Law School Case Brief
Phila. Elec. Co. v. Hercules, Inc. - 762 F.2d 303 (3d Cir. 1985)
In determining whether a particular transaction amounts to a de facto merger as distinguished from an ordinary purchase and sale of assets most courts look to the following factors: (1) a continuation of the enterprise of the seller corporation, so that there is continuity of management, personnel, physical location, assets, and general business operations; (2) a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation; (3) the seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; and (4) the purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.
Prior to October of 1971, the Pennsylvania Industrial Chemical Corporation (PICCO) owned a tract of land abutting the Delaware River in Chester, Pennsylvania where it operated a hydrocarbon resin manufacturing plant. Thereafter, PICCO ceased operations on the Chester site and sold the facility to Gould, Inc. (Gould). Gould did not conduct any operations on the Chester site, other than leasing certain tanks to ABM Disposal Services Company (ABM), which used them to store large quantities of various waste materials. In mid-1973, Philadelphia Electric Company (PECO), obtained an option to purchase the Chester site from Gould. A PECO representative inspected the site, and it found out that Gould’s tenant, ABM, had caused a number of spills on the site, including oil spills in the pond area. ABM was unable to clean up the Chester site in time to meet Gould’s original deadline for vacating the premises, a condition of the PECO purchase agreement. PECO exercised its option and acquired the property in March of 1974. PECO has conducted no operations on the Chester site, but has leased a portion of the land to American Refining Group, Inc. In 1980, the Pennsylvania Department of Environmental Resources (DER) discovered that resinous materials similar to those once produced by PICCO were seeping from the banks of the Delaware River at the Chester site, and that the PICCO pond was contaminated with the same material. PECO implemented a clean-up, incurring expenses amounting to $338,328.69. After the PECO clean-up, the DER found that resins were still on the Delaware River bank. PECO expressed reluctance to spend any additional money on clean-up of the Chester site. It thereby instituted a suit against Gould and Hercules, Inc. (Hercules) which had acquired the remaining assets of PICCO in 1973. Hercules cross-claimed against Gould. On cross-motions for summary judgment the district court ruled that Hercules was liable as PICCO's corporate successor under the express terms of the Agreement and Plan of Reorganization (Agreement) it entered into with PICCO, and because the transaction was a de facto merger. The district court then entered judgment for PECO against Hercules, and entered judgment for Gould on Hercules’ cross-claims. In its present appeal, Hercules contended that the district court erred in ruling that it was liable as PICCO’s successor, and that PECO had no cause of action against it for public or private nuisance.
- Did the district court err in ruling that Hercules, Inc. could be held liable as PICCO’s successor?
- Did PECO have a cause of action against Hercules for public or private nuisance?
The Court of Appeals for the Third Circuit noted that as a general rule, under Pennsylvania common law, when one company sold or transferred all its assets to another, the successor company would not embrace the liabilities of the processor simply because it succeeded to the predecessor’s assets. However, there were certain exceptions to the general rule of nonliability, and one of these was when the transaction amounted to a consolidation or de facto merger. In this case, the transaction between Hercules and PICCO amounted to a de facto merger, as all the elements of a de facto merger existed between the parties’ transaction. First, there was a continuation of the enterprise of PICCO, so that there was continuity of management, personnel, physical location, assets, and general business operations. Second, there was a continuity of shareholders which resulted from Hercules paying for the acquired assets with shares of its own stock. Third, PICCO ceased its ordinary business operations, liquidated, and dissolved; and fourth, Hercules assumed all of PICCO’s debts, obligations, and liabilities as of the Closing Date. Anent the second issue, the Court held that PECO did not have a cause of action against Hercules based in its private and public nuisance actions because the damages it suffered were not the same damages as the public could have asserted.
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