Collecting from Zombie PRPs: Reviving the Living Dead Oregon Brownfields Conference, Salem, OR David Ashton Assistant General Counsel May 13, 2014 Port of Portland Properties 1
Reviving Zombie PRPs What are we going to talk about? Finding sources of money for Brownfields: Opportunities to raise money for cleanup By reviving dissolved corporations Known to have undistributed insurance assets Discussing: Long-tail environmental claims on pre-1986 accident/occurrence based insurance covering property damage from pollution Legal capacity to be sued 2
Suing Zombies For Their Insurance Important to Brownfields Redevelopment is creating cleanup funding sources One source: cost recovery from past polluters Past owners or site users at the time of contamination can sometimes be held liable for cost recovery/contribution Often past owners and users are defunct Can t be sued: dead and buried Recent cases have show that apparently dissolved corps incapable of being sued may be revivable zombies How Does One Identify a Zombie PRP? Zombie PRP = polluter that appears to be out of business and without assets But archeology confirms to have undistributed insurance assets (pre-1986 insurance coverage for property dams) Important Issue: Does Zombie have capacity to be sued? Corps incorporate under state law Create separate legal entity with directors, officers & shareholders Corps go out of business in 3 different ways Formal winding up With or without court supervision Turn out the nights just abandon everything Get acquired by a successor Some dissolved businesses can be dug up in order to be sued for old insurance (zombies) 3
Port of Portland Properties Included multi-user shipyards and terminals Port owned Available to anyone who wanted to import/export products or repair ships Common use sites with multiple users/tenants Many marginal businesses - no longer around Port records contain good evidence of their historical insurance 4
Why Revive Zombie PRPs, they re trouble? May dig up evidence of old insurance of defunct corps. Pre 1986, long-tail liability coverage for accidents and occurrences under comprehensive general liability policies may cover property damages from pollution These old forms of coverage never expire, unless exhausted, bought back, lost or otherwise extinguished But can you tap into them when you re not additional insured and not in a direct action state? Recently, Supreme Court of Delaware has said: yes we can! Under the right circumstances other courts have confirmed this Reviving and Suing Zombies for Insurance In the Matter of Krafft-Murphy Company, Inc., (No. 85, 2013, 2013 WL 6174485 (Del. Nov. 26, 2013)) held: DGCL does not time-bar third-party claims against dissolved corporations receiver can be appointed for dissolved corps, to defend against claims brought any time after 3 years from dissolution when corps have contingent rights against old insurance policies. 5
Reviving Zombie Corporations Krafft-Murphy Company, Delaware corporation that had been engaged in plastering business thru 1980s Also spray-on asbestos Beginning in 1989, named in hundreds of asbestosrelated personal injury lawsuits Over course of business, it had obtained several CGL insurance policies Old coverages still in effect Insurance only remaining assets Corp shut down in 1991 filed dissolution certificate 1999 Under Delaware law, dissolution effective once certificate of dissolution is accepted by Secretary of State Reviving Zombie Corporations Under old common law, when a corporation dissolved any lawsuit against corp abated No longer had legal capacity to be sued Under DGCL survival statute dissolved corp: deemed continued for 3 years (or longer if determined by Chancery) for limited purposes of prosecuting/defending lawsuits and other actions needed to wind up Law encourages directors to get affairs wrapped up within 3 years of dissolution 6
Reviving Zombie Corporations Under DGCL, to wind up, dissolving corp can choose one of two paths: safe harbor procedures: - court-supervised process whereby corp notifies potential claimants, and sets aside security to cover known claims, and contingent and unknown potential future claims likely to arise or become known within 10 years of dissolution Notify people with existing, contingent, conditional or unmatured claims Properly executed, later claimants barred from going after assets distributed to shareholders or directors (safe harbor) default procedure: - corp adopts a plan of distribution providing for payment of all known claims or claims likely to arise within 10 years of dissolution. Reviving Zombie PRPs In 2010, Krafft-Murphy filed motions to dismiss asbestos-related lawsuits begun more than 10 years after its dissolution, arguing: DGCL only provides for 3 years winding up; DGCL only requires dissolving corporations to deal with claims that may arise within 10 years so statute must bar new claims made after 10-year anniversary of dissolution Dismissals of underlying asbestos injury lawsuits stayed while claimants went to Chancery to try to have a receiver appointed for dissolved corp 7
Chancery Suggested Zombies Can Expire Chancery, In the Matter of Krafft-Murphy Company, Inc., 62 A.3d 94 (Del. Ch. 2013) had held: Receiver may be appointed by Chancery at any time, even after 10-year period, if dissolved corp still has existing property interests that have not been distributed to holders. Liability-insurance contracts can qualify as existing property interests. However, if claim has not been brought within 10-years of dissolution, then insurance contracts have no further residual value, and no receiver need be appointed, because: 10 year period is like statute of limitation claims bar Zombie Corporations Revived Del Supreme Court reversed Court of Chancery: statutory winding-up regime simply provides a set of pathways for board of directors to perform their fiduciary duties to existing and future claimants. 3-year winding up period was not a time-bar 10-year planning period for dealing with unknown but likely future claims was not a time bar Legislative history of DGCL indicated Delaware General Assembly never intended winding-up procedures to function as statutes of limitation. 8
Some Delaware Zombies R.I.P. DGCL does bar certain claims if dissolving corp has followed statute's notice procedures: If claimant notified and fails timely to take steps to assert claim these claimants are barred not others. Zombies Revived Krafft-Murphy settles an open question of Delaware corporate law: Third-party claims are not barred under DGCL after 3 or 10 years from dissolution. To bar certain future claims, dissolving corps must go through notice-and-security procedures under DGCL. Doing so, corps can bar future claims brought by claimants who received notice of dissolution or who failed to respond to corps' rejection of their claims. Can t bar unknown future claimants to extent of available assets. 9
Zombies Revived Delaware law now in line with California and New Jersey statutes. Defunct zombie corps + insurance assets: can be dug up have a receiver appointed to represent them be sued in order to reach corporate insurance assets. But what about Oregon? Oregon Zombies Recent ruling in Frontier Leather/Ken Foster Farms: Ironwood Homes v. Bowen, Case 3:08-cv-00098-BR (D. Or. June 14, 2010) (Anna Brown, J.) Oregon law governed capacity to be sued Oregon corp did not go through formal dissolution In situations of administrative dissolution or lights out closures when there is evidence of old insurance assets Long tail insurance policies were undistributed assets Corp could still be revived, receiver appointed, and sued for value of undistributed insurance. 10
Oregon Zombies Had, however, corp followed Oregon s formal dissolution process: Including notifying potential claimants & publishing notice in newspaper Unlike Del, Or dissolution statute contains explicit statute of limitation Nobody can bring suit 5 years after notice Thereafter, claim on old insurance policy is no longer distributable asset Reviving Zombies: Take Aways: Your target PRP might not be a dissolved corporation with no legal capacity to be held liable Know relevant law: check whether your zombie issue will be governed by federal or state law; and which state s law? Check: Did zombie properly follow state dissolution process? Does dissolution process include a SOL? What evidence do you have that zombie has pre-1986 long tail insurance coverage? Evaluate how solid is the claim against insurance? Is the zombie s share of liability large enough? If so, consider developing & implementing a strategy to pursue zombie to reach insurance assets 11
Reviving Zombies: Take Aways: You have to be strategic about going after zombies: It has to be worth pain could involve as many as three lawsuits claim against dissolved corporation, petition to appoint receiver, suit to enforce judgment against insurer. Not for faint of heart. Consider alternative legal fee structures. Joining with others to share the cost of pursuit. Warning: Navigate Cautiously David Ashton: 503-313-5431 David.Ashton@PortofPortland.com 12
Some Zombies R.I.P. depends on state In some regions, district courts have determined that corporate capacity to be sued under CERCLA is a matter of federal, not state, law If applicable: apply a judge-made federal test of capacity to be sued In others, including 9 th CA, where state law controls the issue, One issue is which state s law governs: Often law of state of Zombie s incorporation In some states, including Oregon, Illinois, Michigan, unlike Delaware: Dissolution statutes contain explicit statute of limitation Benefits those who wind up corporations using specified process Including notifying potential claimants & publishing notice in newspaper Use of Insurance Cost Recovery Trusts Zombie settles with US and other PRPs with cost recovery and contribution Transfers rights to sue on long tail insurance to a trust Trustee appointed Law firm hired to represent the trust and collect on the insurance. Variation: zombie also confesses judgment, judgment defines the outer limits of its liability 13