Opinion
No. C 03-05632 SI.
November 12, 2004
ORDER GRANTING IN PART AND DENYING IN PART ARCATA REDWOOD COMPANY LLC'S MOTION TO DISMISS SECOND AMENDED COMPLAINT
On October 22, 2004, this Court heard argument on defendant Arcata Redwood Company, LLC's ("ARC-LLC") Motion to Dismiss Second Amended Complaint. Having carefully considered the argument of counsel and the papers submitted, the Court hereby GRANTS IN PART and DENIES IN PART defendant's motion to dismiss.
BACKGROUND
Plaintiff Nancy Ferguson filed suit on December 15, 2003, against Arcata Redwood Company, LLC ("ARC-LLC") and twenty other defendants, under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. § 6930, and related state laws, seeking contribution for costs of investigation and clean up of the soil and groundwater contamination at and emanating from a property located at 100 Timbers Boulevard, Smith River, California ("the Property"). The Second Amended Complaint alleges, inter alia, that ARC-LLC is an affiliate or the successor-in-interest to one or more entities that owned and/or operated at the Property, concurrently and/or successively, during the relevant period; that from and after 1970 a disposal pit was created on the Property to discard waste materials; that between 1970 and 1978, an electric power plant was built by defendants across the highway from the Property for use by defendant in the operations on the Property; that the power plant included two 5-megawatt generators, and two 80,000-gallon boilers; that transformers containing PCBs were purchased and installed to increase the output of the power generators to 12,800 volts; and, most significantly, that "[s]ometime after 1978, one or more of the defendants dismantled the power plant and dumped the parts into the disposal pit on the Property, including, but not limited to transformers containing PCBs and other hazardous materials." Second Am. Compl. at ¶¶ 6, 31, 33, 35.
Plaintiff has brought eight claims against all twenty defendants. Claims One through Three are claims under CERCLA and for violations of RCRA. The remaining substantive claims, all based on California law, are: contribution under the California Hazardous Substance Accountability Act ("CHSAA"); public nuisance; and private nuisance. Plaintiff also includes claims for equitable indemnity and declaratory relief.
In her complaint, plaintiff alleges that ARC-LLC's involvement in this action arises from its ownership of the Property for a brief period in 1988. According to plaintiff, Arcata Corporation entered into an "Asset Purchase Agreement" with Simpson Acquiring Company, which provided for Arcata Corporation's sale to Simpson Acquiring Company of "all the timberland, sawmills and related properties in Northern California and Southern Oregon, its assignable contracts and leases, personal and real property." Second Am. Compl. at ¶ 36. The real property included the Property before the Court today. Plaintiff claims that under the agreement, Simpson Acquiring Company could use the Arcata employees and acquired the right to use the name "Arcata Redwood Company." After the transaction, Simpson Acquiring Company changed its name to Arcata Redwood Company (ARC-LLC); however, within a few months ARC-LLC sold the Property to defendants Stanley and Carolyn Block. Second Am. Compl. at ¶ 36, 37.
Plaintiff claims that she is entitled to a judgment against all defendants for, among other things, contribution and indemnity for all response costs incurred by plaintiff, compensatory and general damages resulting from the presence of soil and groundwater contamination at and emanating from the Property, and for injunctive and declaratory relief.
On August 17, 2004, this Court granted, with leave to amend, defendant ARC-LLC's motion to dismiss plaintiff's first amended complaint because plaintiff failed to sufficiently plead successor liability with respect to ARC-LLC, which is necessary under CERCLA and RCRA. The Court also dismissed plaintiff's state law claims of public and private nuisance because plaintiff failed to sufficiently plead that ARC-LLC owed a duty to inspect the property it purchased.
On August 27, 2004, plaintiff filed her Second Amended Complaint. Defendant ARC-LLC filed a motion to dismiss the second amended complaint on September 16, 2004, claiming that plaintiff has still failed to state a claim upon which relief can be granted. It is this motion that is before the Court today.
LEGAL STANDARD
A district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The question presented by a motion to dismiss is not whether the plaintiff will prevail in the action, but whether she is entitled to offer evidence in support of each or any of her claims. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 1686 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183, 104 S. Ct. 3012 (1984).
In answering this question, the Court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiff's favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow the plaintiff to develop the case at this stage of the proceedings. See United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir. 1981). A complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99 (1957); cf. Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 248 (9th Cir., 1997); Parks Sch. of Business, Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995).
If the Court dismisses the complaint, it must then decide whether to grant leave to amend. The Ninth Circuit has "repeatedly held that a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F. 3d 1122, 1130 (9th Cir. 2000) (citations and internal quotation marks omitted).
DISCUSSION
Plaintiff has owned the 7-acre parcel of property at issue in this case since 1993. In March 1999, the California Regional Water Quality Control Board ("Water Board") directed plaintiff to prepare a plan to clean up the site. To date, plaintiff has spent in excess of $378,630 on necessary soil investigation and groundwater remediation costs due to releases and threatened releases of hazardous substances at and emanating from the Property. Plaintiff anticipates additional expenses to be incurred. Alleging that the contamination is the direct and proximate result of the acts and omissions of defendants, plaintiff brings this action against the defendants for contribution under CERCLA and RCRA, as well as for damages, declaratory, equitable and injunctive relief on related California state law claims.
1. Plaintiff's federal claims against ARC-LLC
A. Plaintiff's CERCLA claim
Defendant ARC-LLC argues that plaintiff's CERCLA claim should be dismissed, on the basis that plaintiff does not allege that defendant was the owner or operator at the time of disposal or that it contributed to the disposal of waste on the property, which is required to state a CERCLA claim.
Plaintiff argues that she has pled that defendant ARC-LLC is liable as Arcata Corporation's successor, that is, as a "successor-in-interest to the 'persons' (as defined in the federal statute) who actively dumped hazardous waste onto the subject site." Defendant contends that the general rule is that asset purchasers are not liable as successors, and that plaintiff has not sufficiently pled any of the four exceptions to the general rule.
Defendant contends that plaintiff, in her Second Amended Complaint, has already pled that defendant Quebecor World Arcata Corporation, a Canadian corporation headquartered in Montreal, is the successor to Arcata Corporation, and that plaintiff cannot plead that Arcata Corporation has two distinct successors. Plaintiff responds, and the Court agrees, that Fed.R.Civ.P. 8(e)(2) allows pleading alternative theories of liability. See McCalden v. California Library Ass'n, 955 F.2d 1214, 1219 (9th. Cir. 1990) (complaint may contain two or more alternative statements of a claim for relief); Independent Enterprises Inc. v. Pittsburgh Water Sewer Authority, 103 F.3d 1165, 1175 (3rd Cir. 1997) (complaint may plead separate claims, even if inconsistent).
Plaintiff's CERCLA claim against defendant rests on the assertion that defendant is a successor-in-interest to Arcata Corporation as a result of the Asset Purchase Agreement between Arcata Corporation and Simpson Acquiring Company. Asset purchasers are not liable as successor corporations unless: 1) the purchasing corporation expressly or impliedly agreed to assume the liability; 2) the transaction amounted to a "de facto" consolidation or merger; 3) the purchasing corporation was merely a continuation of the selling corporation; or 4) the transaction was fraudulently entered into in order to escape liability. Atchison, Topeka and Santa Fe Railway Company v. Brown Bryant, Inc., 159 F.3d 358, 361 (9th Cir. 1998). The Court will address each exception below.
i. Purchasing corporation expressly or impliedly agreed to assume the liability
Plaintiff alleges in her complaint that defendant "expressly and implicitly agreed to assume Arcata Corporation's liabilities arising from the forest products business." Second Am. Compl. at ¶ 36. Plaintiff supports this assertion by claiming that "the Asset Purchase Agreement provides that the purchasing entity assumed all liabilities 'that arose out of the Forest Products Business.'" Id.
Defendant argues that, to the contrary, the Asset Purchase Agreement limits the liabilities assumed by defendant. Defendant claims that plaintiff quoted from only a portion of the agreement; and that the agreement when read in its entirety does not provide for the assumption of environmental liabilities. The Court agrees.
Defendant's argument requires the Court to consider material outside the complaint, specifically, the text of the Asset Purchase Agreement. Generally, courts cannot consider material outside the complaint when ruling on a motion to dismiss for failure to state a claim. Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th Cir. 2001). However, the Court may consider materials referenced in the complaint if attached by defendant to demonstrate that the materials do not support plaintiff's claim. Branch v. Tunnell, 14 F.3d 449, 453-454 (9th Cir. 1994), rev'd on other grounds by, Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir. 2002). The Court may consider the full text of the document, even if the complaint quotes it only in part. In re Stac Electronics Securities Litig., 89 F3d 1399, 1405 n. 4 (9th Cir. 1996).
Defendants have provided the full text of the definition of "Assumed Liabilities" in an earlier submission to this Court, see Decl. of Michael J. Steel, Docket 21, Ex. 8, and defendant's argument is persuasive. The Asset Purchase Agreement defines "Assumed Liabilities" as follows:
"Assumed liabilities" shall mean all liabilities that (i) arose out of the Forest Products Business, (ii) are recorded in the Books and Records, and (iii) are owed by Arcata as of the Effective Time (whether or not then due) for (A) accrued journals, (B) accounts payable and (C), with respect only to Arcata Employees who become Simpson employees immediately after the Closing Date, accrued salaries and wages, accrued vacations (if any) and holidays, and accrued payroll taxes, in each case as those accounting terms are used in the Balance Sheet.
Plaintiff's selective quotation of the Asset Purchase Agreement in ¶ 36 of the Second Amended Complaint yields an incorrect result. The agreement specifically defines and limits the assumed liabilities, and environmental liabilities are not included. Thus the defendant did not expressly agree to assume the liability. Further, since the Agreement expressly defined the assumed liabilities, it cannot be said that defendant implicitly agreed to assume environmental liability.
ii. "De facto" consolidation or merger
Defendant argues that the Asset Purchase Agreement did not result in a de facto merger between defendant and Arcata Corporation.Louisiana-Pacific Corp. v. Asarco, Inc., 909 F.2d 1260, 1264 (9th Cir. 1990) requires demonstration of a continuity of shareholders in order to establish successor liability under this exception; in order to find a de facto merger, "courts have consistently required continuity of shareholders, accomplished by paying for the acquired corporation with shares of stock". Plaintiff does not allege in her complaint that defendant paid for Arcata Corporation with stock or that there was any other continuity of shareholders; therefore, plaintiff has failed to allege facts to support a claim of de facto merger between defendant and Arcata Corporation.
iii. "Mere continuation" of selling corporation
Defendant argues that plaintiff has failed to plead that ARC-LLC was a "mere continuation" of Arcata Corporation, since a CERCLA successor liability claim under this exception requires that "after the transfer of assets, only one corporation remains, and there is an identity of stock, stockholders, and directors between the two corporations." State of Washington v. United States, 930 F.Supp. 474, 478 (W.D. Wash. 1996).
Plaintiff contends that courts consider a number of factors to determine if a purchasing company is a mere continuation of the seller corporation. Referring to 121 A.L.R. Fed. 173, plaintiff asserts that these factors include: 1) the continued use of trade names; 2) retention of supervisory personnel; 3) retention of production facilities; 4)production of the same products; 5) retention of the same name; 6) continuity of assets; 7) continuity of general business operations; and 8) whether the successor holds itself out as a continuation of the previous enterprise. Plaintiff contends that paragraph 36 of the Second Amended Complaint alleges facts that support the factors listed above.
These eight factors do not apply to the "mere continuation" exception under Atchison. Instead, these factors are considered under the "continuity of enterprise" (or "substantial continuity") theory. State of Washington, 930 F.Supp. at 478. This theory is a deviation from the "mere continuation" rule, which requires that only one corporation remains and there is an identity of stock, stockholders, and directors between the two corporations. Id. However, "there is no 'substantial continuation' exception in this circuit." Atchison, 159 F.3d at 364. Plaintiff must plead facts alleging that only one corporation remained after the transfer of assets and that there is an identity of stock, stockholders, and directors between the two corporations in order to assert successor liability under the "mere continuation" exception. Plaintiff's Second Amended Complaint does not plead these necessary facts; therefore, plaintiff has not stated a claim of successor liability under the "mere continuation" exception.
iv. Fraudulent transaction
Defendant asserts that plaintiff has not sufficiently pled that defendant fraudulently entered into the transaction in order to allow Arcata Corporation to escape liability. Defendant claims that plaintiff makes a conclusory allegation of fraud that does not meet the heightened pleading requirement under Fed.R.Civ.P. 9(b). Plaintiff does not address this exception in her opposition.
Plaintiff alleges in her complaint that the "transaction was otherwise fraudulent, or was intended to avoid potential liability under existing environmental laws such as CERCLA, RCRA and related environmental protection statutes at issue in this complaint." Second Am. Compl. at ¶ 36. Under Fed.R.Civ.P. 9(b), "mere conclusory allegations of fraud are insufficient." Stack v. Lobo, 903 F.Supp. 1361, 1367 (N.D. Cal. 1995). Factors such as the sufficiency of the consideration given for the sale, the insufficient assets of the selling company, or intent by either the purchaser or seller to construct the sale solely to avoid CERCLA liability are important in determining whether the transaction was fraudulent. Atchison, 159 F.3d at 365. Plaintiff fails to plead facts in support of these factors, or any other factors, in support of the fraudulent transaction claim, in her Second Amended Complaint. The Court finds that plaintiff has not stated a claim upon which successor liability can be established under the fraudulent transaction exception.
v. Summary
Plaintiff has failed to allege facts sufficient to support any of the four exceptions to the general rule that asset purchasers are not liable as corporate successors. Plaintiff's CERCLA claims against ARC-LLC rely upon a finding of successor liability. Accordingly, the Court DISMISSES plaintiff's CERCLA claim. Since leave to amend was previously given, no further leave to amend is granted at this point.
B. Plaintiff's RCRA claims
Under RCRA, a defendant may be liable as a corporate successor. See Interfaith Cmty. Org. v. Honeywell Intern., Inc., 263 F.Supp.2d 796 (D.N.J. 2003); Hudson Riverkeeper Fund, Inc. v. Atlantic Richfield Co., 138 F.Supp.2d 482 (S.D.N.Y. 2001). For the reasons stated above, however, the Court DISMISSES plaintiff's RCRA claims without leave to amend, for failure to sufficiently allege claims under a successor liability theory against this defendant.
2. Plaintiff's state law claims
A. California Health Safety Code § 25323.5(a)
Section 25323.5(a)(1) defines a "responsible party" or "liable person" under this chapter to mean "those persons described in [§ 9607(a) of CERCLA.]." Because plaintiff's state claim tracks her claim under CERCLA, the Court likewise GRANTS defendant's motion to dismiss without leave to amend.
B. Public and private nuisance
Defendant ARC-LLC contends that plaintiff has not alleged that ARC-LLC knew of the contamination when it owned the property in 1988 and, as a result, is attempting "to get around the 'knowledge' requirement ofResolution Trust [v. Rossmoor Corp., 34 Cal. App. 4th 93 (1995)] andHendler [v. United States, 38 Fed. Cl. 611 (Fed.Cl. 1987)] by asserting, without citation to authority, that ARC-LLC had a duty to inspectarising from 'its own duty to learn what it was purchasing.'" Def.'s Reply at 5-6.
As discussed above, plaintiff cannot assert that defendant owed a duty to inspect the property based on successor liability. However, under California law, liability for a nuisance requires only that the "possessor knows or should know of the condition and the nuisance."Hendler, 38 Fed.Cl. at 616 n. 2, citing Restatement (Second) of Torts § 839. Therefore, plaintiff's claim that each defendant "knew, or had reason to know, that the contaminants had been dumped on the property, and that the contaminates [sic] continued to exist on the property" and "failed to take remedial measures" is sufficient to allege a cause of action for public and private nuisance. Second Am. Compl. at ¶ 88. As recognized by defendant in its Reply, if defendant knew of the contamination on the property, a nuisance action can continue without it owing a duty to inspect the property.
Assuming the pleadings are true, plaintiff has satisfied the "knowledge" requirement of the hazard under Hendler. The Court DENIES defendant's motion to dismiss, as the plaintiff has stated a cause of action for public and private nuisance under California law.
3. Plaintiff's claims for equitable indemnity and declaratory relief
Plaintiff's eighth and tenth causes of action are premised on plaintiff's substantive legal claims described above. Defendant argues that because plaintiff has failed to state a claim, these claims should also be dismissed. As discussed above, the Court finds that plaintiff has sufficiently pled claims for public and private nuisance and DENIES defendant's motion to dismiss plaintiff's eighth and tenth causes of action.
4. Supplemental jurisdiction
By virtue of this Order, all substantive federal claims against defendant have been dismissed. Defendant argues that if all federal claims are dismissed, the Court should decline to exercise supplemental jurisdiction under 28 U.S.C. § 1367 and dismiss the remaining state claims.
Supplemental jurisdiction is a "doctrine of discretion, not a plaintiff's right." Medrano v. City of Los Angeles, 973 F.2d 1499, 1506 (9th Cir. 1992). The Court DENIES defendant's motion to dismiss the supplemental state claims because the other claims against the other defendants will continue in this action in any event.
CONCLUSION
For the foregoing reasons and for good cause shown, the Court hereby GRANTS defendant's motion to dismiss plaintiff's CERCLA, RCRA and California Health Safety Code § 25323.5(a) claims without leave to amend, and DENIES defendant's motion to dismiss plaintiff's public nuisance, private nuisance, equitable indemnity and declaratory relief claims. [Docket #40.]
IT IS SO ORDERED.