SPR Defeats Appeal of Superfund Liability Claims Based on Veil-Piercing, Lease/Sublease of Contaminated Property
By: Ed Roggenkamp
SPR attorneys successfully defended the appeal of their summary judgment victories for the defendants in Next Millennium Realty, LLC v. Adchem Corp. (16-1260-cv) in the Court of Appeals for the Second Circuit. The May 11, 2017 order dismissing the appeal upheld three successive summary judgment decisions by the District Court. These decisions (1) rejected the plaintiffs’ argument that a lessee of property was liable for a subtenant’s releases of contamination; (2) confirmed that a veil-piercing claim under CERCLA must include proof that improper domination and control of a corporation caused a release of contamination, and that the Next Millennium plaintiffs had failed to provide any evidence of such causation; and (3) found that a corporation that dissolved in 1977 could not be sued in 2003, when the plaintiffs filed their suit. Previous blog posts on those decisions may be found here and here.
The plaintiffs in the case are the current owners of a contaminated site in Westbury, New York, which is a portion of the New Cassel/Hicksville Groundwater Contamination Superfund Site. The site was contaminated with perchloroethylene (“PCE”), a common dry-cleaning solvent, by a sublessee that operated at the site, and the plaintiffs sought to recover millions of dollars in remediation costs under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), more commonly known as the Superfund law.
CERCLA imposes liability on, among others, any entity that owned or operated a contaminated facility at the time that hazardous substances were disposed of . However, the companies that were alleged to have operated the facility at issue in Next Millennium have long since gone out of business. In fact, part of the Second Circuit’s order upheld the district court’s ruling that one of those corporations, which went out of business in 1977, could no longer be sued by the time the plaintiffs filed their case in 2003.
In addition to their claims against the dissolved corporation, the plaintiffs sought to recover under two different theories of liability: first, that the real estate holding company that leased the site and subleased it to the operating companies was the de facto owner of the site at the time it was contaminated; and second, that the operator entities and another company owned by the same family had been run as a “single enterprise,” such that each should be liable for the alleged acts of the other.
CERCLA owner liability for lessee/sublessors was addressed by the Court of Appeals for the Second Circuit in the 2000 case of Commander Oil v. Barlo Equipment Corp., which laid out several factors to be considered in determining whether a lease converts the lessee into a de facto “owner”. The Circuit upheld the previous decision that the lessee/sublessors (SPR’s clients) “lacked most of the core bundle of rights that are associated with ownership of property.”
The Second Circuit also upheld the dismissal of the plaintiffs’ “single enterprise” claim against the defendants. Under New York law, the plaintiffs’ “single enterprise” claim is analyzed under the legal doctrine known as “piercing the corporate veil.” Typically, veil-piercing is used to prevent the use of shell corporations to commit fraud. However, it is broadly applicable to any situation in which the owners or directors of a corporation improperly dominate and control the corporation, and in doing so, cause harm to the plaintiffs. In the CERCLA context, this means that the dominating entity’s improper control of the other company must cause the contamination at issue. The Circuit upheld the district court’s decision that the plaintiffs had failed to present any evidence of any causal link between the contamination at the site and the alleged domination and control.