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PCS Nitrogen, Inc. v. Ross Development Corp.

United States District Court, D. South Carolina, Charleston Division

August 23, 2015

PCS NITROGEN, INC., Plaintiff,

         Decided August 21, 2015

         As Amended by September 23, 2015.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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          For PCS Nitrogen Inc, Plaintiff: Kirby D Shealy, III, LEAD ATTORNEY, Adams and Reese, Columbia, SC; John Buchanan Williams, PRO HAC VICE, Williams Lopatto, Washington, DC; Sandra Kaczmarczyk, PRO HAC VICE, Alton Associates, Washington, DC.

         For Ross Development Corporation, T Heyward Carter, Jr, Grayson G Hanahan, William O Hanahan, III, Katharyne H Rike, Mikell R Scarborough, C Cotesworth Pinckney, as Co Trustee of the Trust of William O Hanahan Jr on behalf of William O Hanahan, Jr, T Heyward Carter, as Co Trustee of the Trust of William O Hanahan Jr on behalf of William O Hanahan, Jr, Ann Hanahan Blessing, Donald Buhrmaster, III, Eleanor W Carter, Margaret H Carter, Elizabeth H Clark, Buist L Hanahan, Elizabeth A Hanahan, Frances G Hanahan, Mary Ross Hanahan, Muriel R Hanahan, Roger Parke Hanahan, Jr, Grayson C Jackson, Oriana H Kirby, Jeanne Deforest Smith Hanahan, Defendants: Daniel S McQueeney, Jr, George Trenholm Walker, Kathleen Fowler Monoc, LEAD ATTORNEYS, John Phillips Linton, Jr, Pratt-Thomas Walker, Charleston, SC.

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         Margaret B. Seymour, Senior United States District Judge.

         This matter is before the court after trial for final disposition of Plaintiff PCS Nitrogen, Inc.'s (" PCS" ) cause of action for fraudulent conveyance. The claims in this case arise out of litigation that resolved liability under the Comprehensive Environmental Response Compensation and Liability Act (" CERCLA" ) for the remediation of the Columbia Nitrogen Superfund Site (" Site" ) in Charleston, South Carolina. Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., Case No. 2:05-cv-02782-MBS (D.S.C.) (hereinafter Ashley II ). Both PCS and Defendant Ross Development Corporation (" Ross" ) are former owners and operators of the Site that were parties to the Ashley II action and were found liable for response costs at the Site. PCS brought this action on December 8, 2009, to recover funds from Ross, T. Heyward Carter, Jr. (" Carter" ); Grayson G. Hanahan; William O. Hanahan, III (" Hanahan" ); Katharyne H. Rike (" Rike" ); Mikell R. Scarborough (" Scarborough" ); and the Estate of G.L. Buist Rivers (collectively the " Ross Directors" ); as well as C.

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Cotesworth Pinckney and T. Heyward Carter as co-trustees of the Trust of William O. Hanahan, Jr.; Anne Hanahan Blessing; Donald Buhrmaster, III; Eleanor W. Carter; Margaret H. Carter; Elizabeth H. Clark; Maria Grayson-Metaxas; Buist L. Hanahan; Elizabeth A. Hanahan; Mary Ross Hanahan; Muriel R. Hanahan; Roger Parke Hanahan, Jr.; Grayson C. Jackson; Orianna H. Kirby; and Jeanne Deforest Smith Hanahan (collectively the " Ross Shareholders" ).[1] ECF No. 1. PCS dismissed its claim against the Estate of G.L. Buist Rivers on June 10, 2011 (ECF No. 91) and against Maria Grayson-Metaxas on July 17, 2014 (ECF No. 294).

         PCS proceeded to trial on three of the causes of action in its Amended Complaint: (1) an action under the Statute of Elizabeth (S.C. Code Ann. § 27-23-10(A)) to set aside alleged fraudulent conveyances brought against Ross, the Ross Directors, and the Ross Shareholders; (2) an action for an alleged civil conspiracy brought against the Ross Directors; and (3) a direct claim for alleged breach of fiduciary duty brought against the Ross Directors. ECF No. 34. The parties tried the equitable claim for fraudulent conveyance to the court at the same time as they tried the two legal claims to the jury. At the conclusion of the trial on July 31, 2014, the jury returned a verdict for the Ross Directors on the civil conspiracy claim and a verdict for PCS in the amount of $5,555,158.00 against the Ross Directors on the breach of fiduciary duty claim. ECF No. 319. According to the joint stipulations submitted to the jury, $5,555,158.00 is the exact amount of all distributions to all the shareholders of Ross from 1999 to 2006, when Ross dissolved. ECF No. 312. The jury declined to award PCS punitive damages. ECF No. 319.

         At an August 19, 2014 hearing, Defendants moved for judgment as a matter of law on the fraudulent conveyance claim. ECF No. 325. The court ordered the parties to prepare briefs addressing whether the jury's verdict provided PCS with an adequate remedy at law that precluded its recovery of equitable relief. Id. Those briefs were submitted to the court by September 12, 2014. ECF Nos. 326, 327, 328, and 329. On October 29, 2014, this court determined that the jury's verdict does not preclude the court from awarding PCS relief under its fraudulent conveyance claim. ECF No. 344. The court did, however, dismiss PCS's claim without prejudice to the extent that it was also brought against the Ross Directors--Carter, Grayson Hanahan, Hanahan, Rike, and Scarborough--because the breach of fiduciary duty claim tried to the jury provided an adequate remedy at law precluding equitable relief as to those Defendants. Id. at 8. The court permitted PCS's claim to proceed against the Ross Shareholders. Id. In the order on the post-trial motions accompanying this Amended Findings of Fact and Conclusions of Law, the court vacated in part its order of October 29, 2014, to the extent that order dismissed without prejudice PCS's fraudulent conveyance claim against the Ross Directors. ECF No. 344. The Ross Directors thus

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remain defendants to PCS's fraudulent conveyance claim.

         PCS's fraudulent conveyance claim alleges that the Ross Directors knew of contamination at the Site and that Ross could be liable for such contamination when they approved all the distributions to themselves and to the Ross Shareholders from 1992 through 2006. ECF No. 34. PCS's amended complaint asserts that from 1992 to 2006, " with knowledge of a future tort claim and with actual intent to evade liability for the Site and defraud Ross creditors, both existing and subsequent, including PCS," the Ross Directors voluntarily distributed all of Ross's assets to all the shareholders of Ross; and that such " distributions made Ross insolvent and unable to pay its creditors, including PCS." ECF No. 34, ¶ ¶ 69-71. In its fraudulent conveyance claim, PCS challenges only the distributions from 1998 to 2006. Summ. J. Hr'g Tr. 22:23-23:6 (ECF No. 343).

         On November 4, 2014, the parties submitted proposed findings of fact and conclusions of law to the court pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. Rule 52(a) directs that " [i]n an action tried on the facts without a jury or with an advisory jury, the court must find the facts specially and state its conclusions of law separately." Fed.R.Civ.P. 52(a).

         Having carefully considered the testimony, exhibits, deposition excerpts, trial briefs, and proposed findings of fact and conclusions of law, the court makes the following findings.


         A. Background: The Ashley II Litigation

         1. Ross is a dissolved South Carolina corporation that was formed more than 100 years ago as Planters Fertilizer and Phosphate Company (" Planters" ). From 1906 to 1966, Planters operated a fertilizer plant at the Site. Trial Tr. 69:5-14.

         2. Planters sold the Site and its fertilizer plant operations to PCS's predecessor, Columbia Nitrogen Corporation (" CNC" ), in 1966. Trial Tr. 69:21-23.

         3. The sale of the Site was governed by a letter of agreement containing an indemnification clause in which Planters agreed to indemnify CNC " in respect to any acts, suits, demands, assessments, proceedings and costs and expenses resulting from any acts of [Planter's] occurring prior to the closing date . . . ." Pl.'s Ex. 3; Trial Tr. 124:2-17.

         4. After the sale, Planters changed its name first to Ross Industrial Products and subsequently to Ross Development Corporation. Trial Tr. 65:22-66:2.

         5. The property that Planters and CNC owned and operated is contaminated with lead and arsenic and must be remediated. Trial Tr. 69:15-20. Ross contributed lead and arsenic to the Site in significant quantities. Id.

         6. In 2005, the EPA estimated that the total remedy costs would be roughly $7.882 million. Trial Tr. 304:10-16; Pl.'s Ex. 76.

         7. Ashley II of Charleston, LLC (" Ashley" ), bought the Site in 2003. Initially, Ashley planned to remediate the Site. In 2005, Ashley sued PCS under CERCLA to recover its remediation costs. See Ashley II. PCS brought counterclaims against Ashley and claims against other former and current owners of the Site, who likewise filed their own cross-claims. Ashley II, ECF No. 627 at 1. These third-party defendants included

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Ross; James H. Holcombe, J. Holcombe Enterprises, L.P., J. Henry Fair, Jr. (Collectively " Holcombe and Fair" ); Allwaste Tank Cleaning, Inc. (" Allwaste" ); Robin Hood Container Express (" RHCE" ); and the City of Charleston.

         8. After Ross was added as a third party defendant in the CERCLA case, and following a bench trial, the court determined, among other things, that PCS was jointly and severally liable to Ashley II for the response costs it had incurred. PCS Nitrogen Inc. v. Ashley II of Charleston LLC, 714 F.3d 161, 167 (4th Cir.), cert. denied, 134 S.Ct. 514, 187 L.Ed.2d 366 (2013). As to the counterclaim and third-party claims, the court equitably allocated liability for the past and future response costs as follows: forty-five percent to Ross; thirty percent to PCS; sixteen percent to Holcombe and Fair; five percent to Ashley; three percent to Allwaste; one percent to RHCE; and zero percent to the City of Charleston. Id. at 185; Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 746 F.Supp.2d 692, 754 (D.S.C. 2010); Trial Tr. 131:10-132:2.

         9. The court entered judgment for Ashley II against PCS for $147,617.02 plus interest and judgment for PCS against Ross for $87,404.82 plus interest. Ashley II, ECF No. 628. The court also held that " PCS cannot collect upon its judgments against contributing tortfeasors until it has paid more than its share of judgment entered in favor of Ashley in this case." Ashley II, ECF No. 660 at 4. The Fourth Circuit affirmed these rulings. PCS Nitrogen, 714 F.3d 161, 186 n.11 (4th Cir. 2013), cert. denied, 134 S.Ct. 514, 187 L.Ed.2d 366 (2013).

         10. At the time, litigation was pending against Ross's insurers, shareholders, and directors to restore assets to Ross so that it could pay its share of response costs. Ashley II, ECF No. 627 at 93. The court held that if this litigation was unsuccessful, Ross's forty-five percent share of costs would be deemed to be an orphan share that would have to be borne by other solvent, liable parties. Id. at 114-15.

         11. Through its fraudulent conveyance claim, PCS seeks to recover funds that can be used to pay response costs. Specifically, PCS seeks to void distributions made by the Ross Directors to the Ross Shareholders during the period 1998 to 2006.

         B. Ross and The Hanahan Family

         12. Ross was founded by J. Ross Hanahan and was for the duration of its existence a privately-held corporation. Ross's shares did not trade publically. At the time of dissolution in 2006, Ross had 36,640 shares outstanding and 71 shareholders. Defs.' Ex. 6, Pl.'s Ex. 108 at 1-9. The shares were not traded; rather, they were largely inherited or gifted within families descended from J. Ross Hanahan. Trial Tr. 715:11-18.

         13. During the period from 1998 to 2006, the Hanahan family controlled the Ross board of directors. The directors--Carter; Scarborough; Rike; Hanahan; and Grayson Hanahan--were all descendants of J. Ross Hanahan. Trial Tr. 745:2-4; see generally ECF Nos. 166-5, 166-23 (responses by

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Defendants to requests for admission). With the exception of Buist Rivers, each director represented the lineal descendants of the children of J. Ross Hanahan. Trial Tr. 739:19-21.

         14. The directors were " selected" by members of their branch of the family line for service on the corporation's board. Trial Tr. 165:20-166:1; 166:12-16; 739:16-21. In at least one instance, a seat on the board was passed from father to son. Trial Tr. 972:24-25.

         15. Although some of the seventy-one shareholders at the time of dissolution were not individuals related to J. Ross Hanahan (e.g., G.L. Buist Rivers, Jr.), all of the Ross Shareholders remaining in this action are members of the Hanahan family. See ECF Nos. 166-5, 166-23; Trial Tr. 49:12-15 (statement of Ross's counsel during opening statement: " One thing [defendants] all have in common is that they are Hanahans by blood or marriage, descended from Ross Hanahan, and they were shareholders of Ross Development Company." ).

         16. The Ross Shareholders include sisters, brothers, wives, children, aunts, uncles, and cousins of the Ross Directors. ECF Nos. 166-5, 166-23; Trial Tr. 66:16-18, 101:4-14, 145:17-146:3; 738:5-14.

         17. Except for Carter, who transferred his shares to his wife and children, all of the Ross Directors were also Ross shareholders. Trial Tr. 66:14-18. Thus, when the Ross Directors approved distributions, they were approving distributions, in large part, to themselves and to their family members.

         18. Hanahan family board members controlled when and whether distributions were made to Ross shareholders, who were also mostly Hanahan family members. As the board sold Ross's real property, Hanahan family members were in close touch with the Ross Directors to ensure that they would promptly receive distributions from the sale proceeds. Trial Tr. 166:12-16.

         19. The Ross Directors knew the Site had been used as a fertilizer plant, but none had ever been to the Site. Trial Tr. 200:10-16. None of the Ross Shareholders had ever been to the Site. ECF Nos. 166-5, 166-23.

         20. Being a director of Ross involved attending board meetings and signing documents on occasion. Trial Tr. 744:16-19. Rike testified that her role on the Board of Directors took ten to fifteen hours a year. Trial Tr. 744:20-23. It was a volunteer, non-salary position that came with no training. Trial Tr. 164:21-166:1; 744:24-745:1.

         21. The Ross Directors relied on Ted Daniell (" Daniell" ) for financial and accounting matters, John Warren (" Warren" ) for corporate legal matters, and Jimmy Bailey (" Bailey" ) for land and development matters. Trial Tr. 745:9-20. Daniell also provided audited financial statements. Trial Tr. 426:15-18.

         22. At the time the shareholders adopted the plan of liquidation ( see infra Part I.C.), Ross's primary asset was a large tract of land of 550 acres known as the Dotterer Tract in the West Ashley area of Charleston near Bees Ferry Road. Defs.' Ex. 57 at 27, 89; Trial Tr. 148:9-150:4, 797:14-798:15. The company's intent was to subdivide it and sell development parcels.

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Trial Tr. 160:2-5; Defs.' Ex. 57 at 103-106. Because the company was liquidating and could no longer actively sell its own real estate, the board resolved that James Bailey of Bailey & Associates, Inc. would manage, list, and sell the Dotterer Tract. Defs.' Ex. 57 at 92, 12. Bailey handled the marketing and limited development steps necessary to sell the development parcels. Trial Tr. 160:17-161:12, 163:12-164:2.

         23. As noted in the minutes of the special meeting of the board of directors on January 27, 1984, the plan of liquidation centered around the Dotterer tract and was always " to encourage access to the property by way of an extension of the Highway 61 Expressway and to sell the property in large blocks as rapidly thereafter as possible." Defs.' Ex. 57 at 96.

         24. The sales of tracts went slowly for reasons that included lack of ready vehicular access and extensive wetlands that diminished the developable acreage from 300 to 100 acres. Trial Tr. 825:10-23, 161:24-162:14, 802:24-802:5. Sales picked up considerably around 1995 upon the completion of the Glenn McConnell Expressway that bisected the Dotterer tract and provided access to it by a major highway as well as frontage on that highway. Trial Tr. 806:6-23, 814:10-16, 162:19-163:11; see also Defs.' Ex. 57 at 198-199, 202-203.

         25. During this period, the primary business of the company was the development and sale of parcels from the Dotterer Tract. Trial Tr. 739:22-740:8.

         26. The Ross Directors met at Carter's law office on Church Street to discuss old and new business, primarily regarding the Dotterer Tract. Trial Tr. 740:14-19. In the early years, the Directors met four or five times a year until sales at the Dotterer Tract increased when they would meet more frequently to review contracts of sale procured by Bailey. Trial Tr. 739:22-740:8. The Ross Directors were not involved with the day to day business of the company.

         27. At their meetings, Carter kept accurate minutes. Trial Tr. 743:24-744:15. Rike testified that there was never an instance where the board specifically and purposefully asked for something to be omitted from the minutes. Trial Tr. 744:12-15.

         28. The Ross shareholders met annually on the fourth Thursday in February. Trial Tr. 740:9-10.

         29. Ross maintained its own bank accounts, separate and distinct from those of its officers, directors, and shareholders. See Trial Tr. 254:20-255:6; 753:2-8; Defs.' Ex. 57.

         30. From 1992 through 2006, the Ross Directors authorized the following gross amounts of distributions to all of Ross's shareholders:

a. January-February, 1992 - $73,269.00
b. September, 1997 - $334,751.00
c. March 1999 - $739,268.00
d. June, 1999 - $292,123.00
e. January-March, 2000 - $164,882.00
f. May, 2002 - $916,153.00
g. October, 2004 - $1,831,732.00
h. August, 2005 - $916,010.00
i. July, 2006 - $659,552.19
j. December, 2006 - $35,429.61

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          ECF No. 312 (Joint Stipulations); see also Appendix A.

         31. A compilation of the details of shareholder distributions from 1998 to 2006 to the Ross Directors and the Ross Shareholders according to the Joint Stipulation of the parties (ECF No. 312) is found in Appendix A.

         32. In 1992, Ross retained Warren as its corporate attorney to perform legal work associated with Ross's contracts to sell real estate. Trial Tr. 225:14-22. Warren testified that he is not an environmental lawyer but that he has dealt with environmental issues in terms of allocation of risk in business transactions. Trial Tr. 221:23-225:17.

         33. In his role as corporate attorney, Warren annually received accounting audit letters from Ross's accountant, Daniell, requesting disclosure of certain items, including threatened claims and unasserted claims and contingencies. Trial Tr. 268:18-269:6. In response to these requests from 1998 to 2006, Warren sent attorney audit letters to Daniell that stated that he was not aware of any pending or threatened litigation or contingent liabilities.[2] See Defs.' Ex . 15.

         C. Ross's Plan of Liquidation

         34. In 1982, the then directors and shareholders of Ross adopted a plan of liquidation to be accomplished over the course of one year. Trial Tr. 152:10-15, 154:5-16; Pl.'s Ex. 4. The plan called for the company to sell all of its assets, pay its creditors, distribute whatever remained to the shareholders, and terminate the existence of the corporation during this time. Trial Tr. 153:1-7; Pl.'s Ex. 4. Due to various circumstances, Ross was unable to accomplish its liquidation within the allotted year. Trial Tr. 154:17-155:14.

         35. The shareholders then adopted an amended plan of liquidation in September of 1983. Defs.' Ex. 57 at 88-91; Trial Tr. 158:9-159:12. The amended liquidation plan provided that Ross would refrain from the active operation of a business and would continue to attempt to dispose of all of its remaining assets in an orderly manner at a price and on terms acceptable to its officers and directors. Defs.' Ex. 57 at 90.

         36. The amended liquidation plan further provided " [t]hat the net proceeds of the sale of its assets which may be available from time to time for distribution to its Shareholders, after maintenance of a reasonable reserve for payment of debts and expenses as determined by its Directors, be distributed by the Company to its Shareholders in liquidation in return for the surrender by such Shareholders of a portion of their stock in the Company." Defs.' Ex. 57 at 90; Trial Tr. 158:9-159:12.

         37. On December 19, 1983, Ross filed its intent to dissolve with the South Carolina Secretary of State. Defs.' Ex. 5; Trial Tr. 156:7-13. The company also published notice of its intent to dissolve in Charleston's daily newspaper, The Post and Courier. Defs.' Ex. 5A; Trial Tr. 156:14-19. The company ceased all

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active operations, closed its office, and no longer had employees. Trial Tr. 160:6-16.

         38. During the liquidation of the company that started in 1982, the Ross Directors typically authorized distributions after the sale of each property if there were excess funds, keeping in reserve amounts to pay taxes, other expenses, and any unknown future liabilities. Ross " tried to keep a minimum of $200,000.00 in the accounts just in case something came up that we didn't know about." Trial Tr. 106:9-15.

         39. Minutes from a special board meeting held December 4, 1986, state that $200,000.00 was the amount " previously set by the Directors as an optimum amount, to retain by the Company for known or unknown contingencies." Defs.' Ex. 57 at 120. At that meeting, the board further discussed " the continued advisability of retaining approximately $200,000 in funds of the Company to meet expenses and other contingencies of the Company during the process of liquidation of the assets of the Company." Defs.' Ex. 57 at 120.

         40. Carter testified that from time to time, $200,000 was the number the directors decided on. Trial Tr. 199:8-10. The $200,000 contingency reserve is discussed in the minutes of the December 17, 1987 meeting; the February 23, 1989 meeting; and the March 15, 2000 meeting. Defs.' Ex. 57 at 128, 140, 238.

         41. Daniell, Ross's accountant of many years, testified if there was no revenue from land sales, there were no distributions made to shareholders. Trial Tr. 471:20-23, 475:1-476:2.

         42. Ross sold its last parcel in 2005. Trial Tr. 823:15-22.

         D. Ross's First Notice of Potential Environmental Contamination at the Site - 1992

         43. In 1992, the board first learned that the adjoining Koppers property was contaminated with creosote and that it was possible some of the creosote migrated to the property where Ross had formerly manufactured fertilizer. At the time, Ross had been in dissolution for ten years and was in the process of liquidating Ross's real property holdings. See Pl.'s Ex. 4.

         44. On January 24, 1992, an unknown law firm published a notice in The Post and Courier seeking information about the operations of companies in the Neck Area of Charleston, South Carolina, including both Planters and CNC. Pl.'s Ex. 6; Trial Tr. 72:14-25. The notice appeared to be related to litigation over contamination at the Koppers Superfund Site, which is located to the south of the property where Planters formerly manufactured fertilizer. Trial Tr. 867:1-17.

         45. The day that the article was published, Carter spoke to Warren, his friend and counsel to the Ross board of directors, about the article. Pl.'s Ex. 7; Pl.'s Ex. 10; Trial Tr. 228:13-18. Carter forwarded the notice to Warren by fax. Trial Tr. ...

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