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 October 2011 Related Practices Environmental and Workplace Health & Safety Law CERCLA Case Law Developments Environmental Contractors Subject to CERCLA Claim by Lender On October 11, 2011, the United States District Court for the Eastern District of Missouri upheld CERCLA and negligence claims brought by a lender against remediation designers and contractors for the disturbance of hazardous materials while remediating its borrower s property. Bancorpsouth Bank v. Environmental Operations Inc., 2011 U.S. Dist. LEXIS (E.D. Mo. Oct. 11, 2011). Bancorpsouth Bank lent money to a property owner who had hired the defendants to prepare and implement an environmental remediation plan for the borrower. The bank alleged that defendants failed to appropriately remediate the site so that it could be used for future redevelopment. The bank brought claims against the remediation designer and contractors under CERCLA and state common law. Defendants moved to dismiss certain of those claims, including the CERCLA claim. With respect to the CERCLA claim, defendants argued that they could not be liable under CERCLA because they were not a CERCLA operator or a generator/arranger and, hence, not a CERCLA-liable party. Defendants principally based their position on the assertion that they did not have authority to control the environmental operations at the property. The bank alleged, however, that defendants engaged in the deliberate disturbance, moving, and re-releasing of contaminants on the property. The court found that, on a motion to dismiss, it could not find that defendants had no authority to control the handling of the hazardous material on the property. Bancorpsouth, 2011 U.S. Dist. LEXIS at *9. The court denied the motion to dismiss the CERCLA claim because the complaint sufficiently alleged the requisite control over hazardous materials. The court also upheld the state law negligence claim. The court granted, however, motions to dismiss the strict products liability and negligent misrepresentation claims. With respect to strict liability, the

2 court found that the state claim only applied to sellers, manufacturers or distributors of a product. Defendants here were involved in the provision of services and could not be held liable under a theory of products liability. The court dismissed the misrepresentation claim because plaintiffs had, at most, alleged only omissions or inadequacies in written reports and not any affirmative misstatements. CERCLA Preempts State Statute of Repose On September 29, 2011, the U.S. District Court for the Northern District of Georgia held that CERCLA 9658, which preempts certain state statutes of limitations for toxic tort actions, also preempts certain state statutes of repose. In re: Camp Lejeune, North Carolina Water Contamination Litigation, 1:11-MD (N.D. Ga. Sept. 29, 2011). Plaintiffs and their families allege they were exposed to toxic substances in the drinking water while living at Camp Lejeune. Plaintiffs claims against the U.S. have been consolidated into multi-district litigation ( MDL ) before the federal court. As part of the preliminary decisions in the MDL, the court ordered the parties to address the U.S. s motion to dismiss, which asserted that certain plaintiffs claims are barred by the North Carolina 10-year statute of repose. The North Carolina statute provides that tort claims first accrue when the injury becomes apparent, but in no case may claims be brought more than 10 years after the defendant s last act giving rise to the claim. The ten-year limitation is called a statute of repose, which differs from a statute of limitations, which sets a final starting date for lawsuits. Plaintiffs argued that, despite the statute of repose, their claims are timely due to the tolling provision contained in CERCLA Section 9658 provides that the state s applicable limitations period (as specified in the state statute of limitations or under common law) can be preempted by CERCLA s federally required commencement date if the applicable state limitations period cuts off the claim. Plaintiffs argued that if the North Carolina statute of repose precluded their claims, CERCLA s 9658 commencement date applied instead to save their claims. The court considered CERCLA s language and purpose and other courts decisions regarding whether 9658 applied to statutes of repose in addition to statutes of limitation. The court found that, if it were writing on a clean slate, it would find that 9658 unambiguously does not preempt state statutes of repose. Lejeune, slip op. at page 18. However, the MDL court was heavily influenced by a decision of a district court judge in the Southern District of Alabama, who found that CERCLA s remedial purpose must be broadly construed. With that mandate in mind, the court held that a state statute of repose cannot preclude a toxic tort claim before plaintiffs have an opportunity to know that they have a case. The court, therefore, held that in this MDL, CERCLA 9658 could preempt state statutes of both limitations and repose. Current Owner May Face CERCLA Claims Despite Effort to Enforce RCRA Order Against Former Source Of Contamination

3 On October 17, 2011, the United States District Court for the Eastern District of Michigan rejected most claims brought by a current property owner seeking to enforce a U.S. EPA Administrative Order on Consent ( AOC ) against a former owner and instead found that the current owner could be liable to that former owner. Saline River Properties, LLC v. Johnson Controls, Inc., 2011 U.S. Dist. LEXIS (E.D. Mich. Oct. 17, 2011). Johnson Controls, Inc. ( JCI ) previously owned a 22-acre parcel of property in Saline, Michigan. In 1993, JCI signed a RCRA AOC with U.S. EPA, which required JCI to take remedial actions by certain dates and provided specific penalties for JCI s failure to do so. Subsequently, Saline River Properties, LLC ( Saline ) purchased the property. In 2010, Saline filed a RCRA action against JCI, alleging that JCI failed to comply with the AOC and seeking to force JCI to pay penalties for noncompliance and to undertake other injunctive relief. Saline also brought state common law claims related to JCI s alleged non-compliance with the AOC. In response, JCI asserted that Saline was responsible to JCI for cost recovery under CERCLA 107 and similar Michigan statutes. After discovery, the parties filed cross-motions to dismiss and/or for summary judgment on all claims. The court dismissed all of Saline s common law claims to enforce the AOC. In doing so, the court found that the AOC was an order, not a contract, and never reached JCI s defense that Saline was not a thirdparty beneficiary of the AOC. The court dismissed Saline s nuisance claim because the last alleged wrongful act by JCI occurred more than three years previously. The court would not extend the three-year statute of limitations because Michigan law does not recognize a continuing wrongs doctrine for nuisance claims. Finally, the court dismissed Saline s negligence claim after finding that the AOC did not impose any legal duty on JCI to provide services for Saline s benefit. As for Saline s RCRA citizen suit seeking to enforce the AOC, the court rejected two of the three bases raised by Saline asserting that JCI failed to comply with that order. JCI demonstrated that it supplied all required progress reports to U.S. EPA, even though some were not in writing, and that it submitted its corrective measures proposal in compliance with the AOC. The court reserved for trial, however, whether JCI had submitted an appropriate Environmental Indicators Report and conducted other required activities under the AOC. The court also reserved ruling on whether it would require JCI to pay penalties for any such non-compliance. Saline moved for summary judgment on JCI s counterclaims, asserting that it had no liability to JCI under CERCLA and similar state law. The court found, however, that JCI had established that Saline may have caused a release of hazardous substances when Saline broke into a concrete slab on its property. This release allegedly led JCI to incur additional groundwater monitoring costs. The court found that because

4 Saline is an owner, it is a CERCLA PRP. Moreover, Saline had no statutory defense to liability because the allegations concerning its potential release of hazardous substances were sufficient to preclude it from relying on either the bona fide prospective purchaser exception or innocent landowner defense to owner liability under CERCLA. Thus, Saline s action against a former owner for prior contamination has led to potentially viable claims against it for a potential exacerbation of that contamination. State Cannot Assert Longer Statute of Limitations to Avoid Dismissal On September 28, 2011, the United States District Court for the Western District of Pennsylvania denied a state environmental agency s motion for reconsideration of the court s prior determination that cost recovery claims against three defendants should be dismissed on statute of limitations grounds. Pennsylvania Department of Environmental Protection v. Beazer East, Inc., 2011 U.S. Dist. LEXIS (W.D. Penn. Sept. 28, 2011). The Pennsylvania Department of Environmental Protection ( PDEP ) filed suit against several parties under CERCLA 107(a) for recovery of response costs it incurred responding to contamination at the former Boldan Landfill. Three defendants filed a motion to dismiss, and in November 2010, the court granted their motion, dismissing PDEP s complaint because it was filed after the CERCLA three-year statute of limitations for removal actions. PDEP moved for reconsideration, arguing that the court should have applied a six-year statute of limitations instead. PDEP argued that it is entitled to a six-year statute of limitations under CERCLA language extending the three-year statute when EPA determines that a continued remedial action needs to be taken. 42 U.S.C. B 9604(c)(1)(C), 9613(g)(2). The court rejected PDEP s request for reconsideration finding that PDEP had never raised this issue in response to the court s first consideration of the motion to dismiss. In addition, the court found that PDEP had no right to rely on an extended statute because the extension only applied when Superfund monies were used, which was not the case here, and because PDEP sought cost recovery for a removal action not a remedial action as required for the CERCLA extension. The district court also denied PDEP s request for the right to file an immediate appeal of the dismissal of its claim against the three defendants. The court found that PDEP had failed to explain the relationship between its claims against the three dismissed defendants and the two remaining defendants and found that PDEP otherwise had not met the bases for an immediate appeal. Supreme Court Denies Cert. Concerning Viability of 107 Cost Recovery for Settling PRPs

5 On October 3, 2011, the United States Supreme Court denied certiorari in Morrison Enterprises LLC v. Dravo Corp., 2011 U.S. LEXIS 5440 (2011). Morrison Enterprises ( Morrison ) had filed a petition for writ of certiorari on July 1, 2011, after lower courts ruled that it could not seek cost recovery under CERCLA 107 because it had already entered into various administrative and court-approved consent agreements. The lower court held that Morrison only could have recovered costs in contribution under CERCLA 113(f). Notably, the United States had filed an amicus brief in the 8th Circuit, opposing Morrison s position. See the April 2011 edition of this publication for a discussion of the 8th Circuit s decision in Morrison Enterprises LLC v. Dravo Corp., No (8th Cir. 2011). RCRA Case Law Developments U.S. Appellate Court Reverses Abstention Dismissal In Favor of Environmental Group s RCRA Claim On October 3, 2011, the United States Court of Appeals for the Third Circuit declined to find primary jurisdiction or Burford abstention in a case involving contamination claims under RCRA and the Clean Water Act ( CWA ). Raritan Baykeeper v. NL Industries, Inc., 2011 U.S. App. LEXIS (3d Cir. 2011). From the 1930s until 1982, NL Industries ( NL ) manufactured titanium dioxide pigments on 440 acres surrounded on three sides by the Raritan River. After 1982, NL retained ownership of the site and leased portions to companies who manufactured sulfuric acid. In 1988, NL undertook an environmental investigation of the site, after which it entered into an administrative consent order with the New Jersey Department of Environmental Protection ( NJDEP ) and agreed to investigate and remediate contamination. Sediments taken in the portions of the river adjacent to and downstream from the site showed elevated levels of arsenic, copper, lead, and zinc, but NL concluded, and NJDEP agreed, that other sources were contributing to the pollution of those sediments. In 2004, after announcing its agreement with NL s conclusion about the source of the pollution, NJDEP stated that any remediation should be undertaken as part of a regional approach and that it would not require NL to undertake and further investigation or remediation of the sediment. No such regional cleanup was initiated. In 2005, the Sayreville Economic and Redevelopment Agency ( SERA ) acquired the site from NL by eminent domain. Later, SERA, the County of Middlesex, and others involved in the development ( developers ) entered into an agreement controlling the development and sale of the site and agreed that NL would retain liability for contamination of sediments in the Raritan River but did not call for any remediation of the sediments. In 2009, U.S. EPA ordered remediation of river sediments upstream from the site. Later that year Raritan Baykeeper, an environmental group, brought

6 suit against NL, the developers, and state and local officials and agencies under RCRA and the Clean Water Act. Raritan Baykeeper sought injunctive relief requiring defendants to remediate sediments in the river. Defendants moved to dismiss on abstention grounds and won in the district court. Raritan Baykeeper appealed the district court s decision to the U.S. Court of Appeals for the Third Circuit. Raritan Baykeeper first argued that the district court should not have abstained on primary jurisdiction grounds. The court held that defendants did not meet the four-factor test for demonstrating primary jurisdiction by a government agency. The court found that although NJDEP has expertise in environmental matters, federal courts also are competent to decide environmental cases, as demonstrated by Congress creation of citizen suits under these statutes. Moreover, NJDEP did not have specific authority here as the federal statutes citizen suit provisions granted enforcement authority to the court. The court also noted that, given that NJDEP s last action regarding sediment contamination was in 2004, there was little chance of the court issuing a ruling inconsistent with or collaterally attacking any agency decision. Next, the court addressed Raritan Baykeeper s appeal of the district court s abstention based on Burford principles in order to [protect] complex state administrative proceedings from undue federal interference U.S. App. LEXIS *13, quoting New Orleans Pub. Serv. Inc. v. Council of New Orleans, 491 U.S. 350, 362 (1989). The Third Circuit held that Burford abstention also is not appropriate here. The court found that Raritan Baykeeper could not obtain timely and adequate state court review of its RCRA and CWA claims because federal courts have exclusive jurisdiction over those citizen suits and New Jersey statutes do not authorize a state court action to enforce rights under RCRA and CWA. Moreover, even if plaintiff could obtain state court review, Burford abstention would not apply here because there was no coherent New Jersey policy in place which the case would disrupt. In conclusion, although the Third Circuit determined that neither primary jurisdiction nor Burford abstention were appropriate in this case, it declined to embrace plaintiff s position that such abstention is never appropriate in RCRA or CWA actions. No Summary Judgment for Prior Tenant of Contaminated Site On September 27, 2011, the United States District Court for the Eastern District of California denied a motion for partial summary judgment in a citizens suit under the Resource Conservation and Recovery Act ( RCRA ) because there were genuine issues of material fact as to whether (1) the contamination posed imminent and substantial endangerment; (2) defendant contributed to the contamination; and (3) defendant demonstrated divisibility of harm. The Newark Group, Inc. v. Dopaco, Inc., 2011 U.S. Dist. LEXIS (E.D. Cal. Sept. 27, 2011)

7 The RCRA citizens suit was brought by the current owner of industrial property in Stockton, California which is contaminated by toluene found below a building s concrete slab basement and in groundwater. Although several parties had used toluene on the site prior to plaintiff s ownership of the property, plaintiff Newark brought the RCRA claim solely against Dopaco, a former tenant at the site who had used toluene. Dopaco moved for summary judgment on several grounds. First, it argued that the presence of toluene in the subsurface below a cement slab did not present an imminent and substantial endangerment, which is necessary for a RCRA citizen suit. Newark introduced evidence that it is required by a city demolition order to break up the cement slab and that doing so could expose its demolition contractor s employees to hazardous concentrations of methane gas due to the toluene contamination. The court found that Dopaco had not shown that the facts on the endangerment issue were uncontroverted and denied summary judgment on that issue. Second, the court found that Dopaco was not entitled to summary judgment on the issue of whether it had contributed to the toluene contamination. Contrary to Dopaco s argument, the court found that there was sufficient evidence presented by Newark that Dopaco was responsible for the contamination to require the issue to go to trial. Finally, the court found that Dopaco also was not entitled to summary judgment with respect to the issue of divisibility of harm. Because RCRA imposes joint and several liability, Dopaco had the burden of proving divisibility of harm. Dopaco s assertion that Newark should have brought claims against other prior owners/operators is not sufficient to show that its harm should be segregated. In addition, although Newark cannot bring a RCRA claim if it was liable for contributing to the contamination, Dopaco had not shown conclusively that Newark had contributed to the contamination. Therefore, the court denied Dopaco s motion for partial summary judgment on all the issues raised. No Liability for Remediation Oversight Contractor During Alleged Unsuccessful Remediation On October 21, 2011, the United States District Court for the District of Alaska granted summary judgment to a remediation contractor, who had faced RCRA and state law claims, holding that a party who merely participated in an unsuccessful remediation of a contaminated site cannot be held liable for those claims. Sears, Roebuck & Co. v. Williams Express, Inc., 3:10-cv (D. Alaska October 21, 2011). Sears, Roebuck & Co. ( Sears ) operates a distribution site in Anchorage, Alaska, which is located across the street from a contaminated former gas station. Williams Express, Inc. ( Williams ) allegedly succeeded to the lessee s interests at the service station, which included an obligation to address contamination under a state compliance order. Williams entered

8 into an agreement whereby Holiday Alaska, Inc. ( Holiday ) agreed to act as Williams local representative overseeing and directing Williams environmental contractors. The agreement between Williams and Holiday provide that Williams retained the general power of supervision and control. Sears alleged that contamination from the service station has and will migrate and may present and imminent and substantial endangerment. Sears sued Williams and Holiday under RCRA and an Alaska statute similar to CERCLA and for trespass and nuisance under Alaska law. Holiday moved for summary judgment on all claims. The court first addressed whether Holiday could be considered a liable person under RCRA. The court held that, unlike CERCLA, RCRA does not limit liability to certain categories of persons because RCRA states that liable persons include but are not limited to parties such as a site operator. Id., slip op. at 12. Instead, the critical question for RCRA liability is whether Holiday could be considered a contributor to the handling, storage, treatment, transportation, or disposals of solid or hazardous waste presenting the endangerment. Id., slip op. at 12. Focusing on the word contributor, the court found that Holiday was not the determining factor in any handling or treatment of the waste, particularly because there was no evidence that Holiday took action leading to additional contamination, despite allegations of passive migration. The court also found that any contribution by Holiday did not create the endangerment because the contamination pre-dated Holiday s involvement. Failure to address existing contamination could not be a source of RCRA contribution to endangerment. Id., slip op. at 19. The court noted that Sears position would mean that every remediation contractor, and even the state environmental agency, could be liable under RCRA. The court was troubled that Sears position could result in no environmental contractor agreeing to participate in a clean-up. The court also refused to find Holiday liable as an operator under the Alaskan version of CERCLA. According to Alaskan law, an operator must have actual control over the contamination when it was released into the environment or over the facility from which the release occurred. The court here found that even if passive migration can be a release, there is not a sufficient nexus between Holiday and the conduct that caused the contamination to establish that Holiday had the requisite operator s control, under the Alaskan statute. Id., slip op. at 23. Holiday s lack of control over the intruding petroleum and its lack of action causing contamination to continue led the court to hold that Holiday has no liability for trespass. Holiday also has no liability for nuisance because it exercised no control over the contamination and was not a substantial factor in causing any alleged nuisance. Thus, Holiday was granted summary judgment on all claims asserted by Sears. State Case Law Developments

9 Adjacent Property Owner s Tort and Contract Claims Against Gas Station Survive Summary Judgment On October 3, 2011, the United States District Court for the Northern District of California granted in part and denied in part BP s and ConocoPhillips s ( Conoco ) motions for summary judgment in a suit brought by owners of property neighboring a contaminated gas station that was previously owned by BP s and Conoco s predecessors. Barrous v. BP P.L.C., 2011 U.S. Dist. LEXIS (N.D. Cal. Oct. 3, 2011). Since 1987, plaintiffs have owned property adjacent to a gas station owned by a predecessor of BP and then by a predecessor of Conoco. In 1992, soil testing revealed that the gas station was contaminated by leakage from underground storage tanks. In 1999, BP told plaintiffs that their property might be contaminated and entered into an access agreement with plaintiffs, allowing BP to monitor contamination and requiring BP to indemnify any lender, lessee, or purchaser of plaintiffs property for liability arising out of the contamination caused by BP. BP and then Conoco remediated the gas station and plaintiffs property, and in 2011 the local environmental agency issued a no further action ( NFA ) letter for both properties. Plaintiffs unsuccessfully sought financing for their property several times and claim that the contamination prevented them from obtaining financing. On May 20, 2010, plaintiffs filed a complaint against BP and Conoco alleging various tort and contract claims. After discovery, defendants moved for summary judgment on several issues. The court granted BP s motion to dismiss claims against its British parent finding that BP p.l.c. had not been involved in any claimed wrongdoing. The court denied defendants attempt to preclude claims for diminution in property value because, despite the NFA letter, plaintiffs presented evidence that the remediation was insufficient. The court also denied defendants statute of limitations defense because they had not established if and when the property s contamination became unabatable. Because the statute of limitations would, under plaintiffs theory, begin to run when they learned the property was permanently damaged, the court found that defendants could not win summary judgment on this issue. The court also denied BP s motion with respect to contract claims, finding that plaintiff had shown disputed issues appropriate for trial regarding whether BP had honored its indemnity obligations and its agreement not to assign the access agreement without plaintiffs consent. Moreover, despite the agreement s non-assignment clause, Conoco could still be liable under that contract once BP purported to assign it to Conoco and Conoco took action consistent with that assignment. Finally, the court refused to dismiss plaintiffs punitive damages claims against BP, finding that a reasonable jury could find that BP s failure to commence remediation for 10 years after learning of the contamination could be considered evidence of malice. The court, however, precluded plaintiffs punitive damages claims against Conoco because plaintiffs presented no evidence that Conoco released additional contaminants on plaintiffs property or

10 intended to interfere with the BP s contractual obligations. Insurance Case Law Developments RI/FS Costs Are Defense Costs for Insurance Purposes On October 26, 2011, the United States District Court for the District of Idaho held that Remedial Investigation and Feasibility Study ( RI/FS ) costs are generally defense costs and are, therefore, recoverable under an insurance policy that includes a duty to defend. Wells Cargo, Inc. v. Transport Insurance Co., 2011 U.S. Dist. LEXIS (D. Idaho Oct. 26, 2011). Wells Cargo conducted mining operations at the North Maybe Mine in Southeast Idaho from 1965 to 1967 and had insurance policies with Transport Insurance Co. ( Transport ) between 1961 and The United States Department of Agriculture Forest Service ( AFS ) brought a CERCLA action against Wells Cargo because of environmental pollution and contamination at the site, and Wells Cargo is seeking a declaration that Transport must defend and indemnify it for the CERCLA action. The court addressed Wells Cargo s and Transport s cross-motions for summary judgment regarding whether Transport had a duty to defend Wells Cargo, whether the amounts Wells Cargo paid in connection with the RI/FS constitute defense or indemnity costs under the insurance policies, and which state s law should be applied. The court determined that Idaho law applies because of an established rule that the law of the state which is the principal location of the insured risk will be applied unless... some other state has a more significant relationship. Barber v. State Farm Mut. Auto. Ins. Co., 931 P.2d 1195, 1199 (Idaho 1997). Transport contended that California had a more significant relationship because the policies were drafted in California, Wells Cargo s former president attended Transport board meetings in California, and the policies identified additional insureds in California. The court rejected these arguments, holding that the relationship with California did not override the presumption in favor of the law of the state where the insured risk is located. The parties agreed that Transport has a duty to defend Wells Cargo against suits but disagreed as to the definition of the term suits. Relying on the Ninth Circuit decision interpreting Idaho law, the court found that a PRP letter is similar to a complaint and is the effective commencement of a suit. See Aetna Cas. & Sur. Co., Inc. v. Pintlar Corp., 948 F.2d 1507, 1517 (9th Cir. 1991). Based on this precedent, the court determined that CERCLA administrative proceedings initiated by a PRP letter and subsequent letters and orders sent to Wells Cargo constitute suits and trigger the duty to defend. The court then held that Transport had a duty to defend AFS s claims alleging property damage. Specifically, Wells Cargo allegedly was responsible for dumping overburden contaminated

11 with selenium onto AFS s land between 1965 and These allegations are sufficient to constitute property damage claims for which Transport must provide a defense. Transport alleged that the RI/FS costs could only be covered as indemnity costs. Wells Cargo argued, and the court agreed, that it was investigating and defending the CERCLA action when it conducted the RI/FS and that Transport is, therefore, obligated to pay Wells Cargo in connection with its duty to defend the CERCLA action. The court found that RI/FS costs conducted to minimize or absolve a party s liability are defense, not indemnity costs. The court then noted that while it was ruling that RI/FS costs generally constitute defense costs, it could not yet rule as to which specific costs incurred by Wells Cargo were defense costs.