Home » Case Summaries » 1997 » Atchison, Topeka, & Santa Fe Railway Co. v. Brown & Bryant, Inc.


Atchison, Topeka, & Santa Fe Railway Co. v. Brown & Bryant, Inc.



Railroad companies Atchison, Topeka & Santa Fe Railway Company and Southern Pacific Transportation Company (Railroads) brought a contribution action under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).[1] The Railroads sought contribution for costs due to soil contamination on property they leased to Brown & Bryant (B&B). However, contribution was not sought from B&B but from PureGro, a purchaser of many B&B assets. The Ninth Circuit held that PureGro was not liable for contribution because it was not the “successor-in-interest” under either the “substantial continuation” or “fraudulently entered transaction” exceptions providing successor liability.

B&B operated an agricultural chemical business on property leased from the Railroads. However, upon realizing it could not meet compliance orders issued by the Environmental Protection Agency (EPA), it sold about half of its equipment to PureGro, a competitor in the same business. The equipment sale agreement provided that the purchase was not a purchase of B&B’s business and that PureGro was not a de jure or de facto successor. In another sale agreement, PureGro purchased tanks and trailers from B&B’s sole shareholder, John Brown.

After these purchases, PureGro and Brown entered into a consulting agreement whereby PureGro retained Brown to help acquire and maintain the prior B&B customers and to assist in the solicitation of new business. PureGro also hired all of B&B’s employees, including Brown. For a short time after the asset sale, PureGro occasionally bought fertilizer from B&B. Eventually, PureGro took over B&B’s telephone numbers. One local newspaper reported that B&B had “joined” PureGro.

In analyzing whether PureGro was liable as a successor-in-interest, the Ninth Circuit began with the general rule that asset purchasers ordinarily do not incur successor liability. However, the Railroads argued that PureGro was liable under two exceptions to this rule, namely the “substantial continuation” or the existing “fraudulently-entered transaction” exception.

The “substantial continuation” exception expands the “mere continuation” exception to allow the imposition of successor liability if the purchasing corporation is substantially, as opposed to merely, a continuation of the selling corporation. This broader exception had not been adopted in the Ninth Circuit, yet the Railroads argued that the Ninth Circuit should use its powers under federal common law to expand CERCLA liability by adding this exception. The Ninth Circuit examined its prior holding in Louisiana-Pacific Corp. v. Asarco,[2] which left open the availability of the broader exception. In Louisiana-Pacific, the Ninth Circuit had stressed the need for uniform federal rules for successor liability. However, in the case at hand, the Ninth Circuit found Louisiana-Pacific to be undermined by a line of Supreme Court cases which stressed that state law determines the scope of successor liability.[3] Therefore, the Ninth Circuit rejected the creation of the “substantial continuation” exception because California state law provided no such exception. The Ninth Circuit further held that even under federal law, it would not create such an exception because state law was adequate to further CERCLA’s goals.

The “fraudulently-entered transaction” exception subjects an asset purchaser to successor liability if the transaction was entered into in order to escape liability. On the facts of the case, the Ninth Circuit found that the sale did not provide B&B a means of escaping liability. B&B had insufficient assets even before the sale. Nor did the parties enter the sale solely to circumvent CERCLA liability. The court noted that the appraised value was paid for each item sold and that there was no agreement between B&B and PureGro forcing PureGro to hire B&B’s employees. Thus, the Ninth Circuit held that this exception was not applicable to the present controversy. 

[1]Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), 42 U.S.C. §§ 9601-9675 (1994).

[2]909 F.2d 1260 (9th Cir. 1997).

[3]United States v. Kimbell Foods, 440 U.S. 715 (1979); O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994); Atherton v. FDIC, 519 U.S. 213 (1997).

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