Categories: Environmental Remediation
February 4, 2019
Recently, in Terranova v. General Electric Pension Trust, __ N.J. Super. __, 2019 WL 149440 (N.J. Super. Ct. App. Div. Jan. 4, 2019), the Appellate Division held that the doctrine of “judicial estoppel” is a valid defense to Spill Act contribution claims. Judicial estoppel is an equitable doctrine that prevents a party from asserting a position inconsistent with one it successfully advanced previously during litigation. The doctrine protects the integrity of the judicial process. Because judicial estoppel is an equitable defense created by the Judiciary and not by the Legislature, the Terranova panel reasoned that the defense was not eliminated by the section of the Spill Act that limits defenses to “an act or omission caused solely by war, sabotage, or God, or a combination thereof.” To reach that conclusion, the panel relied on the Supreme Court’s prior recognition, in Morristown Associates v. Grant Oil Co., 220 N.J. 360 (2015), that the Spill Act does not deprive parties of unlisted defenses established by court rule under the jurisdiction of the Judiciary.
The Appellate Division, therefore, affirmed summary judgment in favor of the Spill Act contribution defendants based on the judicial estoppel defense. Several years prior, the plaintiff arbitrated a Spill Act contribution claim against other parties, contending that those other parties alone were solely responsible for the contamination, a contention that ignored findings by its own expert report that there were potentially other responsible parties. Having successfully advanced that position and obtained an arbitration award, the plaintiff could not now bring a claim against new defendants for contribution by contending that they were also responsible for the contamination.
To be sure, the Terranova panel’s decision was couched in terms of the judicial estoppel defense. But much of the panel’s concluding language and reasoning sounds an awfully lot like application of the entire controversy doctrine: the prospect of judicial estoppel “compels owners to pursue, in a single action, dischargers which are known or reasonably knowable from the circumstances.” Plaintiffs, the panel continued, are “are precluded from floating a lazy cast toward one discharger and then shooting a second line toward others, seeking contribution for clean-up of the same property.” Indeed, the panel acknowledged these policy objectives are shared by other doctrines, including the entire controversy doctrine.
So why was this not an “entire controversy doctrine” case from the get-go? Early on in the decision, the panel waded through the procedural morass of the case, which ultimately led it to the conclusion that the trial court relied only on judicial estoppel to grant summary judgment—though several defendants had also asserted the entire controversy doctrine. It appears, then, that the Appellate Division took something akin to the path of least resistance to reach the same equitable result it likely would have under the entire controversy doctrine.In any event, based on Terranova, it is a near-certainty that the “entire controversy doctrine” likewise survives as an equitable defense to a Spill Act contribution claim. If anything, that equitable doctrine has an even more rock-solid case for survival because it is embodied in Rule 4:30A, and Morristown Associates already held that defenses established by court rule are not subject to legislative abrogation.
January 17, 2019
Like its federal counterpart CERCLA, the New Jersey Spill Compensation and Control Act (“Spill Act”) imposes strict liability for environmental cleanup costs. But on whom? The legal test used to answer that question has drastic consequences on the potential personal liability of corporate owners and officers. Though New Jersey courts have relied upon the more stringent “veil piercing” test, a recent decision of the Appellate Division departed therefrom, opting to utilize a test that makes it substantially easier to tag corporate owners and officers with personal Spill Act liability. That departure was likely incorrect. The conflict may ultimately require the Supreme Court of New Jersey to weigh in.
Since the decision of the U.S. Court of Appeals for the Third Circuit in Witco Corp v. Beekhuis, 38 F.3d 682, 692 (3d Cir. 1994), corporate owners and officers in New Jersey have faced potential personal liability as “operators” under CERCLA, notwithstanding the corporate form. Personal liability is a function of the corporate owner or officer’s participation in the conduct resulting in a release of a hazardous substance. As distinguished from potential CERCLA “operator” liability, the Appellate Division’s decision in State, Department of Environmental Protection v. Arky’s Auto Sales, 224 N.J. Super. 200, 207 (App. Div. 1988), requires there be grounds to “pierce the corporate veil” before personal liability can be imposed on a corporate owner or officer under the Spill Act. The Arky’s Auto decision rejected the imposition of personal liability on the two shareholders and officers of a junkyard business because they “were acting for the corporation, not for themselves individually” and there was no evidence supporting that the company’s “corporate veil should be pierced,” which requires that a plaintiff first show fraud or injustice. Several federal district courts recognize the Spill Act veil piercing requirement. Veil-piercing, in fact, has been a staple of Spill Act liability analysis since State, Department of Environmental Protection v. Ventron Corp., 94 N.J. 473, 500-02 (1983). However, a recent decision of the Appellate Division discarded the traditional Spill Act veil-piercing requirement, replacing it with something closely resembling the Witco “operator” liability analysis for CERCLA liability.
In Morris Plains Holding VF, LLC v. Milano French Cleaners, Inc., A-604-16, 2018 WL 1882956, at *2 (N.J. Super. Ct. App. Div.), certif. denied, 236 N.J. 109 (2018),a panel of the Appellate Division affirmed the trial court’s imposition of Spill Act liability on the sole shareholder of a dry-cleaning business operating as a corporation. Rejecting the shareholder’s contention that there were no grounds to pierce the corporation’s veil, the panel instead focused on the fact that he was “everything” to the business: it’s only shareholder, its operator, the person responsible for overseeing and handling the chemical that contaminated the site, and the person in charge of compliance with legal regulatory obligations. Finding this sufficient, the panel held that the Spill Act’s language imposing liability on persons “in any way responsible” for a release evidenced the Legislature’s intent to impose expansive liability “without regard for corporate veils and the like.” The statutory language, the panel believed, did not contemplate that a “shareholder of a close corporation could contaminate property, put his corporation in bankruptcy, and walk away from the problem.” Notably, the Supreme Court denied certification.
The Milano analysis is also inconsistent with the Appellate Division’s decision only two years prior in New Jersey Department of Environmental Protection v. Navillus Group, A-4726-13, 2015 WL 9700541, at *8-9 (N.J. Super. Ct. App. Div. Jan. 14, 2016), wherein the panel assessed corporate owner and officer liability using a veil-piercing analysis. Reversing the trial court’s imposition of Spill Act liability on the corporation’s owner and officer, the panel utilized a veil piercing analysis. The plaintiff had not adduced sufficient evidence on summary judgment to demonstrate the appropriateness of veil piercing, which is to be utilized to avoid a perpetration of fraud, a crime, evade the law, or where an individual is abusing the corporate form as an alter ego.
The veil piercing test is both more consistent with precedent and with the language of the Spill Act itself. Veil piercing is endorsed by the published Arky’s Auto case directly concerning personal liability of a corporate owner or officer. But other analogous precedent is also instructive on this issue. In Allen v. V and A Brothers, Inc., 208 N.J. 114, 130-33 (2011), the Supreme Court addressed the potential for personal liability of corporate owners and employees under the strict liability New Jersey Consumer Fraud Act (“CFA”). The Court emphasized that the statute’s definition of “person” refers not only to a natural person, but also “include[es] individuals who are acting through or on behalf of corporations and other business entities,” i.e. “any agent, employees, salesman, partner, officer, director, member, stockholder, associate, [or] trustee . . . thereof.” This “breadth” and “expansive sweep of the definition” of the term lent strong support to imposition of direct personal liability under the CFA. Veil piercing was unnecessary to impose personal liability.
The Spill Act, however, stands in marked contrast. While it holds “any person” strictly liable for their discharge of a hazardous substance or if they are in any way responsible therefor, N.J.S.A. 58:10-23.11g(c)(1), and also strictly liable for contribution, N.J.S.A. 58:10-23.11f(a)(2)(a), the Spill Act defines “person” only as “public or private corporations, companies, associations, societies, firms, partnerships, joint stock companies, individuals, the United States, the State of New Jersey and any of its political subdivisions or agents.” N.J.S.A. 58:10-23.11b. Thus, unlike the CFA, the Spill Act conspicuously omits any reference to individuals acting on the behalf of corporate entities. This difference lends further credence to the conclusion that Arky’s Auto veil piercing, rather than Witco/Milano “operator” liability is appropriate to determine the potential personal liability of a corporate owner or officer.
The ostensible unsettled nature of the law governing the personal liability of corporate owners and officers likely means that the Supreme Court will ultimately have to intercede. In the meantime, it is paramount in Spill Act litigation to develop and be armed with the facts ready to prosecute or defend a Spill Act claim utilizing both legal tests—perhaps with an eye to review by the high court. This is particularly true given that the standard for owner/officer liability under CERCLA is settled and is invariably involved in a Spill Act case.
The firm’s Environmental Law Department welcomes any opportunity to assist you with your environmental counseling and litigation needs
January 17, 2019
Recently, in Morris Plains Holding VF, LLC v. Milano French Cleaners, Inc., the New Jersey courts held the sole shareholder of a corporation personally liable for the cost to clean up the property on which his business operated. The defendant operated a dry cleaning business in a shopping center. When dry cleaning solvents were discovered in 1999, the defendant spent $140,000 over 10 years remediating the property before closing its business and filing for bankruptcy in 2012. At that point, the corporate defendant had no assets to complete the cleanup. Plaintiff, who owned the shopping center and assumed responsibility for the remediation, sued the dry cleaner’s sole shareholder, individually, and the trial court found he was personally liable under the New Jersey Spill Compensation and Control Act. Thus, the corporate shareholder was required to spend his own money on the cleanup costs.
Defendant argued that the facts proven at trial did not show that he was a “discharger” as defined in the Spill Act, was responsible for the discharge of hazardous substances or that there was a basis for piercing the corporate veil to hold him personally liable. The Appellate Division affirmed the trial court’s decision that there was no need for a “smoking gun witness” who had seen the sole shareholder actually discharge the solvents onto the property, since the dry cleaning business used 15 gallons of dry cleaning solvent annually for 25 years, was the only dry cleaning business ever on the property, the machinery sat on a concrete floor with no drains, and the soil located directly beneath the machinery was contaminated with the dry cleaning solvents. The Appellate Division agreed that the evidence supported holding the sole shareholder personally liable because he was ”everything” vis-à-vis this business: its sole shareholder, the operator of the business, responsible for handling the dry cleaning solvents and charged with ensuring legal and regulatory compliance. The court concluded that by imposing liability on persons “in any way responsible,” the New Jersey legislature intended to expand the scope of liability under the Spill Act “without regard for corporate veils and the like.” Thus, the court concluded that a shareholder of a close corporation could not contaminate property, put his corporation in bankruptcy and walk away from the problem.
This case expands the liability of corporate shareholders under the Spill Act. Previously, courts had required that the test for corporate veil piercing must be met to hold shareholders, officers or directors personally liable under the Spill Act for cleanup costs. Basically, those cases refused to hold shareholders personally liable where they were acting for the corporation, not for themselves individually, so that they would not be personally liable unless the corporation was used to perpetrate fraud, to accomplish a crime or to otherwise evade the law. Previously, under the federal Comprehensive Environmental Response, Compensation and Liability Act which was modelled after New Jersey’s Spill Act, the most significant exception to the rule that the shareholders, officers and directors could not be held personally liable absent veil piercing was where the shareholder, officer or director was shown to have personally participated in the hazardous substance disposal activities so that he or she was held to be an “operator.” The court in the Morris Plains Holding held that New Jersey’s Spill Act imposes the same liability on shareholders as “operators,” without the need to pierce the corporate veil. Those operating businesses that involve hazardous substances should take affirmative steps to insulate themselves from liability arising either from being an “operator” or the piercing of the corporate veil, including by buying environmental insurance to protect their businesses and personal assets.