The opinion of the court was delivered by: CURTIN
In December 1990, the State of New York commenced the present CERCLA action against Westwood-Squibb Pharmaceuticals, Inc. ("Westwood"), as owner of an 8.8 acre parcel of property bounded by Dart Street and Bradley Street in the City of Buffalo. Westwood purchased the parcel from the Iroquois Gas Corporation ("Iroquois") in 1972. During construction and associated soil testing, Westwood discovered various subsurface contaminants. Westwood now seeks to recover the response costs for which it claims National Fuel Gas Distribution Corporation ("National Fuel") is liable.
In an order dated May 21, 1990, the court granted in part and denied in part the parties' cross motions for summary judgment. The court held that there were questions of fact as to whether National Fuel caused Westwood to incur response costs at the site. The court also held that while the New York State doctrine of caveat emptor did not bar Westwood's action, it did bar a common-law private nuisance claim. The court held finally that the contractual relationship between the parties did not preclude National Fuel from raising a CERCLA defense. Westwood Pharmaceuticals v. Nat. Fuel Gas Dist., 737 F. Supp. 1272 (W.D.N.Y. 1990); reconsideration denied, 767 F. Supp. 456 (W.D.N.Y 1991), aff'd, 964 F.2d 85 (2d Cir. 1992).
In August 1993, the State amended its complaint to add National Fuel as a defendant. The State then issued a remediation plan. After public hearing and comment, the State, through the Department of Environmental Conservation, issued a Record of Decision ["ROD"] establishing the remedial action to be taken on the site. Item 619.
On November 15, 1994, plaintiffs moved for partial summary judgment against National Fuel. The parties then entered into a consent decree to provide for implementation by National Fuel of the "riparian component" of the remedy specified in the ROD. The riparian component concerns the clean up of "surface waters and sediments of Scajaquada Creek upstream of the Terrestrial Component to RETEC sample location B-1 and downstream from the Terrestrial Component to the West Avenue bridge and the contaminated sections of the eastern creek bank along the Terrestrial Component." Item 107, p. 5.
On July 7, 1995, plaintiff State of New York and Westwood entered into a consent decree under which Westwood agreed to perform the "terrestrial component" of the ROD. The terrestrial component describes the abatement of waste in the area generally described as "bounded by Dart Street, Bradley Street and the crest of the eastern bank of Scajaquada Creek, including the area to the east of the current fence along Dart Street . . . and the area between the current fence west to the crest of the eastern bank of the creek, and such adjacent areas as are necessary to carry out the remediation specified in the ROD." Item 107, p.5.
The entry of this consent decree ended the participation of the State in the suit.
National Fuel and Westwood then filed cross claims on the issue of successor liability for the costs of remediation. A trial was held before this court on August 12 and 13, 1996. At trial, Westwood advanced three successor liability theories, and presented three issues to be determined by this court:
(1) Whether, between 1917 and 1921, William Judge acted as agent for National Fuel Gas Company ("NFGC") when he purchased and operated the Buffalo Gas Company ("BGC") assets; and therefore, National Fuel is responsible for any liabilities attributable to Judge's operation of the site;
(2) Whether Niagara Gas Corporation ("Niagara") assumed all of Judge's liabilities associated with his operations at the site, including any CERCLA liabilities attributable to such operations; and, therefore, NFGC, as the successor to Niagara, is responsible for any such CERCLA liabilities; and
(3) Whether the November 25, 1925, foreclosure sale constituted a de facto merger of People's Gas Light and Coke Company ("People's") into Iroquois, with the result that NFGC, as the successor to Iroquois, is responsible for any CERCLA liabilities attributable to People's ownership of the site between 1898 and 1925, and People's operation of the site between 1898 and 1901.
Defendant National Fuel has stipulated that it is the successor by merger to Iroquois and Niagara. In addition, National Fuel has stipulated that it is responsible for any liability that might be imposed on NFGC, its parent corporation.
The events of this case involve a complicated cast of corporations and individuals engaged in a tangled series of transactions stretching back nearly one hundred years. Therefore, a brief explanation of the role of each may be helpful in understanding the relationships which must be addressed in this decision.
I. The Corporations and Individuals
A. People's Gas Light and Coke Company
In 1901, People's leased the site to BGC. BGC was incorporated in 1899 as a consolidation of the Buffalo City Gas Company and the Buffalo Gas Light Company. PF 15. Under the lease, BGC operated the gas manufacturing plant on the site, and kept all proceeds from those operations. PF 17. After the lease was executed, BGC owned and operated all of the gas manufacturing facilities located in Buffalo. PF 18.
The actual lease between People's and BGC has not been found. Westwood trial exhibit 43 sets out the terms of the lease. An attached note states that although the lease was not found, operation of the site by BGC during that period, as well as under succeeding leases, could be construed as acceptance of the arrangement. PF 17; Ex. 43.
The lack of any actual written leases may be explained, at least in part, by the fact-that when BGC entered into the arrangement, it already owned 1,920 of the 2,100 People's bonds and 26,824 of 30,000 shares of People's stock. BGC therefore owned over ninety percent of the shares of the company that owned the site it was leasing. PF 16, 17. BGC later acquired an additional 125 People's bonds and an additional 200 shares of People's stock. The identities of the shareholders of the remaining 2,976 shares of People's stock were never determined. Ex. 59. The Buffalo Gas Company - People's entity was purchased by William J. Judge at a receivers' sale in 1917.
C. National Fuel Gas Company and National Fuel Gas Distribution Corporation
NFGC was organized as a holding company in 1902. In the same year, it purchased the stock of eight natural gas companies, including Buffalo Natural Gas Fuel Company ("BNGFC"). PF 20. The president of BNGFC, W.W. Richardson, commissioned a report on the advisability of acquiring the BGC assets. In July 1912, the report was issued. In November of the same year, BNGFC merged with Iroquois, and Richardson went on to become president of Iroquois.
Walter Jennings was the president of NFGC at the time of the events described. William J. Judge was Vice President and Secretary of NFGC and was a member of the NFGC board of directors. He served as President and Chairman of the Board of NFGC from 1919 until 1943. PF 24. Judge was also proprietor of the Buffalo Gas Company-People's entity from 1917 to 1921.
National Fuel Gas Distribution Corporation ("National Fuel") is a subsidiary of NFGC. Only National Fuel is a defendant in the present action. By stipulation, National Fuel has agreed to be responsible for any liability that may be imposed on NFGC. PF 2.
D. Niagara Gas Corporation
Niagara was incorporated on April 8, 1921, by members of the law firm that served as counsel to Judge. On April 9, 1921, the day after Niagara's incorporation, the Niagara board of directors authorized the purchase of the People's bonds and BGC assets from Judge for $ 4 million. PF 38. This price was ultimately reduced to $ 3 million by the Public Service Commission ("PSC"). Niagara merged into Iroquois just over a year later, in December 1922.
E. Iroquois Gas Corporation
Iroquois was organized in 1911 and commenced operations in 1912 by acquiring the assets of the BNGFC from NFGC in exchange for Iroquois stock. NFGC ultimately became the majority shareholder of Iroquois. As noted, W.W. Richardson, the president of BNGFC, became president of Iroquois and a member of its board of directors in July, 1912. PF 20A.
Three years later, on November 22, 1916, NFGC's board of directors authorized the president of NFGC, Walter Jennings, to acquire the bonds of the former BGC at a price not to exceed 42 1/2 percent of par. Exs. 5, 176; PF 23.
L.H. Gethoefer was the president of the Pittsburg Trust Company. Pittsburg Trust was at least one of NFGC's primary bankers during the period discussed in this case.
Daniel J. Kenefick was a partner in the law firm of Kenefick, Cook, Mitchell & Bass. He is often referred to in the documents as Judge Kenefick because he had been a New York State judge. In addition to representing Judge and Niagara before the PSC and in various courts, the law firm prepared the deeds and many documents described in detail below. In June 1923, NFGC paid the firm $ 15,000 in fees related to the acquisition of the BGC property by Judge. PF 37. As noted, members of the law firm were the incorporators of Niagara.
William J. Judge was an officer of NFGC. In 1917, at the time of the transactions described below, Judge was Vice President of the company. Although National Fuel disputes that Judge was a Vice President at the time of the transaction, Westwood exhibit 141 shows Judge's signature above the title "Vice President" on a document dated June 23, 1917. In addition, Exhibit 133 shows Judge's signature over the title "Secretary" on a document dated July 16, 1917. PF 25B, Exs. 133, 141. Judge went on to serve as President of NFGC from 1919 to 1943. PF 25, Ex. 28.
Richardson was the president of BNGFC, until the company merged into Iroquois in 1912. After the merger, Richardson became the president of Iroquois, and a member of its board of directors. PF 20A.
At all times relevant to the events described, New York Public Service Commission Law provided that no gas corporation could transfer its works to any person or corporation without approval of the PSC. The law did not, however, prevent such a transfer by an individual. The law also provided that a stock company that was not a gas company could not own more than ten percent of the capital stock issued by a gas corporation organized under New York law. N.Y. Pub. Serv. Comm'n L. § 70 (McKinney's 1917), L. 1911, ch. 788 § 1, PF 27A. The same law also prohibited a gas corporation from acquiring the stock of any other corporation in a similar business, operating in the same municipality, without permission of the PSC. N.Y. Public Service Comm'n L. § 70.
A. Judge's Acquisition of the BGC Assets
By 1917, BGC remained an independent corporation manufacturing gas on the leased People's site. The BGC assets included more than ninety percent of the stock of People's. PF 27C.
On April 18, 1917, NFGC deposited one million dollars with the Pittsburg Trust Company, so that NFGC could begin to acquire forty and one-half percent of the par bonds of BGC. PF 26. NFPF 26. Between April 18 and June 1, 1917, NFGC also borrowed $ 1,226,000 from Pittsburg Trust. The four notes comprising the loan were ultimately consolidated into a single note. Exs. 131, 141; PF 26. With the $ 2,226,000 in funds supplied by NFGC, L.H. Gethoefer, the Pittsburg Trust president, acquired BGC bonds with a face value of $ 5.3 million at forty-two percent of par ($ 5.3 million x 0.42 = $ 2,226,000).
On June 15, 1917, the NFGC board authorized Jennings to bid no more than sixty percent of par for the remaining BGC bonds at the receiver's sale to be held on July 16, 1917. In 1917, NFGC sold an issue of its capital stock to obtain funds to acquire the BGC assets. Ex. 8; PF 25. There is no evidence that Jennings was authorized to bid in his own name, rather than in the name of the company, and there is no authorization for William J. Judge, NFGC vice-president and board member, to bid on the BGC assets on the company's behalf.
National Fuel argues that there is no evidence to support the theory that Gethoefer acted as NFGC's agent to purchase the bonds. Exs. 134, 136, 140, 141; PF 26C. National Fuel Response ("NFR") 26. But at trial, National Fuel's expert witness, Paul Kramer, conceded that Jennings "was using Gethoefer to do what he [Jennings] was asked to do," by the Board. Tr. 356. Kramer agreed with the statement that "the Board made the authority to Mr. Jennings [to purchase the bonds] and left it up to Mr. Jennings as the President of the company as to how best to implement the charge he was given." Tr. 356. Kramer further agreed that "in April of 1917 Mr. Jennings working with Mr. Gethoefer proceeded to go about the charge that he had been given by the Board." Tr. 356. Kramer then acknowledged that by the time of the receiver's sale, NFGC had acquired ninety percent of the BGC bonds through Gethoefer, and that it "appeared" that the bid made by Gethoefer at the receiver's sale was on behalf of NFGC. Tr. 357.
At the July 16, 1917, receiver's sale, Gethoefer acquired the BGC assets using $ 2,360,000 in BGC bonds that he had already acquired. This amount represented forty percent of the $ 5.9 million BGC bond issue. To complete the purchase, Gethoefer deposited $ 5,342,000 in BGC bonds with Carlton Ladd, the Special Master. This left a balance of $ 558,000 of the original $ 5.9 million bond issue outstanding. The remaining amount to be paid was $ 176,000 ($ 558,000 x 40 percent = $ 223,000, less the $ 47,200 deposit at the time of the bid = $ 176,000), plus an additional $ 1,000 paid in fees to Carlton Ladd). PF 26D; Ex. 136.
Between July 16 and July 28, 1917, Gethoefer assigned his bid on the BGC assets to William J. Judge. PF 27. In order to fund Judge's acquisition of the assets, NFGC created a loan account for Judge. PF 27. The first memorandum of the Judge Loan Account is a statement dated September 28, 1917, that Judge paid the Special Master the $ 177,051.50 balance due from the receiver's sale. Exhibit 140 includes a check from NFGC to Judge dated September 28, 1917, for $ 177,051.50. Ex. 140. By indenture dated October 1, 1917, the BGC assets were conveyed to Judge. Exs. 136, 140; PF 27, NFR 26; Ex. 171.
On October 25, 1917, just over three weeks after the BGC assets were transferred to Judge by the receivers, the NFGC board authorized a guarantee of payment for $ 35,819 for a new water gas apparatus to be installed at the site. PF 28. NFR 28.
Between September 28 and December 31, 1917, the Judge loan account was increased to a total of $ 2,561,231.29. This total comprised a number of transactions, including two large transactions of particular significance to the present case. A voucher executed on December 15, 1917, states that NFGC debited the Judge loan account $ 1,284,800 and credited NFGC's Pittsburg Trust Co. Note Account the same amount. Ex. 140, bottom p.3. This money was advanced to Judge by NFGC to repay Pittsburg Trust the money borrowed by NFGC to purchase additional bonds after the initial $ 1,000,000 advance to Gethoefer was exhausted. The interest charged Judge by NFGC on that amount was $ 41,496.81. Ex. 140, bottom p.3. On the same date, NFGC debited the Judge loan account $ 1,042.703.82. This amount represents the original $ 1 million advance from NFGC to Gethoefer for the acquisition of the BGC bonds, and $ 42,703.82 in interest and miscellaneous payments to Pittsburg Trust and Gethoefer. Ex. 140, p.2. At the time of the debit, NFGC charged the Judge loan account $ 40,894.03 in interest on the advance. NFGC ultimately entered a credit to its Pittsburg Trust Account and a debit to the Judge loan account in the same amount.
NFGC charged interest totaling $ 9,197.16 on the total $ 2.6 million amount of the Judge loan account from September 28, 1917, the date of the first activity in the Judge loan account, until the end of 1917. Ex. 140; PF 30. In addition, $ 78,403.02 in interest was charged to the Judge loan account for the first six months of 1918. Ex. 150.
On December 31, 1918, NFGC reversed the interest charges to the Judge loan account for 1918 by entering a voucher showing a debit to its interest account. Ex. 178. The voucher indicates that the reason for the reversal was that the PSC would not allow the capitalization of interest on the account for the year 1918. Ex. 178. On December 30, 1920, the $ 50,091.19 in interest ($ 40,894.03 $ 9,197.16) paid in 1917 was reversed. Ex. 129. The voucher states that these amounts were improperly charged.
After reversing the interest charges for 1917 and 1918, the Judge account was no longer treated as an account receivable for the years 1919 and 1920, the accounting treatment consistent with a loan, but rather was treated as an investment of NFGC. The reasons for the reversal, and the conclusions to be drawn from the changed accounting status, are a central feature of this litigation. The trial testimony concerning these practices is discussed in more detail below.
Interest was charged, capitalized, and debited from the Judge loan account in 1917 and 1918. Tr. 149. In 1917, the Judge loan account was recorded as cash on the NFGC accounting statement. Ex. 154; Tr. 258. In 1918, the Judge loan account was recorded as an account receivable. Ex. 154; Tr. 152, 258. The treatment of the loan account as cash or an account receivable is consistent with the view that the account was a loan. Tr. 258.
Although the interest was charged in 1917 and 1918, there is no definitive memorandum of how much, if any, interest was actually paid. PF 31; Tr. 149; 315. William Rooney testified that although NFGC accounted for interest charged in 1917, "this is strictly from an accounting point of view in which they would have recognized it in profit and loss . . . and because they didn't receive it they had to debit that to some asset account, and that's what they did when they charged or capitalized the W.J. Judge loan account." Tr. 149. Paul Kramer testified that although NFGC clearly charged interest on the loan through June 30, 1918, and that some type of payment was made by Judge to NFGC, "there is no indication whether [the amount noted is] a payment on the principal, whether it's interest or what the payment is." Tr. 315. Kramer went on to state: "I assume that they're reductions of the total loan and not interest payments . . . ." Tr. 315.
In 1919 and 1920, the treatment of the loan account changed. On the NFGC final balance sheet for 1919, the loan account is reclassified as an investment of NFGC. Ex. 154; Tr. 155. On the final balance sheet for 1920, the account is also treated as an investment. Id. No interest was charged on the loan account for 1919 and 1920. PF 31, NFR 31.
Throughout the existence of the Judge loan account, NFGC clearly identified the account in its records. A financial audit conducted by the certified public accounting firm of Perine & Nichols for fiscal year 1921 noted that the Judge loan account balance totaled $ 2,626,715.65, or approximately 7.5% of NFGC's total asset value. Ex. 154. Perine & Nichols did not include any explanation of the nature of the Judge loan account. Id.
At trial, Westwood's expert conceded on cross-examination that if Judge had held such a large loan as an agent of NFGC, the auditors should have insisted that the agency relationship be recorded on the company financial statements. Tr. 260. No such record was ever made. Id.
At a continuation of that proceeding, Kenefick told the PSC: "We frankly admitted he borrowed the money of the National Fuel Gas Company and he feels under a moral obligation, there not being any legal obligation, to turn that plant over to whomever they direct when they get it in shape to know what they want to do with it." Ex. 49, pp. 904-5; PF 33. NFR 33.
During Judge's tenure of the assets, he owned and operated them as a sole proprietorship known as W.J. Judge-Buffalo Gas. Judge and NFGC maintained separate and independent financial books and records and made separate filings with the PSC. National Fuel Ex. 2; Exs. 43, 48, 126. As an unincorporated entity, National Fuel argues that the Judge-BGC assets could not have been officially treated as a subsidiary of NFGC.
There is no record that Judge made any significant investment of capital that was not loaned to him directly by NFGC and debited from the Judge loan account. NFGC guaranteed certain performance and payments by Judge in his acquisition of the BGC assets. PF 35; NFR 35. In June 1923, NFGC paid $ 15,000 in legal fees to Kenefick, Cook, Mitchell & Bass. These fees were incurred by Judge during his acquisition of the BGC assets. PF 37; NFR 37. Judge did, however, personally enter into contracts, Exs. 7, 15, agree to assume obligations of and indemnify the receivers of BGC, Exs. 55, 56 and 156, obtained an appellate bond, was subject to personal risks in litigation, Exs. 9, 14 and 69, and assumed franchise taxes and local assessments. Ex. 51.
B. The Transfer to Niagara
On April 9, 1921, the stockholders of Niagara agreed to purchase the BGC assets from Judge for $ 4 million, subject to the approval of the PSC. Ex. 13; PF 38. The resolution specifically stated that the offer was for all of Judge's BGC assets, including $ 2,045,00.00 of a par value of a total issue $ 2,100,000.00 in People's bonds and $ 2,702,400 of a par value of $ 3,000,000.00 in People's stock. Ex. 13.
When Niagara, a wholly owned subsidiary of NFGC, sought to acquire the BGC assets held by Judge, both Judge and Niagara made independent applications to the PSC for approval. Neither the submissions to, nor the orders from, the PSC make any reference to a purported agency relationship. Exs. 13-15, 43-48, 51, 53, 55, 56, 82-83, 170; National Fuel Exs. 2, 8-10.
In examining Judge's petition, the staff of the PSC noted that it was unclear how Judge arrived at the $ 4 million price, given that his proprietorship account amounted to over $ 15 million. PF 40, Ex. 170. The staff noted that the $ 15 million included the value of securities, and that there was no data to support the value asserted by Judge. The staff concluded that in the event of a hearing, Judge should be questioned as to what the property actually cost him. Id. The PSC subsequently approved the transaction at a price of $ 3 million. PF 41, Ex. 14. In making its determination, the PSC found that Judge acquired the BGC assets at a foreclosure sale on October 1, 1917, for a total of $ 2.6 million, and that $ 379,000 had been spent in permanent additions to equipment and in working capital. Ex. 14; PF 41.
Following the determination of the PSC, Kenefick sent a letter to Judge stating that although Judge could appeal the determination, Kenefick had little hope it would be reversed by the Appellate Division. Kenefick stated:
While the order is not as favorable as I hoped for, or as I think we were reasonably entitled to, yet under all the circumstances I believe it should be accepted so that we may push ahead without further delay on our larger plans. Of course, we have the right to review the order by certiorari in the Appellate Division but I have little hope that we could succeed in annulling the order. I am inclined to think the court would regard the original purchase as having been made for the National Fuel Gas Company and that the present proceeding was in effect simply a method of changing the form of investment from an account receivable against W.J. Judge to stock of the Niagara Gas Corporation, and looking at it in this aspect would hold that the Commission was justified ...