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Pharmacia Corporation v. Motor Carriers Services Corp.

2009 WL 323154 (U.S. Ct. App. 3rd Cir. 2009) (Unpublished)

ENVIRONMENTAL LIABILITY — The term “cleanup” includes investigatory, remedial, and monitoring work mandated by law or a government agency with no time limitation based on when the pollutants at issue migrated from the site and the cost of all studies and any damages required to be paid in connection with the pollutants can be considered as “cleanup costs.”

For approximately thirty-five years, a company manufactured chemicals at a facility abutting a river. It sold the site for approximately $5.5 million. The purchase and sale agreement expressly called for the buyer to pay all costs and expenses associated with environmental cleanup activities required by federal or state law for any substances on or migrating from the site. Four years later, the buyer was acquired by, and became a wholly-owned subsidiary of, another corporation. The acquiring corporation became a successor to the buyer under the purchase and sale agreement. It assured the seller that the buyer’s net worth was at least $5 million. Ten years after the original sale, the New Jersey Department of Environmental Protection (DEP) issued an administrative directive that the seller and buyer were potentially liable under state law for contamination of the river. Pursuant to an Order on Consent issued by the DEP, the settling parties agreed to jointly fund $10 million of the costs to remediate the river contamination. In addition, the Environmental Protection Agency (EPA), and the National Oceanic and Atmospheric Administration (NOAA) contacted the seller regarding potential liability under federal law for the costs of waterway contamination studies and for natural resource damages to the waterway. The buyer refused to indemnify the seller for any environmental liability in connection with these two actions. The seller’s claims for indemnification were incorporated in a lawsuit brought by the seller against the buyer and the buyer’s affiliate in the U.S. District Court. The District Court held that the buyer and the affiliate’s parent company were liable for any liability incurred by the seller under the purchase and sale agreement. It ultimately ordered the indemnifying parties to pay the seller’s cleanup costs and attorney’s fees, each incurred in connection with the underlying government agency investigations. The buyer appealed.

In the appeal, the Court of Appeals found that, under the agreement, the buyer was required to indemnify the seller for any cleanup costs imposed under federal or state law if the costs arose from environmental harms caused by the seller’s former operations. It further defined “cleanup” to mean investigatory, remedial, and monitoring work mandated by law or a governmental agency in connection with the escape of substances from the chemical site, with no time limitation based on when the pollutants at issue migrated from the site. It held that the cost of all studies and any damages required to be paid were to be treated as “cleanup costs,” as contemplated under the purchase and sale agreement. The Court also held that the district court correctly concluded that the buyer’s affiliate was liable for the buyer’s indemnity obligations, as the buyer no longer held shareholder meetings, maintained a balance sheet, employed individuals or issued financial reports. It held that the buyer was merely a holding company of the affiliate. However, it reversed the lower court’s judgment that the affiliate’s parent company was also responsible for such costs, as the District Court had made no finding that the combined net worth of the buyer and the affiliate was less than the net worth that the buyer was required to maintain pursuant to the agreement.


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