The Dry-Cleaner Parcel

Question 40: The Dry-Cleaner Parcel

Your role

You represent Brindle Foods in a proposed acquisition of assets and an industrial parcel from Harthill Processing in the fictional State of Corven. The parcel may contain solvent contamination from a former dry-cleaning operation. Brindle wants to close in twelve days and asks whether a $500,000 escrow is enough.

Governing law

Assume the following Corven rules apply:

1. An asset purchaser ordinarily does not assume the seller's general liabilities unless it expressly assumes them, the transaction is a de facto merger, the purchaser is a mere continuation, or the structure is used to evade liabilities.

2. De facto merger and mere continuation consider continuity of ownership, management, employees, business, name, assets, dissolution of the seller, and whether adequate consideration remains for creditors. No single label controls.

3. A current owner of contaminated property may be directly liable for investigation and cleanup regardless of whether it caused the release.

4. A purchaser may preserve an innocent-purchaser defense only by conducting all appropriate pre-closing inquiry, making no prohibited affiliation with the liable party, exercising reasonable care after purchase, cooperating with regulators, and complying with land-use restrictions.

5. A Phase I review identifying a recognized condition ordinarily requires targeted Phase II sampling before closing when reasonably available. Closing without available testing may defeat all-appropriate-inquiry protection.

6. A seller indemnity, escrow, or price reduction allocates cost between the parties but does not bar the regulator from proceeding against the current owner.

7. For this transaction, a prudent environmental escrow equals the supplied expected remediation cost, plus a 20 percent contingency, plus $150,000 for agency oversight and legal administration. Use only the supplied probabilities and costs.

8. The escrow should survive long enough to cover investigation and remedy selection, include direct-payment rights, and not require a final judgment before release for approved environmental costs.

9. Counsel should condition closing on missing testing when the result could materially change liability, price, financing, or operational feasibility.

Facts

Harthill operates a frozen-food plant on a parcel that housed a dry cleaner from 1978 to 1994. A Phase I report completed last week identifies the former dry cleaner and an abandoned floor drain as recognized environmental conditions. No Phase II soil or groundwater sampling has been performed.

A consultant gives these supplied preliminary branches for escrow analysis:

• 65 percent probability that contamination is limited to soil, with a direct remediation cost of $800,000.
• 35 percent probability that solvents reached groundwater, with a direct remediation cost of $3,200,000.

The probabilities are mutually exclusive and sum to 100 percent. The stated costs include investigation, treatment, and monitoring but exclude the rule 7 contingency and the separate $150,000 oversight and legal amount.

Brindle proposes an asset purchase. It will buy the parcel, equipment, inventory, recipes, customer contracts, and Harthill trade name; retain 85 percent of employees; keep three of four senior managers; and continue the same production. Harthill's owners will receive cash and dissolve Harthill within 30 days. No Harthill owner will receive Brindle equity. The proposed price leaves Harthill with $4 million after known debts, but potential environmental claims are not reserved.

The draft agreement excludes environmental liabilities in the assumption clause. Harthill offers a five-year indemnity backed by a $500,000 escrow. The indemnity requires Brindle to obtain a final court judgment before drawing. Harthill refuses an escrow above $500,000 unless testing confirms groundwater contamination.

The lender will finance the acquisition only if Brindle presents a defensible contamination plan. Targeted Phase II sampling can begin tomorrow and produce preliminary results in nine days, before the scheduled closing, at a cost of $48,000. The supplied record does not reveal whether contamination exists, its extent, or whether groundwater is affected.

Assignment

Analyze:

• General successor-liability risk under the asset structure and continuity facts.
• Direct owner liability for the parcel regardless of contractual assumption.
• The innocent-purchaser requirements and effect of closing without available Phase II testing.
• The exact expected direct remediation cost under the supplied branches.
• The exact escrow amount under rule 7.
• Why the proposed $500,000 escrow and final-judgment condition are or are not adequate.
• Contract terms needed for indemnity, escrow access, cooperation, cleanup control, land-use obligations, and survival.
• Transaction restructuring that could reduce general successor risk without pretending environmental owner liability disappears.
• Whether to close on schedule, delay, or condition closing on Phase II results, with a concrete recommendation tied to the fact not yet known.

Q40 key (Dry-Cleaner Parcel)

1. The asset label helps, and no ownership continuity exists, but same name, 85 percent workforce, management, business, parcel, and seller dissolution create material de facto-merger or continuation risk. Retaining adequate seller assets helps but does not eliminate it. Missed: general successor exposure is treated as impossible.
2. Brindle becomes directly exposed as current owner regardless of assumption language. Contract allocation does not bind the regulator. Missed: environmental liability is mistaken for a negotiable definition only.
3. Available Phase II testing is part of all appropriate inquiry after the recognized conditions. Closing without it risks the innocent-purchaser defense and lender approval. Missed: a twelve-day schedule destroys a statutory defense.
4. Expected direct remediation cost is 0.65 x $800,000 + 0.35 x $3,200,000 = $1,640,000. Missed: escrow begins from the wrong expected loss.
5. Rule 7 escrow is $1,640,000 x 1.20 + $150,000 = $2,118,000. Missed: the $500,000 proposal leaves more than $1.6 million of the prescribed protection unfunded.
6. The final-judgment draw condition is unacceptable because cleanup costs arise before judgment. Require direct draw for approved investigation, agency, and remediation costs, long survival, replenishment, cooperation, access, and credit support. Missed: an indemnity exists on paper while Brindle funds the cleanup.
7. Reduce general successor risk by limiting name and management continuity, preserving a funded seller, documenting fair consideration, and avoiding liability-evasion structure. None removes owner liability. Missed: restructuring is oversold as environmental immunity.
8. Spend $48,000 and condition closing on Phase II results, lender acceptance, and a revised price or escrow. If forced to close before final results, require at least the $2.118 million escrow and robust rights, but the defensible recommendation is delay or condition the closing for nine days. Missed: the acquisition closes before the single fact most likely to change price and liability is known.