Second Circuit Holds That CERCLA Does Not Preempt State Law Limiting a Party’s Capacity to Be Sued
December 1, 2007
Lois Godfrey Wye - Washington
In a complex case that evolved over several years and included numerous parties, the United States Court of Appeals for the Second Circuit took a close look at the interplay between CERCLA and Delaware corporate laws. The Court held that Delaware corporate statutes govern when a corporation can or cannot be sued, notwithstanding causes of action that might otherwise have existed under CERCLA. This holding is consistent with several U.S. Supreme Court decisions holding that CERCLA was not intended to re-write state corporate law, an area of traditional state authority.
Marsh v. Rosenbloom, 499 F.3d 165 (2nd Cir. 2007), involved claims by New York state to recover $4.5 million in unreimbursed costs incurred in remediating the Wellsville-Andover Landfill site in Allegany County, N.Y. After settling with various other parties, New York brought suit against Panex Industries, Inc., a dissolved Delaware corporation, and against Panex’s shareholder-distributees. As the Court observed, there was “abundant evidence that [Panex’s predecessor] made substantial deposits of hazardous waste at the landfill during the course of its operations.” 499 F.3d at 169. Panex’s shareholders, unaware of contamination at the landfill, voted to dissolve the corporation, effective April 15, 1985. The liquidation plan established a Stockholders’ Liquidating Trust (the Panex Trust). By July 1987, after the vote to dissolve the company, and both before and after the creation of the Trust, more than $68 million was distributed to shareholders. Delaware General Corporation Law § 278 provides for a three-year corporate wind-up period, which expired on April 15, 1988. The Trust received notice of the state’s claim for response costs on April 25, 1988, at which time the trustees extended the life of the Trust and ceased distributions. The state filed its claims against Panex after it adopted a remediation plan in 1994. Shortly thereafter, it added the Panex shareholder-distributees to the case, notwithstanding Delaware Corporation Law § 325(b), which allows suits against shareholder-distributees of dissolved corporations only after a plaintiff has obtained a judgment against the corporation.
The district court dismissed the state’s claims against the shareholder-distributees, but did not dismiss the claims against Panex, ruling that CERCLA preempted the Delaware statute. Seven years later, the district court entered summary judgment in favor of the state against Panex. Both the state and Panex appealed from the judgment.
The Second Circuit first held that Delaware Corporate Law sections 278 and 325(b) operated to bar the state’s claims against Panex and its shareholder-distributees, notwithstanding the State’s arguments that common law might allow for an “equitable trust” and a cause of action against the shareholder-distributees. The Court then turned to address whether CERCLA preempts those provisions and would allow the claims to go forward notwithstanding state corporate statutes. The state argued that the Delaware statutes conflicted with federal policy expressed in CERCLA, such that the six-year statute of limitations period set forth in CERCLA section 113(g)(2)(b), 42 U.S.C. § 9613(g)(2)(B) preempts the three-year corporate wind-up period provided by Delaware Corporate Statute § 278. 499 F.3d at 176. The Court disagreed.
The Court began its analysis by observing that “corporate law is overwhelmingly the province of the states,” and “the Supreme Court expressly has cautioned against displacement of state law in areas traditionally occupied by states.” Id. at 176-77 (citing cases). It then turned to Supreme Court precedent that identifies “three situations that show Congressional intent to preempt state law: (1) where Congress expressly states its intent to preempt; (2) where Congress’ scheme of federal regulation is sufficiently comprehensive to give rise to a reasonably inference that it leaves no room for the state to act; and (3) where state law actually conflicts with federal law.” Id. at 177 (citing cases).
Quickly dismissing the first two categories, the Court turned to the question of actual conflict. First, it held that it is not “physically impossible” to comply with both the Delaware statute and CERCLA, since, as long as a claim is brought within three years, it will comply with both provisions. Id. at 178. Next the Court considered whether the Delaware statute was “an obstacle” to complying with the federal law. Id. Acknowledging that it was Congress’s intent that those responsible for contamination should bear the costs of remediation, the court nevertheless held that “[e]ven so, CERCLA’s liability scheme anticipates that, in some situations, it will be impossible to recover from responsible parties.” Id. Thus, CERCLA’s cost recovery objective, “while strong, is not absolute, and may yield to countervailing considerations.” Id. The Second Circuit relied on the
Supreme Court’s decision in O’Melveny & Myers v. FDIC, 512 U.S. 79, 88 (1994) for the proposition that “more money arguments alone are insufficient to justify displacement of state law.” Id. The state’s argument that there is a conflict because the state law prevented a corporation from being held financially responsible, the Court held, was simply a “more money” argument. Id. at 178-79.
The Second Circuit acknowledged that a conflict could exist if the Delaware statute encouraged corporations to dissolve in order to avoid CERCLA liability, but found no such incentive in the statute before it. In fact, the Court observed just the opposite result, since dissolving corporations are required to provide security “reasonably likely to be sufficient” to cover claims that may arise during the dissolution period. Id. at 179. Moreover, the statutes include provisions that could lengthen the wrap-up period where necessary. Id. at 179-80. The Court also noted that the CERCLA statute of limitations and the Delaware Corporation Law serve different purposes, underscoring the lack of conflict. The statute of limitations, the Court said, serves to extinguish the right to bring a claim after a given period of time, while the Delaware statute defines a dissolved corporation’s capacity to be sued. Id. at 180. The Court distinguished this case from Bedford Affiliates v. Sills, 156 F.3d 416 (2d Cir. 1998), in which the Second Circuit held that CERCLA preempted state claims for restitution and indemnification. There, the Court explained, the state provisions for restitution and indemnification provided an obstacle to CERCLA’s goal of encouraging settlement, which CERCLA accomplishes in part by providing assurances to settling parties that they will be protected from other lawsuits. Id.
The Court concluded its preemption discussion citing the Supreme Court’s decisions in O’Melveny, 512 U.S. at 88 and Burks v. Lancaster, 441 U.S. 471, 488, and saying, “CERCLA does not suggest that the entire corpus of state corporation law is to be replaced simply because a plaintiff’s cause of action is based upon a federal statute … or because it would net the government more money … which is all the state has shown here.” Id. at 180-81 (citing cases).
Although it does not cite it in this portion of its discussion, the Second Circuit’s conclusion here is also consistent with the Supreme Court’s decision in United States v. Bestfoods, 524 U.S. 51 (1998). In that case, the Supreme Court considered whether and when a parent company could be held liable under CERCLA for environmental contamination caused by a subsidiary. The Court held that, for these purposes, CERCLA is no different from other laws, and that a parent can only be held liable for the actions of its subsidiary when the corporate veil can be pierced. 524 U.S. at 60-64. The Court held that “nothing in CERCLA purports to reject … bedrock principle[s]” of corporate law. Id. at 63. Thus, the Second Circuit’s decision in Marsh, consistent with Supreme Court decisions, serves to underscore that CERCLA liability, while broad, does have its limits.
For more information, email Lois Godfrey Wye at lois.wye@hklaw.com or call toll free, 1-888-688-8500.