PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGED

PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT PRIVILEGED
CALDERWOOD & HARKNESS LLP 1900 Euclid Avenue, Suite 3200 Cleveland, OH 44115
Matter No.: 1006-00003
October 21, 2022
MEMORANDUM
To: Derek Huang, General Counsel, Crestline Packaging Solutions LLC Vanessa Moretti, Deal Partner, Briarwood Capital Partners LP
From: Beatrice Holloway, Partner, Calderwood & Harkness LLP
Cc: James Prentice, Partner; Harrison Caldwell, Of Counsel; Grace Nakamura, Associate
Re: Environmental Risk Allocation Strategy — Proposed Acquisition of Allegheny Chemical Coatings, Inc. — Analysis of Negotiation Positions and Recommended Approach
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I. Executive Summary
This memorandum is an internal, privileged strategy document prepared for the benefit of Crestline Packaging Solutions LLC ("Crestline" or "Buyer") and Briarwood Capital Partners LP ("Briarwood") in connection with the proposed acquisition of Allegheny Chemical Coatings, Inc. ("ACC" or the "Seller"). Its purpose is to analyze the current gap between Crestline's and the Seller's respective environmental risk allocation positions as reflected in the draft Stock Purchase Agreement (the "SPA"), and to recommend a tiered set of negotiation tactics and defined fallback positions designed to achieve a commercially reasonable and legally protective outcome for Crestline and Briarwood.
Transaction Overview. Crestline Packaging Solutions LLC, an Ohio limited liability company and portfolio company of Briarwood Capital Partners LP, Fund IV, proposes to acquire one hundred percent (100%) of the outstanding common stock of Allegheny Chemical Coatings, Inc., a Pennsylvania corporation, for an aggregate purchase price of $94.5 million. The purchase price reflects an EBITDA multiple of 7.0x applied to ACC's trailing twelve-month adjusted EBITDA of approximately $13.5 million. The transaction is structured as a stock purchase, meaning Crestline will acquire the ACC entity itself — including all assets, liabilities, contracts, permits, and environmental obligations — rather than purchasing selected assets. This structural point is critical to the environmental risk analysis discussed throughout this memorandum.
Financing. The acquisition is to be financed through a combination of (a) a $65 million senior secured term loan facility and a $20 million revolving credit facility, each to be provided by Commonwealth National Bank, N.A. pursuant to a commitment letter executed on July 8, 2022, and (b) an equity contribution of approximately $9.5 million from Briarwood Capital Partners Fund IV LP.
Environmental Diligence Findings. Environmental due diligence conducted to date has revealed material environmental conditions at two of ACC's four operating facilities. Specifically, Phase II Environmental Site Assessment investigations at the McKeesport Main Plant and the Clarksburg Resin Blending Facility have identified, or are expected to identify, contamination that will require remediation. Based on the analysis of TerraVerde Environmental Consultants, LLC, estimated environmental liabilities associated with known and reasonably anticipated conditions range from a low of approximately $1.925 million to a high of approximately $4.345 million. It should be emphasized that the upper bound of this range could increase if the pending Clarksburg Phase II analytical results reveal more significant contamination than presently anticipated, or if the Pennsylvania Department of Environmental Protection ("PA DEP") elects to reopen a prior No Further Action ("NFA") determination at the McKeesport site.
Current Negotiation Gap. The parties are currently separated by a meaningful gap on environmental risk allocation. As of the most recent exchange of positions, the parties are $2.5 million apart on the size of the environmental escrow ($4.0 million proposed by Crestline versus $1.5 million proposed by the Seller). Beyond the escrow, the parties have fundamental disagreements on the structure and scope of the environmental indemnification obligation, including whether the indemnity should be uncapped or subject to a $3.5 million aggregate cap; whether the survival period for environmental representations and indemnity obligations should be seven years or three years; whether environmental claims should be carved out from the general representation basket and deductible; and whether escrow release should be tied to remediation milestones or time-based triggers. The Seller's most recent counterproposal was received on October 24, 2022 from Hargrove, Dalton & Speer LLP, by Franklin Speer. Crestline's formal response is pending, and this memorandum is intended to inform the substance and approach of that response.
Recommendation. Calderwood & Harkness recommends that Crestline adopt a tiered negotiation approach with clearly defined primary and fallback positions. Our analysis supports maintaining an aggressive but market-justified primary position, while identifying two structured fallback alternatives that would supplement contractual protections with a Pollution Legal Liability ("PLL") insurance policy from Ironclad Specialty Insurance Company to bridge the escrow gap. We further recommend that Crestline defer its formal counterproposal until receipt of the pending Clarksburg Phase II analytical results (expected October 28, 2022), while pursuing informal principal-level discussions to maintain deal momentum.
II. Background: Environmental Diligence Findings
A. Summary of Facilities and Findings
ACC operates four facilities across Pennsylvania and West Virginia. Environmental due diligence has been conducted on all four facilities, with varying levels of investigation and varying degrees of environmental concern identified. The following is a summary of each facility and the key environmental findings.
Facility 1 — McKeesport Main Plant
The McKeesport Main Plant is located at 2200 Iron Works Boulevard, McKeesport, Pennsylvania 15132, in Allegheny County. The property consists of approximately 14.3 acres improved with approximately 185,000 square feet of manufacturing space and approximately 12,000 square feet of office space. ACC has owned the property in fee simple since 1987, when it acquired the parcel from a prior owner that had operated a steel fabrication business on the site. The McKeesport Main Plant is ACC's largest and most operationally significant facility, serving as the primary production site for its chemical coatings product lines.
A Phase I Environmental Site Assessment was conducted by TerraVerde Environmental Consultants, LLC ("TerraVerde") and dated August 15, 2022. The Phase I ESA identified two Recognized Environmental Conditions ("RECs") and one Historical Recognized Environmental Condition ("HREC"). The first REC relates to potential solvent contamination associated with current and historical degreasing operations in Building C. The second REC relates to an area of stressed vegetation and staining observed near the former underground storage tank ("UST") farm on the eastern portion of the property, notwithstanding the existence of a 2001 NFA letter for a 1994 UST release. The HREC relates to the documented 1994 UST release and subsequent remediation, which resulted in the May 2001 NFA determination under PA Act 2.
Based on the Phase I findings, a Phase II Environmental Site Assessment was authorized and conducted by TerraVerde. Field work was completed on September 26, 2022, and analytical results were received from the laboratory on October 10, 2022. The Phase II investigation yielded the following significant findings:
(a) Toluene in Groundwater at MW-3: Toluene was detected in a groundwater sample collected from monitoring well MW-3 at a concentration of 1,420 micrograms per liter (µg/L). The applicable Pennsylvania Act 2 Statewide Health Standard for toluene in groundwater (used-aquifer medium-specific concentration, or "MSC") is 1,000 µg/L. The detected concentration represents a 42% exceedance of the applicable standard. Notably, the 1,000 µg/L MSC applies regardless of whether the site is evaluated under residential or non-residential land use assumptions, as it is a used-aquifer standard.
(b) Trichloroethylene ("TCE") in Sub-Slab Soil Gas Beneath Building C: TCE was detected in sub-slab soil gas samples collected beneath Building C at a concentration of 42 micrograms per cubic meter (µg/m³). The applicable PA DEP vapor intrusion screening level for TCE is 21 µg/m³, meaning the detected concentration exceeds the screening level by 100%. This finding indicates a potential vapor intrusion pathway into the occupied manufacturing building and raises immediate worker health and safety concerns under both OSHA and PA DEP regulatory frameworks.
(c) Tetrachloroethylene ("PCE") in Soil at SB-7: PCE was detected in a soil sample collected from soil boring SB-7 at a concentration of 3.8 milligrams per kilogram (mg/kg). The applicable PA Act 2 Statewide Health Standard for PCE in soil is 2.4 mg/kg under a residential land-use scenario and 14 mg/kg under a non-residential land-use scenario. The detected concentration exceeds the residential standard but is well below the non-residential standard.
(d) Lead in Soil at SB-14: Lead was detected in a soil sample collected from soil boring SB-14 at a concentration of 680 mg/kg. The applicable PA Act 2 Statewide Health Standard for lead in soil is 450 mg/kg under a residential land-use scenario and 1,000 mg/kg under a non-residential land-use scenario. As with PCE, the detected concentration exceeds the residential standard but falls below the non-residential standard.
In addition to the contaminant exceedances described above, the McKeesport facility contains asbestos-containing materials ("ACM") in pipe insulation (approximately 2,400 linear feet) and floor tiles (approximately 14,000 square feet) in portions of the manufacturing buildings. Lead-based paint has also been identified in the office building, which was constructed circa 1955.
Facility 2 — Charleroi Specialty Coatings Plant
The Charleroi Specialty Coatings Plant is located at 450 Industrial Park Road, Charleroi, Pennsylvania 15022, in Washington County. The property consists of approximately 8.7 acres and was developed as a greenfield facility constructed in 2003. The Phase I ESA conducted by TerraVerde identified no Recognized Environmental Conditions, no Controlled Recognized Environmental Conditions ("CRECs"), and no Historical Recognized Environmental Conditions. Based on the clean Phase I findings, no Phase II investigation was conducted. No material environmental liabilities have been identified at this facility. The Charleroi plant does not contribute to the environmental risk allocation analysis in any meaningful way.
Facility 3 — Clarksburg Resin Blending Facility
The Clarksburg Resin Blending Facility is located at 1875 Route 50 West, Clarksburg, West Virginia 26301, in Harrison County. The property consists of approximately 5.2 acres and is leased by ACC from Mountainview Properties LLC pursuant to a triple-net lease dated January 1, 2015, with a term extending through December 31, 2029.
The Phase I ESA identified one Controlled Recognized Environmental Condition and one Recognized Environmental Condition. The CREC relates to residual diesel fuel contamination from the prior tenant (Valley Freight Lines Inc., now dissolved), which is subject to institutional controls established under the West Virginia Department of Environmental Protection ("WV DEP") Voluntary Remediation and Redevelopment Program, Site ID WVUST-2012-04887. The institutional controls are memorialized in an Environmental Covenant recorded in the Harrison County Clerk's Office at Book 1245, Page 312. The REC relates to observed staining in and around the drum storage area used by ACC for storage of resins, solvents, and other chemical raw materials.
A Phase II Environmental Site Assessment was authorized and commenced by TerraVerde on October 3, 2022. Field sampling was completed on October 7, 2022, and the samples were submitted to Keystone Analytical Laboratories for analysis. As of the date of this memorandum, analytical results from the Clarksburg Phase II investigation remain pending and are expected by October 28, 2022. The receipt and analysis of these results is a critical pending diligence item that will materially affect the overall environmental liability estimate and, consequently, the negotiation dynamics.
TerraVerde has prepared a preliminary cost estimate for potential remediation at Clarksburg, contingent on the Phase II results confirming contamination. If soil contamination is confirmed in the drum storage area, estimated remediation costs for soil excavation and disposal range from $350,000 to $750,000. If groundwater impacts are also identified, additional remediation costs of $150,000 to $400,000 could be incurred.
Facility 4 — Weirton Warehouse & Distribution Center
The Weirton Warehouse & Distribution Center is located at 600 Commerce Way, Weirton, West Virginia 26062, in Hancock County. The property consists of approximately 3.1 acres and is leased by ACC from Northern Panhandle Realty Corp. The Phase I ESA identified one Controlled Recognized Environmental Condition relating to a prior remediation conducted under the WV DEP Voluntary Remediation and Redevelopment Program. A Certificate of Completion was issued in September 2015, and a deed restriction was recorded in the Hancock County Clerk's Office at Book 487, Page 89. The Phase I also noted a de minimis hydraulic fluid stain of approximately four square feet on the warehouse floor, which does not constitute a REC. No Phase II investigation was conducted. No material environmental liabilities have been identified at this facility.
B. Quantified Environmental Liability Estimates
Based on the Phase I and Phase II investigations conducted to date, and the preliminary cost estimates prepared by TerraVerde in its memorandum dated October 18, 2022, the estimated environmental liabilities associated with the ACC facilities are summarized in the following table:
It should be noted that the Clarksburg estimates are preliminary and wholly contingent upon the results of the Phase II investigation currently pending from Keystone Analytical Laboratories. If the Phase II results reveal no significant contamination attributable to ACC operations at Clarksburg, the Clarksburg soil and groundwater remediation line items would be eliminated, reducing the low-end aggregate liability estimate to approximately $1,425,000 and the high-end estimate to approximately $3,195,000.
All estimates are expressed in current dollars and do not include potential regulatory penalties (including, without limitation, penalties under 25 Pa. Code Chapter 245 or the West Virginia Groundwater Protection Act), third-party claims (including contribution actions, toxic tort claims, or natural resource damage assessments), which are considered speculative at this stage but cannot be entirely discounted in the context of a stock purchase in which Crestline inherits all entity-level liabilities.
C. Pending Uncertainties
Several significant uncertainties remain that could materially affect both the quantum of environmental liability and the appropriate negotiation posture. These include:
(a) Clarksburg Phase II Analytical Data: As noted above, samples submitted to Keystone Analytical Laboratories on October 7, 2022 have not yet been returned. Results are expected by October 28, 2022. The outcome of this analysis will determine whether contamination attributable to ACC's drum storage operations exists at the Clarksburg facility, and if so, whether it has migrated to groundwater. This is the single most important outstanding diligence item.
(b) Title V Permit Modification at McKeesport: ACC submitted an application in March 2022 to the PA DEP Bureau of Air Quality for modification of its Title V operating permit at the McKeesport facility to reflect upgrades to the thermal oxidizer used to control volatile organic compound ("VOC") emissions from the coating lines. As of the date of this memorandum, the application remains under review and no decision has been issued. If the permit modification is denied or if PA DEP imposes new conditions (such as lower emission limits or additional monitoring requirements), post-closing compliance costs could increase.
(c) Potential Reopening of McKeesport NFA: The Phase II findings at McKeesport — specifically, the toluene exceedance in groundwater and the TCE vapor intrusion pathway — raise a question as to whether PA DEP might reopen the May 2001 NFA determination under PA Act 2. The NFA was issued based on investigation and remediation of a 1994 UST release and relied on data collected between 1994 and 2000. The Phase II data collected in September-October 2022 demonstrates contamination that was either not present or not characterized at the time of the original investigation. PA DEP retains the authority under 25 Pa. Code § 250.404 to reopen an NFA determination if new information demonstrates contamination that was not addressed by the original cleanup. Calderwood & Harkness assesses the risk of NFA reopening as moderate, particularly in light of the toluene exceedance at a monitoring well (MW-3) that may be situated in the vicinity of the former UST farm.
III. Current Negotiation Positions
A. Crestline's Position
Crestline's current environmental risk allocation position, as set forth in Calderwood & Harkness's letter to Hargrove, Dalton & Speer LLP dated October 20, 2022, is as follows:
Environmental Escrow. Crestline has proposed that $4.0 million of the $94.5 million purchase price be held back at closing and deposited into a segregated escrow account maintained by a mutually acceptable institutional escrow agent. The escrow would serve as a first source of recovery for environmental indemnification claims arising out of pre-closing environmental conditions.
Escrow Release Mechanics. Under Crestline's proposal, the release of escrowed funds would be tied to the completion of defined remediation milestones at the McKeesport Main Plant and the Clarksburg Resin Blending Facility (to the extent remediation is required at Clarksburg). Any remaining balance in the escrow account would be released to the Seller on the later of (a) thirty-six (36) months following the closing date, or (b) receipt of regulatory no-further-action determinations or comparable regulatory closure documentation from PA DEP and/or WV DEP, as applicable, with respect to all identified environmental conditions requiring remediation.
Special Environmental Indemnity. Crestline has proposed that the Seller provide an uncapped fundamental indemnification obligation (the "Special Environmental Indemnity") covering all pre-closing environmental conditions, including without limitation contamination, regulatory non-compliance, and third-party claims (including toxic tort, contribution, and natural resource damage claims). This obligation would be treated as a fundamental representation and warranty, not subject to any aggregate cap on the Seller's indemnification obligations.
Survival Period. Crestline has proposed a seven (7) year survival period from the closing date for environmental representations and warranties and for the Special Environmental Indemnity. This extended survival period reflects the anticipated timeline for completion of remediation activities (typically three to five years for groundwater treatment programs) plus an additional period to account for latent conditions or regulatory re-openings.
Carve-Out from General Basket/Deductible. Crestline has proposed that environmental indemnity claims be carved out from, and not subject to, the general representation and warranty basket/deductible of $475,000. Under this structure, Crestline would receive first-dollar coverage for environmental losses without the need to satisfy an aggregate threshold before the indemnity obligation is triggered.
Rationale. Crestline's position is driven by the following considerations: The high-end liability estimate of $4.345 million means that the proposed $4.0 million escrow approximates but does not fully cover the upper range of estimated environmental costs. The uncapped indemnity is intended to provide additional protection for conditions that may exceed current estimates, including unforeseen contamination, newly discovered historical releases, emerging regulatory requirements, or enforcement actions. In a stock purchase, Crestline inherits all historical liabilities of the ACC entity, including liabilities arising from operations that predate ACC's ownership (e.g., steel fabrication operations at McKeesport prior to 1987). The uncapped indemnity is Crestline's primary mechanism for allocating pre-closing environmental risk to the party that owned and operated the business during the period in which contamination occurred or was exacerbated.
B. Seller's Position
The Seller's current environmental risk allocation position, as conveyed by Hargrove, Dalton & Speer LLP in its counterproposal received on October 24, 2022 from Franklin Speer, is as follows:
Environmental Escrow. The Seller has proposed a reduced environmental escrow of $1.5 million, representing a reduction of $2.5 million from Crestline's proposed escrow.
Escrow Release Mechanics. The Seller has proposed a time-based release structure under which (a) fifty percent (50%) of the escrow ($750,000) would be released to the Seller at eighteen (18) months following the closing date, and (b) the remaining fifty percent (50%) ($750,000) would be released at thirty-six (36) months following the closing date. The Seller has not agreed to tie escrow release to remediation milestones or regulatory closure determinations.
Environmental Indemnity Cap. The Seller has proposed an aggregate cap of $3.5 million on all environmental indemnification obligations, inclusive of amounts recovered from the environmental escrow. This means that the Seller's total environmental exposure would be capped at $3.5 million regardless of the actual magnitude of environmental losses.
Survival Period. The Seller has proposed a three (3) year survival period from the closing date for environmental representations and warranties and for the environmental indemnification obligation.
General Basket/Deductible Applies. The Seller has proposed that environmental indemnity claims be subject to the same $475,000 aggregate deductible basket that applies to claims under the general representations and warranties. Under this structure, Crestline would bear the first $475,000 of environmental losses before the Seller's indemnification obligation would be triggered.
Seller's Stated Rationale. Franklin Speer's counterproposal letter articulated the following justifications for the Seller's position:
(i) The McKeesport Main Plant is zoned and used exclusively for industrial purposes. Accordingly, non-residential cleanup standards under PA Act 2 should apply, which significantly reduces the scope of actual remediation obligations. Under non-residential standards, several of the Phase II exceedances (PCE in soil, lead in soil) would fall within acceptable limits.
(ii) The May 2001 NFA letter issued by PA DEP under the PA Act 2 Statewide Health Standard should provide comfort regarding legacy UST conditions at McKeesport. The NFA represents a regulatory determination that the 1994 UST release has been satisfactorily addressed.
(iii) The Clarksburg facility is a leased property, and tenant remediation obligations under the lease are limited to "tenant-caused contamination." The legacy diesel contamination identified as the CREC is the landlord's (Mountainview Properties LLC's) responsibility, not ACC's. Accordingly, Clarksburg should not be treated as a significant environmental liability for purposes of the transaction.
(iv) Walter Kessler, who holds 62% of ACC's outstanding shares and is 71 years of age, is not willing to bear uncapped post-closing environmental exposure. Mr. Kessler desires a clean exit from the business, and open-ended contingent liabilities are inconsistent with his personal estate planning objectives.
(v) The proposed purchase price of $94.5 million already reflects the fair value of the business, taking into account all known conditions and risks, and no further purchase price adjustment is warranted.
C. The Gap
The gap between the parties' respective positions can be summarized as follows:
While the escrow gap of $2.5 million is the most quantifiable point of divergence, the structural disagreements on indemnity cap, survival period, basket applicability, and escrow release mechanics are, in many respects, more consequential to Crestline's overall risk exposure. As discussed in Section IV below, these structural elements interact with one another — a low escrow combined with a low cap, a short survival period, and a $475,000 deductible creates a scenario in which Crestline's practical recovery from the Seller could be significantly limited relative to the actual environmental liabilities it inherits as the stock purchaser.
IV. Analysis of Key Disputed Issues
A. Applicable Cleanup Standards — Residential vs. Non-Residential
The Seller's principal argument regarding the McKeesport Main Plant is that non-residential cleanup standards should apply under PA Act 2 (the Land Recycling and Environmental Remediation Standards Act, 35 P.S. §§ 6026.101–6026.908), because the site is zoned for industrial use and is currently used exclusively for manufacturing operations. If non-residential standards are applied, several of the Phase II exceedances identified at the site would fall within acceptable limits, thereby reducing the scope (and cost) of remediation.
Analysis. Under PA Act 2, a person conducting remediation may elect to attain the Statewide Health Standard, which establishes medium-specific concentrations (MSCs) for regulated substances in soil, groundwater, and indoor air. The Statewide Health Standard differentiates between residential and non-residential land-use scenarios for soil MSCs, with non-residential standards generally being less stringent (i.e., allowing higher concentrations) due to reduced exposure assumptions. If the non-residential standard is selected for the McKeesport site, the following Phase II findings would fall within acceptable limits:
•  PCE in soil at SB-7: 3.8 mg/kg detected vs. 14 mg/kg non-residential MSC — within standard.
•  Lead in soil at SB-14: 680 mg/kg detected vs. 1,000 mg/kg non-residential MSC — within standard.
To this extent, the Seller's argument has merit. If non-residential standards are properly applied and maintained, the soil contamination identified at SB-7 and SB-14 would not require active remediation.
However, the Seller's argument does not address two critical findings that remain exceedances regardless of land-use designation:
•  Toluene in Groundwater at MW-3: The detected concentration of 1,420 µg/L exceeds the PA Act 2 Statewide Health Standard used-aquifer MSC of 1,000 µg/L. Under 25 Pa. Code § 250.304, the groundwater MSC for toluene in used-aquifer areas is 1,000 µg/L, and this standard applies without differentiation between residential and non-residential land use. The 42% exceedance remains a compliance issue under any land-use scenario. Active groundwater remediation (pump-and-treat, in-situ chemical oxidation, or monitored natural attenuation with engineering controls) will be required.
•  TCE in Sub-Slab Soil Gas Beneath Building C: The detected concentration of 42 µg/m³ is double the PA DEP vapor intrusion screening level of 21 µg/m³. Vapor intrusion presents a direct inhalation exposure pathway to workers occupying Building C. This is not a land-use classification issue — it is a worker health and safety issue in an occupied industrial building. Even under non-residential standards, the vapor intrusion pathway must be addressed through installation of a sub-slab depressurization system, vapor barrier, or comparable engineering controls. Moreover, OSHA's general duty clause (29 U.S.C. § 654(a)(1)) independently requires employers to provide a workplace free from recognized hazards likely to cause serious harm, providing an additional regulatory basis for requiring vapor mitigation regardless of PA DEP cleanup standard selection.
Future Land Use Risk. An additional consideration that the Seller's analysis overlooks is the risk associated with future changes in land use. In a stock purchase, Crestline acquires the ACC entity and, with it, all responsibilities associated with the McKeesport property. If Crestline or a future owner were to redevelop, repurpose, or sell portions of the McKeesport site for residential or mixed-use purposes — a possibility that cannot be foreclosed over a seven- to ten-year investment horizon, particularly given the ongoing economic revitalization of the Mon Valley region — residential cleanup standards could become applicable, significantly increasing remediation obligations. The reliance on non-residential standards is contingent on the maintenance of industrial zoning and use in perpetuity, which Crestline cannot guarantee.
Conclusion. The Seller's argument regarding non-residential cleanup standards has partial merit with respect to soil contamination at SB-7 and SB-14, and Calderwood & Harkness recommends that Crestline concede the applicability of non-residential soil standards for these specific contaminants and locations. However, Crestline should maintain its position that the groundwater exceedance at MW-3 and the vapor intrusion issue in Building C require remediation regardless of land-use classification, and that these are the primary cost drivers in TerraVerde's remediation estimate.
B. NFA Letter and Potential Reopening
The Seller relies on the May 2001 NFA letter issued by PA DEP under the PA Act 2 Statewide Health Standard as evidence that legacy environmental conditions at the McKeesport site have been satisfactorily addressed. While the NFA letter does provide a measure of regulatory closure, its protective value in the current context is limited for several reasons.
First, the May 2001 NFA letter addresses only the 1994 UST release that was the subject of the original investigation and remediation. The scope of the NFA is confined to the conditions that were investigated and remediated between 1994 and 2000. The NFA does not provide a blanket assurance that the entire McKeesport property is free from contamination, nor does it address conditions that were not investigated or that have developed since the original remediation was completed.
Second, the Phase II findings from the September-October 2022 investigation demonstrate contamination — specifically, toluene in groundwater and TCE in sub-slab soil gas — that was either not present at the time of the original investigation or was not characterized because the original investigation focused on the UST release area. The toluene exceedance at MW-3 may or may not be related to the historical UST release; however, the TCE contamination in Building C is almost certainly attributable to ACC's degreasing operations rather than the historical UST release, as trichloroethylene is not a constituent of petroleum fuels.
Third, PA DEP retains the statutory and regulatory authority to reopen an NFA determination if new information demonstrates contamination that was not addressed by the original cleanup. Under 25 Pa. Code § 250.404, the Department may require additional investigation or remediation if it determines that the original attainment demonstration was based on incomplete or inaccurate information, or if new contamination has been discovered. The Phase II data collected in 2022, if presented to or discovered by PA DEP, could provide a basis for reopening the NFA — particularly if the toluene plume at MW-3 is shown to be connected to the former UST release area.
Risk Assessment. Calderwood & Harkness assesses the probability of PA DEP reopening the McKeesport NFA as moderate. Several factors militate in favor of reopening, including the documented exceedance at MW-3, the apparent migration of contamination beyond the original investigation area, and PA DEP's increasing focus on vapor intrusion pathways at sites with prior NFA determinations. Factors cutting against reopening include the passage of over twenty years since the NFA was issued, PA DEP's resource constraints, and the fact that reopening would require the Department to take affirmative action. Nevertheless, this is a meaningful post-closing regulatory risk that Crestline should not be asked to bear without adequate contractual protection.
C. Clarksburg Lease — Allocation of Legacy vs. Tenant-Caused Contamination
The Seller argues that environmental liability at the Clarksburg facility should not be attributed to ACC because the legacy diesel contamination (the CREC) is the responsibility of the landlord, Mountainview Properties LLC, and not the tenant.
Lease Analysis. The lease between Mountainview Properties LLC and ACC, dated January 1, 2015, with a term extending through December 31, 2029, is structured as a triple-net lease. Section 12.4 of the lease requires the tenant to "remediate, at tenant's sole cost and expense, any contamination of the Premises caused by tenant's operations or the operations of tenant's agents, employees, contractors, or invitees" (the "tenant-caused contamination" provision). The lease does not impose on ACC any obligation to remediate pre-existing contamination, including the legacy diesel contamination associated with the former tenant, Valley Freight Lines Inc. (now dissolved), which is subject to the institutional controls established under WV DEP Site ID WVUST-2012-04887.
To this extent, the Seller's position regarding the legacy diesel contamination has merit. The institutional controls, memorialized in an Environmental Covenant recorded in the Harrison County Clerk's Office at Book 1245, Page 312, reflect a regulatory determination that the diesel contamination has been managed to acceptable risk levels, and the lease allocates remediation responsibility for pre-existing conditions to the landlord.
However, the REC identified at Clarksburg — the drum storage area staining — is potentially attributable to ACC's own operations. If the pending Phase II results confirm that contamination in the drum storage area was caused by releases from ACC's stored drums of resins, solvents, or other chemical raw materials, this would constitute "tenant-caused contamination" within the meaning of the lease, and ACC (and therefore Crestline, as stock purchaser) would bear the remediation obligation.
Additional Risk. In a stock purchase, Crestline steps into ACC's shoes as tenant and inherits all of ACC's rights and obligations under the lease, including the tenant-caused contamination remediation provision. Moreover, Crestline would inherit any potential exposure to contribution claims that the landlord, Mountainview Properties LLC, might assert against ACC under CERCLA Section 113(f) or comparable state law if the landlord were to incur costs associated with the legacy diesel contamination. While the strength of such contribution claims is debatable given the lease allocation, the risk of litigation cannot be entirely dismissed, particularly given the dissolution of Valley Freight Lines Inc. and the landlord's potential interest in shifting remediation costs to a solvent party.
Conclusion. The Clarksburg Phase II results from Keystone Analytical Laboratories will be determinative of this issue. If contamination attributable to ACC operations is confirmed, the Clarksburg facility becomes a meaningful component of the environmental liability estimate and strengthens Crestline's negotiation position. If the results are clean, the Clarksburg facility drops out of the liability analysis, which could warrant some adjustment to Crestline's escrow demand.
D. Uncapped vs. Capped Indemnity — Structural Considerations
Crestline's request for an uncapped fundamental environmental indemnity is not unusual in transactions involving significant known or potential environmental exposure. In the M&A market, uncapped environmental indemnities are most commonly seen in stock purchases of industrial or chemicals companies where contamination has been documented, where the acquiring entity inherits all historical liabilities, and where the risk of future regulatory action or third-party claims is non-trivial.
However, Calderwood & Harkness acknowledges that the uncapped indemnity may be a non-starter for the Seller in this transaction. Walter Kessler, who holds 62% of ACC's outstanding shares and is 71 years of age, has expressed through counsel a desire for a "clean exit" without open-ended post-closing contingent liabilities. The Kessler Family Trust (holding 12% of shares, with Margaret Kessler as trustee) and the ESOP (holding 8% of shares) add further complexity, as the trust fiduciary and the ESOP administrator may be reluctant to consent to a transaction that leaves trust and ESOP beneficiaries exposed to uncapped contingent claims after closing.
Analysis of Seller's Proposed $3.5M Cap. The Seller's proposed environmental indemnity cap of $3.5 million represents approximately 3.7% of the $94.5 million purchase price. In Calderwood & Harkness's experience with comparable chemicals and manufacturing acquisitions, environmental indemnity caps typically range from approximately 5% to 15% of the purchase price in transactions involving known contamination. At the lower end of this range, a 5% cap on a $94.5 million purchase price would yield a cap of approximately $4.725 million. The Seller's proposed cap of $3.5 million falls meaningfully below the lower boundary of the market range.
Compounding the concern, the Seller's proposed cap is inclusive of escrow amounts, meaning that the maximum incremental exposure to the Seller beyond the escrow would be only $2.0 million ($3.5 million cap minus $1.5 million escrow). This $2.0 million of incremental indemnity coverage, combined with the $475,000 deductible and the three-year survival period, would leave Crestline with extremely limited recovery in a scenario where environmental liabilities approach or exceed the high-end estimate of $4.345 million. Under the Seller's proposal, Crestline's maximum recovery would be $3.025 million ($3.5 million cap minus $475,000 deductible), which is $1.32 million below the high-end liability estimate — and this assumes that all claims are identified, asserted, and resolved within the three-year survival period, which is unrealistic for groundwater remediation programs.
Market-Appropriate Range. Based on Calderwood & Harkness's deal database and comparable transaction precedents (discussed further in Section VIII), a cap of $6.0 million to $8.0 million (approximately 6.3% to 8.5% of the purchase price) would be more consistent with market practice for a transaction of this nature and risk profile. A cap in this range would provide meaningful protection to Crestline while giving the Seller a defined maximum exposure that can be factored into post-closing financial planning.
E. Survival Period
Crestline's Proposed Seven-Year Survival. Crestline's proposed seven-year survival period for environmental representations, warranties, and indemnification obligations is designed to account for two key factors: first, the time required to design, implement, and complete remediation of the identified contamination, and second, an additional tail period to capture latent environmental conditions or regulatory actions that may not manifest until after remediation is underway or completed.
At the McKeesport Main Plant, the primary remediation mechanisms under consideration — pump-and-treat groundwater remediation or in-situ chemical oxidation, combined with a sub-slab depressurization system for Building C — typically require three to five years of active operation before contaminant concentrations can be reduced to levels that would support an application for regulatory closure (i.e., an NFA determination under PA Act 2). A seven-year survival period would provide a two- to four-year tail beyond the expected completion of active remediation, during which Crestline could pursue indemnification claims for costs that exceed the escrow or that arise from conditions discovered during the remediation process.
Seller's Proposed Three-Year Survival. The Seller's proposed three-year survival period is insufficient to cover the expected remediation timeline at McKeesport. If groundwater treatment is initiated promptly after closing, it is unlikely that contaminant concentrations will be reduced below applicable MSCs within three years, meaning that the Seller's indemnification obligation would expire before remediation is complete and before final costs are known. A three-year survival period essentially shifts the majority of the remediation cost risk to Crestline, regardless of the escrow and indemnity cap amounts, because the indemnity would no longer be available by the time the largest expenditures are incurred.
Market Comparison. In Calderwood & Harkness's experience with chemicals and manufacturing transactions involving known contamination, environmental survival periods of five to seven years are standard, and survival periods of ten years are not uncommon for transactions involving Superfund-listed sites, RCRA corrective action obligations, or other complex regulatory programs. A three-year survival period is more typical for clean transactions in which environmental diligence has revealed no material conditions.
Recommended Position. Calderwood & Harkness recommends that Crestline maintain the seven-year survival period as its primary negotiating position. As a fallback, Crestline should not accept a survival period of less than five years, which represents the minimum period necessary to encompass the expected remediation timeline and provide a modest tail for latent conditions.
F. Basket/Deductible.  The Seller's proposal to apply the $475,000 general representation and warranty basket to environmental indemnity claims would require Crestline to absorb the first $475,000 of environmental losses before any recovery from the Seller would be available. While a deductible mechanism is a common feature in M&A indemnification structures, its application to environmental claims in a transaction with known contamination is problematic for several reasons.
First, the known contamination at McKeesport alone is estimated to require remediation costs of at least $1.2 million (at the low end). The application of a $475,000 deductible means that Crestline would bear approximately 40% of the low-end remediation cost at McKeesport before any indemnification from the Seller is triggered. When combined with the Seller's proposed $1.5 million escrow and $3.5 million cap, the effective maximum recovery for Crestline would be $3.025 million ($3.5 million less $475,000), even if environmental losses reach or exceed the high-end estimate of $4.345 million.
Second, in deals with known environmental conditions, it is standard market practice to carve out environmental indemnification claims from the general representation and warranty basket. The rationale is straightforward: the parties are aware of the environmental conditions, the expected costs have been estimated, and the risk allocation for those costs should be addressed directly through the environmental indemnity provisions rather than being diluted by a general deductible that was designed for unanticipated breaches of ordinary representations and warranties.
Recommended Position. Crestline should maintain its primary position of first-dollar environmental indemnification coverage (i.e., no basket or deductible for environmental claims). As a fallback, Crestline should be willing to accept a reduced environmental-specific mini-basket of no more than $150,000. This would demonstrate a willingness to bear a share of the risk while preserving the practical effectiveness of the environmental indemnity. A $150,000 mini-basket represents less than 8% of the low-end liability estimate and less than 4% of the high-end estimate, which is a reasonable risk-sharing threshold.
V. Lender Requirements
The acquisition financing for this transaction is being provided by Commonwealth National Bank, N.A. ("Commonwealth" or the "Lender"), with Victoria Chen, Managing Director, serving as the lead relationship manager. The commitment letter, executed on July 8, 2022, provides for a $65 million senior secured term loan facility and a $20 million revolving credit facility, subject to customary conditions precedent, including an environmental condition.
Environmental Condition. The commitment letter requires, as a condition to closing, that Crestline provide Phase I Environmental Site Assessments on all real property owned or operated by the target company, with no Recognized Environmental Conditions that are not "adequately addressed," or, in the alternative, that acceptable Pollution Legal Liability insurance coverage be in place at or before closing.
Current Status. Phase I ESAs have been completed for all four ACC facilities. However, the RECs identified at the McKeesport Main Plant (two RECs) and the Clarksburg Resin Blending Facility (one REC) have not yet been "adequately addressed" within the meaning of the commitment letter. At McKeesport, the Phase II investigation has confirmed exceedances of applicable standards, and no remediation plan or regulatory submission has been made. At Clarksburg, the Phase II investigation has been completed but analytical results are still pending.
Implication. The Lender will likely require one of two alternative approaches before the environmental condition can be satisfied: (a) that a satisfactory remediation plan be developed and that the escrow and indemnification protections in the SPA are sufficient to address the identified RECs to the Lender's satisfaction, or (b) that a PLL insurance policy be placed at or before closing in an amount and with coverage terms acceptable to the Lender.
Strategic Leverage. The Lender's environmental condition provides Crestline with additional, and potentially decisive, leverage in the environmental risk allocation negotiations with the Seller. If the contractual protections in the SPA are inadequate to satisfy the Lender's requirements, and if PLL insurance is not in place, the acquisition financing will not close. This risk is shared by both parties — a failed closing benefits neither Crestline nor the Seller. Accordingly, Crestline can legitimately argue that the Seller's proposed $1.5 million escrow, $3.5 million cap, three-year survival, and $475,000 deductible may be insufficient to satisfy the Lender's environmental condition, and that more robust contractual protections are necessary not merely as a matter of buyer preference but as a financing requirement.
It should be noted that invoking the Lender's environmental condition as negotiating leverage carries some risk — specifically, it could be perceived by the Seller as a suggestion that Crestline's financing is uncertain, which could reduce the Seller's confidence in the transaction. Calderwood & Harkness recommends deploying this argument selectively, and framing it as a structural constraint rather than a financing weakness.
VI. PLL Insurance as a Bridge Mechanism
A. Ironclad Specialty Insurance Company Indicative Terms
Calderwood & Harkness, in coordination with Whitfield & Calder Insurance Advisors LLC ("W&C"), has obtained a non-binding indication of interest from Ironclad Specialty Insurance Company ("Ironclad") for a Pollution Legal Liability insurance policy in connection with the proposed acquisition. The indication was procured by Douglas Whitfield, Managing Principal, and Lauren Petrov, Vice President, of W&C's environmental insurance practice group. The underwriting contact at Ironclad is Sean McAllister, Senior Underwriter, based in Ironclad's Hartford, Connecticut office.
The indicative terms are summarized as follows:
•  Policy Type: Pollution Legal Liability (PLL)
•  Aggregate Limit of Liability: $15,000,000
•  Per-Occurrence Limit: $10,000,000
•  Policy Term: 10 years from inception
•  Premium: $187,500 (fully earned at inception; payable in a single lump sum)
•  Self-Insured Retention (SIR): $250,000 per claim
•  Named Insured: Crestline Packaging Solutions LLC and/or Allegheny Chemical Coatings, Inc. (to be determined)
•  Covered Locations: All four ACC facilities
•  Status: Indicative only; non-binding. Formal application has not been submitted. Underwriting is paused pending receipt of Clarksburg Phase II analytical results and confirmation that the transaction will proceed.
It is important to emphasize that the indicative terms are preliminary and subject to change following formal underwriting, review of the complete environmental data package (including Clarksburg Phase II results), and negotiation of policy terms and conditions. Ironclad has indicated that the premium and SIR could increase if the underwriting process reveals additional risk factors, and the aggregate and per-occurrence limits may be adjusted depending on the scope of coverage ultimately negotiated.
B. PLL Coverage Analysis — Relevance to Escrow Gap
If the Ironclad PLL policy can be structured to cover identified pre-existing contamination at the McKeesport and Clarksburg facilities — and not merely unknown or newly discovered conditions — the policy could theoretically provide a $15 million aggregate backstop that dwarfs the $2.5 million escrow gap between the parties. A PLL policy of this magnitude would, in principle, provide more than adequate coverage for the high-end liability estimate of $4.345 million, even accounting for the $250,000 SIR.
Known-Conditions Exclusion. The principal coverage concern is the known-conditions exclusion that is standard in virtually all PLL policies. Under a standard known-conditions exclusion, the policy would not cover contamination that was known to the insured at the inception of the policy. Given that the McKeesport Phase II results are now available and document specific contaminant exceedances, the toluene, TCE, PCE, and lead contamination at McKeesport would be classified as "known conditions" and would be excluded from coverage under a standard policy.
To address this issue, a "scheduled known-conditions endorsement" can be negotiated with Ironclad. Under this endorsement, the specific known conditions (by contaminant, location, and concentration) would be scheduled to the policy and affirmatively covered, notwithstanding the general known-conditions exclusion. Coverage of scheduled known conditions typically results in a higher premium — W&C has indicated that the premium for a policy with a known-conditions endorsement covering the McKeesport contamination could increase from $187,500 to a range of $200,000 to $225,000, depending on the scope of the endorsement.
Additional Coverage Concerns. Beyond the known-conditions exclusion, several other coverage issues require attention:
(a) Pre-Existing Contamination Definition: The temporal scope of the "pre-existing contamination" definition in the policy must be carefully negotiated. Crestline will want the definition to encompass all contamination that existed at or prior to the policy inception date, regardless of when it was discovered, while Ironclad may seek to limit coverage to contamination discovered during the policy term.
(b) Vapor Intrusion Sublimit: Some PLL policies impose sublimits on coverage for vapor intrusion-related claims. Given the TCE vapor intrusion issue at Building C, it is critical that the policy provide adequate coverage for the costs of vapor mitigation (sub-slab depressurization, vapor barriers, monitoring) and any associated third-party claims (worker health claims, OSHA enforcement actions). If a vapor intrusion sublimit is imposed, it must be set at a level sufficient to cover the estimated costs of mitigation (included in TerraVerde's $1.2M–$2.8M estimate for McKeesport).
(c) Defense Cost Erosion: Many PLL policies treat defense costs as eroding (i.e., reducing) the policy limits, rather than providing defense costs in addition to the policy limits. If defense costs are within limits, the practical coverage available for remediation and third-party damages is reduced. This issue should be negotiated to the extent possible, although defense-costs-in-addition-to-limits is becoming increasingly difficult to obtain in the current environmental insurance market.
C. Cost-Benefit of PLL vs. Escrow
The PLL premium of $187,500 (for a ten-year policy term) is a relatively modest cost in the context of a $94.5 million acquisition and a $2.5 million escrow gap. Even at the higher end of the premium range ($225,000 with known-conditions endorsement), the annual cost of the PLL policy on an amortized basis is approximately $22,500 per year — a small fraction of the environmental liabilities at issue.
PLL insurance offers several advantages that contractual indemnification does not:
•  PLL provides coverage for third-party claims, including toxic tort claims, natural resource damage assessments, and contribution actions, which are not typically recoverable under a contractual environmental indemnity without specific drafting.
•  PLL includes coverage for defense costs (subject to policy terms), providing funding for legal and technical defense of environmental claims and regulatory enforcement actions.
•  PLL provides a funded, independent source of recovery that does not depend on the Seller's financial solvency or willingness to honor indemnification obligations at the time a claim is made. This is particularly relevant given Walter Kessler's age (71) and the potential that Seller proceeds may be distributed, spent, or otherwise unavailable several years after closing.
•  PLL policies are typically assignable to lenders as additional insureds, which can help satisfy Commonwealth National Bank's environmental condition under the commitment letter.
PLL insurance is not, however, a perfect substitute for contractual protections. The $250,000 SIR means that first-dollar losses are still borne by Crestline. Coverage exclusions (including the known-conditions exclusion, if not endorsed) and sublimits may create gaps in coverage. The claims process under a PLL policy can be slower and more contentious than drawing on an escrow account, as the insurer retains the right to investigate, adjust, and potentially deny claims. And the policy has a finite term (ten years), after which no further claims can be made regardless of ongoing environmental conditions.
Recommended Hybrid Approach. Calderwood & Harkness recommends a hybrid approach in which PLL insurance serves as a supplement to a reduced (but still meaningful) environmental escrow, with the contractual indemnity maintained as the primary recovery mechanism. Under this approach, the escrow provides immediate, liquid funds for initial remediation costs; the indemnity provides a direct contractual obligation of the Seller for losses exceeding the escrow; and the PLL policy provides a backstop for losses that exceed the indemnity cap, for third-party claims, and for conditions that may emerge after the survival period expires. The $187,500 to $225,000 premium could be allocated between Crestline and the Seller as a negotiation concession — for example, a 50/50 split of approximately $93,750 to $112,500 per party.
VII. Recommended Negotiation Strategy
Based on the foregoing analysis, Calderwood & Harkness recommends that Crestline adopt a tiered negotiation strategy with defined primary and fallback positions, as set forth below.
A. Primary Position (Best Case for Crestline)
Crestline's primary negotiating position should be maintained as follows:
•  Environmental Escrow: $4.0 million holdback from the purchase price, deposited into a segregated escrow account at closing.
•  Environmental Indemnity: Uncapped fundamental indemnification obligation of the Seller for all pre-closing environmental conditions, including contamination, regulatory non-compliance, and third-party claims.
•  Survival Period: Seven (7) years from the closing date for environmental representations, warranties, and the Special Environmental Indemnity.
•  Basket/Deductible: First-dollar coverage; environmental claims carved out from the general representation basket/deductible.
•  Escrow Release: Milestone-based release tied to completion of remediation at McKeesport and Clarksburg (if applicable), with any remaining balance released upon receipt of regulatory no-further-action determinations.
This position represents Crestline's opening offer and is consistent with the terms set forth in Calderwood & Harkness's October 20, 2022 letter. Calderwood & Harkness views this position as aggressive but defensible based on the environmental diligence findings, the stock purchase structure, and comparable market precedent.
B. First Fallback Position
If the Seller rejects the primary position, Crestline should be prepared to offer the following first fallback:
•  Environmental Escrow: $3.0 million (reduced from $4.0 million), conditioned on the Seller agreeing to procure and place a PLL insurance policy (at the Seller's expense) with at least $10 million in aggregate coverage, a ten-year policy term, and a known-conditions endorsement covering the identified McKeesport contamination. Based on the Ironclad indicative terms, the estimated premium for such a policy would be in the range of $187,500 to $225,000.
•  Environmental Indemnity Cap: $7.5 million aggregate cap (approximately 7.9% of the purchase price). This is significantly higher than the Seller's proposed $3.5 million cap but reflects the known and potential environmental liabilities, the stock purchase structure, and comparable market precedent (as discussed in Section VIII below).
•  Survival Period: Seven (7) years from the closing date (no concession on this point at the first fallback level).
•  Basket/Deductible: Reduced environmental-specific mini-basket of $100,000 (Crestline bears the first $100,000 of environmental losses; the Seller's indemnification obligation is triggered at losses exceeding $100,000).
•  Escrow Release: Fifty percent (50%) released at thirty-six (36) months post-closing; remaining fifty percent (50%) released upon receipt of NFA or regulatory closure determination, or at sixty (60) months post-closing, whichever is earlier.
The first fallback position offers meaningful concessions to the Seller — a $1.0 million reduction in the escrow, acceptance of a cap (albeit higher than the Seller's proposal), and acceptance of a mini-basket. These concessions are conditioned on the Seller's agreement to place PLL insurance, which shifts the cost of risk mitigation to the Seller while providing Crestline with a robust insurance backstop.
C. Second Fallback Position (Floor)
If the Seller also rejects the first fallback position, Crestline's floor position — below which Calderwood & Harkness does not recommend further concessions — is as follows:
•  Environmental Escrow: $2.5 million, conditioned on both (a) the Seller placing a PLL policy at the Seller's cost with a known-conditions endorsement (as described above), and (b) the Seller agreeing to an environmental indemnity cap of $6.0 million (approximately 6.3% of the purchase price).
•  Environmental Indemnity Cap: $6.0 million aggregate cap.
•  Survival Period: Five (5) years from the closing date. Calderwood & Harkness considers five years the minimum acceptable survival period given the expected remediation timeline at McKeesport.
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