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It’s not too often that a federal judge declares that five of the judges on her own bench were wrong about a point of law in a string of decisions spanning a decade. What’s even rarer is when that lone judge learns, just days after she sticks her neck out, that she was right to do so — due to the coincidence of an appellate court decision in an unrelated case that tackles the same legal question. Both decisions are sure to grab the attention of environmental lawyers because they clarify the rules courts should use in deciding when a corporation may be held liable under the Superfund law on a theory of “successor liability.” On Aug. 31, U.S. District Judge of the Eastern District of Pennsylvania Anita B. Brody handed down a 37-page decision in Action Manufacturing Co. Inc. v. Simon Wrecking Co., in which she rejected the plaintiff’s argument that Marcegaglia USA Inc. should share responsibility for the costs of an environmental clean-up in Malvern, Pa. Lawyers for Action Manufacturing had argued that Marcegaglia was also liable as the successor-in-interest to Bishop Tube Co. because it had purchased the assets of Bishop Tube in a bankruptcy court sale. To win its argument, Action Manufacturing had to persuade Brody to apply the so-called “substantial continuity” test. Brody said she recognized that five of her Eastern District colleagues have applied the substantial continuity test in toxic clean-up cases brought under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, in a string of decisions spanning from 1993 to 2002. Although the 3rd U.S. Circuit Court of Appeals has never endorsed the test, Brody found that, in light of the 1998 decision of the U.S. Supreme Court in United States v. Bestfoods, it is no longer good law, and that “the national trend is to reject the substantial continuity test.” As Brody described it, the substantial continuity test “is not part of the traditional doctrine of successor liability. … Rather, the substantial continuity test, also known as the ‘continuity of the enterprise test,’ is often described as an expansion of the traditional ‘mere continuation’ theory of successor liability.” Under the traditional mere continuation theory, a purchasing corporation is liable as a “mere continuation” of the transferor corporation if, after the transfer of assets, there is an identity of stock, stockholders and directors between the two corporations. But Brody found that the substantial continuity test “expands the mere continuation doctrine by making a purchaser of assets liable if it is a ‘substantial continuation’ of the seller corporation, even if there is no identity of stock and stockholders.” With no 3rd Circuit ruling on the point, Brody looked to other appellate courts and found that the circuits are split, with four circuits — the 1st, 2nd, 6th and 9th — rejecting the “substantial continuity” theory and only two — the 4th and 8th — endorsing it. Forced to choose, Brody looked to the 3rd Circuit’s 1988 decision in Smith Land & Improvement Corp. v. Celotex Corp. which instructed courts to “follow federal common law” when deciding successor liability issues. In passing CERCLA, the Smith Land court said, Congress “expected the courts to develop a federal common law to supplement the statute.” Brody also found that, in determining the content of federal common law, the 3rd Circuit “emphasized the need for national uniformity and the need to consider the general doctrine of successor liability in all states.” As a result, Brody concluded that the substantial continuity test must now be rejected. “Given Smith Land’s concerns with national uniformity and given that courts in the 3rd Circuit must apply federal common law which consists of the general doctrine of successor liability applicable in most states, I follow the majority of circuit courts that have addressed this issue and conclude that the substantial continuity test should not be applied to determine successor liability in CERCLA cases,” Brody wrote. “The substantial continuity test is not part of federal common law because it is not part of the general doctrine on successor liability in operation in most states. Nor should I attempt to expand federal common law beyond traditional common law rules in order to encompass the substantial continuity test.” If Brody was wondering whether she got it right, she didn’t have to wonder very long. On Tuesday, the 3rd Circuit handed down its 56-page opinion in United States v. General Battery Corp. Inc. Writing for the court, Chief Judge Anthony J. Scirica said, “we return, once again, to the difficult area of indirect liability under CERCLA.” CERCLA, Scirica said, is a “sweeping” federal remedial statute that was passed in 1980 to ensure that “everyone who is potentially responsible for hazardous-waste contamination may be forced to contribute to the costs of cleanup.” But Scirica noted that the law “is not, however, a model of legislative draftsmanship,” and that “successor liability is one of its puzzles.” Most of Scirica’s opinion is devoted to a discussion of whether the two appellants — General Battery and Exide Corp. — were properly held liable on the government’s argument that, due to a “de facto merger,” they were the successors-in-interest to Price Battery Corp. Upholding a ruling by Senior U.S. District Judge Ronald L. Buckwalter, Scirica concluded that “the de facto merger criteria are satisfied.” But in a brief, final section of the opinion, Scirica effectively upheld Brody’s decision by rejecting Buckwalter’s alternative holding that Exide would also be liable under CERCLA on a “substantial continuity” theory of successor liability. Scirica noted that, prior to the U.S. Supreme Court’s decision in Bestfoods, several courts had adopted the substantial continuity test as a basis for CERCLA successor liability. The substantial continuity theory, Scirica said, “eliminates certain elements of the de facto merger analysis — including the continuity of ownership requirement �- and in effect creates a more expansive rule of liability than is accepted in most states.” But recently, Scirica found, several of the federal circuits “have rejected the doctrine as inconsistent with Bestfoods.” With just two sentences of discussion, Scirica said the 3rd Circuit was joining its sister circuits in rejecting substantial continuity. “ Bestfoods held that CERCLA does not, sub silentio, abrogate fundamental common law principles of indirect corporate liability,” Scirica wrote. “Accordingly, ‘substantial continuity’ is untenable as a basis for successor liability under CERCLA.” In the case before Brody, Marcegaglia USA was represented by attorneys Robert W. Thomson, C. Shawn Dryer, Steven F. Baicker-McKee and Kevin K. Douglass of Babst Calland Clements & Zomnir in Pittsburgh. Action Manufacturing was represented by attorneys Larry Silver, David E. Romine and Sandra Gibbs of Langsam Stevens & Silver in Philadelphia. In the 3rd Circuit case, Justice Department attorney John T. Stahr argued for the government; General Battery and Exide were represented by attorneys Robert L. Collings and Carl A. Solano of Schnader Harrison Segal & Lewis.

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