In recent years, the EPA has increasingly relied on fraudulent transfer claims to supplement its already-broad authority to recover environmental cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9607(a), commonly referred to as “CERCLA” or “Superfund.” This trend is exemplified by United States v. Oak-Bark Corporation et al., which involves cleanup costs at the Wright Chemical Superfund Site in Columbus County, North Carolina. The EPA filed Oak-Bark in 2023, seeking to seize funds alleged to have been fraudulently transferred from a business that is liable under CERCLA to its minority owners who are not liable under CERCLA. Robinson Bradshaw represents the minority owners and successfully moved to dismiss them from the lawsuit due to the EPA’s failure to plausibly allege that the liable business was insolvent when the transfers were made or that the transfers were intended to evade responsibility for the cleanup costs.   

Facts of the Case

The site was used to manufacture sulfuric acid and phosphate fertilizer. In 1984, the EPA identified contaminated soil at the site and determined that additional investigation was necessary. The EPA later estimated that its cleanup costs could exceed $5 million.

In 2004, Oak-Bark Corp. purchased the assets of Wright Chemical Corp., including much of the site, and continued its operations. The operations were managed by William Oakley and James Barker. In 2013, Oakley and Barker created Cronly Bluffs LLC and caused a portion of the site to be transferred to Cronly. Cronly still owns a portion of the site valued at $2.4 million. In 2013, Cronly began making routine distributions to its owners.

The EPA brought the Oak-Bark lawsuit in 2023, asserting CERCLA cost recovery claims against Oak-Bark Corp. and Cronly as part owners of the site. The EPA also asserted claims to set aside Cronly’s distributions to its owners as alleged fraudulent transfers in violation of the Federal Debt Collection Procedures Act, 28 U.S.C. § 3304. Two of Cronly’s minority owners hired Robinson Bradshaw to defend them against the fraudulent transfer claims. Together with counsel for other defendants, we filed a motion to dismiss the fraudulent transfer claims.   

Key Takeaways: Dismissal of Fraudulent Transfer Claims

Our clients and other recipients of alleged fraudulent transfers argued, and the Court agreed, that the fraudulent transfer claims must be dismissed due to the EPA’s failure to plausibly allege facts supporting the elements of the claims. The Court laid out three scenarios by which the EPA could maintain viable fraudulent transfer claims against the owners of Cronly who received the distributions. The Court found that Cronly’s insolvency was germane under all three scenarios and therefore focused on whether Cronly was insolvent when the distributions were made.    

The Court explained that insolvency for purposes of fraudulent transfer claims exists “if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.” The Court looked to the Bankruptcy Code and relevant case law for guidance. Relying on Bankruptcy Court rulings, the Court ruled that a finding of insolvency cannot rest on a contingent liability, such as liability under CERCLA, unless the liability is adjusted to account for the possibility that the contingency will not occur. The EPA relied on Cronly’s alleged value of approximately $2.4 million, compared with the EPA’s projection of up to $5 million of possible cleanup costs. The EPA theorized that this estimated disparity was sufficient to establish insolvency due to CERCLA’s joint and several liability scheme under which each liable party can be responsible for the full amount of cleanup costs. The Court rejected this theory as speculation. The Court noted in this regard that Cronly was only one of several liable parties under CERCLA and that, despite CERCLA’s joint and several liability scheme, Cronly is entitled to contribution from the other liable parties. The Court also noted the EPA’s failure to cite any fraudulent transfer case that analyzed insolvency based on CERCLA’s joint and several liability scheme. For good measure, the Court found also that the EPA failed to plausibly allege that Cronly’s distributions to its owners were intended to evade Cronly’s CERCLA liability.

Moving Forward

The Court’s analysis and dismissal of the EPA’s fraudulent transfer claims represent a rare check on the EPA’s far-reaching enforcement authority, and the decision’s precedential effect should hinder the EPA’s ability to use such claims moving forward.