7th Circuit Upholds 25% CERCLA Allocation to Innocent Business Buyer

Introduction

Buying a business with CERCLA issues is fraught with risk. The buyer hopes that it can price the deal correctly; which includes an estimate of what if anything the buyer can recover from the actual polluter.

The deal

Here, the buyer purchased an environmentally contaminated Indiana steel mill out of bankruptcy in 20014. The mill was offered for sale at $20 million and sold for $6.4 million.

The lawsuit

The buyer sued the former owner who had caused the contamination to recover its cleanup costs under CERCLA in an Indiana federal district court. The court ordered the former owner to pay 75% of the costs leaving the buyer responsible for the remaining 25%. The buyer appealed.

The buyer argued that the former owner should be responsible under CERCLA for 100% of the cleanup costs as it caused the pollution. The 7th Circuit Court of Appeals disagreed. It said that CERCLA gives courts the authority to allocate the cleanup costs between the former owner and the buyer based upon what is fair and rationale.

Here, the buyer knew going into the deal of the extensive cleanup issues. Furthermore, it had purchased the steel mill at a deep discount. Thus, it was fair and rationale to stick the buyer with 25% of the cleanup costs.

This case is referred to as Valbruna Slater Steel Corporation v. Joslyn Manufacturing Company, Nos. 18-2633, 18-2738, United States Court of Appeals, Seventh Circuit (Decided August 8, 2019)  

Comment

A lesson for a buyer of businesses with environmental problems is to not expect that only deep pocket former owners who were at fault will ultimately bear all the clean up costs; especially if the buyer knew about the problem and used that information to get a significant price reduction.

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

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