LIBRARY. CERCLA Case Law Developments ENVIRONMENTAL COST RECOVERY & LENDER LIABILITY UPDATE. Full Article

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1 ENVIRONMENTAL COST RECOVERY & LENDER LIABILITY UPDATE As a service to Jenner & Block's clients and the greater legal community, the Firm's Environmental, Energy and Natural Resources Law practice maintains this online resource center that offers the latest case law and other developments in Environmental Cost Recovery & Lender Liability. Please also visit the Firm's Corporate Environmental Lawyer Blog for current developments in this area. Jenner & Block will update this web page with new developments and items of interest as they become available. For further information, please contact Partner Gabrielle Sigel. Full Article April 2011 Related Practices Environmental and Workplace Health & Safety Law CERCLA Case Law Developments Service Station Owner May Be Liable For Prior Owner s Waste Generation On March 21, 2011, the United States District Court for the District of New Hampshire denied defendant s motion for summary judgment, holding that the corporate owner of a gas station had not shown that it could not be held liable under CERCLA as the successor to the former owner of the station. Members of Beede Site Group v. Federal Home Loan Mortgage Corp., No. 1:09-CV (D.N.H. Mar. 21, 2011). Prior to 1999, Robert Shaw, the former mayor of Manchester, New Hampshire, owned a gas station and associated market and shops. Shaw allegedly sent waste motor oil to a Superfund site in Plaistow, New Hampshire. In 1999, Jean Poulin, one of Shaw s employees, bought the gas station, with its trade name, but not other assets operated by Shaw. In 2001, Poulin reorganized the gas station business as Shaw s Service Station LLC ( SSS ). Plaintiffs, who are other potentially responsible parties ( PRPs ) at the Superfund site, filed suit seeking CERCLA contribution from SSS for the waste sent to the site in the 1980s, before Poulin s purchase transaction. SSS filed a motion, deemed to be for summary judgment, arguing that it purchased limited assets and could not be held responsible for Shaw s waste generation. The court explained that, particularly in the context of CERCLA, a corporation acquiring assets, still can be held responsible for the prior business s liabilities under the equitable doctrine of successor liability. Adopting the First Circuit s instruction to apply state law to the interpretation of the successor liability doctrine, the court employed two tests. One test for successor liability was adopted by the New Hampshire Supreme Court from a federal court case, Kleen Laundry & Dry Cleaning v. Total Waste Mgt., 817 F. Supp. 225, (D.N.H. 1993), which determines a de facto merger, by evaluating whether there is: (1) a continuation of the seller s enterprise; (2) a continuity of shareholders; (3) a speedy dissolution of the predecessor corporation; and (4) the

2 successor s assumption of the predecessor s obligations as necessary for continuing normal business operations. The New Hampshire Supreme Court also analyzed whether a successor corporation is a mere continuation of the predecessor. Bielagus v. EMRE of New Hampshire Corp., 826 A.2d 559, 567 (N.H. 2003). A mere continuation is found when only one corporation remains after the transaction and the directors, stockholders, and stock are the same. The court evaluated the evidence found to date, including Poulin s 1999 bank loan application describing his business plan, and determined that SSS had not carried its burden of proof on its summary judgment motion and had not established that, as a matter of law, it could not be held liable under the doctrine of successor liability. Thus, until further motions or trial, SSS remained a defendant in the case. CERCLA Pre-Enforcement Review Bar Applies to Cleanup of Former Defense Sites On March 25, 2011, the United States District Court for the District of Kansas granted the United States motion for partial dismissal and held that the CERCLA 113(h) bar on pre-enforcement reviews precludes a lawsuit seeking injunctive relief to require the U.S. to complete its work on a Defense Environmental Restoration Program-Formerly Used Defense Sites ( DERP-FUDS ) cleanup. City of Salina v. U.S., No. 10-CV-2298 (D. Kan. 2011). From 1942 until 1965, the United States operated Shilling Air Force Base in Salina, Kansas and upon closing of the base, transferred the land and buildings to the Salina Airport Authority and a school district. The land is currently home to a Kansas State University campus and a city-owned wastewater treatment facility. In 1991, the U.S. Army Corps of Engineers discovered contamination on the site, investigated, and initiated cleanup efforts under the DERP-FUDS program. In May 2010, the City of Salina, school district, airport authority, and Kansas State University filed a CERCLA action against the United States, seeking reimbursement of past and cleanup costs and injunctive relief. The United States moved to dismiss plaintiffs claims for injunctive relief and for attorneys fees. The federal government asserted that the court lacked jurisdiction because 113(h) precluded federal court jurisdiction over a challenge to an ongoing remedial action selected pursuant to CERCLA 104. Plaintiffs argued that a DERP-FUDS clean-up was not a cleanup authorized by the President under 104 and, thus, not subject to the 113(h) jurisdictional bar. Analyzing the statutes, the court found that under 104, the President had authorized the Department of Defense ( DoD ) to conduct the cleanup of former defense sites. The DERP-FUDS statute authorized DoD to conduct a CERCLA-compliant cleanup at these sites. Thus, DoD s action at the Kansas site is an action under 104 and subject to the 113(h) bar. The court then found that plaintiffs claims for injunctive relief constitute an impermissible challenge to the remedial action and the

3 court lacked jurisdiction over those claims. Finally, the court held that, with respect to cost recovery claims, plaintiffs could not recover attorneys fees for bringing the cost removal action as they are not a legitimate CERCLA response cost. 8th Circuit Limits Basis for Environmental Cost Recovery On April 6, 2011, the U.S. Court of Appeals for the Eighth Circuit addressed an issue left open by the U.S. Supreme Court, by upholding a trial court s decision limiting the rights to cost recovery of a PRP, who had been subject to U.S. EPA enforcement actions under CERCLA. Morrison Enterprises LLC v. Dravo Corp., No (8th Cir. 2011). In Morrison, a site in Hastings, Nebraska had been on the NPL since 1986 as a result of releases of solvents and other chemicals from seven source areas within the site. EPA identified several PRPs for the site, including the city of Hastings and two businesses Dravo Corp. and Morrison Enterprises. Over the next decade, EPA brought lawsuits or issued orders against each of the three PRPs, which were typically resolved by consent decree requiring cleanup activities. In 2008, two of the PRPs, Morrison and Hastings, sued Dravo under CERCLA 107 to recover their cleanup costs. Under 107, a defendant can be held jointly and severally liable for a plaintiff s environmental response costs. Notably, plaintiffs did not bring a claim against Dravo seeking contribution under CERCLA 113(f). Under 113(f), rather than joint and several liability, the court allocates liability and costs among all PRPs based on equitable factors. Dravo moved for summary judgment, asserting that Morrison, as a PRP who had been sued by EPA, could not pursue costs under 107. Dravo also moved to preclude the city s claim for certain costs as time-barred. The trial court granted Dravo summary judgment on both issues, specifically finding that Morrison s sole remedy to recover costs was in contribution under 113(f). The Eighth Circuit upheld the lower court s decision, affirming that 113(f) provides the exclusive remedy for a PRP who had incurred response costs pursuant to an administrative or judicially approved settlement under CERCLA 106 or 107. The court noted that in Atlantic Research v. U.S., 551 U.S. 128 (2007), the U.S. Supreme Court, affirming a decision by the Eighth Circuit, allowed a PRP, who had never been sued under 106 or 107, to rely on 107 to recover costs. However, the Supreme Court had explicitly left open the question of whether a PRP who had been sued under 106 or 107 could bring an action under 107, 113(f), or both. The Eighth Circuit further held that plaintiff s attempt to parse its liabilities to certain portions of the site and to certain cleanup remedies did not mean that it could sue under 107, because the common liability with Dravo arose out of an indivisible harm, not out of any specific actions

4 to address that harm. The Eighth Circuit held, agreeing with the amicus brief filed by the United States, that in order to ensure the continued vitality of 113(f), PRPs who had been subject to enforcement actions could only sue for contribution. Morrison at p. 10. The court also found that Morrison could not amend its complaint to add a 113(f) claim after its 107 claim was stricken because it did not demonstrate diligence or good cause in failing to amend its complaint earlier. Finally, the court held that the city s attempt to recover its costs for relocating its water supply was time-barred. The court found that the city s water relocation activity is a remedial action for which a lawsuit to recover costs must be brought within 6 years of initiation, not 25 years later. Historic Corporate Parent Not CERCLA Operator of Manufactured Gas Plants On April 13, 2011, the U.S. Court of Appeals for the Second Circuit affirmed a defense judgment in favor of UGI Utilities, holding that UGI was not the former operator of nine manufactured gas plants ( MGPs ) in Connecticut and, therefore, was not liable for cleaning up tar and oil wastes at the sites. Yankee Gas Services Co. v. UGI Utilities Inc., No CV (2d Cir. 2011). UGI was the parent corporation to Connecticut Light & Power and to other companies which owned and operated several MGPs from Together, Yankee Gas Services Co. and Connecticut Light & Power Co. currently own 13 former MGP facilities and allege that UGI was a CERCLA former operator at nine of the sites. Plaintiffs originally claimed that UGI was responsible for the four additional sites as well, but severed the claims concerning one MGP to be tried separately and withdrew claims as to the other three MGPs. In the instant case, plaintiffs appealed the trial court s judgment in favor of UGI. Yankee Gas Services Co. v. UGI Utilities Inc., 616 F. Supp. 2d 228 (D. Conn. 2009). The lower court held that UGI was not an operator of nine MPGs under the standard set by the U.S. Supreme Court in United States v. Bestfoods, 524 U.S. 51 (1998). In Bestfoods, the Supreme Court held that a parent corporation can face CERCLA operator liability if it directs the workings of, manages, or conducts the affairs of a facility, and if the operator had manage[d], direct[ed] or conduct[ed] operations specifically related to pollution... or decisions about compliance with environmental regulations. 524 U.S. at Reviewing the trial court s factual findings for clear error and its conclusions of law de novo, the Second Circuit applied the rules and tests from Bestfoods and concluded that the District Court did not err in determining that UGI was not an eccentric corporate parent and did not exercise the requisite control over the MGPs which results in CERCLA operator liability. In sum, the appellate court found that, while UGI was a vigilant parent company that provided occasional assistance to its subsidiaries, UGI did not manage, direct, or operate the nine facilities at issue with respect to environmental matters.

5 Insurer May Not Bring Cost Recovery Claim For Payments to Innocent PRP On April 20, 2011, the United States District Court for the Northern District of California held that Chubb Custom Insurance Company ( Chubb ) is barred from bringing a Comprehensive Environmental Response, Compensation, and Liability Act ( CERCLA ) cost-recovery claim to recover payments made to a policyholder even if the policyholder could have brought such a claim on its own behalf. Chubb Custom Ins. Co. v. Space Systems/Loral Inc., No. 09-CV (N.D. Cal. 2011). At issue in the case is the cleanup of a 44-acre former industrial site in Palo Alto, California. In 1999, the California Regional Water Quality Control Board ( CRWQCB ) issued an order naming dischargers and requiring them to clean up and abate hazardous substances on the site. In 2003, the Taube-Koret Campus for Jewish Life bought a parcel that is part of the site, intending to redevelop it, but the CRWQCB named Taube- Koret as a discharger and ordered it to comply with the previous order. Taube-Koret then hired a contractor to remove contaminated soil from the site and, in 2006, submitted a claim to Chubb for continuing remediation. In 2008, Chubb paid Taube-Koret a final reimbursement of $2,400,000 and filed superfund cost-recovery and subrogation claims against several potentially responsible parties ( PRPs ), alleging joint and several liability for the cleanup costs. Four of those PRPs, Ford Motor Company ( Ford Motor ), Chevron Corporation ( Chevron ), Sun Microsystems ( Sun ), and Harman Stevenson, Inc. ( Harman ), moved to dismiss. Chubb Alleges that Defendant Ford Motor controlled Ford Aerospace & Communications Corporation ( Ford Aerospace ), which, according to Chubb, owned and occupied the entire 44-acre parcel from 1959 to 1990 and used the site to manufacture satellites and satellite equipment. Chubb further alleges that Ford Aerospace currently occupies all of the properties at issue, except for that currently occupied by Taube-Koret, and that Ford Motor operates a dewatering system on the site and releases hazardous substances on the site. Chubb claims that the Taube-Koret parcel was sold to Sun in 1988 who in turn sold it to Taube-Koret, knowing that it was contaminated. Chubb also alleges that Chevron owned and operated a service station on the parcel between 1960 and 1977 and discharged hazardous substances including polychlorinated biphenyls ( PCBs ) onto the site and that Stevenson operated a fast food restaurant on the parcel between 1977 and 2007 and contaminated portions of the site during construction and demolition. The Northern District of California held that Chubb lacks standing to pursue a Section 107 cost-recovery action against the PRPs for its insurance payments as environmental response costs. The court cited a 2004 decision in which a California District Court held that insurance payments are not CERCLA response costs and an insurer is not a party in the CERCLA sense and is this ineligible to bring Section 107 costrecovery actions. Cal. Dept. Toxic Substance Control v. City of Chico, 297 F. Supp. 2d 1227 (E.D. Cal. 2004).

6 Chubb attempted to argue that it was standing in its insured s shoes and bringing the Section 107 claim on its behalf because that insured was only one of a number of PRPs and this could only bring a cost-recovery action under Section 113. The court rejected this argument, explaining that allowing insurers to bring claims under Section 107 would nullify Section 112(c), which gives insurers an express a limited right to assert CERCLA claims for subrogation. The court said that Chubb was trying to elude the limits set in Section 112 (c) by asserting a right to subrogation under a different section that was not written to provide such a right. The court further held that, in any case, Chubb did not have a Section 112 (c) subrogation claim because the section only applies to claimants. A claimant is one who demands reimbursement from the Superfund or another PRP, and the only claim alleged in the complaint is Taube-Koret s claim for ongoing reimbursement in 2006 and its final reimbursement request in 2008, Chubb s only basis for paying these claims were its responsibilities under the insurance policy, and there are no allegations that Taube-Koret sought reimbursement from PRPs before going to Chubb. Chubb brought some state law claims as well but these claims were timebarred by the statute of limitations. A Ten-Year Limit on Indemnity Does Not Preclude Future CERCLA Claims On April 22, 2011, the United States District Court for the District of Montana denied defendant International Paper s ( IP ) motion for summary judgment, holding that IP had not shown that a provision in a property sales contract requiring that indemnification claims be brought within ten years of the sale precludes all subsequent claims for environmental liabilities. Stimson Lumber Co. v. Int l Paper Co., No M (D. Mont. 2011). In 1993, Stimson Lumber Co. ( Stimson ) bought assets, including a sawmill and plywood manufacturing plant, from IP s corporate predecessor. The purchase agreement stated that the seller would indemnify Stimson for environmental liabilities for a 10-year period. The agreement also provided that Stimson would not be responsible for any of the seller s liabilities. After Stimson was notified of polychlorinated biphenyls on the site, it entered into an administrative order and consent decree with Montana and conducted a cleanup of the property. On July 26, 2010, Stimson filed a cost-recovery action against IPC under CERCLA and the Montana Superfund law. IP filed a motion for summary judgment to preclude all claims. Specifically, IP asserted that the purchase agreement precluded Stimson from bringing any environmental claims against IP. The trial court adopted the findings of the magistrate judge, who had found that the agreement was ambiguous and that IP had not carried its burden of proving that it was entitled to judgment as a matter of law. Specifically, the court noted that the agreement did not include a provision expressly stating that no environmental claim could be

7 brought against IP after expiration of the ten-year indemnity period. Moreover, the contract s express statement that the buyer does not assume the seller s liabilities, further undermined IP s argument. RCRA Case Law Developments Run-Off of Utility Pole Chemicals Does Not Violate CWA or RCRA On March 31, 2011, the United States District Court for the Northern District of California dismissed citizen suit claims under the Clean Water Act ( CWA ) and the Resource Conservation and Recovery Act ( RCRA ) against utility companies, holding that the alleged conveyance to the environment of chemicals from utility poles through natural processes is not a basis for liability under those statutes. Ecological Rights Foundation v. Pacific Gas & Electric, No. C (N.D. Cal. 2011). The complaint alleged that the defendant utilities use wooden poles, which are pressure-treated with an oil-pentachlorophenol preservative mixture. Over time, weather causes these chemicals to wash off the surface of the poles and the chemicals are carried by rainwater or dust into water bodies and other locations. Plaintiff Ecological Rights Foundation ( ERF ) asserted that this movement of chemicals from the poles, due to wind, rain, and storm water, constituted an actionable disposal of solid waste under RCRA. Plaintiff further alleged that the wash-out of these chemicals constituted a discharge of pollutants into federally-regulated waters, including the San Francisco Bay, in violation of the CWA. The utilities moved to dismiss all claims. The court found in defendants favor on all counts. With respect to the CWA claims, the court found that washing out chemicals through natural processes, when those chemicals are not collected or channeled in a conduit of some type, does not constitute a point source discharge. In reaching this decision, the court distinguished the appellate court s opinion in Northwest Environmental Defense Center v. Brown, 617 F.3d 1176 (9th Cir. 2010). In Brown, chemicals that washed off a logging road and then were collected in a drainage system connected to those roads, were determined to be point source discharges. In contrast, the ERF court found that the lack of a discharge collection system specifically dedicated to utility poles was the distinctive factor in determining that no point source discharge had been alleged. Absent a point source discharge, plaintiffs had no claim based on the CWA. With respect to plaintiff s RCRA claim, the court evaluated whether the natural process of chemical wash-out out from utility poles constitutes disposal of solid waste, i.e., discarded material, as defined in the statute. The court noted that, while passive migration of chemicals can be a RCRA disposal, here the chemicals are not spilling from any containers meant to hold them, such as a tank. The court further noted that if chemicals washed out by natural forces from utility poles constituted a RCRA discarded material, then any building or outdoor structure could be

8 subject to RCRA liability. The court held, therefore, that plaintiff had not stated a claim under RCRA because it had not alleged disposal of a solid waste. Bankruptcy Developments Court Confirms $536 Million Environmental Trust Created By Former GM On March 29, 2011, the Bankruptcy Court for the Southern District of New York confirmed a Motors Liquidation Co. ( MLC ) bankruptcy plan that creates the largest environmental response trust in U.S. history. In re Motors Liquidation Co., No (Bankr. S.D.N.Y. plan confirmed Mar. 29, 2011). General Motors Corp. filed for bankruptcy on June 1, 2009, and emerged from bankruptcy protection on July 10, Thereafter, General Motors sold almost all of its assets to a new company and changed its name to Motors Liquidation Co. or Old GM. The bankruptcy plan establishes four trusts, one of which, the Environmental Response Trust ( ERT ) is dedicated to environmental cleanup. The ERT is composed of cash, unsold real properties, and equipment and will provide $536 million for continuing environmental remediation of MLC s remaining properties. See the December 2010 and March 2011 issue of Environmental Lender Liability publication for discussions of previous MLC settlements. In re: Motors Liquidation Co., No (Bankr. S.D.N.Y. Dec. 14, 2010); In re: Motors Liquidation Co., No (Bankr. S.D.N.Y. March 4, 2011).