred." Luxliner [P.L. Export, Co. v. RDI/Luxliner, Inc., 13 F.3d 69, 73 (3d. Cir. 1993)] (citing Good v. Lackawanna Leather Co., 96 N.J.Super. 439, 452 (1967)); see also Menacho v. Adamson United Co., 420 F.Supp. 128, 133 (D.N.J. 1976) (applying New Jersey law). Rather, "the crucial inquiry is whether there was an 'intent on the part of the contracting parties to effectuate a merger or consolidation rather than a sale of assets.'" Luxliner, supra, 13 F.3d at 73 (citing McKee [v. Harris-Seybold Co., 109 N.J.Super. 555, 567 (Law Div. 1970), aff'd, 118 N.J.Super. 480 (App. Div. 1972)]).
[Woodrick, supra, 306 N.J.Super. at 73-74 (quoting Glynwed, Inc. v. Plastimatic, Inc., 869 F.Supp. 265, 275-76 (D.N.J. 1994)) (brackets in original omitted).]

Because those factors are fact sensitive, we cannot determine whether there was a de facto merger on the present record. Consequently, we vacate the administrative decision denying Cliflake's application for an innocent party grant and remand for further consideration by DEP, which may require an evidentiary hearing. On remand, Cliflake will be required to demonstrate that there was a de facto merger[3] and that the change in structure between the LP and LLC did not diminish the assets available for remediation or otherwise shield the LLC or its members from the LP's liability or that of its partners with respect to the remediation at issue. In addition, Cliflake will be required to demonstrate that it is otherwise eligible for the grant.

Finally, because DEP will be reconsidering the application, Cliflake can raise the issue of the recently enacted Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1 to -94, which is now in effect.

Vacated and remanded.


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