The Sun Sets on Federal Common Law: Corporate Successor Liability Under CERCLA After O'Melveny & Meyers
By Gregory C. Sisk and Jerry L. Anderson
INTRODUCTION
Liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) “has been described as ‘a black hole that indiscriminately devours all who come near it.”’ Once a party “is ensnared in the web of CERCLA liability, escape is near impossible.” With an expansive liability regime of strict liability, retroactive application, and joint and several liability--imposed with no clear requirement of causation and the exclusion of equitable defenses--CERCLA has been eroding an ever deeper channel in the law, sparing few traditional limitations on liability.
Indeed, in an unceasing eagerness to further augment the pool of parties potentially liable for a hazardous waste site, several courts reached beyond the language of the statute to formulate new judge-made rules when they deemed established legal principles insufficiently generous. In particular, some federal courts set aside state law rules developed over the past century to govern corporate successorship and instead instituted a new federal common-law regime for determining when a purchaser of corporate assets should be held to succeed to the liabilities of the selling entity. These courts displaced traditional rules to impose liability under a novel “continuity of enterprise” theory that seemed to rest, not on a solid conception of the corporate form or genuine responsibility for prior disposal of hazardous substances, but on the desire to find more deep pockets to pay for environmental cleanup. The roundhouse swing of CERCLA liability thus threatened to topple carefully balanced and long established state law principles of corporate successor liability.
But then came the Supreme Court's decision in O'Melveny & Myers v. Federal Deposit Insurance Corp. In that landmark decision, the Court ruled that judicial creation of a federal rule of decision is warranted only in “extraordinary cases.” The Court firmly rejected formulation of a federal common-law rule to enhance the ability of the Federal Deposit Insurance Corporation, acting in its capacity as receiver for a savings and loan corporation, to recover losses from legal counsel of the failed institution for alleged malpractice. Before a federal court may resort to judge-made law, the Court held, a compelling showing must be made that a federal common-law rule is essential to achieve a federal statutory objective.
The thesis of this Article is that federal common lawmaking under CERCLA in the context of corporate successor liability was illegitimate from its inception and has now been thoroughly undermined by the Supreme Court's decision in O'Melveny & Myers. Federal courts should not deviate from the straight and narrow path of limited federal jurisdiction and enter into the unfamiliar territory of common-law judging, except in the most unusual of circumstances, and subject to clear statutory authorization and meaningful legislative guidance. When a court assumes common lawmaking powers, it departs from the circumscribed federal judicial role and engages in a policy analysis outside the scope of its proper prerogative of statutory adjudication. In a manner akin to a federal court's duty to be assured of its own subject matter jurisdiction, the question of common lawmaking authority goes to the essence of the federal judicial power.
Federal common law is especially inappropriate when its effect is to displace organic state law in an area of traditional state concern, such as the creation, status, successorship, and dissolution of corporations. “Congress has never indicated that the entire corpus of state corporation law is to be replaced simply because a plaintiff's cause of action is based upon a federal statute.” Fabrication of a new federal common law regime regarding a matter grounded in corporation law would disrupt existing commercial relationships and prove unfair to those who had legitimately relied upon longstanding state law principles.
In adopting the traditional standards of corporate successor liability, the states have made a considered policy decision to balance the equitable end of preserving the responsibility of a true corporate successor--that is, a mere continuation of a predecessor corporation in another form--against the goal of promoting the free transferability of assets in a dynamic economy through a general rule of non-liability for the bona fide purchaser. Thus, determination of the proper test for corporate successorship entails a weighing of conflicting interests and contrasting policies. Our system of government reserves this role either for the policymakers of the legislative and executive branches of the federal government or for the several states:
Federal courts, unlike state courts, are not general common-law courts and do not possess a general power to develop and apply their own rules of decision. The enactment of a federal rule in an area of national concern, and the decision whether to displace state law in doing so, is generally made not by the federal judiciary, purposefully insulated from democratic pressures, but by the people through their elected representatives in Congress.
Although federal law as specified in the express provisions of the statute ultimately controls the issue of liability under CERCLA, “[c]ontroversies . . . governed by federal law[ ] do not inevitably require resort to uniform federal rules." Frequently, state law is adopted to provide the interstitial rules that a federal statute leaves unresolved. Indeed, under the Rules of Decision Act the “laws of the several states” are to be “regarded as rules of decision in civil actions in the courts of the United States” unless a federal statute, treaty, or constitutional provision “otherwise require[s] or provide[s].” Congress has not acted in CERCLA to displace state corporation law nor indicated that this is one of those “few and restricted” instances in which federal common law may be used to formulate a uniform federal rule of decision.
Prior to the Supreme Court's decision in O'Melveny & Myers, the federal courts of appeals were divided on whether federal common law may be created to supply a rule of decision on corporate successor liability. Those decisions adopting judge-made rules were vulnerable when rendered, as courts failed to support this conclusion with relevant legislative authority, neglected to apply the governing judicial test for determining the propriety of federal common law (as articulated by the Supreme Court in United States v. Kimbell Foods, Inc.), and departed from the otherwise careful pattern of judicial deference to state corporation and contract law in other CERCLA contexts. Moreover, those courts overreached their authority because the exercise in federal common lawmaking was unnecessary to reach the result in those particular cases.
In any event, those decisions creating federal common law under CERCLA have been superseded by the Supreme Court's intervening decision in O'Melveny & Myers. Since that authoritative decision, most federal courts have heeded the Supreme Court's teaching, and the tide has turned against inference of federal common law under CERCLA. In O'Melveny & Myers, a unanimous Supreme Court emphasized the clear presumption against creation of federal common law, and in favor of adopting state law, as the rule of decision when a federal statute is silent on the matter.
In sum, the Supreme Court's decision in O'Melveny & Myers has swept away the underpinnings of federal common-law claims in the CERCLA corporate successor liability context. O'Melveny & Myers signals the dawn of a new day for federal common law, or more accurately, the setting of the sun on federal common law under CERCLA. In light of that decision, the issue of the proper source of law for corporation issues under CERCLA must be examined afresh, with vigor, and with a jaundiced eye toward a “‘federal common law’ untethered to a genuinely identifiable (as opposed to judicially constructed) federal policy.”
Liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) “has been described as ‘a black hole that indiscriminately devours all who come near it.”’ Once a party “is ensnared in the web of CERCLA liability, escape is near impossible.” With an expansive liability regime of strict liability, retroactive application, and joint and several liability--imposed with no clear requirement of causation and the exclusion of equitable defenses--CERCLA has been eroding an ever deeper channel in the law, sparing few traditional limitations on liability.
Indeed, in an unceasing eagerness to further augment the pool of parties potentially liable for a hazardous waste site, several courts reached beyond the language of the statute to formulate new judge-made rules when they deemed established legal principles insufficiently generous. In particular, some federal courts set aside state law rules developed over the past century to govern corporate successorship and instead instituted a new federal common-law regime for determining when a purchaser of corporate assets should be held to succeed to the liabilities of the selling entity. These courts displaced traditional rules to impose liability under a novel “continuity of enterprise” theory that seemed to rest, not on a solid conception of the corporate form or genuine responsibility for prior disposal of hazardous substances, but on the desire to find more deep pockets to pay for environmental cleanup. The roundhouse swing of CERCLA liability thus threatened to topple carefully balanced and long established state law principles of corporate successor liability.
But then came the Supreme Court's decision in O'Melveny & Myers v. Federal Deposit Insurance Corp. In that landmark decision, the Court ruled that judicial creation of a federal rule of decision is warranted only in “extraordinary cases.” The Court firmly rejected formulation of a federal common-law rule to enhance the ability of the Federal Deposit Insurance Corporation, acting in its capacity as receiver for a savings and loan corporation, to recover losses from legal counsel of the failed institution for alleged malpractice. Before a federal court may resort to judge-made law, the Court held, a compelling showing must be made that a federal common-law rule is essential to achieve a federal statutory objective.
The thesis of this Article is that federal common lawmaking under CERCLA in the context of corporate successor liability was illegitimate from its inception and has now been thoroughly undermined by the Supreme Court's decision in O'Melveny & Myers. Federal courts should not deviate from the straight and narrow path of limited federal jurisdiction and enter into the unfamiliar territory of common-law judging, except in the most unusual of circumstances, and subject to clear statutory authorization and meaningful legislative guidance. When a court assumes common lawmaking powers, it departs from the circumscribed federal judicial role and engages in a policy analysis outside the scope of its proper prerogative of statutory adjudication. In a manner akin to a federal court's duty to be assured of its own subject matter jurisdiction, the question of common lawmaking authority goes to the essence of the federal judicial power.
Federal common law is especially inappropriate when its effect is to displace organic state law in an area of traditional state concern, such as the creation, status, successorship, and dissolution of corporations. “Congress has never indicated that the entire corpus of state corporation law is to be replaced simply because a plaintiff's cause of action is based upon a federal statute.” Fabrication of a new federal common law regime regarding a matter grounded in corporation law would disrupt existing commercial relationships and prove unfair to those who had legitimately relied upon longstanding state law principles.
In adopting the traditional standards of corporate successor liability, the states have made a considered policy decision to balance the equitable end of preserving the responsibility of a true corporate successor--that is, a mere continuation of a predecessor corporation in another form--against the goal of promoting the free transferability of assets in a dynamic economy through a general rule of non-liability for the bona fide purchaser. Thus, determination of the proper test for corporate successorship entails a weighing of conflicting interests and contrasting policies. Our system of government reserves this role either for the policymakers of the legislative and executive branches of the federal government or for the several states:
Federal courts, unlike state courts, are not general common-law courts and do not possess a general power to develop and apply their own rules of decision. The enactment of a federal rule in an area of national concern, and the decision whether to displace state law in doing so, is generally made not by the federal judiciary, purposefully insulated from democratic pressures, but by the people through their elected representatives in Congress.
Although federal law as specified in the express provisions of the statute ultimately controls the issue of liability under CERCLA, “[c]ontroversies . . . governed by federal law[ ] do not inevitably require resort to uniform federal rules." Frequently, state law is adopted to provide the interstitial rules that a federal statute leaves unresolved. Indeed, under the Rules of Decision Act the “laws of the several states” are to be “regarded as rules of decision in civil actions in the courts of the United States” unless a federal statute, treaty, or constitutional provision “otherwise require[s] or provide[s].” Congress has not acted in CERCLA to displace state corporation law nor indicated that this is one of those “few and restricted” instances in which federal common law may be used to formulate a uniform federal rule of decision.
Prior to the Supreme Court's decision in O'Melveny & Myers, the federal courts of appeals were divided on whether federal common law may be created to supply a rule of decision on corporate successor liability. Those decisions adopting judge-made rules were vulnerable when rendered, as courts failed to support this conclusion with relevant legislative authority, neglected to apply the governing judicial test for determining the propriety of federal common law (as articulated by the Supreme Court in United States v. Kimbell Foods, Inc.), and departed from the otherwise careful pattern of judicial deference to state corporation and contract law in other CERCLA contexts. Moreover, those courts overreached their authority because the exercise in federal common lawmaking was unnecessary to reach the result in those particular cases.
In any event, those decisions creating federal common law under CERCLA have been superseded by the Supreme Court's intervening decision in O'Melveny & Myers. Since that authoritative decision, most federal courts have heeded the Supreme Court's teaching, and the tide has turned against inference of federal common law under CERCLA. In O'Melveny & Myers, a unanimous Supreme Court emphasized the clear presumption against creation of federal common law, and in favor of adopting state law, as the rule of decision when a federal statute is silent on the matter.
In sum, the Supreme Court's decision in O'Melveny & Myers has swept away the underpinnings of federal common-law claims in the CERCLA corporate successor liability context. O'Melveny & Myers signals the dawn of a new day for federal common law, or more accurately, the setting of the sun on federal common law under CERCLA. In light of that decision, the issue of the proper source of law for corporation issues under CERCLA must be examined afresh, with vigor, and with a jaundiced eye toward a “‘federal common law’ untethered to a genuinely identifiable (as opposed to judicially constructed) federal policy.”