Stock sellers lose opening legal battle over buyer’s environmental claim

In November 2007, Sellers of Target agreed to sell Target to Buyer through a stock purchase agreement. When the sale closed in December 2007, Sellers placed $16.7 million into escrow to secure any post-closing claims that Buyer might assert.

Target’s assets included a large facility in Muncie, Indiana.  Before 1965, one section of the facility served as a trucking terminal, complete with a fueling station and underground storage tanks. Several years after the Target sale closed, Buyer found previously undisclosed soil and groundwater contamination in that section of the facility.

Buyer wrote to Sellers in March 2011 about the contamination.  Specifically, Buyer told Sellers that the levels of benzene and vinyl chloride at the facility exceeded guideline levels set by the state of Indiana for soil and groundwater cleanup, and that Buyer needed to report the contamination to Indiana pursuant to the Indiana spill rule. Buyer reported the contamination to Indiana the same day it wrote to Sellers.

Indiana responded quickly and instructed Buyer to submit a written spill report as required under the Indiana spill rule. Less than two weeks later, Indiana—in accordance with Indiana statutes on hazardous substances—contacted Buyer again to ask Buyer to investigate the nature and extent of the contamination at the Muncie facility and submit another written report. Indiana also notified Buyer of potential civil penalties for failing to comply with its official request.

In April 2011, Buyer sent Sellers a claim notice based upon the stock purchase agreement’s indemnification provisions. That notice provided a preliminary estimate of Buyer’s costs for complying with Indiana’s cleanup requirements. Buyer gave Sellers an updated cost estimate a month later. Shortly after, the parties (who had already released most escrow funds) directed the escrow agent to keep $3.3 million in escrow pending further instructions.

In late 2011, Buyer agreed to enter the Muncie facility into Indiana’s voluntary remediation program, an alternative to the more rigid state cleanup program. Ultimately, under Indiana’s oversight and direction, Buyer investigated the facility further and developed a remediation plan. Pursuant to its statutory authority, Indiana reviewed and approved the final plan in July 2017. To the date of this court ruling, Buyer had incurred over $1.5 million in investigation and remediation costs.

Sellers claimed that it has no responsibility under the stock purchase agreement to indemnify Buyer for contamination; and asked a Chicago federal district court to so rule so that Buyer’s environmental claim would not hold up release of the remaining $3.3 million held in escrow. Early in the litigation Sellers asked the court to rule in its favor based upon the above facts and the language of the stock purchase agreement.

Sellers made technical arguments for its position which the court did not buy. The result: the case goes on.

This case is referred to as Hammond, Kennedy, Whitney & Co., Inc. v. Honeywell International, Inc., Case No. 16-cv-9808, United States District Court, N.D. Illinois, Eastern Division, (January 29, 2018).

Comment. A buyer is always concerned about unknown liabilities of the business to be acquired. One of the biggest unknown liabilities can be environmental liabilities.

In this case the unknown soil and groundwater contamination apparently came from a target owned a facility that before 1965, served as a trucking terminal, complete with a fueling station and underground storage tanks.

To protect Buyer, the stock purchase agreement required Sellers to represent and warrant that there were no environmental problems with the facility. The stock purchase agreement also obligated Sellers to indemnify Buyer if this was not true, and this promise was secured by an escrow of a significant portion of the purchase price.

Those provisions put Buyer in a strong position in this litigation.

By John McCauley: I help people start, grow, buy and sell their businesses.



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Posted in environment representations and warranties, escrow, indemnification, representations and warranties

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