Fourth Circuit Affirms Ashley Rulings

April 9th, 2013

The United States Court of Appeals finally issued its much anticipated ruling in PCS Nitrogen v Ashley II of Charleston, 2013 U.S. App. LEXIS 6815 (4th Cir. 4/4/13) last week. However, the wait turned out to be much ado about nothing.

The court affirmed the district court rulings but did not clarify perhaps the most problematic holding that Ashley II of Charleston (Ashley) was precluded from qualifying for the Bona Fide Prospective Purchaser (BFPP) liability exemption because it had an impermissible affiliation with a responsible party. Click Here for our discussion on the prior rulings and the oral argument.

Ashley filed an action in 2005 seeking a declaratory judgment that PCS Nitrogen was jointly and severally liable for response costs at a former fertilizer manufacturing site in Charleston, South Carolina that Ashley planned to redevelop. PCS counterclaimed and also brought third-party contribution actions against past and current owners and operators of the Charleston site. The district court bifurcated the case for trial with the first phase addressing liability and the second phase allocating response costs.

Successor Liability 

Following the first bench trial, the court ruled that PCS was liable as a successor to a former owner and operator of the Charleston site, Columbia Nitrogen Corporation (Old CNC).

By way of review, Planters Fertilizer & Phosphate Company (Planters) manufactured phosphate fertilizer at the site from 1906 to 1966 by reacting sulfuric acid with phosphate rock. Planters produced the sulfuric acid for the process on-site, and stored the acid in lead-lined tanks. Prior to the 1930s, Planters used pyrite ore as the primary fuel for its sulfuric acid production. The burning of pyrite ore generated a pyrite slag byproduct containing high concentrations of arsenic and lead. Planters spread the slag byproduct to stabilize roads on the site. The vast majority of the arsenic and lead contamination found at the site was attributable to the slag by-product.

In 1966, Planters sold the site including the plant and its equipment to Old CNC who continued operating the acid and fertilizer plants until the early 1970s. Old CNC also owned and operated an ammonia and nitrogen fertilizer plant in Augusta, Georgia.

Although Old CNC did not use pyrite ore at the Charleston Site, its fertilizer production process generated dust that contained elevated levels of arsenic and lead, and contributed to arsenic and lead soil contamination at the Charleston Site.

Following a severe storm in 1971 that damaged the acid plant and other buildings, Old CNC demolished the acid plant. The demolition activities disturbed the subsurface soil to a depth of at least two feet. By October 1972, Old CNC ceased all fertilizer production at the Charleston site. Between 1977 and 1981, Old CNC demolished the remaining structures at the property.

In 1985, Old CNC sold the Charleston site to an entity owned by James H. Holcombe and J. Henry Fair (collectively “H & F”). One year later, the parent corporations of Old CNC (collectively “DSM Parties”) decided to shut down Old CNC to qualify for a $100MM tax preference in the Netherlands. Andlinger & Company, Inc. incorporated CNC Corp. (“New CNC”) to purchase the assets and business of Old CNC for $50 million, approximately 60% discount from book value. In exchange for an additional $5 million discount, New CNC accepted the acquired business and assets “as is.”

After the sale, Old CNC initiated the process of liquidation and dissolution. New CNC continued producing ammonia- and nitrogen-based fertilizers at the Augusta plant. By virtue of a series of mergers and acquisitions, PCS Nitrogen, Inc., eventually became a successor to New CNC. Neither New CNC nor PCS ever owned or operated any portion of the Charleston Site.

On appeal, the Fourth Circuit said that the district court erred when it initially held that New CNC unambiguously assumed Old CNC’s CERCLA liabilities for the Charleston Site under the Acquisition Agreement. The appeals court said Section 3.4 of the Agreement which provided for a transfer of “[a]ll obligations required to be performed under all court, administrative and regulatory orders” did not address, let alone unambiguously provide, that it covers CERCLA “obligations” arising after execution of the Agreement. Moreover, the Fourth Circuit said the clause of Section § 3.6 providing for assumption of liabilities “arising out of or in connection with the Acquired Business or the Purchased Assets” ordinarily did not transfer liabilities associated with assets no longer owned by a seller in an asset deal. However, the appeals court noted the contract ambiguously provided that New CNC would assume all obligations and liabilities relating to the Acquired Business . . .” as if the [New CNC] were to purchase the stock of [Old CNC] on the open market.

Usually, when an appeals court concludes that a district court has erred in holding a contract unambiguous, the case will be remanded for a factual determination of the parties’ intent based on extrinsic evidence. Here, though, the appeals court noted that the district court had already analyzed the extrinsic evidence during the bench trial, and had based its ruling on that evidence. In such a situation, the Fourth Circuit said, it could only reverse the lower court if after reviewing the entire record, it was “left with the definite and firm conviction that a mistake has been committed.” Under this rigorous standard, the court said it could not conclude that the district court had clearly erred.

One gets the sense that had the appeals court been reviewing the evidence on a de novo basis, it would have found for PCS. In a tactfully and carefully worded passage the court said:

“This is not to say that PCS did not present evidence that the district court could have resolved the Agreement’s ambiguity in its favor. But Ashley presented contrary evidence supporting its view as to the meaning of the ambiguous contract language, and the district court, as fact finder, found in favor of Ashley. ….Here, as in many other cases, “both the intrinsic and extrinsic evidence of intended reach of the agreement might have supported a contrary finding. But we are not ‘left with the definite and firm conviction that a mistake has been committed.’ Accordingly, we must affirm the judgment of the district court holding that in the Agreement New CNC assumed Old CNC’s CERCLA liabilities for the site and that PCS is therefore a PRP as a successor to Old CNC’s CERCLA liability for the site.”

Liability of Individual Parties

The appeals court then turned to the arguments by the various defendants that the district court had erred when it determined they were responsible parties under CERCLA.

H&F

The district court had found that H& Fair were PRPs as owners at the time of disposal because they engaged in site-wide earth-moving activities, including the construction of a street extension, the addition of water and sewer lines, excavation and grading, and the construction of several detention ponds. The district court observed that as late as 1998, H&F undertook earth-moving activities in areas with “discolored” and “contaminated” soils, and destroyed on-site wetlands along the Ashley River. The district court did note, though, that H&F added a four-to six inch limestone run of crusher cover over the majority of the site, which mitigated risks of acute exposure to the site’s contaminated soils.

On appeal, H& F Fair did not challenge the notion that an owner could be liable for so-called “secondary disposals. Instead, they challenged the district court’s finding that secondary disposals had occurred during their ownership. H&F alleged that PCS had not offered any “discrete proof” that H& Fair actually moved or dispersed contaminated soils during their earth-moving activities. The appeals court said that “At best, Holcombe and Fair contended, the evidence demonstrated only that a disposal “probably” occurred during their ownership of the site.”

The Fourth Circuit agreed that PCS had not presented direct evidence that H & F moved or dispersed any contaminated soils. However, the appellate opinion said that CERCLA did not require a “smoking gun”. Moreover, the court said it bound to affirm any inference of CERCLA liability if “plausible in light of the record viewed in its entirety.” The appeals court said that the district court heard evidence showing that H& F had engaged in extensive grading and construction that had affected at least 27.9% of the Charleston site during their ownership, and that even superficial earth-moving activities such as grading could redistribute contaminated soils. Considering the evidence of widespread contamination across the site, the Fourth Circuit said that it was certainly plausible that the construction activities at some point caused a secondary disposal.

RHCE

Robin Hood Container Express (“RHCE”) purchased two acres from H&F in 1990. RHCE then arranged for the excavation of a 1380-cubic-foot pond, two asphalt driveways, and extended sewer and water lines on its parcel. RHCE’s contractors also stripped six inches of topsoil and graded and proof-rolled the land. Although RHCE did not introduce any arsenic or lead to its leasehold, these contaminants were present in the soils.

On appeal, RHCE argued that its leasehold was not “part of the property for which Ashley sued PCS to remediate.” Essentially, RHCE said its leasehold was not part of the CERCL facility because it was not part of the area that was targeted for remediation. However, the Fourth Circuit said the statutory definition encompassed “by the bounds of the contamination.” Thus, the appeals court held the district court did not err in finding that RHCE’s leasehold was contaminated as part of a pattern of widespread contamination across the entire site. The appellate court said fertilizer production and construction activities widely contaminated the site, including the area of RHCE’s leasehold. That the leasehold was less contaminated than some of the rest of the site and would not require remediation for its current industrial use, the appeals court opinion continued, made no difference for purposes of determining PRP status under CERCLA. To hold otherwise, the appellate opinion explained, would allow an operator of a less-contaminated leasehold in a multiple-parcel facility to avoid liability for CERCLA response costs for the rest of the facility merely by demonstrating less pollution-sensitive land use on its leasehold. Such a result, the court suggested, turn CERCLA’s strict liability framework on its head, and would improperly broaden Congress’ specific exemption from liability for “innocent” contiguous landowners

The district court had ruling that RHCE was not entitled to the Third Party defense. To establish the defense, a defendant must satisfy four prongs. On appeal, RCHE only challenged the district court’s rulings on two of the prongs. Because a party must establish all prongs of the defense, the appeals court said it must affirm the court’s denial of RHCE’s innocent landowner defense.

AllWaste

In December 1987, H& F sold three acres of the Charleston site to Max and Marlene Mast who in turn conveyed the parcels to Allwaste Tank Cleaning, Inc., (All Waste) acquired title to three acres of the Charleston site in 1988 and lease two additional acres in 1991 to operated a shipping container cleaning and storage business. As part of its operations, Allwaste utilized an underground sump system to capture wastewater generated by the container-cleaning process and pump it into a treatment system. The district court determined that Allwaste allowed the sumps to deteriorate during its ownership of the parcel to the extent that the sumps presented a threat of a release of hazardous substances. Allwaste sold its parcel to Ashley in 2008.

Ashley-

Ashley purchased 27.62 acres of the Charleston Site in November 2003 as part of a larger, mixed-use project. Ashley purchased the site with knowledge of, and the intent to remediate, the contaminated soils. By the time of Ashley’s ownership, the run of crusher cover had degraded, leaving contaminated soil exposed in many areas. Ashley also had engaged in extensive pre-acquisition diligence when it acquired the Allwaste parcel in 2007.

The district court specifically found that Ashley failed to clean out and fill in sumps as recommended in a phase 1 report and that these structures should have been filled or removed when related aboveground structures were demolished. The district court also determined that Ashley had monitored and adequately address conditions relating to a debris pile and the limestone run of crusher cover on the site. The court concluded that these inactions established that Ashley did not exercise appropriate care at the site.

On appeal, Ashley argued that Congress had established a lower level of care when it used the phrase “appropriate care” in the elements of the BFPP liability exemption instead of the phrase “due care” requirement of the innocent landowner/third party defense. The conventional wisdom has been that the different language was simply a drafting error and many commentators felt that Ashley’s argument did not pass the “red face” test.

The Fourth Circuit agreed, saying that Ashley had failed to provide a “persuasive rationale” for requiring a lower level of care for a BFPP than for an “innocent landowner.” The court said that both the BFPP exemption and the innocent landowner defense require a demonstration of “reasonable steps. Moreover, the court held:

Logic seems to suggest that the standard of ‘appropriate care’ required of a BFPP, who by definition knew of the presence of hazardous substances at a facility, should be higher than the standard of ‘due care’ required of an innocent landowner, who by definition ‘did not know and had no reason to know’ of the presence of hazardous substances when it acquired a facility.

Nevertheless, the appeals court said it did not have to determine if the BFPP standard of ‘appropriate care’ was higher than the standard of “due care” mandated elsewhere in CERCLA  because “appropriate care” was at least as stringent as “due care”. Following the suggestion of EPA in its 2003 “Common Elements Guidance”, the appellate panel then examined Ashley’s actions through the lens of CERCLA’s “due care” case law. The Fourth Circuit said it agreed with the Second Circuit that the “due care” inquiry asks whether a party “took all precautions with respect to the particular waste that a similarly situated reasonable and prudent person would have taken in light of all relevant facts and circumstances.” Under this standard, the appeals court concluded that Ashley’s inactions clearly show that it failed to exercise “appropriate care.”

The appeals court said Ashley’s delay in filling the sumps—which the court noted that even Ashley’s expert admitted should have been filled a full year before Ashley did so—demonstrated that it did not take the “reasonable steps to . . .prevent any threatened future release” that “a similarly situated reasonable and prudent person” would have taken.

Apportionment

PCS and RHCE challenge the district court’s denial of apportionment of harm at the site, asserting that the harm at the site was divisible and was capable of being apportioned. The appeals court noted that the district court found that two factors contributed to the harm at the site—the amount of hazardous substances each PRP caused to be contributed to the site, and the amount of soil each PRP caused to be contaminated through secondary disposals. The district court thus recognized that the harm at the site was at least “theoretically divisible” if a defendant provided sufficient evidence to establish a reasonable basis for apportionment based on those two factors.

At trial, PCS offered several bases for apportionment, including (1) the amount of fill material each PRP added to the site; (2) the volume of contaminants Planters and Old CNC introduced to the site; (3) the period of time that Planters and Old CNC produced fertilizers on the site; (4) the percentage of soils each PRP first disturbed on the site; and (5) the number of contaminated soil samples attributable to each PRP. According to PCS, these factors consistently demonstrated that PCS should be responsible for, at most, six percent of the harm at the site.

However, the district court found PCS’s methods did not (1) provide a reasonable estimate of the volume of soil contaminated by secondary disposals; (2) account for the likelihood of contamination prior to 1906, and thus assumed that Planters was responsible for all contamination prior to 1945; or (3) compensate appropriately for changes in the type and intensity of uses and construction on the site over time. In addition, the district court held that any reasonable basis for apportionment must include reliable evidence as to both the initial disposals of hazardous substances and any secondary disposals that occurred over time. Indeed, the court distinguished. The district court further found that PCS’s apportionment methodologies individually and collectively failed to provide the evidence as to secondary disposals necessary to “establish a reasonable basis for apportioning the harm at the Site.”

On appeal, PCS argued that the district court did not properly apply the standard established by the Supreme Court in Burlington Northern when the district court required than a “reasonable basis” for apportionment. The Fourth Circuit said apportionment was a fact-intensive, site-specific determination and that the district court had undertook precisely such an intensive inquiry. Denying apportionment because a party fails to provide reliable evidence as to one of the factors informing apportionment, the appeals court said. Apportionment without adequate evidence, the Fourth Circuit said, would result in an arbitrary apportionment. Accordingly, the appeals court said that the district court’s fact-intensive and site-specific analysis underlying its denial of apportionment entirely accords with Burlington Northern.

PCS and RCHE also argued that they had provided a reasonable basis for apportioning their individual liability. In other words, must a PRP provide a reasonable basis to apportion all of the harm, or only its share of the harm to avoid joint and several liability. The appeals court acknowledged that neither the circuit nor the Supreme Court had addressed that question. However, the Fourth Circuit said it did not have to decide the issue PCS had failed to establish a reasonable basis for apportioning its own harm. The appeals court said both primary disposals (from fertilizer manufacturing) and secondary disposals (from earth-moving and construction) occurred during Old CNC’s ownership and operation of the site. Therefore, to establish its own share of the harm, PCS as the successor to Old CNC needed to provide an apportionment methodology that addressed both types of disposals. Because it did not do so, PCS failed to provide a “reasonable basis for apportionment” of its own harm (let alone all of the harm). Accordingly, it affirmed the finding of the district court.

RHCE argued that it could avoid joint and several liability as a current operator by demonstrating that no disposal of hazardous substances has occurred during its operation of the facility. The Fourth Circuit rejected this view, explaining that allowing current owner and operator PRPs to avoid joint and several liability through a zero-share apportionment because no disposal occurred during their ownership or operation would effectively render current owner or operator liability coterminous with liability based on ownership or operation at the time of disposal. Such an approach would defeat the purposes of CERCLA to permit a current operator PRP, who was also an operator at the time of disposal, to claim individual share apportionment, while denying this right to a current operator PRP who was not a PRP at the time of disposal.

Moreover, the court went on, such a rule would frustrate the narrow statutory defenses and exemptions Congress created to address truly innocent landowners. The court noted that all of these provisions require much more than a mere showing that no disposal occurred during a current owner or operator’s tenure at a facility. Consequently, allowing such PRPs to apportion solely their own zero-share of liability would render the heightened requirements of these narrow defenses and exemptions” dead letters”. The appeals court said it must interpret a statute to avoid rendering any of its provisions superfluous and preserves Congress’ calculated balance of broad strict liability and narrow defenses and exemptions under CERCLA.

Allocation

Finally, the Fourth Circuit turned to the allocation of liability under section 113(f) of CERCLA. The appeals court said it reviews a district court’s choice of allocation factors for abuse of discretion, and its ultimate allocations of liability for clear error. In this case, the parties do not challenge the court’s selection of relevant factors in arriving at the appropriate allocation.

Considering the record as a whole, the appeals court it could not conclude that the district court clearly erred. The appeals court said the ultimate allocation of liability reasonably weighed relevant factors, including the degree of involvement each party had in disposals (both primary and secondary) on the site, the degree of care each party exhibited with respect to hazardous substances, the degree to which each party cooperated with government officials with respect to hazardous substances, and the benefit each party reaped from disposals of hazardous substances on the site. The appeals court said that although the record might have supported a different allocation, the ultimate allocation was among the reasonable conclusions supported by the evidence. Therefore, the court affirm the district court’s allocation of liabilities under § 9613(f).

 

For all the attention this lawsuit has received, much of this case is unremarkable. There is a long line of cases dating back to the mid-1980s that parties like H&F or RHCE may be liable under CERCLA for moving contaminated dirt. The successor liability issue turned on an agreement that was not a model of precise drafting and which reasonable minds could differ on its meaning.

Likewise, Ashley deserved what it received. It ignored recommendations in a phase 1 and its own parent’s internal policy, and failed to take any action for nearly two years to stabilize a known contaminated site that was located within proximity to sensitive receptors (wetlands and the Ashley River). Several circuit courts have held that doing nothing is not “due care”.

It is unfortunate that the appeals court did not clarify the improper “affiliation” holding of the district court. It was unclear from the trial court opinion if the indemnity from Ashley to H&F was the improper affiliation, if it was the efforts of Ashley to convince EPA not to seek cost recovery from H&F since this would trigger Ashley’s indemnity or a combination of both of these facts that caused Ashley to have violate the “no affiliation” element of the BFPP. Indemnities are important tools in real estate transactions and if merely granting an indemnity is enough for a buyer to lose BFPP status, this will have a particularly chilling effect on brownfield projects. Such an interpretation does not seem reasonable but the Court of Appeals missed an opportunity to clarify this important issue.

That being said, this case has lots of lessons for brownfield developers. Often times, developers will hold properties for a long period of time while they assemble lots and line up financing. Sometimes, they demolish structures and then leave the site exposed to the elements while project planning proceeds. In some instances, developers will phase in construction and will only expend funds on the portion of the property being developed. Those involved in brownfield development will need to review their site management policies and should take a holistic approach to their site, evaluating risks posed by areas of concern, assessing the potential presence of sensitive receptors and implementing interim measures to control or stabilize those portions of site that may present a risk of a release or a threatened release.

Leave a Reply