ASSET PURCHASERS BEWARE; NEW
YORK DISTRICT COURT APPLIES "SUBSTANTIAL CONTINUITY" TEST IN CERCLA
CASE DESPITE CONCERNS RAISED BY U.S. SUPREME COURT, SUBJECTING ASSET PURCHASER
TO SUCCESSOR LIABILITY
On February 16, 2001, the United States District Court for
the Eastern District of New York concluded that the federal common law
"substantial continuity" test for evaluating asset purchaser successor
liability under CERCLA is alive and well.
According to the "substantial continuity" test,
whether an asset purchaser is a "substantial continuation" of the
seller and should thus be held liable under CERCLA as its legal successor
depends upon the courtís evaluation of eight factors: (1) retention of the
sellerís employees by the asset purchaser; (2) retention of the same
supervisory personnel; (3) retention of the same production facilities and
location; (4) production of the same product; (5) retention of the same name;
(6) continuity of assets between the seller and purchaser; (7) continuity of
general business operations; and (8) representations by the asset purchaser
holding itself out to the public as continuation of the sellerís enterprise.
The broad sweep of this test, developed under federal common law, tends to
subject asset purchasers to successor liability where traditional principles of
state corporate law would not.
Serv-All operated an industrial garment rental service in
Bayshore, New York from 1962 through 1988. As part of its service, Ser-All
dry-cleaned uniforms using the
solvent perchlorethylene or PCE.
Ten years later, Serv-All sold substantially all of its
assets to a company known as Initial Service Investments ("ISI") for
approximately $2.23 million, including its customer contracts, customer lists,
trucks, garage equipment, inventory, accounts receivable, office supplies,
uniforms, and rights to the "Serv-All" trade name. Following the sale,
Serv-All was liquidated and dissolved, and ISI hired all of Serv-Allís truck
drivers and used the Serv-All trucks to provide the industrial garment rental
services to Serv-Allís former customers. ISI did not, however, acquire or
operate out of Serv-Allís facility, and did not dry-clean uniforms as part of
the services it provided. In 1992, 100% of the stock of ISI was acquired by NSI.
Upon review of these facts, the District Court concluded that "NSIís
operations were a substantial continuation of Serv-Allís business, and thus,
NSI is subject to successor liability for Ser-Allís environmental
(Saul Ewing, April 2001)