Explore a pivotal legal case where a buyer acquired an environmentally contaminated steel mill and sought to recover cleanup expenses under CERCLA. Discover the court’s decision and its implications for M&A deals with environmental liabilities.
September 13, 2019
M&A Stories
Introduction:
Purchasing a business with environmental liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) involves inherent risks. Buyers must assess their ability to price the deal accurately and recover costs from the responsible party.
The Transaction:
In this case, a buyer acquired an environmentally contaminated Indiana steel mill through bankruptcy proceedings in 2014. The initial asking price was $20 million, but it was eventually sold for $6.4 million.
The Legal Dispute:
The buyer initiated legal action against the former owner, who had caused the pollution, seeking to recover cleanup expenses under CERCLA in an Indiana federal district court. The court ruled that the former owner was liable for 75% of the cleanup costs, leaving the buyer responsible for the remaining 25%. The buyer appealed.
Court’s Decision:
The buyer contended that the former owner should bear 100% of the cleanup costs as the polluter. However, the 7th Circuit Court of Appeals disagreed. It held that CERCLA permits courts to allocate cleanup costs between the former owner and the buyer based on fairness and reason.
In this case, the buyer was aware of the extensive cleanup challenges when entering the deal and had acquired the steel mill at a significant discount. Therefore, allocating 25% of the cleanup costs to the buyer was deemed fair and reasonable by the court.
Commentary:
Buyers considering businesses with environmental issues should not assume that only deep-pocketed former owners at fault will shoulder the entire cleanup burden, especially if the buyer was aware of the problem and used that knowledge to negotiate a reduced purchase price.
Case Reference:
Valbruna Slater Steel Corporation v. Joslyn Manufacturing Company, Nos. 18-2633, 18-2738, United States Court of Appeals, Seventh Circuit (Decided August 8, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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