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Federal Court Rules on Successor Corporation Liability

Winter 1995

In the wake of the rising tide of cleanup actions, regulatory agencies are continually seeking to impose liability upon additional parties as a means to facilitate the performance of the cleanup of a contaminated site. As an outgrowth of this search, regulatory agencies often require the current owners of a company to bear the responsibility for the environmental contamination arising from the company’s operations, even if the offending operations were conducted under the auspices of a former owner of the company.

Typically, a corporation which acquires the assets of another corporation does not acquire the liabilities unless the acquisition was entered into fraudulently to escape liability or certain other exceptional circumstances exist. However, under the federal Superfund law, courts have imposed successor liability upon acquiring corporations if "substantial continuity" exists between the purchasing and selling corporations. In determining if substantial continuity exists, the courts look to various factors such as whether the purchasing corporation:

- retained the employees and supervisory personnel following the sale;
- retained the same production facilities at the same location;
- produced the same product using the same name; and
- continued the same general business operations as the selling corporation.

Some courts also look to whether the purchasing corporation had notice at the time of the purchase of the seller’s potential Superfund liability. If the court determines substantial continuity does exist, then the corporation which purchased the assets can be held liable as a successor corporation for the contamination resulting from the off-site waste disposal of the selling corporation.

The courts which have examined the issue of successor corporation liability have accorded differential weight to the various factors. Some courts have focused heavily upon the extent to which the successor uses the same employees to produce the same product from the same location, while other courts have found the successor’s knowledge at the time of the sale to be the dispositive factor.

The District Court for the Eastern District of Wisconsin’s recent decision in Hunt’s Generator Committee, et al. v. Babcock & Wilcox, et al. represents the first decision by a seventh circuit court regarding the parameters of the substantial continuity test for successor liability. In addressing this question, the Eastern District noted the various factors which other courts have taken into consideration, including the purchaser’s knowledge of the potential liability and the similarity of the business operations. While the Court did not claim to place particular reliance on any single factor, the Court noted that the purchasing corporation had no knowledge of the seller’s potential Superfund liability and refused to hold the purchasing corporation liable. Despite the fact that the purchasing corporation appeared to retain the same employees, engaged in essentially the same operation(s), and serviced many of the same customers, the court concluded that the purchaser was not a "successor corporation."

While the precise parameters of the substantial continuity test for successor liability remain somewhat unclear, this decision may give new life to companies’ efforts to fend off the imposition of successor liability.

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