Third Circuit Broadens Reach of CERCLA to Encompass “Contractually Responsible Parties”

 By Steven R. Tombalakian

Steven R. Tombalakian is an associate with the Newark, New Jersey, firm of Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C.

A recent precedent setting decision by the U.S. Court of Appeals for the Third Circuit provides that third parties may seek contribution directly from entities that contractually agreed to assume and become liable for a potentially responsible party’s Superfund liability, even when the assuming party could not otherwise be independently liable under Superfund. The decision in Caldwell Trucking PRP v. Rexon Technology Corp., 421 F.3d 234 (3d Cir. 2005), provides significant additional guidance concerning the ability to shift environmental liabilities between contracting parties.

Business attorneys have long employed various contractual means to guard against the assumption of environmental liabilities when purchasing other companies. Such efforts gained additional importance after Superfund was created in 1980, because that law brought with it the threat of retrospective liabilities. Congress, recognizing the chilling effect the Superfund’s retrospective liability provisions could have on corporate transactions, expressly authorized parties to protect themselves by means of contractual contribution and indemnification. 42 U.S.C.A. § 9613(f). Despite such allowances, however, the statute forbade an entity’s complete divestiture of liabilities vis-à-vis claims by the government. See,e.g.,Horsehead Indus., Inc. v. Paramount Communications, Inc., 258 F.3d 132, 135 (3d Cir. 2001).

Caldwell Trucking involved a situation in which a third-party group of potentially responsible parties (the “PRP Group”), after settling with the government and agreeing to remediate a Superfund site under a consent decree, sought cost contribution against an impecunious subsidiary and its former parent, which parent had earlier agreed to assume direct liability for its subsidiary’s Superfund liabilities as part of its agreement selling the subsidiary in 1989. The subsidiary’s purchasers, conscious of the risks associated with purchasing the stock of a company with a thirty-year manufacturing history, demanded that the parent agree to assume the subsidiary’s liabilities as part of the deal. The contract that was ultimately negotiated required the parent not only to indemnify and hold the subsidiary harmless from and against any and all environmental liabilities, including Superfund liabilities, but it expressly provided that the parent would assume and become liable for those liabilities as well.

Less than a year later, these contractual provisions were put to the test when the USEPA notified the subsidiary that it would likely be named as a potentially responsible party at the Caldwell Trucking Superfund Site. The subsidiary demanded that its former parent step in and assume the obligations per the contract, but the parent balked, disputing the relevance of the environmental assumption it had recently agreed upon. Complicating the dispute was the federal government’s concurrent prosecution of the subsidiary for illegally exporting banned materials to Saddam Hussein’s Iraq. While the parent and its former subsidiary bickered over the terms of the contract and within weeks of the PRP Group filing its Superfund contribution suit, the subsidiary was put out of business by court order.

As a result, the PRP Group’s only practical recourse was to seek enforcement of the liability assumption provision in the contract between the parent and the now defunct subsidiary. The PRP Group argued that the parent was directly responsible given its assumption of the subsidiary’s liability, whereas the parent argued that its contractual obligations, if any, ended when the subsidiary was put out of business. The parties eventually cross-moved for summary judgment as to the issue of contractual assumption of Superfund liabilities. The district court held in the PRP Group’s favor, finding that the parent was directly liable for its subsidiary’s Superfund liabilities. After a week long bench trial on damages, the parent appealed the adverse decision to the Third Circuit.

On appeal, the parent argued, inter alia, that a parent corporation was protected against a subsidiary’s CERCLA liability under the precedent established by the Supreme Court in United States v. Bestfoods, 524 U.S. 51 (1998). The parent further argued that federal statutory and common law barred the contractual transfer or shifting of Superfund liabilities, and that it was, at most, an indemnitor of a defunct entity that no longer required the protection provided by indemnification. Lastly, the parent contended that it was not even required to indemnify the subsidiary unless the defunct entity first contributed at least $100,000 towards the PRP Group’s remedial costs, which the parent knew the subsidiary could never satisfy.

Initially, the Third Circuit rejected the parent’s Bestfoods arguments by finding that the PRP Group’s claims against the parent had nothing at all to do with the parent/subsidiary relationship, but rather on the parent’s contractual assumption of its subsidiary’s liability. Thus, the issue the Third Circuit needed to decide was whether the parent could be held directly responsible for its former subsidiary’s liability given its prior contractual commitments. Applying New Jersey state contract law in affirming the district court’s interpretation of the contract, the Third Circuit explained that the parent had in fact agreed, under a section of the contract captioned “Seller’s Retention of Certain Liabilities,” “to assume and become liable for, and pay, perform and discharge and to indemnify . . .” the former subsidiary. The Third Circuit determined that, because the parent had agreed to “assume and become liable for” its subsidiary’s liability, a third-party PRP Group could enforce that agreement, particularly because the parent had further agreed to indemnify and hold the subsidiary harmless from such liabilities.

Caldwell Trucking thus provides an important new precedent concerning a third party’s standing and ability to maintain direct contribution claims against those who contractually assumed another entity’s Superfund liabilities.