Opinion
No. UWY CV 98 0146037S
March 26, 2009
MEMORANDUM OF DECISION
I BACKSTORY
On or about April 22, 1992, the defendant, Phoenix Soil, Inc. (PSI), filed its application for an air permit to operate a low temperature thermal desorption (LTTD) unit with the state of Connecticut Department of Environmental Protection (the DEP). The application was dated April 22, 1992. (Plaintiff's and defendant's partial stipulation of facts dated June 30, 2008, ¶ 1 [stipulation].) On or about April 30, 1992, PSI filed a certificate of incorporation with the state of Connecticut secretary of state. The certificate of incorporation, which was dated April 23, 1993, stated that PSI's place of business was 130 Freight Street, Waterbury, Connecticut (premises). (Stipulation, ¶ 2.) PSI's president, sole director and sole shareholder was David Green. (Stipulation, ¶ 3.)
The DEP notified PSI on or about May 6, 1992, that construction of the LTTD unit could begin, but PSI needed to obtain an operating permit prior to operation. (Stipulation, ¶ 4.) The Waterbury Board of Aldermen voted to authorize the plaintiff, the city of Waterbury, to intervene in PSI's application before the DEP, and Waterbury did intervene by letter dated February 11, 1993. (Stipulation, ¶¶ 5, 6.)
Subsequently, Waterbury and PSI entered into an agreement dated March 2, 1993, regarding the operation of the LTTD unit at the premises. (Stipulation, ¶ 7.) The March 2, 1993 agreement was approved by the Waterbury board of aldermen on March 8, 1993. (Stipulation, ¶ 8.) The agreement, which pertained to the LTTD unit, provided that "[PSI] shall operate (i.e. post stack testing) a LTTD unit at the above referenced location for no longer than three (3) years." The agreement further provided that "[t]he Board of Alderman, its agents or other representatives, shall not communicate (in written or oral form) any objections to the issuance of any permits relating to the operation of [PSI's] LTTD facility, to any agencies or other bodies with jurisdiction over the permit application . . ." The agreement also provided that Waterbury and PSI "shall use their best efforts to obtain an alternate site" for [PSI] and that "[PSI] shall not seek any expansions of the Permit approved by DEP, without the express permission of the Waterbury Board of Alderman. Further, [PSI] shall not seek any extension of said permit beyond the time frame set forth in this agreement without the express permission of the Waterbury Board of Alderman, which shall not be unreasonably withheld."
PSI received an air permit (the air permit) on June 30, 1993, for low temperature thermal treatment/soil remediation equipment, permitting PSI to construct and operate its LTTD unit for a period of one year. The final air permit approval was conditioned upon successful emission stack testing. (Stipulation, ¶ 9.) By its terms, the air permit expired on June 30, 1994. (Stipulation, ¶ 11.) On July 1, 1993, PSI received a waste permit (the waste permit) under General Statutes § 22a-454, which was in effect for five years. (Stipulation, ¶ 10.)
On or about August 30, 1994, PSI and the DEP entered into consent order no. 1397 allowing PSI to continue operation of the LTTD unit "until September 1, 1995, unless a later date is agreed to in writing by the Commissioner [of environmental protection], or the date of issuance of a final permit to operate the unit under Section 22a-174-3 of the Regulations, whichever is earlier (Plaintiff's exhibit 14). Consent order no. 1397 also required PSI to conduct emissions testing on the LTTD unit. (Stipulation, ¶ 12.) In addition, the consent order required PSI to submit a complete permit application as deemed by the DEP bureau of air management within sixty days of the issuance of the consent order. The DEP extended the time limit of consent order no. 1397 through letters to PSI dated January 10, 1995 (extension from 60 days after the issuance of the consent order to 180 days), February 21, 1995 (extension to 213 days after the issuance of the consent order), April 17, 1995 (extension to 303 days after the issuance of the consent order), and June 27, 1995 (extension to 393 days after the issuance of the consent order). (Stipulation, ¶ 13.) Stack testing was conducted in 1994 and 1995. (Stipulation, ¶ 14.)
PSI filed a "certificate amending or restating certificate of incorporation" with the Connecticut secretary of state on November 23, 1994, changing its name from PSI to Soil Recyclers, Inc. (Soil Recyclers). (Stipulation, ¶ 15.)
Also on November 23, 1994, Phoenix Soil, LLC (Phoenix Soil) was formed with its place of business located at 130 Freight Street in Waterbury, Connecticut. (Stipulation, ¶ 16.) At all relevant times, David Green was and is the holder of a 99 percent membership interest in Phoenix Soil and at all relevant times, his wife, Jean, was and is the holder of a 1 percent membership interest in Phoenix Soil. (Stipulation, ¶ 17.) At about the same time that Phoenix Soil was formed, Soil Recyclers sold all of its physical assets to Phoenix Soil. (Stipulation, ¶ 18.)
On February 22, 1995, PSI forwarded a letter to the DEP waste engineering enforcement division, seeking to modify the waste permit, informing the DEP that PSI had changed its name to Phoenix Soil so as "to take advantage of the new Federally and State accepted Limited Liability Company" and that "[t]he owners are the same people and the operational control remains the same, only the company name changes." (Plaintiff's exhibit 18.)
On March 29, 1995, PSI forwarded a letter to the DEP bureau of air management stating that it had changed its name to Phoenix Soil and that "[t]his change is name only and Phoenix Soil is still owned and operated by the same person. The only reason for the change is to take advantage of a new tax status recently created by the federal government and just accepted by the State of Connecticut." (Plaintiff's exhibit 19.)
In an April 13, 1995 letter to PCI, the DEP waste management bureau acknowledged PSI's February 22, 1995 notice regarding modifications to the waste permit, including the name change. (Stipulation, ¶ 19.)
On or about February 2, 1996, Phoenix Soil and the DEP entered into consent order no. 1435, permitting additional operation time through October 30, 1996, and requiring stack testing. (Stipulation, ¶ 22.)
On or about May 1, 1996, the city of Waterbury Department of Inspections issued a mechanical permit for stack modification to Phoenix Soil. (Stipulation, ¶ 23.)
In a May 3, 1996 letter, the DEP instructed Phoenix Soil to do further stacking testing, and Phoenix Soil conducted additional stack testing in October 1996. (Stipulation, ¶¶ 24, 25.)
On or about October 31, 1996, the DEP extended consent order no. 1435 to December 11, 1996. (Stipulation, ¶ 26.) On or about December 11, 1996, the DEP extended consent order no. 1435 to February 11, 1997. (Stipulation, ¶ 27.) On or about July 28, 1997, the DEP extended consent order no. 1435 to December 31, 1997. (Stipulation, ¶ 28.)
Deborah Green, a DEP hearing officer, issued a proposed final decision authorizing the issue of the air permit to Phoenix Soil on December 30, 1997. (Stipulation, ¶ 30.)
On or about December 31, 1997, the DEP extended consent order no. 1435 to March 31, 1998. (Stipulation, ¶ 31.)
On January 26, 1998, Phoenix Soil filed a waste permit renewal application with the DEP seeking a renewal of the waste permit that was issued on July 30, 1993. The waste permit renewal application is still pending. (Stipulation, ¶ 32.) On March 31, 1998, consent order 1435 and related modifications expired, and Phoenix Soil temporarily ceased operation of its LTTD unit. (Stipulation, ¶ 33.)
On April 6, 1998, David Leff, an assistant commissioner of the DEP ordered a remand of Phoenix Soil's air permit application to Deborah Green. (Stipulation, ¶ 34.)
On March 23, 1999, the DEP issued a five-year air permit to Phoenix Soil. (Stipulation, ¶ 35.)
On March 26, 1999, the zoning enforcement officer for the city of Waterbury issued a cease and desist order to Phoenix Soil regarding the height of Phoenix Soil's smokestack. (Stipulation, ¶ 36.)
On May 18, 1999, Waterbury Mayor Philip Giordano requested that the DEP revoke Phoenix Soil's air permit. (Stipulation, ¶ 38.)
On April 29, 2002, Soil Recyclers filed a certificate of dissolution with the Connecticut Secretary of State, stating that Soil Recyclers was dissolved on April 30, 2000. (Stipulation, ¶ 39.)
On November 21, 2003, Phoenix Soil filed an application for air permit renewal to operate a contaminated soil treatment facility in Waterbury, Connecticut, relating to its air permit with the DEP. That application is still pending. (Stipulation, ¶ 40.)
II JOURNEY OF THE PLEADINGS
Waterbury brought this declaratory judgment action against Phoenix Soil via a three-count complaint dated April 16, 1998. Waterbury filed an amended complaint dated May 15, 2006, adding a fourth count for breach of contract and a prayer for injunctive relief and specific performance. On June 17, 2008, Waterbury withdrew count two of the amended complaint. This matter was tried to the court on July 1 and July 2, 2008.
III DISCUSSION
Waterbury argues that Phoenix Soil is bound by the terms of the March 2, 1993 agreement between Waterbury and PSI in which, argues Waterbury, PSI agreed that it would operate the LTTD unit at the premises for no longer than three years post stack testing. Phoenix Soil asserts that it is not bound to the agreement as it is not a party to it.
Waterbury argues that Phoenix Soil is subject to successor liability as it a "mere continuation" of PSI. The court agrees with Waterbury.
"Under Connecticut law, a corporation which purchases the assets of another company does not automatically become liable for the debts and liabilities of its predecessor unless there exists one of four established exceptions to this general rule. Specifically, the party seeking to impose liability on the basis of a de facto successorship must establish: (1) that the purchase agreement expressly or impliedly so provides; (2) there was a merger or consolidations of the two firms; (3) the purchaser is a `mere continuation' of the seller; or (4) the transaction is entered into fraudulently for the purpose of escaping liability . . . Another recognized exception in Connecticut to the general rule is the `product line' exception, which is generally applied to assess liability where the successor corporation may hold itself out as being the same name or product, operation and sale, thereby receiving the benefit of past goodwill, it should likewise bear the burden of past operation . . .
"Where a successor corporation is a `mere continuation' of the predecessor corporation, the `mere continuation' exception to the general rule `in effect takes cognizance of what may be called de facto merger,' the requirements for de facto merger being (1) continuation of the enterprise of the seller corporation so that there is a continuity of management, personnel, physical location, assets and general business operations; (2) continuity of shareholders; (3) the seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; (4) the purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation . . . Not every one of these indicia must be established, however, but the court should apply more of a balancing test." (Citations omitted.) Peglar Associates, Inc. v. Professional Indemnity Underwriters Corp., Superior Court, complex litigation docket at Stamford, Docket No. X05 CV 97 0160824 (June 19, 2002, Rogers, J.) (32 Conn. L. Rptr. 359, 363). "The issue of whether a purchaser is a mere continuation of the selling corporation is a question of fact." Chamlink Corp. v. Merritt Extruder Corp., 96 Conn.App. 183, 187, 899 A.2d 90 (2006).
In the present case, Phoenix Soil purchased the physical assets of Soil Recyclers. Phoenix Soil's management, personnel, physical location, assets and general business operations were identical to PSI's. David Green managed PSI's day-to-day operations; he continued to manage the day-to-day operations of Phoenix Soil after the asset purchase. David Green was PSI's president and sole director and is the managing and controlling member (99 percent) of Phoenix Soil and has always had the authority to act on behalf of both PSI and Phoenix Soil.
All of PSI's employees continued to work for Phoenix Soil. Both PSI and Phoenix Soil were located at 130 Freight Street in Waterbury, Connecticut and utilized the same rental space there. Phoenix Soil served the same customers that PSI had. All of Soil Recylers' physical assets were transferred to Phoenix Soil. Phoenix Soil continued to remediate contaminated soil through operation of the LTTD unit purchased from Soil Recyclers and pursuant to consent orders from the DEP issued directly to PSI. PSI submitted the air permit application and the final air permit was issued to Phoenix Soil under the same permit number. Therefore, this court finds that the first requirement of the four requirements for de facto merger has been met as there was a "continuation of the enterprise of [PSI] so that there is a continuity of management, personnel, physical location, assets and general business operations . . ." Peglar Associates, Inc. v. Professional Indemnity Underwriters Corp., supra, 32 Conn. L. Rptr. 363.
David Green was the sole shareholder of PSI, and he owns a 99 percent interest in Phoenix Soil, with his wife, Jean Green, owning the remaining 1 percent interest in Phoenix Soil. Given that David Green was the sole shareholder of PSI and owns a 99 percent interest in Phoenix Soil, this court finds that the second requirement of the four requirements for de facto merger has been met as there has been a "continuity of shareholders." Id.
After the sale of the LTTD unit and all of its other physical assets to Phoenix Soil, Soil Recyclers did not conduct any business other than collection of receivables until Soil Recyclers was finally dissolved. Richard Simione, David Green's certified public accountant for approximately fourteen years, testified through deposition that after Soil Recyclers sold its assets to Phoenix Soil, it completely stopped all of its business operations. Simione indicated that during the six-year period between the sale of the assets and the dissolution of Soil Recyclers, Soil Recyclers existed as a shell corporation solely maintained to collect accounts receivable. Although Soil Recyclers did not dissolve "as soon as legally and practically possible;" id.; it did "[cease] its ordinary business operations, [and] [liquidate] . . . as soon as legally and practically possible;" id.; as it sold all of its assets to Phoenix Soil and was not conducting any business besides collecting accounts receivable. Therefore, the court finds that part of the third requirement for de facto merger has been met. As started earlier, as the court need not find that every requirement has been established in order to find a de facto merger, it is possible for the court to find a de facto merger even though the third requirement has not been completely established.
In order for Phoenix Soil to operate the LTTD unit and continue the soil recycling operations in which PSI had been engaged, it needed an air permit and a waste permit for the premises. In addition, Phoenix Soil assumed PSI's lease of the premises. Phoenix Soil continued PSI's operations as permitted under PSI's temporary air permit and as extended by the DEP's consent orders. In addition, Phoenix Soil continued to operate the LTTD unit as per PSI's waste permit. In relation to the waste permit, the DEP required PSI to present a closure plan to obtain and maintain the waste permit along with financial assurances in the event that PSI vacated the premises without performing an environmental cleanup. This financial agreement was in the form of a trust agreement, and the trust agreement was funded by money provided by David and Jean Green. For Phoenix Soil to continue operating pursuant to the waste permit, Phoenix Soil had to assume PSI's closure plan and trust fund monies. As Phoenix Soil operated pursuant to the air and waste permits granted to PSI and assumed PSI's lease of the premises, the court finds that the fourth requirement for de facto merger has been met as "[Phoenix Soil] assume[d] those liabilities and obligations of . . . [PSI/Soil Recyclers] ordinarily necessary for the uninterrupted continuation of normal business operations of. [PSI/Soil Recyclers]." Id.
Furthermore, following the asset sale, David Green treated Phoenix Soil and PSI interchangeably. For example, both the temporary air permit and the waste permit required PSI to notify the DEP if the ownership of the facility changed. Yet, PSI neither informed the DEP that it sold its assets to Phoenix Soil nor that there was a change of ownership of the LTTD unit or facility. Instead, with regard to the waste permit, David Green informed the DEP that PSI was merely changing its name to Phoenix Soil so that PSI's owners could take advantage of the tax benefits connected with a limited liability company but that the company retained the same ownership. With respect to the air permit, David Green informed the DEP that PSI changed its name to Phoenix Soil but that the company was still owned and operated by the same person. Also, Phoenix Soil continued to use the PSI logo on its letterhead, and in correspondence with the DEP, Phoenix Soil referred to itself as PSI.
Based on its analysis of the facts of this case and the four de facto merger factors, the court finds that Phoenix Soil is a "mere continuation" of PSI. Therefore the court finds that Phoenix Soil is bound by the March 2, 1993 agreement with Waterbury.
The court will next turn to the terms of the March 2, 1993 agreement. The agreement states that "[t]he parties agree that [PSI] shall operate (i.e. post stack testing) a LTTD unit at the above referenced location for no longer than three (3) years." Waterbury asserts that according to the agreement, PSI was to operate the LTTD unit at the premises for no more than three years following the completion of stack testing needed to obtain the final air permit. Phoenix Soil's position is that the agreement permits Phoenix Soil to operate the LTTD unit for as long as the final air permit requires annual stack testing. In other words, as long as the final air permit requires stack testing, the clock never starts to run on the three years.
"A contract must be construed to effectuate the intent of the parties, which is determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction . . . In ascertaining intent, we consider not only the language used in the contract but also the circumstances surrounding the making of the contract, the motives of the parties and the purposes which they sought to accomplish . . . Thus, a contract's meaning is contextual." (Citations omitted; emphasis in original; internal quotation marks omitted.) Honulik v. Greenwich, 290 Conn. 421, 453, 963 A.2d 979 (2009).
If the court adopts Phoenix Soil's position, then the three years would not start to run until stack testing was no longer required under the final air permit. Therefore, Phoenix Soil would be able to operate the LTTD unit so long as stack testing was required. The court does not find that this was the intent of PSI and Waterbury when they entered into the agreement.
CT Page 5641
IV CONCLUSION
While the court finds that Waterbury's position is correct and that the three years began to run at the time the final air permit was issued, which was March 23, 1999, Waterbury did not prosecute this action from 1999 to 2006 after the action was first commenced in 1998. As the court is fashioning an equitable remedy in the present case, the court finds that given Waterbury's failure to actively pursue its action for nearly seven years, the court orders that the three-year period for operation of the LTTD unit at the premises begin to run from the date of this decision provided all necessary permits are in place.