PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Derek Huang, General Counsel, Crestline Packaging Solutions LLC Vanessa Moretti, Deal Partner, Briarwood Capital Partners LP Patricia Okonkwo, Vice President, Environmental Health & Safety, Crestline Packaging Solutions LLC
FROM: Harrison Caldwell, Of Counsel (Environmental & Land Use), Calderwood & Harkness LLP Beatrice Holloway, Partner (Mergers & Acquisitions), Calderwood & Harkness LLP
DATE: October 24, 2022
RE: Comparative Analysis — Environmental Escrow/Indemnity vs. Pollution Legal Liability Insurance as Risk Transfer Mechanisms in the Proposed Acquisition of Allegheny Chemical Coatings, Inc.
MATTER NO.: 1006-00003
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I. Executive Summary
The purpose of this memorandum is to provide Crestline Packaging Solutions LLC ("Crestline" or "CPS") and its private equity sponsor, Briarwood Capital Partners LP ("Briarwood"), with a detailed comparative analysis of two principal mechanisms available to allocate and transfer environmental risk in connection with the proposed stock purchase acquisition of Allegheny Chemical Coatings, Inc. ("ACC" or the "Target"): (1) contractual escrow and indemnification provisions to be embedded in the Stock Purchase Agreement (the "SPA"), and (2) a Pollution Legal Liability ("PLL") insurance policy to be procured from a specialty environmental insurer. This memorandum also evaluates a hybrid approach combining both mechanisms, which we believe offers the most promising path toward closing the transaction while adequately protecting Crestline and its investors from identified and prospective environmental liabilities.
Transaction Context. Crestline proposes to acquire 100% of the outstanding common stock of ACC for a purchase price of $94.5 million, reflecting a 7.0x multiple on ACC's fiscal year 2021 adjusted EBITDA of approximately $13.5 million. The transaction is structured as a stock purchase, meaning that Crestline will acquire ACC as a going concern and will, by operation of law, succeed to all of ACC's liabilities — including all environmental liabilities, whether known or unknown, contingent or accrued, disclosed or undisclosed. This structural reality underscores the critical importance of adequate risk transfer mechanisms.
Environmental Diligence Findings. Environmental diligence conducted by TerraVerde Environmental Consulting LLC ("TerraVerde"), under the direction of this firm, has identified estimated environmental liabilities ranging from approximately $1.925 million (low estimate) to $4.345 million (high estimate) across ACC's four operating facilities in the Commonwealth of Pennsylvania and the State of West Virginia. The most significant liabilities are concentrated at the McKeesport Main Plant, where Phase II Environmental Site Assessment results have confirmed toluene exceedances in groundwater, trichloroethylene ("TCE") vapor intrusion at levels double the applicable screening standards, and elevated concentrations of tetrachloroethylene ("PCE") and lead in soil. Analytical results from a Phase II assessment at the Clarksburg, West Virginia facility remain pending at the time of this memorandum and may materially alter the liability estimates.
Negotiation Impasse. The parties have reached an impasse on the environmental provisions of the SPA. Crestline has proposed a $4.0 million environmental escrow with an uncapped Special Environmental Indemnity and seven-year survival period. The Seller — Walter Kessler, Thomas Kessler, the Kessler Family Trust, and the Employee Stock Ownership Plan (collectively, "Seller") — has countered with a $1.5 million escrow, a $3.5 million aggregate indemnity cap, a three-year survival period, and application of the $475,000 general representation basket to environmental claims. The resulting $2.5 million escrow gap and substantial structural disagreements on indemnity terms represent the principal obstacle to execution of the SPA and closing of the transaction.
PLL Insurance Indication. Ironclad Specialty Insurance Company ("Ironclad"), a Hartford, Connecticut-domiciled specialty environmental insurer, has provided a non-binding indication of interest for a PLL policy with $15 million aggregate and $10 million per-occurrence limits, a ten-year policy term, a $250,000 self-insured retention ("SIR"), and an indicative premium of $187,500, brokered through Whitfield & Calder Insurance Advisors LLC ("Whitfield & Calder"). The indication remains preliminary; formal underwriting has been paused pending completion of the Clarksburg Phase II results and resumption of deal negotiations.
Principal Conclusion. A hybrid approach — pairing a reduced contractual escrow of approximately $2.0 million to $2.5 million with a PLL policy — may bridge the current negotiation gap and provide Crestline with aggregate environmental protection well in excess of the identified liability range. However, critical coverage limitations in the PLL indication — most significantly, the known-conditions exclusion, the pre-existing contamination definition, and the vapor intrusion sublimit — must be satisfactorily resolved before PLL insurance can serve as an adequate substitute for contractual protections. Specifically, the known-conditions exclusion would likely exclude coverage for the primary identified liabilities at McKeesport, which are precisely the liabilities driving the escrow request in the first instance.
Recommendation. Crestline should not accept PLL insurance alone as a replacement for contractual escrow and indemnification. However, a combination approach merits further negotiation and may offer a path to resolving the current impasse, subject to favorable resolution of the identified coverage gaps with Ironclad Specialty. Specific near-term actions are set forth in Section VIII of this memorandum.
II. Background
A. Transaction Overview
Crestline Packaging Solutions LLC. Crestline is an Ohio limited liability company headquartered at 4100 Riverside Commerce Drive, Suite 300, Dayton, Ohio 45402. Crestline is a wholly-owned portfolio company of Briarwood Capital Partners LP, operating through Briarwood's Fund IV, which has aggregate committed capital of approximately $2.1 billion. Crestline reported annual revenue of approximately $285 million and adjusted EBITDA of approximately $41 million for the fiscal year ended December 31, 2021. Crestline's operations are focused on chemicals and manufacturing, specifically the production of specialty packaging solutions including coated substrates, barrier films, and industrial laminates for the food and beverage, pharmaceutical, and consumer products industries.
Allegheny Chemical Coatings, Inc. ACC is a Pennsylvania corporation, incorporated in 1987, headquartered at 2200 Iron Works Boulevard, McKeesport, Pennsylvania 15132. ACC is a specialty industrial coatings manufacturer engaged in the formulation, production, and sale of epoxy, polyurethane, and solvent-based coatings for industrial applications. ACC reported annual revenue of approximately $78 million and adjusted EBITDA of approximately $13.5 million for the fiscal year ended December 31, 2021. ACC operates through four facilities, two located in Pennsylvania and two in West Virginia, as described in detail in Section II.B below.
Transaction Structure and Economics. The proposed transaction is structured as a stock purchase in which Crestline will acquire 100% of the outstanding common stock of ACC. The negotiated purchase price is $94.5 million, representing a 7.0x multiple on ACC's fiscal year 2021 adjusted EBITDA of $13.5 million. Financing for the acquisition consists of a $65 million senior secured term loan and a $20 million revolving credit facility from Commonwealth National Bank, N.A. (Victoria Chen, Managing Director, serving as relationship officer), together with a $9.5 million equity contribution from Briarwood Fund IV. The strategic rationale for the acquisition centers on the vertical integration of specialty coatings into Crestline's existing supply chain, with management's projections estimating procurement cost savings of $12 million to $15 million annually upon full integration, anticipated within eighteen to twenty-four months following closing.
Seller Ownership. The outstanding common stock of ACC is held as follows: Walter Kessler (62%), Thomas Kessler (18%), the Kessler Family Trust (12%, with Margaret Kessler serving as trustee), and the ACC Employee Stock Ownership Plan (8%). Walter Kessler, age 71, is the founder of ACC and has served as its Chief Executive Officer and Chairman of the Board since incorporation. Thomas Kessler, Walter's son, serves as ACC's President and Chief Operating Officer.
SPA Status and Timeline. A draft Stock Purchase Agreement was initially circulated by Calderwood & Harkness LLP on behalf of Crestline on August 12, 2022. Environmental representations and warranties, indemnification provisions, and related schedules have been exchanged through multiple rounds of comments between October 2022 and the date of this memorandum. The SPA has not been executed. The original expected closing date was targeted for November 30, 2022, in order to accommodate the fourth quarter of Crestline's fiscal year for accounting and integration purposes. The current negotiation impasse on environmental terms has placed this timeline in jeopardy.
Seller's Counsel and Advisors. The Seller is represented by Hargrove, Dalton & Speer LLP, a Pittsburgh, Pennsylvania firm, with Franklin Speer serving as lead partner on the transaction. The Seller's financial advisor is Veltrano Partners LLC (Nathan Ashford, Managing Director), also of Pittsburgh, Pennsylvania, which conducted the sell-side marketing process and continues to advise the Kessler family on deal economics.
B. Summary of Environmental Diligence Findings
Environmental diligence has been conducted by TerraVerde Environmental Consulting LLC ("TerraVerde"), with Dr. Nina Sorensen, P.E., CHMM, serving as Principal-in-Charge and Kevin O'Malley, P.G., serving as Project Manager. TerraVerde was retained by and reports through Calderwood & Harkness LLP, and all work product has been prepared under the protection of the attorney work product doctrine and, to the extent applicable, the attorney-client privilege. Phase I Environmental Site Assessments ("Phase I ESAs"), conducted in accordance with ASTM E1527-21 standards, were completed for all four ACC facilities between August 15 and August 25, 2022. Phase II Environmental Site Assessments ("Phase II ESAs") were completed at the McKeesport Main Plant (analytical results received October 10, 2022) and commenced at the Clarksburg Resin Blending Facility (sampling completed October 7, 2022; analytical results from Keystone Analytical Laboratories, Inc. remain pending at the time of this memorandum). The findings at each facility are summarized below.
McKeesport Main Plant (2200 Iron Works Boulevard, McKeesport, PA 15132)
The McKeesport Main Plant is ACC's primary manufacturing facility. 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 owns the property in fee simple, having acquired it in 1987 from the estate of Keystone Metalworks, a defunct steel fabrication operation. The property is located approximately 0.5 miles from the former Irwin Iron & Steel Superfund site (NPL-listed 1989; Record of Decision issued 1996; construction complete 2004), a relevant consideration in evaluating the potential for commingled groundwater contamination and future CERCLA contribution claims.
The Phase I ESA identified two Recognized Environmental Conditions ("RECs") and one Historical Recognized Environmental Condition ("HREC"). The RECs relate to (i) historical solvent usage in the coatings mixing area (Buildings B and C) with observed floor staining and degraded concrete, and (ii) a former aboveground storage tank farm on the western boundary of the property where aerial photographs from 1992 through 2004 revealed evidence of spills or releases. The HREC relates to a closed underground storage tank (UST) that was removed in 1995 under Pennsylvania Department of Environmental Protection ("PA DEP") oversight, with a No Further Action ("NFA") determination letter issued by PA DEP on March 15, 2001.
The Phase II ESA, the results of which were received on October 10, 2022, confirmed the following conditions:
•  Toluene in groundwater at monitoring well MW-3: Detected at a concentration of 1,420 micrograms per liter (µg/L), exceeding the Pennsylvania Act 2 Statewide Health Standard of 1,000 µg/L by 42%. MW-3 is located approximately 75 feet downgradient of the coatings mixing area in Building B.
•  Xylene in groundwater at MW-3: Detected at 8,200 µg/L, below the applicable Act 2 Statewide Health Standard of 10,000 µg/L. While currently below the standard, the concentration is sufficiently elevated to warrant ongoing monitoring.
•  Tetrachloroethylene (PCE) in soil at soil boring SB-7: Detected at 3.8 milligrams per kilogram (mg/kg), exceeding the Act 2 residential soil standard of 2.4 mg/kg but below the non-residential soil standard of 14 mg/kg. SB-7 is located adjacent to the former solvent degreasing station in Building C.
•  Lead in soil at soil boring SB-14: Detected at 680 mg/kg, exceeding the residential soil standard of 450 mg/kg but below the non-residential soil standard of 1,000 mg/kg. SB-14 is located near the former aboveground storage tank farm. The elevated lead is potentially associated with historical Keystone Metalworks operations predating ACC's ownership.
•  Trichloroethylene (TCE) in sub-slab soil gas beneath Building C: Detected at 42 micrograms per cubic meter (µg/m³), exactly double the PA DEP vapor intrusion screening level of 21 µg/m³ — a 100% exceedance. This result confirms the existence of an active vapor intrusion pathway at Building C, where approximately forty-five employees work during regular operating hours. The presence of TCE vapor intrusion is the most operationally significant finding, as it may trigger worker health and safety obligations, potential PA DEP enforcement action, and remediation requirements including installation and operation of a sub-slab depressurization system.
TerraVerde issued a preliminary remediation cost estimate on October 18, 2022, projecting total remediation costs for the McKeesport facility in the range of $1.2 million (low estimate) to $2.8 million (high estimate). The low estimate assumes successful application of in-situ chemical oxidation ("ISCO") for groundwater remediation with a limited vapor mitigation system, while the high estimate assumes a conventional pump-and-treat groundwater remediation system with full sub-slab depressurization across Building C and a portion of Building B, coupled with extended monitoring. Both estimates include costs for regulatory interaction with PA DEP under the Act 2 framework.
In addition to the contamination-related liabilities, the Phase I ESA and supporting building surveys identified the presence of asbestos-containing materials ("ACM") — primarily in floor tiles, pipe insulation, and roofing materials in Buildings A and B — and lead-based paint ("LBP") on interior and exterior structural steel elements. Estimated abatement costs are $180,000 to $310,000 for ACM and $45,000 to $85,000 for LBP. These are not contamination conditions in the environmental regulatory sense but represent material building-related environmental liabilities that Crestline will assume through the stock purchase.
Charleroi Specialty Coatings Plant (450 Industrial Park Road, Charleroi, PA 15022)
The Charleroi facility is a clean site. The property was developed by ACC in 2003 on former agricultural land and houses specialty coatings blending and packaging operations. The Phase I ESA identified no RECs, CRECs, or HRECs. No Phase II ESA was conducted at this facility, and none is recommended based on the Phase I findings. This facility does not contribute to the identified environmental liabilities.
Clarksburg Resin Blending Facility (1875 Route 50 West, Clarksburg, WV 26301)
The Clarksburg facility consists of approximately 5.2 acres improved with a resin blending and storage operation. ACC does not own the property; it is leased from Mountainview Properties LLC ("Mountainview"), owned and managed by Gerald Boothe, pursuant to a triple-net lease effective January 1, 2015, through December 31, 2029. The lease contains a provision requiring ACC, as tenant, to remediate contamination caused by the tenant's operations but is silent on responsibility for pre-existing contamination attributable to prior occupants or the landlord.
The Phase I ESA identified one Controlled Recognized Environmental Condition ("CREC") and one REC. The CREC relates to residual diesel-range organics ("DRO") from a former underground storage tank associated with Valley Freight Lines Inc. (the prior tenant, now dissolved), for which institutional controls have been recorded in the Harrison County Clerk's Office at Book 1245, Page 312, and which is tracked under West Virginia Department of Environmental Protection ("WV DEP") Site ID WVUST-2012-04887. The REC relates to visible staining observed in the northeast corner of the warehouse area, in the vicinity of bulk resin storage tanks.
A Phase II ESA was completed at the Clarksburg facility on October 7, 2022. Soil and groundwater samples were collected from eight locations across the property. The samples were submitted to Keystone Analytical Laboratories, Inc. for analysis, and the analytical results had not yet been received at the time of this memorandum. The pending results are a significant data gap in the environmental diligence and a critical variable in the risk allocation analysis.
If contamination is confirmed at Clarksburg, TerraVerde has provided preliminary cost estimates of $350,000 to $750,000 for soil excavation and off-site disposal, and an additional $150,000 to $400,000 if groundwater is impacted, for a total potential remediation cost of $500,000 to $1,150,000. The allocation of remediation responsibility between ACC (as tenant) and Mountainview (as landlord) — and, potentially, Valley Freight Lines Inc. (as the former tenant that operated the UST, now dissolved) — adds legal complexity to the remediation obligations at this facility. As a practical matter, ACC may be the only viable responsible party given the dissolution of Valley Freight Lines and the limited financial resources of Mountainview.
Weirton Warehouse & Distribution Center (600 Commerce Way, Weirton, WV 26062)
The Weirton facility consists of approximately 3.1 acres improved with warehouse and distribution operations. The property is leased from Northern Panhandle Realty Corp. (Susan Delvecchio, principal), pursuant to a double-net lease effective March 1, 2018, through February 28, 2028. The lease is silent on environmental responsibilities beyond a general obligation to comply with applicable environmental laws.
The Phase I ESA identified one CREC relating to the property's enrollment in the West Virginia Voluntary Remediation and Development Program ("VRDP"), which culminated in a Certificate of Completion issued by WV DEP in September 2015. A deed restriction memorializing engineering and institutional controls has been recorded in the Hancock County Clerk's Office at Book 487, Page 89. Compliance with the ongoing VRDP obligations — including maintenance of engineering controls and periodic reporting — is an assumed responsibility of the property owner (Northern Panhandle Realty Corp.) but may have implications for ACC as the operating tenant. The Phase I also identified a de minimis hydraulic fluid stain of approximately four square feet in the warehouse area, which does not constitute a REC and does not warrant further investigation. No Phase II ESA was conducted at this facility.
Aggregate Estimated Environmental Liabilities
Based on the available information as of the date of this memorandum, TerraVerde's aggregate estimated environmental liabilities across the four ACC facilities are as follows:
Low Estimate: $1,925,000
•  McKeesport remediation: $1,200,000
•  Clarksburg soil remediation (if confirmed): $350,000
•  Asbestos-containing materials abatement: $180,000
•  Lead-based paint abatement: $45,000
•  Groundwater contingency (Clarksburg, if impacted): $150,000
High Estimate: $4,345,000
•  McKeesport remediation: $2,800,000
•  Clarksburg soil remediation (if confirmed): $750,000
•  Asbestos-containing materials abatement: $310,000
•  Lead-based paint abatement: $85,000
•  Groundwater contingency (Clarksburg, if impacted): $400,000
It is important to note that these estimates are preliminary. The Clarksburg Phase II analytical results remain pending and may materially alter the liability estimates in either direction. Additionally, the estimates are based on conceptual remedial approaches and have not been refined through detailed feasibility studies or interaction with the applicable regulatory agencies. Actual remediation costs may fall outside the stated range, particularly if regulatory agencies impose more aggressive remediation standards, if offsite migration of contaminants is identified, or if previously undiscovered contamination conditions are encountered during the remediation process.
C. Lender Requirements
Commonwealth National Bank, N.A. ("CNB") issued a commitment letter for the proposed acquisition financing on July 8, 2022, signed by Victoria Chen, Managing Director, in CNB's Leveraged Finance Group. The commitment letter conditions CNB's obligation to fund the $65 million senior secured term loan and $20 million revolving credit facility on, among other things, satisfactory environmental diligence with respect to the Target's real property assets.
Specifically, the environmental condition in the CNB commitment letter provides as follows:
"Borrower shall have delivered to Agent Phase I Environmental Site Assessments on all Target real property, prepared by a qualified environmental consulting firm acceptable to Agent, reflecting no Recognized Environmental Conditions that are not, in Agent's reasonable determination, adequately addressed through remediation, escrow, indemnification, or acceptable pollution legal liability insurance."
The phrasing of this condition is significant because it presents the environmental protections in the disjunctive — remediation, escrow, indemnification, or acceptable PLL insurance. This means that a PLL policy, if acceptable to CNB, may independently satisfy the lender's environmental condition even if escrow negotiations with the Seller remain unresolved. This structural feature of the commitment letter has important tactical implications for Crestline's negotiating strategy, as discussed in Section VI below.
The McKeesport Phase I ESA identified two RECs, and the subsequent Phase II confirmed that one of these RECs is associated with confirmed exceedances of applicable remediation standards. These conditions are, at present, arguably "not adequately addressed" in the absence of remediation, escrow, or insurance. Accordingly, the lender's environmental condition is not currently satisfied, and closing cannot occur unless and until one or more of the enumerated remediation, escrow, indemnification, or insurance mechanisms is put in place.
CNB will need to be consulted on the selected risk transfer mechanism. We recommend engaging Victoria Chen in parallel with the Seller negotiations and Ironclad underwriting process to confirm what specific PLL terms would satisfy CNB's condition and whether the lender will require any additional protections, such as assignment of the PLL policy or a mortgagee endorsement naming CNB as loss payee with respect to the McKeesport facility, which serves as collateral for the term loan.
III. Contractual Environmental Escrow and Indemnification — Analysis
A. Crestline's Proposed Terms (Calderwood & Harkness Draft)
Crestline's proposed environmental protection terms, as set forth in the Calderwood & Harkness draft SPA circulated on August 12, 2022, and refined through subsequent markup exchanges, include the following principal elements:
Environmental Escrow. A $4,000,000 holdback from the purchase price at closing, to be deposited into a segregated escrow account maintained by an independent escrow agent (proposed: Ridgeline Savings Bank). The environmental escrow would be separate from and in addition to any general indemnification escrow.
Escrow Release Mechanics. Release of the environmental escrow would be tied to the completion of defined remediation milestones at each applicable facility, as certified by an independent environmental consultant mutually acceptable to the parties. Partial releases would be permitted upon completion of discrete remediation phases, and any remaining escrow balance would be released to the Seller upon receipt of a No Further Action letter or equivalent regulatory closure determination from the applicable state environmental agency. In the event that remediation costs are less than the escrowed amount, the excess would be returned to the Seller.
Special Environmental Indemnity. The environmental representations and warranties in the SPA would be classified as "Fundamental Representations," and the Seller's indemnification obligations with respect to pre-closing environmental conditions would not be subject to any overall indemnification cap. The uncapped nature of the Special Environmental Indemnity is intended to ensure that Crestline has recourse to the Seller for environmental liabilities that exceed the escrowed amount, reflecting the inherent uncertainty of environmental remediation costs and the potential for discovery of previously unknown conditions.
Survival Period. The Special Environmental Indemnity and the environmental representations and warranties would survive for a period of seven years from the closing date. This survival period is intended to account for the protracted timelines typically associated with environmental investigations, regulatory proceedings, and remediation activities.
Carve-Out from General Representation Basket. Environmental indemnification claims would be carved out from the $475,000 general representation basket (deductible) that otherwise applies to Seller's indemnification obligations. This carve-out ensures that Crestline is not required to absorb the first $475,000 of environmental losses before the Seller's indemnification obligation attaches, recognizing that individual environmental claims — such as ACM abatement ($180,000–$310,000) or LBP abatement ($45,000–$85,000) — may fall below or near the basket threshold and would otherwise be entirely unrecoverable.
Scope of Coverage. The Special Environmental Indemnity would cover all environmental liabilities arising from pre-closing conditions at any ACC facility or associated with ACC's pre-closing operations, including without limitation: (i) remediation and cleanup costs, (ii) third-party bodily injury and property damage claims, (iii) governmental orders and directives, (iv) fines and penalties (to the extent legally recoverable through indemnification), and (v) associated investigation, legal, consulting, and expert fees.
B. Seller's Counterproposal (Hargrove, Dalton & Speer)
The Seller's counterproposal, most recently communicated through Hargrove, Dalton & Speer LLP on October 14, 2022, proposes the following environmental protection terms:
Environmental Escrow. $1,500,000 holdback from the purchase price at closing.
Indemnity Cap. A $3,500,000 aggregate cap on all environmental indemnification obligations of the Seller, inclusive of the escrow amount. Once Crestline has recovered $3,500,000 in aggregate environmental indemnification claims (whether from the escrow or otherwise), the Seller's environmental indemnification obligations would be fully discharged.
Survival Period. Three years from the closing date for all environmental representations and the Special Environmental Indemnity.
Basket/Deductible. The $475,000 general representation basket would apply to environmental indemnification claims. Crestline must absorb the first $475,000 of aggregate environmental losses before any indemnification obligation of the Seller attaches.
Seller's Stated Rationale. In its markup comments and through communications from Franklin Speer, the Seller has advanced the following justifications for its proposed terms:
1.  The McKeesport facility has a 2001 NFA letter from PA DEP, which the Seller contends demonstrates that the facility's environmental conditions have been previously investigated and resolved to the satisfaction of the regulatory agency.
2.  The Charleroi facility is demonstrably clean, with no identified environmental conditions.
3.  The contamination at the Clarksburg facility (residual DRO from a former UST) is pre-existing — attributable to the prior tenant, Valley Freight Lines Inc. — and is not contamination caused by ACC. The Seller contends that ACC should not bear responsibility for this legacy condition.
4.  The Weirton facility has received a VRDP Certificate of Completion, and ongoing VRDP obligations are the responsibility of the property owner (Northern Panhandle Realty Corp.), not ACC.
5.  The total estimated environmental liabilities at the low end of the range ($1,925,000) are significantly below Crestline's proposed $4,000,000 escrow, which the Seller characterizes as excessive and punitive.
Response to Seller's Rationale. While we acknowledge that certain of the Seller's factual assertions are accurate, the Seller's proposed terms do not adequately address the environmental risk profile of this transaction for the following reasons. First, the 2001 NFA letter for the McKeesport UST closure does not address the subsequently discovered toluene groundwater exceedance, TCE vapor intrusion, or PCE and lead soil contamination, which are distinct conditions identified in the 2022 Phase II ESA. An NFA letter is condition-specific and does not constitute a blanket determination that a facility is free from contamination. Second, while Clarksburg contamination may be attributable to a prior tenant, ACC is the current occupant and, under the triple-net lease, may bear remediation responsibility for tenant-caused contamination if the contamination is determined to have been exacerbated or contributed to by ACC's operations. Moreover, as a practical matter, Valley Freight Lines Inc. is dissolved and unavailable to fund remediation. Third, the Weirton VRDP Certificate of Completion addresses historical conditions, but ongoing compliance with engineering and institutional controls carries costs and risks that transfer to Crestline through the stock purchase.
C. Analysis of the Gap
The gap between Crestline's proposed terms and the Seller's counterproposal is both quantitative and structural. The principal dimensions of the gap are as follows:
Escrow Gap: $2,500,000. The difference between Crestline's proposed $4,000,000 escrow and the Seller's proposed $1,500,000 escrow. This gap represents a fundamental disagreement regarding the appropriate level of pre-funded protection for identified environmental liabilities.
Indemnity Structure Gap: Uncapped vs. $3,500,000 Cap. This represents a fundamental disagreement on risk allocation for unknown or worsening environmental conditions. Under Crestline's proposal, the Seller bears ongoing exposure for environmental liabilities without limit; under the Seller's proposal, Crestline absorbs all environmental liabilities in excess of $3,500,000, regardless of their origin, severity, or timing.
Survival Period Gap: Four Years (Seven vs. Three). Environmental contamination conditions often surface, are characterized, or become the subject of regulatory action well beyond a three-year horizon. Groundwater plume migration, offsite impacts, regulatory re-openers following NFA determinations, and third-party tort claims arising from exposure to contaminants are all scenarios that commonly develop over periods of five to fifteen years or more. The Seller's proposed three-year survival would leave Crestline without contractual recourse for any environmental condition first discovered, remediated, or litigated after the third anniversary of closing — a result we consider unacceptable given the known conditions at McKeesport and the pending results at Clarksburg.
Basket/Deductible Gap: Carve-Out vs. $475,000 Threshold. The application of the $475,000 general basket to environmental claims is significant for smaller, discrete environmental liabilities. ACM abatement ($180,000–$310,000), LBP abatement ($45,000–$85,000), and Clarksburg staining investigation costs would each fall below the basket individually and might not reach the basket in the aggregate, depending on timing and characterization. Under the Seller's proposal, Crestline would absorb the first $475,000 of environmental losses with no recourse — effectively increasing the gap between the parties' positions by that amount.
Key Risk Exposure. If remediation costs approach or exceed the high estimate of $4,345,000, the Seller's proposed $3,500,000 indemnity cap would leave Crestline exposed to approximately $845,000 or more in uncovered liability. When the $475,000 basket is factored in, Crestline's total potential unindemnified environmental exposure under the Seller's terms rises to approximately $1,320,000 — a material amount relative to the deal economics and one that would be entirely borne by Briarwood's equity investment.
Compounding Risk Factor: Clarksburg Phase II Pending. The Clarksburg Phase II analytical results remain pending. If significant groundwater contamination is confirmed at that facility, the high estimate could increase by $400,000 or more (the difference between the soil-only remediation estimate and the combined soil-plus-groundwater estimate), further widening the gap between the Seller's proposed cap and actual environmental liabilities. In a worst-case scenario at Clarksburg — involving extensive groundwater contamination requiring long-term remediation and monitoring — the total environmental liability estimate could exceed $5,000,000, rendering the Seller's $3,500,000 cap grossly inadequate.
D. Advantages of Contractual Escrow/Indemnity
The contractual escrow and indemnification approach offers several significant advantages as a risk transfer mechanism in this transaction:
Certainty of Recovery. Escrow funds are pre-deposited at closing into a segregated account administered by an independent escrow agent. The funds are available for disbursement upon satisfaction of the contractually defined release conditions, without the need to submit a claim to an insurance carrier, undergo a coverage investigation, or litigate a coverage dispute. This certainty of access to funds is particularly important in the remediation context, where regulatory agencies often impose aggressive timelines for investigation and cleanup that do not accommodate the delays inherent in insurance claims processing.
Breadth of Coverage. The escrow and indemnification provisions in the SPA can be drafted to cover all identified and unknown pre-closing environmental conditions without the exclusions, limitations, sublimits, and conditions that are characteristic of insurance policies. The contractual provisions are entirely within the control of the parties and can be tailored to the specific risk profile of the transaction and the specific environmental conditions identified during diligence.
No Premium Cost. The environmental escrow is a holdback from the purchase price — it is the Seller's economic burden, not an out-of-pocket expense for Crestline. While the escrow does reduce the Seller's immediately available proceeds from the sale, it does not require Crestline to incur additional cash expenditure beyond the agreed-upon purchase price.
Control Over Claims Process. Under the SPA, Crestline would control the remediation decision-making process and the escrow release mechanics. Crestline would not need to obtain insurer consent before undertaking voluntary cleanup activities, engaging remediation contractors, or selecting remedial technologies. This operational flexibility is important in the environmental context, where the choice of remedial approach and the timing of remediation can have significant implications for ongoing operations at the facilities.
No Insurer Disputes. Perhaps most significantly, the contractual approach eliminates the risk of insurer coverage disputes, declination of claims, or delayed payment. Environmental insurance claims are notoriously contentious, and insurers frequently raise defenses based on policy exclusions, late notice, failure to cooperate, and disputes over the characterization of conditions. The contractual approach avoids these risks entirely.
Alignment with Stock Purchase Structure. In a stock purchase transaction, the buyer inherits all liabilities of the target entity by operation of law, including all environmental liabilities, whether disclosed or undisclosed, known or unknown. The contractual escrow and indemnification approach directly addresses this structural reality by providing the buyer with pre-funded and contractually supported recourse against the seller for liabilities that the buyer had no role in creating.
E. Disadvantages of Contractual Escrow/Indemnity
Despite its advantages, the contractual approach has notable limitations:
Finite Dollar Protection. Even Crestline's proposed $4,000,000 escrow provides finite dollar protection that will be exhausted once fully depleted. If environmental conditions prove to be more extensive or costly than anticipated — a common occurrence in environmental remediation — the escrow may prove insufficient. Catastrophic conditions, such as the discovery of a large-scale groundwater plume requiring decades of pump-and-treat remediation, or the identification of the McKeesport facility as a potentially responsible party in connection with the nearby Irwin Iron & Steel Superfund site, could generate liabilities that dwarf the escrow amount.
Seller Credit Risk. Indemnification claims in excess of the escrowed amount depend entirely on the Seller's financial ability and willingness to pay. Walter Kessler is 71 years old and is expected to retire following the closing. Upon receipt of approximately $58.6 million in sale proceeds (reflecting his 62% ownership interest), Mr. Kessler's assets may be distributed to personal accounts, family trusts, and estate planning vehicles that may not be readily accessible to satisfy indemnification claims. The Kessler Family Trust holds 12% of ACC, and Margaret Kessler, as trustee, has fiduciary obligations to trust beneficiaries that may conflict with indemnification obligations. The ESOP's 8% share presents additional complications, as ESOP proceeds are distributed to participant accounts and are not available for indemnification. In sum, the post-closing creditworthiness of the Seller is uncertain, and recourse beyond the escrow may be illusory as a practical matter.
Negotiation Impasse. The current $2,500,000 escrow gap is the primary obstacle to closing the transaction. Continued insistence on a $4,000,000 escrow — while defensible on risk allocation grounds — may jeopardize the deal and forfeit the estimated $12 million to $15 million in annual procurement cost savings that constitute the strategic rationale for the acquisition. Every day of delay also carries opportunity cost for Briarwood Fund IV and the risk that competitive bidders may emerge or that ACC's performance may deteriorate.
Survival Period Limitations. Even Crestline's proposed seven-year survival period has a fixed terminus. Certain environmental liabilities — particularly CERCLA contribution claims, Natural Resource Damage assessments, and toxic tort claims based on long-latency exposure — can arise decades after the activities giving rise to the contamination. No contractual survival period, however long, can fully address this tail risk.
Seller Perception of Deal Economics. From the Seller's perspective, the escrow reduces the effective purchase price by the escrowed amount. While the escrow is theoretically refundable to the Seller upon satisfaction of release conditions, the time value of money and the uncertainty of release timing effectively discount the Seller's proceeds. Veltrano Partners, the Seller's financial advisor, has communicated that the Kessler family views the proposed $4,000,000 escrow as a material reduction in deal value and a reflection of excessive buyer risk aversion.
IV. Pollution Legal Liability Insurance — Analysis
A. Summary of Ironclad Specialty Indicative Terms
Ironclad Specialty Insurance Company, domiciled in Hartford, Connecticut, has provided a non-binding indication of interest for a Pollution Legal Liability insurance policy through Whitfield & Calder Insurance Advisors LLC, a specialty environmental insurance brokerage located at 227 West Monroe Street, Suite 1800, Chicago, Illinois 60606. The brokerage team consists of Douglas Whitfield, Senior Vice President, and Lauren Petrov, Account Executive. The underwriting contact at Ironclad is Sean McAllister.
The principal indicative terms are as follows:
It is important to emphasize that the indication is non-binding. Ironclad has not received a formal application and has not completed underwriting. The underwriting process has been paused pending (i) receipt of the Clarksburg Phase II analytical results, and (ii) resumption of deal negotiations. Ironclad has reviewed the Phase I ESAs and the McKeesport Phase II ESA report and has had preliminary discussions with Whitfield & Calder regarding the transaction structure and the environmental risk profile. However, final policy terms, premium, exclusions, endorsements, and conditions of coverage may differ materially from the indicative terms upon completion of full underwriting.
B. Scope of Potential Coverage
PLL insurance policies are specialty environmental insurance products designed to cover environmental liabilities that arise from pollution conditions at insured locations. The scope of coverage under a typical PLL policy, and as indicated in Ironclad's preliminary term sheet, includes the following categories:
First-Party Cleanup Costs. Coverage for the costs of investigation and remediation of pre-existing contamination conditions (i.e., conditions that existed prior to policy inception but were unknown) and new contamination conditions discovered during the policy period at covered locations. This is the core coverage relevant to the identified liabilities in this transaction.
Third-Party Bodily Injury and Property Damage. Coverage for claims by third parties alleging bodily injury or property damage arising from pollution conditions at or emanating from covered locations. This coverage is particularly relevant given the TCE vapor intrusion conditions at McKeesport Building C (potential worker exposure claims) and the proximity of the McKeesport facility to residential areas downgradient of the groundwater flow (potential neighbor claims from groundwater plume migration).
Defense Costs. Coverage for legal, consulting, and expert costs incurred in the defense of covered environmental claims, including regulatory proceedings. As discussed in Section IV.C.4 below, defense costs under the Ironclad indication are within limits, meaning that they erode the policy's aggregate and per-occurrence limits.
Regulatory Defense and Penalties. Coverage for costs incurred in defending against regulatory actions and, where insurable under applicable law, certain governmental fines and penalties. The scope of insurable penalties varies by jurisdiction.
Transportation and Non-Owned Disposal Site Liability. Coverage for liabilities arising from the transportation of hazardous substances from covered locations and the disposal of such substances at off-site disposal facilities. This coverage is relevant to ACC's ongoing waste disposal operations and potential CERCLA contribution claims associated with off-site disposal facilities used by ACC.
The Ironclad indication contemplates coverage for on-site cleanup at all four ACC facilities (to be scheduled as covered locations), third-party claims, and defense costs. The temporal scope of the policy — a ten-year term — significantly exceeds the Seller's proposed three-year contractual indemnity survival period and provides three additional years of coverage beyond Crestline's own proposed seven-year survival. The dollar scope of the policy — a $15,000,000 aggregate limit and $10,000,000 per-occurrence limit — far exceeds the estimated environmental liability range of $1,925,000 to $4,345,000, providing substantial headroom for cost overruns, newly discovered conditions, or third-party claims that are not captured in the current estimates. The per-occurrence limit of $10,000,000 similarly exceeds any single-site liability estimate, including the high-end McKeesport estimate of $2,800,000.
C. Coverage Gaps and Exclusions — Critical Issues
While the PLL policy offers attractive aggregate limits and duration, several critical coverage limitations in the Ironclad indication must be carefully analyzed and, if possible, resolved through negotiation before PLL insurance can serve as a reliable risk transfer mechanism in this transaction. We address each in turn.
1. Known Conditions Exclusion
Ironclad's indication includes a "known conditions" exclusion, which is standard in the PLL insurance market. This exclusion provides that the policy does not cover contamination conditions that were known to the insured at the time of policy inception. The rationale underlying the exclusion is that insurance is designed to transfer the risk of uncertain, fortuitous events — not to cover conditions that are already identified and quantified.
Application to This Transaction. The McKeesport Phase II ESA results — including the toluene exceedance at MW-3, the TCE vapor intrusion at Building C, the PCE soil contamination at SB-7, and the lead soil contamination at SB-14 — are now known to Crestline and its advisors. Under a standard known-conditions exclusion, these conditions would likely be excluded from coverage under the PLL policy. This is the single most critical coverage gap in the Ironclad indication, because the primary environmental liabilities identified during diligence — the very conditions driving Crestline's $4,000,000 escrow request — would fall outside the scope of PLL coverage.
In practical terms, if Crestline were to accept PLL insurance as a substitute for the environmental escrow, it would be exchanging $4,000,000 of certain contractual protection (funded from the purchase price) for $15,000,000 of insurance coverage that almost certainly excludes the most significant known liabilities. This is not an acceptable trade.
Potential Negotiation Strategies. Calderwood & Harkness has communicated to Whitfield & Calder, for relay to Ironclad, a request that the known-conditions exclusion be modified in one of two ways:
Option A: Narrowing the Exclusion. Revise the exclusion language to exclude only conditions where remediation costs are "reasonably quantifiable" above a stated dollar threshold (e.g., conditions where remediation costs are expected to exceed $500,000 based on pre-inception assessment data). This approach would permit coverage for conditions that are "known" in the sense of being identified, but whose remediation costs remain uncertain and may significantly exceed initial estimates.
Option B: Scheduled Known Conditions Endorsement. Add an endorsement to the policy expressly granting coverage for specifically identified and scheduled known conditions (e.g., "McKeesport MW-3 Toluene Groundwater Plume," "McKeesport Building C TCE Vapor Intrusion") up to a stated sublimit, which might be set at $2,000,000 to $3,000,000. This approach would provide a defined layer of PLL coverage for known conditions while preserving the broader policy coverage for unknown conditions.
Ironclad has not yet responded to this request. The feasibility of either approach — and the premium impact, if any — will depend on Ironclad's underwriting appetite and loss experience with scheduled known conditions. We note that scheduled known conditions endorsements are available in the market but are not universally offered and typically command additional premium, often in the range of 15% to 25% of the base premium depending on the nature and estimated cost of the scheduled conditions.
2. Pre-Existing Contamination Definition
Distinct from but related to the known-conditions exclusion, the PLL policy's definition of "pre-existing contamination condition" determines whether contamination that existed before the policy inception date but was unknown to the insured at inception is covered. Ironclad's indication defines "pre-existing condition" broadly, and coverage for pre-existing unknown conditions is generally available under the indicated terms. This is an important feature of the policy, as it means that contamination conditions that pre-date ACC's operations or Crestline's ownership — but that are not yet known — would be covered if first discovered during the policy period.
However, the interplay between the pre-existing contamination definition and the known-conditions exclusion creates an important ambiguity for conditions that are partially known at the time of policy inception. The Clarksburg facility illustrates this ambiguity vividly. Phase II sampling at Clarksburg was completed on October 7, 2022 — before any policy inception date — but the analytical results from Keystone Analytical Laboratories have not yet been received. If those results confirm contamination, the question arises: is the Clarksburg contamination a "known" condition (because sampling was conducted and the insured was aware that contamination might exist) or an "unknown" condition (because the analytical results had not yet been received and the presence and extent of contamination had not been confirmed)?
Under a strict interpretation of the known-conditions exclusion, an insurer might argue that the act of conducting Phase II sampling reflects knowledge or suspicion of contamination, and that the insured's awareness of the sampling results — even if not yet received — triggers the exclusion. Under a more favorable interpretation, the exclusion would apply only to conditions that have been analytically confirmed, and conditions for which sampling is pending but results are unknown would be treated as pre-existing unknown conditions eligible for coverage.
Recommendation. We recommend that the pre-existing contamination definition be clarified in the final policy to ensure that conditions first confirmed by laboratory analytical results received after the policy inception date are treated as "unknown" for purposes of the known-conditions exclusion, regardless of when sampling was conducted or when the insured became aware of a Recognized Environmental Condition through a Phase I ESA. This clarification is essential to secure PLL coverage for the Clarksburg facility.
3. Vapor Intrusion Sublimit
Ironclad's indication includes a vapor intrusion sublimit, the specific amount of which was not stated in the indication. In the current PLL market, vapor intrusion sublimits are common and are typically set at 25% to 50% of the per-occurrence limit. Applied to the $10,000,000 per-occurrence limit in the Ironclad indication, this would result in a vapor intrusion sublimit of approximately $2,500,000 to $5,000,000.
Application to This Transaction. TCE vapor intrusion at McKeesport Building C is an active concern. The detected TCE concentration in sub-slab soil gas (42 µg/m³) is exactly double the PA DEP vapor intrusion screening level (21 µg/m³), confirming an active vapor intrusion pathway. Remediation will likely require installation and operation of a sub-slab depressurization system, which TerraVerde estimates at $200,000 to $500,000 as part of the broader McKeesport remediation estimate. However, if broader vapor intrusion issues are discovered across the facility — for example, if additional sampling in Buildings A and B reveals similar or more severe intrusion pathways — the remediation costs could escalate significantly, and the sublimit could become constraining.
Furthermore, if the vapor intrusion condition gives rise to third-party bodily injury claims by workers exposed to TCE vapors (TCE is a known human carcinogen, classified as Group 1 by IARC and listed under California Proposition 65), the defense costs and potential settlements or judgments arising from such claims would be subject to the vapor intrusion sublimit and could rapidly exhaust it.
Recommendation. We recommend requesting explicit removal of the vapor intrusion sublimit, or, at minimum, confirmation that the sublimit is at least $5,000,000 per occurrence. Given that TCE vapor intrusion is the most operationally urgent and potentially costly environmental condition identified at any ACC facility, a restrictive sublimit would materially undermine the value of the PLL policy.
4. Defense Cost Erosion
Ironclad's indication states that defense costs are "within limits" — meaning that the costs of defending covered claims erode the $15,000,000 aggregate limit and the $10,000,000 per-occurrence limit. This is in contrast to "defense costs outside limits" policies, where defense costs are paid in addition to the stated limits.
In a complex environmental remediation scenario involving regulatory agency oversight, potential Responsible Party negotiations, and possible third-party tort claims, defense costs can be substantial. Environmental defense costs routinely include fees for environmental counsel, technical consultants, expert witnesses, remediation oversight, regulatory negotiations, and administrative proceedings. In our experience, defense costs in a multi-site environmental matter with active remediation and regulatory interaction can consume 20% to 30% of total claim costs — and in litigated third-party claims, defense costs can exceed indemnity payments.
The practical impact of defense cost erosion in this transaction is that the $15,000,000 aggregate policy limit may provide materially less than $15,000,000 in remediation and indemnity coverage. If, for example, defense costs consume 25% of the aggregate limit ($3,750,000), the effective remaining coverage for remediation and third-party indemnity would be $11,250,000 — still substantial, but a meaningful reduction from the stated limits.
By contrast, the contractual escrow and indemnification approach would typically provide for separate recovery of defense costs (legal fees, consulting fees) under the indemnification provisions, without eroding the escrow amount designated for remediation.
Recommendation. We recommend requesting that defense costs be placed outside limits entirely. If Ironclad is unwilling to offer defense costs outside limits, we recommend requesting a dedicated defense cost carve-out of $2,000,000 to $3,000,000 outside the per-occurrence limit, which would preserve the per-occurrence limit for remediation and indemnity while providing a meaningful defense cost allowance.
5. Exclusions for Fines, Penalties, and Intentional Acts
Standard PLL policies exclude coverage for fines and penalties that are not insurable under applicable law, as well as losses arising from intentional or willful acts by the insured. These exclusions are inherent features of liability insurance and are generally non-negotiable.
Application to This Transaction. ACC's operational history includes a February 2020 incident involving an uncontrolled release of an epoxy hardener at the McKeesport facility, which resulted in a PA DEP enforcement action and a $4,500 civil penalty. If similar incidents occur in the future and involve knowing or willful violations of environmental laws, the resulting fines, penalties, and related remediation costs (if attributable to intentional conduct) would not be covered under the PLL policy.
The practical impact of these exclusions is limited relative to the magnitude of the identified environmental liabilities. The primary environmental risks in this transaction relate to pre-existing contamination conditions, not ongoing operational violations. However, Crestline should be aware that the PLL policy would not cover future fines or penalties arising from operational non-compliance, and that ACC's environmental management systems and compliance programs should be evaluated as part of the post-closing integration process.
6. Leased Property Complications
Two of ACC's four facilities — Clarksburg and Weirton — are leased properties. The PLL policy must schedule these facilities as "covered locations" in order for environmental conditions at those sites to be eligible for coverage. However, the leased nature of these properties introduces several complications.
Clarksburg (Mountainview Properties LLC, Gerald Boothe, Landlord). The Mountainview lease requires ACC, as tenant, to remediate contamination caused by the tenant's operations. However, the CREC at Clarksburg — residual DRO from a former UST associated with Valley Freight Lines Inc. (prior tenant, now dissolved) — is not contamination caused by ACC. If the Phase II results confirm that the contamination is attributable to the former UST and not to ACC's operations, ACC may not have a remediation obligation under the lease. In that scenario, the contamination may not be ACC's liability, and the PLL policy may not provide coverage if ACC is not legally liable for the condition.
Conversely, if the Phase II results identify contamination attributable to ACC's resin blending operations (e.g., releases from the bulk resin storage area where the REC was identified), ACC would have a remediation obligation under the lease, and the PLL policy would potentially cover the remediation costs (subject to the known-conditions exclusion and pre-existing contamination definition analysis discussed above).
The CREC itself — the existing institutional controls recorded in the Harrison County Clerk's Office — may be treated as a known condition by Ironclad, depending on the policy language. If the institutional controls are deemed to constitute "knowledge" of a contamination condition, coverage for related claims could be excluded.
Additionally, Mountainview may need to be named as an additional insured or loss payee under the PLL policy, depending on the lease requirements and the landlord's cooperation in the remediation process.
Weirton (Northern Panhandle Realty Corp., Susan Delvecchio, Landlord). The Weirton lease is a double-net lease that is silent on environmental responsibilities beyond a general compliance-with-law provision. The VRDP obligations — including ongoing maintenance of engineering and institutional controls — are associated with the property and are the responsibility of the property owner. However, ACC, as the operating tenant, may have practical obligations to maintain compliance with the deed restrictions and institutional controls, and any failure to do so could result in a reopening of the VRDP case.
Whether the ongoing maintenance of VRDP controls triggers PLL coverage or is excluded as a routine maintenance or compliance obligation will depend on the specific policy language. Many PLL policies exclude coverage for costs incurred to comply with institutional controls or to maintain engineering controls that are conditions of prior regulatory closures. This exclusion, if applicable, would mean that the PLL policy would not cover the cos