New York v. National Service Industries, Inc.

This appeal presents a question of successor liability under the Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. §§ 9601-9675 (2000). Specifically, the question before us is whether federal common law for purposes of determining corporate successor liability under CERCLA incorporates state law — in this case, New York law — or displaces state law in favor of a uniform national rule derived from traditional common-law principles. We must then determine whether, under the applicable governing law, defendant-counterclaimant-appellee National Service Industries, Inc. ("NSI") is liable as the legal successor to Serv-All Uniform Rental Corp. ("Serv-All"). For the reasons that follow, we find that we need not decide whether federal common law under CERCLA would displace state law because the claim of plaintiff-counter-defendant-appellant the State of New York ("the State") would fail under either New York or traditional common law. That is, we hold that New York follows the traditional common-law rules of successor liability, which would govern if state law did not provide the rule of decision, and which require some evidence of continuity of ownership to find the existence of a de facto merger, and thus, successor liability. For that reason, we also hold that the State's common-law unjust enrichment and restitution claims fail.

The facts underlying this appeal are undisputed and have been set forth in New York v. National Services Industries, Inc., 134 F.Supp.2d 275, 276-77 (E.D.N.Y.2001) ("NSI I") and New York v. National Service Industries, Inc., 380 F.Supp.2d 122, 123-26 (E.D.N.Y.2005) ("NSI III"), familiarity with which is presumed. We repeat only those facts necessary to understand this appeal.

From 1962 to 1988, Serv-All operated a uniform rental business that served customers on Long Island. It delivered its clients clean uniforms, and picked up and cleaned the soiled ones. Until the mid-1980s, Serv-All cleaned the uniforms itself using a dry-cleaning process. In 1978, it arranged to have several dozen drums of perchloroethelyne, a hazardous substance used in dry cleaning, disposed of at the Blydenburgh Landfill in Islip, New York. In soil, perchloroethelyne decomposes into several chemicals, including vinyl chloride. Both perchloroethelyne and vinyl chloride are considered hazardous substances under CERCLA. See 42 U.S.C. § 9602; 40 C.F.R. § 302.4 (2005). Since 1983, the Blydenburgh Landfill has been listed in the New York Registry of Hazardous Waste Sites and in 1987 was added to the National Priority List of contaminated sites. Because Serv-All arranged for the disposal of the perchloroethelyne, the parties do not dispute that Serv-All was a potentially responsible party under CERCLA. See 42 U.S.C. § 9607(a)(3).

In October 1988, Serv-All sold almost all of its assets, including its customer list, current contracts, trucks, good will, and the right to use its name to Initial Service Investments ("Initial") for approximately $2.2 million. Ralph Colantuni and William Lepido, Serv-All's owners, also signed a covenant not to compete with Initial in the area for seven years. Initial operated the uniform rental business in large measure as Serv-All had done before the sale. It used the Serv-All name and trucks, and employed some of Serv-All's management and support personnel and all but one of Serv-All's former drivers. Initial did not continue Serv-All's practice of dry-cleaning uniforms, however, but instead laundered them in water at one of its facilities.

After the transaction, Serv-All changed its name to C-L Dissolution Corporation and adopted a liquidation plan. On January 27, 1989, C-L Dissolution Corporation formally dissolved. In 1992, NSI bought all shares of Initial's stock. On August 31, 1995, Initial merged into NSI.

Meanwhile, the State conducted a cleanup of the Blydenburgh Landfill, for which it incurred response costs that, as of 2002, exceeded $12 million with interest.1

In 1999, the State sued NSI to recover its response costs under CERCLA § 107(a), 42 U.S.C. § 9607(a), and for unjust enrichment and restitution under state law. Although a corporation that purchases another corporation's assets generally is not liable for the debts of the seller, the State asserted that NSI was liable because it fit into one of the four exceptions to this rule. See New York v. Nat'l Serv. Indus., Inc., 352 F.3d 682, 683 (2d Cir.2003) ("NSI II"). Specifically, the State argued that NSI was the "mere continuation" of Serv-All pursuant to the "substantial continuity" test we adopted in B.F. Goodrich v. Betkoski, 99 F.3d 505 (2d Cir.1996). In Betkoski, we concluded that "the substantial continuity test [is] the appropriate legal test" for determining whether a corporation that purchased another's assets is a mere continuation of the prior business and thus liable for its debts. Id. at 519. The substantial continuity test was a CERCLA-specific rule that we held displaced the narrow and more restrictive state common-law rules for determining whether an asset purchaser is a mere continuation of the seller. Id.

Relying on our decision in Betkoski, the district court (Mishler, J.) held that NSI was the legal successor to Serv-All and therefore responsible for Serv-All's CERCLA liability. See NSI I, 134 F.Supp.2d at 280-81. It consequently entered judgment for the State. NSI filed a timely appeal, maintaining that the substantial continuity test adopted in Betkoski was not good law after the Supreme Court's decision in United States v. Bestfoods, 524 U.S. 51, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998). In Bestfoods, a case involving parent-subsidiary liability under CERCLA, the Supreme Court rejected the test that the district court had applied in that case because it "disregard[ed] entirely . . . time-honored common-law rule[s]." Id. at 70, 118 S.Ct. 1876. The Court held that nothing in CERCLA indicated that Congress intended to abrogate the common law, and thus a parent corporation could be charged with its subsidiary's wrongdoing only when the corporate veil could be pierced. Id. at 63-64, 70, 118 S.Ct. 1876. While the Supreme Court noted that "[t]here is significant disagreement among courts and commentators over whether, in enforcing CERCLA's indirect liability, courts should borrow state law, or instead apply a federal common law of veil piercing," it did not resolve the question. Id. at 63 n. 9, 118 S.Ct. 1876.

In considering NSI's first appeal, we took from the Supreme Court's decision in Bestfoods "the principle that when determining whether liability under CERCLA passes from one corporation to another, we must apply common law rules and not create CERCLA-specific rules." NSI II, 352 F.3d at 685. "Because the substantial continuity test in Betkoski departs from the common law rules of successor liability," we held, "Betkoski is no longer good law." Id. As we explained in NSI II, the traditional common-law rules provide that a corporation that acquires another corporation's assets assumes the latter's liabilities only if (1) the successor corporation expressly or impliedly agrees to do so, (2) the transaction may be viewed as a de facto merger, (3) the successor is the mere continuation of the predecessor, or (4) the transaction is fraudulent. Id. Accordingly, we vacated the district court's grant of summary judgment and remanded the case to the district court for further proceedings.

In doing so, we declined to decide whether courts should apply state law or create a federal rule based on traditional common-law principles for purposes of determining successor liability under CERCLA. See id. at 687 n. 1. Nevertheless, we observed in NSI II that, although we had chosen a federal rule in Betkoski, the analysis for determining whether federal common law would absorb or displace state law might produce a different result after Bestfoods. See id.

On remand, NSI moved for summary judgment on the ground that it was not the legal successor to Serv-All. The State responded that NSI was liable pursuant to the "de facto merger" theory of successor liability. See NSI III, 380 F.Supp.2d at 128-29. The de facto merger doctrine creates successor liability when the transaction between the purchasing and selling companies is in substance, if not in form, a merger.

In granting NSI's motion, the district court (Townes, J.), considered the choice-of-law question left open in NSI II: whether CERCLA requires the displacement of state law for purposes of determining successor liability. Id. at 128. The court concluded that it did not need to decide the question, however, because the State's claim would fail regardless of which law applies. Id. The court found that general common law principles require continuity of ownership before a de facto merger can be found to have occurred. Id. at 129-30. Although the New York Court of Appeals has not explicitly held that continuity of ownership is required to find a de facto merger, the district court predicted that it too would require continuity of ownership under state law. See id. at 131. Because there is no evidence of continuity of ownership in this case, the district court held that NSI is not Serv-All's successor for purposes of the State's common-law or CERCLA claims. See id. at 134. The district court therefore entered judgment for NSI dismissing the State's claims.

On appeal, the State argues that New York law should govern whether NSI is the legal successor to Serv-All with respect to its CERCLA and common law claims. Because it contends that New York law is unsettled with respect to whether continuity of ownership is required to find a de facto merger, it asks us to certify this question to the New York Court of Appeals.

We review de novo a district court's grant of summary judgment, construing all evidence and drawing all reasonable inferences in favor of the State, the non-moving party. See Syms v. Olin Corp., 408 F.3d 95, 100 (2d Cir.2005).

The first question before us is what law provides the rule of decision governing corporate successor liability under CERCLA. We conclude, like the district court did, that we need not decide this question because the outcome would be the same whether we apply state law or a national rule derived from traditional common-law principles. To reach this conclusion, however, we review the analysis by which CERCLA choice-of-law questions should be resolved.

CERCLA does not specifically provide that a successor corporation may be held liable for response costs. Nevertheless, we have held that CERCLA encompasses successor liability. See NSI II, 352 F.3d at 685. Thus, strictly speaking, federal law (i.e., federal common law) governs successor liability under CERCLA. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 727, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). In giving content to that law, however, we must decide whether to "adopt state law or ... fashion a nationwide federal rule." Id. at 728, 99 S.Ct. 1448. Because federal common law governs the State's claim whether we apply state law or a national rule, the terminology can be confusing. To clarify, we use the term "traditional common law" to refer to the law that would govern were we to hold that state law should be displaced in favor of a national rule. See Bestfoods, 524 U.S. at 70, 118 S.Ct. 1876 (explaining that federal common law under CERCLA should not depart from traditional common law principles); NSI II, 352 F.3d at 685 (concluding that federal common law for purposes of successor liability under CERCLA should apply traditional common law principles). We use "state law" or "New York law" to refer to the rule that would govern were we to hold that federal common law would not displace state law.

As an initial matter, NSI maintains that we do not need to undertake a new choice-of-law analysis. It contends that Betkoski's holding that state law should be displaced is still good law even if its adoption of the substantial continuity test is not. That is, NSI asserts that we are bound by our decision in Betkoski that CERCLA requires a national rule for purposes of determining whether a corporation is a successor-in-interest even though the national rule we adopted in that case has been overruled. We disagree.

In Betkoski, we held that CERCLA required a uniform federal rule for successor liability because doing so allowed us to adopt the substantial continuity test. See Betkoski, 99 F.3d at 519; accord B.F. Goodrich v. Betkoski, 112 F.3d 88, 91 (2d Cir.1997) ("Betkoski II") (clarifying upon the denial of rehearing that "our primary reason for adopting a federal common law rule [in Betkoski] was our concern that allowing state law rules such as the inflexible and easily evaded `identity' rule to control the question of successor liability would defeat the goals of CERCLA"). Because we determined that the substantial continuity test could not stand after Bestfoods, our rationale for displacing state law has been overruled. We should therefore revisit our choice-of-law decision in Betkoski. See BankBoston, N.A. v. Sokolowski (In re Sokolowski), 205 F.3d 532, 534-35 (2d Cir.2000) (holding that we are "bound by a decision of a prior panel unless and until its rationale is overruled, implicitly or expressly, by the Supreme Court or this court en banc" (quotation marks and citation omitted)).

Generally, "[i]n the absence of congressional guidance on the issue of what law to apply, we look to the three-part test enunciated by the Supreme Court in United States v. Kimbell Foods, Inc." VKK Corp. v. Nat'l Football League, 244 F.3d 114, 122 (2d Cir.2001). Under Kimbell Foods, courts determining whether federal common law should displace state law must consider: (1) whether the federal program, by its very nature, requires uniformity; (2) whether application of state law would frustrate specific objectives of the federal program; and (3) whether application of a uniform federal rule would disrupt existing commercial relationships based on state law. 440 U.S. at 728-29, 99 S.Ct. 1448. As the Supreme Court noted recently, the essence of this test is "whether the relevant federal interest warrants displacement of state law." Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. ___, 126 S.Ct. 2121, 2132, 165 L.Ed.2d 131 (2006) (citing Boyle v. United Techs. Corp., 487 U.S. 500, 507 n. 3, 108 S.Ct. 2510, 101 L.Ed.2d 442 (1988)).

The choice-of-law question is a complicated one that has led our sister circuits to reach different answers. See, e.g., N. Shore Gas Co. v. Salomon, Inc., 152 F.3d 642, 650 (7th Cir.1998) (noting the circuit split). On one hand, in United States v. Davis, 261 F.3d 1 (1st Cir.2001), for example, the First Circuit found "no evidence that application of state law to the facts of this case would frustrate any federal objective," and held that federal common law therefore would absorb state law to determine the scope of successor liability under CERCLA. Id. at 54. The court concluded that this approach "heed[s] the Supreme Court's warning that courts should presume that matters left unaddressed are subject to state law when a `comprehensive and detailed' federal statutory regime is at issue, and that cases in which the creation of a `special federal rule would be justified' generally are `few and restricted.'" Id. at 53 (quoting O'Melveny & Myers v. Fed. Deposit Ins. Corp., 512 U.S. 79, 85, 87, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994)); see also Redwing Carriers, Inc. v. Saraland Apartments, 94 F.3d 1489, 1501 (11th Cir. 1996) (finding that "[a]bsent a showing that state partnership law is inadequate to achieve the goals of CERCLA, we discern no imperative need to develop a general body of federal common law to decide cases such as this" (internal quotation marks omitted)); City Mgmt. Corp. v. U.S. Chem. Co., 43 F.3d 244, 253 (6th Cir.1994) (explaining that state law governs the question of corporate successor liability under CERCLA); Atchison, Topeka & Santa Fe Ry. Co. v. Brown & Bryant, Inc., 159 F.3d 358, 363 (9th Cir.1998) (noting that "[a]lthough often invoked in this context, there has been no real explanation of the need for uniformity in this particular area of successor liability — especially since state law will in many other instances determine whom the EPA may or may not look to for compensation"); Anspec Co., Inc. v. Johnson Controls, Inc., 922 F.2d 1240, 1248 (6th Cir.1991) (Kennedy, J. concurring) (arguing that corporations are creatures of state law and therefore state law should determine their liability absent a conflict with federal law).

On the other hand, in a split decision, the Third Circuit recently reaffirmed its pre-Bestfoods precedent that successor liability for purposes of CERCLA should be determined by a uniform, national rule. See United States v. Gen. Battery, 423 F.3d 294 (3d Cir.2005). In doing so, the court observed that no Supreme Court case had explicitly overruled its prior holding. See id. at 299-300. It also concluded that the Supreme Court's approach in Bestfoods supported the use of a national rule based on traditional common law. Id. at 300. In Bestfoods, the Third Circuit found, the Supreme Court had applied "fundamental" and "hornbook" principles of corporate liability, not the law of any particular state. Id. As the Third Circuit explained, "the Supreme Court declined to apply Michigan law and instead looked to the general `hornbook' rule of veil-piercing." Id. Moreover, the General Battery court rejected the reasoning of the First and Ninth Circuits, which, as noted, found no conflict between CERCLA's purposes and the use of state law. Id. at 301-02, 303. By contrast, the Third Circuit concluded that "[a] more uniform and predictable federal liability standard corresponds with specific CERCLA objectives by encouraging settlements and facilitating a more liquid market in corporate and `brownfield' assets." Id. at 302. Similarly, the Fourth Circuit concluded that a national rule is required by "[t]he national interest in the uniform enforcement of CERCLA and the same interest in preventing evasion by a responsible party." United States v. Carolina Transformer Co., 978 F.2d 832, 837 (4th Cir.1992).

As we observed in NSI II, the Kimbell Foods factors appear to favor the absorption (non-displacement) of state law. See NSI II, 352 F.3d at 687 n. 1. Although CERCLA is a federal statute for which there is presumably an interest in uniform application, where there is no conflict between federal policy and the application of state law, "a mere federal interest in uniformity is insufficient to justify displacing state law in favor of a federal common law rule." Betkoski II, 112 F.3d at 91 (citing O'Melveny & Myers, 512 U.S. at 87-88, 114 S.Ct. 2048); VKK Corp., 244 F.3d at 121-22; see also Kamen v. Kemper Fin. Servs., 500 U.S. 90, 98, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991) ("The presumption that state law should be incorporated into federal common law is particularly strong in areas in which private parties have entered legal relationships in the expectation that their rights would be governed by state-law standards.... Corporate law is one such area.").

Here, NSI points to no conflict between the application of state law and the federal interests at issue in CERCLA, and we fail to see one. See Empire HealthChoice Assurance, Inc. v. McVeigh, 396 F.3d 136, 141 (2d Cir.2005) (finding no reason to displace state law where "Empire's briefs on appeal fail to mention a single state law or state-imposed duty that runs contrary to the federal interests asserted in this case"), aff'd, ___ U.S. ___, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006). New York law embraces successor liability and the tests it uses to define successor liability are not unduly restrictive. In fact, according to the State, New York's standards for finding successor liability under the de facto merger exception are more expansive than traditional common-law principles. Nevertheless, because the State's claim fails under either New York law or traditional common-law principles, we need not, and thus do not, decide whether CERCLA requires the displacement of state law in this instance.

Under both New York law and traditional common law, a corporation that purchases the assets of another corporation is generally not liable for the seller's liabilities. See Gen. Battery, 423 F.3d at 305 (applying traditional common law principles); Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 244-45, 464 N.Y.S.2d 437, 451 N.E.2d 195 (1983) (applying New York law). Both New York law and traditional common law, however, recognize certain exceptions to this rule. Gen. Battery, 423 F.3d at 305; Schumacher, 59 N.Y.2d at 245, 464 N.Y.S.2d 437, 451 N.E.2d 195. Hence, as noted above, a buyer of a corporation's assets will be liable as its successor if: "(1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations." Schumacher, 59 N.Y.2d at 245, 464 N.Y.S.2d 437, 451 N.E.2d 195; accord N. Shore Gas Co., 152 F.3d at 651 (traditional common-law principles).

The exception for the "consolidation or merger of seller and purchaser" is at issue here. Schumacher, 59 N.Y.2d at 245, 464 N.Y.S.2d 437, 451 N.E.2d 195. The State claims that Serv-All's sale of its assets to Initial (now NSI) was, in fact, a de facto merger of Serv-All into Initial. As noted, "[a] de facto merger occurs when a transaction, although not in form a merger, is in substance `a consolidation or merger of seller and purchaser.'" Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45 (2d Cir.2003) (quoting Schumacher, 59 N.Y.2d at 245, 464 N.Y.S.2d 437, 451 N.E.2d 195). At common law, the hallmarks of a de facto merger include: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation as soon as possible; (3) assumption by the purchaser of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets, and general business operation. See generally N. Shore Gas Co., 152 F.3d at 652 & n. 6; accord In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 520 (2d Cir.1988); 15 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 7124.20 (3d ed.2002) (citing the majority rule).