As the trial date for the sprawling Deepwater Horizon Gulf Oil Spill litigation date rapidly approaches, the federal district court has been busy issuing decisions to help refine the issues. Two of these opinion involved interpreting the scope of contractual indemnities-one of our favorite topics.

The first opinion involved cross-motions for partial summary judgment filed by BP and Transocean (RIG).  In re Oil Spill by the Oil Rig “Deepwater Horizon, 2012 U.S. Dist. LEXIS 9005 (E.D. La. 1/26/12). The claims arose from related litigation, In re Triton Asset Leasing GmbH, et al., that was instituted by RIG  as owner of the DEEPWATER HORIZON pursuant to the Limitation of Shipowners’ Liability Act, 46 U.S.C. § 30501, et seq to address claims filed against Transocean for personal injury, wrongful death, economic loss, property damage, etc. RIG, in turn, impleaded BP. The second related action was U.S. v. BP Exploration & Prod. Inc., et al., No. 10-4536 where the United States asserted claims for civil penalties under Section 311(b)(7) of the Clean Water Act  (“CWA”) and a declaration of liability for removal costs and damages under the Oil Pollution Act of 1990 (“OPA”). BP and RIG  were named as defendants  and filed cross-claims against each other.

As readers no doubt recall, predecessors to BP and RIG entered into a drilling contract in 1998 where RIG agreed to build a mobile offshore drilling unit (“MODU”) that BP agreed to hire for drilling activities on the outer continental shelf. The drilling contract contained several indemnity clauses allocating liability for certain risks and releasing the other party from claims associated with those risk. In particular, Articles 24.1 and 24.2 addressed pollution risks while Article 25.1  broadly defined the scope of the indemnity obligation. In general, Article 24.1 allocated to RIG for risks associated with pollution originating on or above surface waters with Article 24.2 allocating to BP pollution risk “not assumed by” RIG (i.e., pollution originating beneath the water’s surface). Article 25.1 generally applied to indemnity clauses that contained the phrase “shall protect, release, defend, indemnify and hold harmless” but did not apply “to the extent any such obligation is specifically limited to certain causes elsewhere in this contract.”

RIG asserted in its motion that BP was required under their drilling agreement to defend and indemnify RIG from claims and liabilities related to pollution originating below the surface of the water even if Transocean was strictly liable or if the pollution was caused by RIG’s negligence or gross negligence. RIG also asserted that the scope of BP’s indemnity obligation extended to compensatory damages, punitive damages, and statutory penalties. RIG argued that broad indemnity of Article 25.1 applied to Article 24.2, because Article 24.1 did not  contain language specifically limiting indemnity coverage to certain causes after it used the “shall protect” phrase. However, RIG admitted that the drilling contract did not provide indemnity for intentional or willful misconduct.

Meanwhile, BP denied that it owed indemnity for claims based on strict liability such as for claims under OPA or the CWA where RIG acted with gross negligence. Specifically, BP argued that the last sentence of Article 24.2 limited its indemnity obligation to instances where subsurface pollution is caused by Transocean’s “negligence or fault”, and because of this specific limitation Article 25.1. BP also argued that even if RIG’s interpretation was correct, contractual indemnities that purport to include gross negligence, punitive damages, or CWA civil penalties were unenforceable on public policy grounds. Finally, BP also argued that the indemnity clause was void if RIG breached the drilling contract or materially increased risks to BP.

After considering the language of the contract and the applicable law, the court agreed with RIG that Article 24.2 did not specifically limit the application of Article 25.1. The court said Article 25.1 provided broad indemnity coverage wherever the “shall protect” triggering phrase appeared. The court said the broad indemnity coverage would apply unless the exclusionary phrase “except . . . specifically limited” was contained in the particular indemnity provision. The court noted the specific exclusionary phrase appeared in Articles 22.3 and 23.1 but not in Article 24.2. Absent language that specifically limited Article 25.1, the court said it could be reasonably inferred that the parties intended that Article 25.1 would be fully incorporated into Article 24.2, and did not operate to exclude gross negligence, strict liability, or other causes or damages. The court also said this was consistent with the plain language of Article 24.2 providing that BP would  assume “any” liability not assumed by RIG in Article 24.1

Having ruled on the meaning of the indemnity, though, the court then said that RIG was not legally entitled to indemnity for the full range of liabilities listed in Article 25. The court said that cases holding that public policy prohibited a party from being indemnified for its own gross negligence were not applicable because the cases cited by the parties dealt with “release” or “exculpatory clauses”, and not indemnities. The court said there was a tension between the policy of freedom of contract, which weighs in favor of enforcing the indemnity, and a reluctance to encourage grossly negligent behavior, which weighs against enforcing the indemnity the freedom of contract. The reciprocal nature of these indemnity clauses arguably created an incentive for RIG to avoid grossly negligent conduct, or at least did not encourage RIG to act in a grossly negligent manner, the court said which favored enforcing the clause. In addition, the court said, the agreement reflected an attempt by sophisticated entities engaged in a potentially lucrative and obviously risky endeavor to allocate risk ahead of time, ostensibly in the hopes that some degree of certainty may be brought to the risks inherent in that undertaking.

The court found further support from OPA the primary source of the compensatory damages arising from oil pollution. The court observed that OPA section 2710 expressly permitted contractual indemnity but was silent if such indemnity may include gross negligence. In contrast, the court said, OPA section 2716(f)(1) states that a responsible party’s “guarantor” may raise as a defense that the responsible party acted with “willful misconduct,” but not gross negligence. The court acknowledged that while section 2716(f)(1) might involve different policy concerns it nonetheless served as another indication that OPA is not opposed to indemnification for gross negligence.

Thus, the Court held that if RIG committed gross negligence that caused pollution originating below the surface of the water, public policy would not bar its claim for contractual indemnity from BP. 16 However, the court explained its holding was limited to compensatory damages, and did not include any punitive damages which  might arise if Transocean is found grossly negligent.

RIG also asserted that CWA civil penalties should be covered by the indemnity because they were primarily remedial in nature. RIG also argued that the CWA section 1321 expressly allowed contractual indemnification and to the extent the statute does not apply, indemnification is allowable under OPA 2710. The court observed that CWA secton 1321(b)(7) imposes a civil penalty for discharges of a “harmful” quantity of oil discharges and that the penalties were increased for gross negligence or willful misconduct. The court also noted the legislative history and case law suggested that civil penalty provision has multiple goals, including restitution but that the primary objectives are to punish and deter future pollution. Thus, the court held that public policy invalidated the drilling contract’s indemnity clause to the extent it included civil penalties.

Finally, the court rejected RIG’s claim that BP had a duty to defend much like under an insurance policy. The court said while insurance contracts are a type of indemnity contract, the similarities were different (to quote Dale Berra-Yogi Berra’s son). The court said the purpose of an insurance contract is to distribute risk of loss across a large group, are usually not negotiated., and any ambiguities are construed in favor of the insured. By contrast, the court explained, an indemnity clause contained in a non-insurance contract is construed against coverage, because the agreement creates duties that differs or extends beyond those established by general principles of law. Such clauses are typically collateral or incidental to a contract that has a principal purpose other than risk shifting. The court said Article 25.1 did not contain any express language that the duty to defend was broader than indemnity. Since Article 25.1 listed the duty to defend in the same sentence as the duty to indemnify the court said this reflected that the duties to defend and indemnify are to be treated identically. Because these duties are co-extensive, and the extent to which RIG is owed indemnity was not entirely clear at the moment, the scope of the duty to defend also could be determined. Accordingly, the court held that BP’s duty to defend only required it to reimburse RIG’s defense costs after there has been judicial determination on the merits.

The second opinion involved cross-motions for summary judgment by both BP and Halliburton in a decision issued on January 31^st. In re Oil Spill by the Oil Rig “Deepwater Horizon, 2012 U.S. Dist. LEXIS 10952 (E.D. La. 1/31/12). Halliburton asserted that BP was required to defend and indemnify Halliburton against any and all claims related to a blowout or uncontrolled well condition and relating to pollution and/or contamination from the reservoir. BP’ sought a ruling that it was not required to indemnify Halliburton for punitive damages, fines, or penalties. Additionally, BP opposed Halliburton’s motion on the grounds that Halliburton committed fraud, breached the contract, and/or materially increased risks to BP as indemnitor, and such acts discharge BP’s indemnity obligations

The indemnity provisions were contained in clause 19 of the agreement. Like the drilling contract between RIG and BP, the contract between Halliburton and BP contained reciprocal indemnities where Halliburton assumed certain liabilities for pollution emanating from its equipment above the surface. However, a significant difference was that BP expressly agreed in clause 19.7(a) to indemnify Halliburton for its gross negligence. BP did not dispute the language but focused on whether public policy permits such indemnification.

For the same reasons as in the RIG decision, the court said that if CWA civil penalties were indirectly asserted against Halliburton via equitable contribution or indemnity, BP would not have a contractual obligation to indemnify Halliburton for public policy reasons. Likewise, the court held that BP did not owe Halliburton indemnity for punitive damages.

Finally, BP alleged that Halliburton made fraudulent statements and fraudulently concealed material information concerning the cement tests it conducted, and that BP relied on these statements when it allowed Halliburton to pour the unstable cement slurry that led to the uncontrollable well and blowout. BP asserted that the language of the indemnity  did not extend to fraud, nor would public policy permit such indemnification, given that fraud involves willful misconduct exceeding gross negligence. Halliburton denied that it committed fraud and asserted that BP’s allegations were merely breach of contract claims cloaked as fraud. In any event, Halliburton argued that Clause 19.7 was broad enough to include fraud.

The Court agreed that fraud could void an indemnity clause on public policy grounds, given that it necessarily includes intentional wrongdoing. The Court also said that a mere failure to perform contractual obligations as promised did not constitute fraud. However, since there were material issues of fact,  the Court denied ruling on this aspect of the summary judgment motions.

Can a party be indemnified for its own negligence? In many states, such provisions are void as against public policy. Other some states allow enforcement of indemnification for the indemnitee’s own negligence when the clause expressly references “negligence.” Likewise, many states will enforce indemnities where the indemnified party is strictly liable because of its status as an owner or operator if the clause refers to “strict liability”. As a result, environmental  indemnity clauses often contain a parenthetical reference to “including strict liability”  to ensure that such liability is covered.

Even in those states that where indemnification for the indemnified party’s negligence is void as a matter of public policy, there may be circumstances that allow enforcement of such a provision. For example, a New York case recently allowed enforcement of an indemnity where the tenant was required to obtain an insurance policy for third party liability.

In DiBuono v Abbey, LLC, et al, 2011 N.Y. App. Div. LEXIS 2822 (App. Div.-2^nd Dept. 4/5/11),  the plaintiffs commenced an action for property damage related to contamination that had migrated from three nearby  service stations. One of the defendants, L.M.C. Partners, LLC (LMC) filed a third party complaint against its former tenant, Palisades Resources, Inc. (Palisades), alleging that Palisades breached its the lease by failing to defend and indemnify LMC and for not obtaining insurance.

LMC moved for summary judgment.Palisadesargued that the General Obligations Law (GOL) § 5-321 prevented enforcement of the indemnification provision in the lease. GOL § 5-321 provides that exculpatory clauses that purports to exempt a lessor from its own negligence are void and unenforceable.  However, the trial court said that GOL § 5-321 does not apply to an indemnification provision in a commercial lease negotiated at arm’s length between two sophisticated parties when coupled with an insurance procurement requirement. Under such circumstances, the trial court explained, the purpose of the indemnity clause is not to exempt the lessor from liability to the victim, but to allocate the risk of liability to third parties between the lessor and the lessee. The said the lease indemnification provision operated as such an allocation since LMC and Palisades agreed in that Palisades would be responsible for liability to third parties arising from damages incurred during the lease period. Accordingly, the trial court granted summary judgment to LMC. The appellate division affirmed that the indemnification clause was enforceable but modified the order so that the indemnification was limited to damages incurred during the term of the lease.

Regulators are increasingly focusing on management of the wastewater and other chemicals used in fracking operations. The recent case of Kartch v EOG, 2011 U.S. Dist. LEXIS 130711 (D.N.D 11/10/11) illustrates the legal issues that property owners and drillers are increasingly having to face when negotiating drilling leases.

In this case, the plaintiffs purchased agricultural land located in North Dakota in 2004 but the seller retained the rights to the mineral estate to the land. The seller subsequently entered into an oil and gas lease that was assigned to EOG who commenced drilling operations in 2008. The lease did not contain any provisions about the use of reserve pits. Plaintiffs then purchased additional land that contained a residence which was located only 1/2 mile from the well site.

Under North Dakota law, the mineral estate is considered the “dominant” estate and has the right to use the surface as reasonably necessary to explore, develop and transport minerals in what is known as the “accommodation doctrine”. The reasonableness of the use of the surface will be based on the specific circumstances and the surface estate owner has the burden of establishing that the mineral lessee acted unreasonably. The doctrine is not a balancing test where the harm or inconvenience of the surface right owner is weighed against those of the mineral estate. Instead, the surface owner has the burden of showing that there were reasonable alternatives available to the mineral rights holder. In addition, a North Dakota law also requires developers of mineral rights to provide a “modicum of compensation” for damages caused by the oil and gas production. Prior to commencing drilling operations, EOG offered the plaintiffs $8K to pay for anticipated damages. Plaintiffs rejected the offer and instituted the lawsuit.

The plaintiffs sought an order requiring EOG to remove a waste disposal pit known as a reserve pit that had been placed on their property or, alternatively, damages for the costs to remove the pit and restore the land. Regulations adopted by the state Industrial Commission allows the use of reserve pits to ensure adequate quantity of drilling mud and to hold well cuttings. The regulations provide that the reserve pit is to be constructed, used and reclaimed in a matter that will prevent pollution of land and surface waters. While drill cuttings may be placed in the reserve pits, the regulations prohibit disposal or dumping of other fluids, waste and debris used or recovered during well drilling and completion.

EOG used a synthetic liner when it constructed the reserve pit though it stated this was simply a precautionary measure and was not required because of the relatively impervious clay soils. When drilling was completed, EOG removed the liquid waste from the pit, and left the well cuttings and other solid wastes in place as permitted by state regulations. A tear had occurred in the liner during the use of reserve pit and  EOG excavated soil from either side of the tear as a precautionary measure under state supervision, and then covered the pit with a four foot cap and regarded the surface.

Plaintiffs argued that EOG’s use of a reserve pit and leaving waste was was per se unreasonable and that instead of using a reserve pit, EOG should have used an alternative such as a “closed loop” system to recycle of the drilling mud and capture well cuttings in tanks for later off-site disposal. At the very least, plaintiffs contended, EOG should have completely removed the wastes and the pit liner for offsite disposal prior to reclaiming the pit.

The specific motion before the court involved a dispute over the plaintiffs’ discovery request but the opinion discussed the nature of obligations of gas drillers in deciding what discovery was warranted.  The court rejected EOG’s claim that it had no obligation under common law to reclaim the pit. Moreover, the court noted that the Commission is considering amending its rules to further restrict the use of test pits. Because EOG’s use of the surface estate had to be reasonable, the court allowed some of the discovery requested by plaintiffs on industry practices on use of reserve pits, closed loop systems and the synthetic liner but deferred or denied other requests pending a decision on the merits of the case.

An Illinois appeals court ruled that an insurer had a duty to defend a successor  of an insured where the insured made an assignment of benefits pursuant to a asset sales agreement. The assignment of benefits had been made without consent of the insured and the insurance policy had contained an anti-assignment clause..

In Illinois Tool Works, Inc. v Commerce and Industry Insurance Company and United States Fire Insurance Company, 2011 Ill. App. LEXIS 1250 (App. Ct. 12/12/11), a landlord had filed a lawsuit against its former tenant, Binks Manufacturing and Illinois Tools Works (ITW)as successor to Binks, for contamination alleged to have been caused by the tenant operations.Binks had leased the property from 1959 to 1998 when it sold its assets to a predecessor of ITW who continued to lease the premises until 2003 As part of the asset purchase, ITW received an assignment of rights to all insurance Binks’ insurance policies.

Defendants Commerce and Industry Insurance Company (C&I) and United States Fire Insurance Company (USF) defended Brinks in the lawsuit filed by the landlord but declined to defend ITW. In 2006, ITW  filed a declaratory judgment action in Illinois state court seeking a ruling that C&I and USF had breached their policies by refusing to defend ITW in the underlying landlord litigation. ITW asserted that it was entitled to a defense because it was a successor of Binks and had been assigned the rights under the policies.

On cross-motions for summary judgment, the trial court ruled in favor of the insurers but the appeals court reversed, holding that an assignment of rights can be made without consent of an insured since such as assignment does not expand the risk to carriers as the assignor cannot grant rights greater than it has under ther policy. The court also said that an assignment of a policy can be made without the insurer’s consent where a loss has occurred. Since in this case, the contamination had occurred prior to ITW’s purchase of the Binks assets, the court held the assignment was valid and the insurers should have provided defense to ITW,

In what may be one of the more important common law pollution cases of the past few years, the Montana Supreme Court ruled that property owners may proceed with lawsuit alleging damages from contamination that has migrated from a railyard that had operated by Burlington Northern & Santa Fe Railway Company and its predecessors from the late 19th century until 1987. Burley v BNSF, 2012 Mont. LEXIS 31 (Mont. 2/7/12).

The state of Montana filed a lawsuit against BNSF in 1988 which was resolved by the entry of a partial consent decree in 1990 requiring BNSF to implement remedial actions. The state DEQ discussed sampling results with residents in 1992. Sometime thereafter, BNSF decided to implement a remedy consisting of monitored natural attenuation. Residents near the former railyard filed separate lawsuits in 2007 and 2008 seeking damages for the groundwater contamination that had migrated to their properties. Some residences also had vapor intrusion concerns.

BNSF filed a motion for summary judgment in federal district court arguing the claims were barred by statute of limitations. The magistrate judge concluded that the contamination had reached the plaintiffs’ properties in the 1990s and that the plaintiffs had been aware of the contamination. She recommended that the district court grant BNSF’s motion.

The plaintiffs objected to the magistrate’s recommendation, claiming she had improperly declined to apply the continuing tort exception. The court district court declined to adopt the magistrate’s recommendation, based on the reasoning of a state court that had dismissed a statute of limitations claim on similar facts. The district court then asked the Montana Supreme Court to determine if the continuing torts doctrine should apply to the plaintiffs’ claims.

In a well-written opinion, the Supreme Court reviewed the leading caselaw on this issue. The court explained that the cases fell into two camps. The first group holds that the continuing tort stops and the applicable statute of limitations begins to run when the polluting activities ceased. The second line of cases focuses on whether the continuing migration of the contamination. Under this analysis, the tort will continue until the pollution is abated. In nuisance actions, a temporary and continuing nuisance will be one that is reasonably abatable whereas contamination that cannot be reasonably abatable will be considered a permanent nuisance at which time the statute of limitations will be deemed to have begun.

Adopting the reasoning of the Restatement (Second) of Torts, the court then said an abatable condition is one that could be accomplished without unreasonable hardship or expense. The court acknowledged that there was a tension between economic interest and environmental protection that courts had to carefully navigate. Finding a condition was a permanent nuisance would discourage tortfeasors from remediating contamination, thereby undercutting the philosophy of tort law to put an injured person as closely as possible to its pre-injury condition. The court said that a tortfeasor who impairs the property rights of another should not avoid liability for its contamination because the remediation takes a long time to complete or is costly. On the other hand, the court said, tort law does not necessarily require complete removal of the contamination. Thus, the court said judges should evaluate all factors such as ease of abating the harm, the abatement cost, the type of property, the severity of the contamination and the length of time necessary to remediate the contamination when determining if a particular harm was reasonably abatable standard.

In this case, the plume had stabilized and the contaminant concentrations had begun to decline. One has to wonder if this case reflects the potential downside of natural attenuation remedies that are rarely considered when a responsible party is selecting a remedy. While natural attenuation was less costly, did it prove more expensive in the long-run? In other words, would BNSF have been subject to toxic tort liability if it had used a more aggressive active groundwater treatment system than might have gained hydraulic control over the plume and prevent migration onto the plaintiffs’ property or reduced concentration levels more quickly and undercut the basis for the court to find that there was continuing tort? The district court will now have to apply the doctrine to the facts of this case.

In Queens W. Dev. Corp. v. Honeywell Int’l, 2011 U.S. Dist. LEXIS 91795 (D.N.J. 2011), the plaintiff developers commenced remedial activities at two parcels that were accepted into the New York State Department of Environmental Conservation (NYSDEC) Brownfield Cleanup Program (BCP) and Voluntary Cleanup Program (VCP). Plaintiffs filed a lawsuit against the defendants as successors to the responsible parties to recover response costs that plaintiffs estimated to meet or exceed $20 million

Defendants filed motion to dismiss the CERCLA § 113(f)(3)(B) contribution claim, private nuisance and restitution claim. The court granted the defendants motion to dismiss the contribution claim because the state BCP and VCP agreements were not administrative or judicially approved settlements under  section 113(f)(3)(B) because the agreements did not resolve CERCLA liability. Instead, the plaintiffs alleged that they “have resolved, or will resolve, their liability to the State of New York.”.

The court also dismissed the private nuisance action. While the parties disputed whether New York or New Jersey law applied, the court said it did not have to resolve that issue because both states confined  private nuisance to situations where one’s property use interferes with another’s use of neighboring or adjoining property but that successor landowners could not maintain private nuisance actions against prior landowners of the same property.

The court declined to rule on the restitution claim depending on the outcome of the CERCLA private cost recovery claim under section 107(a)(4)(B).

Groundwater at many commercial properties in Long island and suburban areas of New York has been contaminated from discharges to dry wells, leaching pools and septic systems. In the 1980s, the New York State Department of Environmental Conservation (NYSDEC) frequently used consent orders issued pursuant to Title 17 of the Environmental Conservation Law which prohibits discharges of wastewater to groundwater without a permit to address groundwater contaminated from these sources.

Because the orders did not resolve CERCLA liability, they do not qualify as  administrative settlements that would allow the remediating party to bring a contribution action under section 113(f) of CERCLA. Recently, though, federal district court for the northern district of New York suggested that the costs might be recoverable as removal actions under section 107 of CERCLA.

In New York State Elec. & Gas Corp. v. FirstEnergy Corp., 2011 U.S. Dist. LEXIS 101201 (N.D.N.Y. 9/7/11), a predecessor of New York State Electric and Gas (NYSEG) owned and operated manufactured gas plants throughout New York State. NYSEG sought recovery of its response costs from First Energy under veil piercing and successor liability theories. Following a bench trial, the court found First Energy liable as an owner and operator of the sixteen sites during all or portions of the period from 1922 through 1940. The court then allocated liability between the two principal parties based on the the volume of manufactured gas produced at the facilities during their relevant periods of ownership and operation.

First Energy filed a motion for reconsideration. One of the findings that First Energy challenged was the applicable statute of limitations for the cleanup performed at the Plattsburgh MGP site. In the mid-1970s, the NYSDEC became aware of seepage of coal tar into the Saranac River. Apparently, the former MGP had discharged a coal tar/water mixture to an on-site lagoon that had been located approximately 30 feet from the Saranac River. After the tar in the emulsion settled to the lagoon bottom, the remaining water was discharged without further treatment into the Saranac River.

In 1981, NYSEG entered into an order with the DEC pursuant to ECL 17-501 to voluntarily undertake a remedial project to prevent coal tar from reaching the Saranac River from the tar lagoon and to remove coal tar from the river. NYSEG installed a bentonite-soil slurry wall to isolate contamination in the lagoon pond, excavated contaminated sediments and riverbank soils, deposited the excavated materials into a second containment area abutting the coal tar pond containment, and then constructed a second bentonite-soil slurry wall around this containment area. Both containment cells were capped and covered with topsoil. NYSEG also constructed a bentonite-concrete slurry wall adjacent to the Saranac River to halt further migration of coal tar that had already passed the limits of the containment areas. The 1981 consent order did not require NYSEG to conduct any investigation or perform response actions in the area where the former MGP plant was located.

In the early 1990s, coal tar was once again reported to be seeping into the river. NYSEG subsequently entered into a multi-site order on consent in 1994 that required the company to investigate and implement necessary response actions at 33 former MGP sites, including the Plattsburgh property. From 2004-2010, NYSEG performed response actions at the PLattsburgh site consisting of excavating coal-tar wastes from three gas holder foundations and tar lagoon, and other areas where coal tar was found. NYSEG has begun developing a remedial program for the river. NYSEG incurred over $32MM in response costs at the Plattsburgh Site and estimated the costs reach $42MM.

NYSEG sought to recover its response costs for some of the former MGPs from First Energy. In addition to arguing that it was not liable under veil piercing or successor liability theories, First Energy argued that the six-year statute of limitations for remedial actions had expired because the lawsuit had been filed more than six years after the start of the remedial action. NYSEG responded that the work constituted removal rather than remedial action and its claim was not barred because the work under the 1981 Consent Order addressed violations of state clean water laws, and was not pursuant to CERCLA.

The court found that primary purpose of the 1981 consent order was to address migration of coal tar emanating from the tar lagoon located on the site into the Saranac River and that the order was issued under the authority of ECL 17-501, not CERCLA or the state superfund law. The court also said that work was not intended to be a comprehensive investigation and remediation of the human health and environmental concerns associated with coal tar. Supporting this conclusion, the court explained, was the fact that while some limited sampling was performed where the former MGP plant had been located, the focus of the consent order was the tar lagoon and the migration of tar from that point to the Saranac River. Indeed, the court noted that New York had not yet identified coal tar as a hazardous waste in 1981. Thus, the court concluded that the actions taken pursuant to the 1981 DEC consent order did not constitute a remedial action under CERCLA sufficient to trigger the six-year statute of limitations.

The court then went on to say that if it was required to categorize the work performed under the 1981 Consent Order to resolve the statute of limitations issue, it would hold that the work was more akin to a removal action.

The Third Party defense (42 U.S.C. 9607(b)(3) is probably the most important CERCLA defense. To assert the defense, a defendant must satisfy the following four elements or prongs:

• The release was solely caused by a third party;
• The defendant had no direct or indirect “contractual relationship” with the third party (“contractual relationship” prong);
• The defendant exercised due care with respect to the hazardous substances (“due care” prong); and,
• The defendant took precautions against the foreseeable acts or omissions of third parties (“precaution” prong).

A defendant does not necessarily have to performed due diligence to assert the third party defense if it can satisfy all the elements of the defense. However, the lack of due diligence could impact the ability of the defendant to satisfy the “due care” element of the defense.

The third party defense has often served as a secondary defense when a defendant has not been able to assert one of the CERCLA landowner liability protections. EPA has indicated that in its “Common Elements” guidance that the caselaw decided under the third party “due care” prong will inform the “appropriate care” requirement of the Bona Fide Prospective Purchaser defense. Moreover, the innocent landowner defense is technically a part of the third party defense since a party who does not know or have any reason to know of contamination following performing due diligence will be deemed to not have a “contractual relationship” with a responsible party.

A number of cases interpreting the scope of the “due care” obligation were decided in the latter half of 2011. We will discuss these cases in a series of posts. In this post, we will discuss New York State Electric & Gas Corp. v First Energy Corp, 2011 U.S. Dist. LEXIS 74216 (N.D.N.Y. 7/11/11) which was a complex case involving 16 former manufactured gas plants (MGPs) in New York.

At the beginning of the 20^th century, nearly 300 MGPs operated in New York. The third party defense at issue in this case involved two former MGP sites owned by I.D. Booth (Booth) in Cortland-Homer and Elmira. The last MGP in New York ceased operating around 1960. In the 1980s, the New York State Department of Environmental Conservation (NYSDEC) began an initiative to investigate and remediate impacts from the former MGPs. NYSEG agreed to implement a sampling program and entered into a multi-site consent order in 1994.

NYSEG has incurred approximately $94MM in response costs between 1994 and 2009 for sixteen sites and expects its total costs will approach $144MM before remediation is completed at those sites. In 2003, the company sought recovery of its costs against First Energy who, in turn, filed contribution actions against a number of third parties including Booth. The litigation has had a rich procedural history that involved complex questions of corporate law as well as the interplay of CERCLA 113(f) contribution actions and 107 cost recovery actions. We previously discussed the corporate veil-piercing portion of that decision. A motion for reconsideration was denied at 2011 U.S. Dist. LEXIS 101201 (N.D.NY. 9/7/11). NYSEG also recovered $20MM from insurance carriers that covered remedial costs of all of its 38 known MGP sites and any sites discovered in the future.

In response to First Energy’s third party complaint, Booth invoked the third party defense. However, the court ruled that Booth had not sustained the defense for the Cortland-Homer site but was entitled to the defense for the Elmira site.

The court began its analysis by acknowledging that by the time Booth became aware of the contamination at its sites, the NYSEG investigation was well under way. The court said that to satisfy the “due care” prong of the third party defense, Booth had the burden to show that it took precautions with respect to that hazardous substance that “a similarly situated reasonable and prudent person would have taken in the light of all relevant facts and circumstances. The court said that the due care prong required a defendant to take affirmative action to protect the public from the threat posed by the release of hazardous substances. As an example, the court cited to Idylwoods Assocs. V Mader Capital, Inc., 956 F.Supp 421 (W.D.N.Y. 1997) where the court said the defendants went so far as to cease paying taxes on the property in the hope that the local government would foreclose on the property and take it off their hands. While the court said that Booth was required to take steps necessary to protect the public from the threat posed by the contamination, this obligations did not include duplicating the actions taken by NYSEG but required Booth to cooperate with efforts of others to protect human health and the environment.

In 1971, Booth purchased the Cortland-Homer site from Mack Trucks who had earlier acquired the property from NYSEG. Booth did not perform any pre-acquisition environmental due diligence, a title search, obtain an appraisal, a survey or even inspect the property to taking title. Booth used the site to sell plumbing and heating supplies, and leased a portion of the site to a telephone company.

In the mid-1980s, NYSEG advised Booth that it was required to conduct an investigation of the Cortland-Homer site for potential contamination associated with the former MGP.  Booth provided access to NYSEG but did not actively participate in any of the investigation or response actions. In the late 1980s, a contractor of Booth removed a groundwater well during paving operations.

After confirming the presence of MGP-related contaminants and the presence of two former gasholders at the site, NYSEG approached Booth in the early 1990s about purchasing the property to facilitate the removal of the contaminated source materials. Booth declined to sell the property because of the disruption to its business and the loss of rental income. Negotiations continued into the turn of the century and in 2005, NYSEG obtained an appraisal that valued the property at $350K. Booth, though, demanded $2MM for the southern two thirds of the site along with relocation expenses. NYSEG considered requesting assistance from New York State to initiate condemnation proceedings but because that process could take up to 5 years to complete, NYSEG agreed to pay Booth $1.8MM in 2008 and granted Booth a right of first offer. Since NYSEG had planned to demolish the building on the southern portion of the property, the agreement also provided that would vacate the premises within eight months. However, Booth did not leave the premises until January 2010.

The court said that after Booth became aware of the extent of the contamination and that NYSEG needed to acquire portions of the Cortland-Homer property to effectuate a proper remediation, Booth engaged in protracted negotiations for the sale of the property at issue that delayed the sale of the property for two years. Specifically, the court said that Booth failed to timely respond to NYSEG proposals and demanded an aggressive price for the property. The court found the delay complicated the remediation, explaining that NYSDEC had first wanted NYSEG to remove the former gasholders and purifying house located on Booth’s property, and then address the downgradient contamination. Booth’s negotiation posture and lack of responsiveness, the court said, not only forced NYSEG to address the downgradient contamination first but also allowed coal tar and other MGP contaminants to further migrate from the source area.

In addition to the delays caused by the protracted negotiations over the purchase of property, the court said that Booth had inadequately cooperated with the site remediation. The court said that Booth has failed to provide NYSEG with requested feedback and, instead, adopted a “wait and see” approach. The court said that Booth’s lack of responsiveness to both NYSEG and the DEC caused or contributed to delay in the issuance of a PRAP for the Cortland-Homer Site. Under these circumstances, the court concluded that Booth has failed to satisfy the due care prong of the third-party defense for the Cortland-Homer Site.

The court reached a different conclusion for the Elmira Site. Booth purchased the Elmira site directly from NYSEG in 1977. Like the Cortland site, Booth did not perform any pre-acquisition diligence. Booth used the Elmira Site to sell hardware, plumbing, heating, and electrical supplies. In the mid-1980s, NYSEG contacted Booth suggesting a possible swap of parcels to facilitate the remediation of the Elmira site. The negotiations continued throughout the 1990s and culminated in a 2003 sale where Booth conveyed the western 2.9 acres of the Elmira Site back to NYSEG for $225K as well as $17K for moving expenses and  $6K reimbursement for repairs to the parking lot that Booth claimed resulted from NYSEG investigation. As part of the deal, Booth retained the right to lease the building and lands as well as the right to purchase the land back after remediation. In April 2008, NYSEG offered to purchase another portion of the site for $25K but Booth did not accept the offer.

Although the parties engaged in a protracted period of negotiations for the Elmira site, the court said the evidence reflected that Booth had cooperated with NYSEG for this site, permitting access to conduct response actions as well as occasionally providing volunteer manpower and equipment to assist with the site investigation and remediation. Under these circumstances, the court concluded Booth has established the existence of due care and qualified for the third party defense for the Elmira Site.

As a result, Booth was ordered to pay First Energy $160K as its equitable share of the past response costs incurred through 2009 along with $19K in pre-judgment interest through September 2, 2011. In addition, the court ordered Booth pay First Energy 6.72% of all response costs incurred by NYSEG for the Cortland-Homer site after 2009.

In addition to the specific ruling on the third party defense, the case was interesting in its review of the different interpretations adopted by the Ninth and Second Circuits on the application of the “contractual relationship” prong of the third-party defense to purchasers of contaminated property. The court explained that the Ninth Circuit has adopted a broad view of the phrase “contractual relationship” so that it applies to any contracts involving the sale of land. Under this approach, the court said, the third-party defense is unavailable to a purchaser who acquires land from a polluting owner or operator and cited to Carson Harbor Village, Ltd. v. Unocal Corp., 270 F.3d 863, 883 (9th Cir. 2001) to illustrate this point.

In contrast, the court went on, the Second Circuit held in New York v. Lashins Arcade Co., 91 F.3d 353 (2nd Cir. 1996) that the mere existence of a contract is not enough to impose liability on a purchaser but that the contract must relate to hazardous substances or allow the landowner to exert some element of control over the third party’s activities to preclude the defense. Under this view, a mere lease with a dry cleaner would not cause a landlord to be in a “contractual relationship” for purposes of CERCLA liability.

A federal district court ruled that a company was not liable for improper disposal of PCB-contaminated capacitors by a former employer because the employer was not aware of nor had authorized the actions of its former employee. In essence, the court concluded that the employee had engaged in an independent venture for which his employer should not be held liable under CERCLA as well as common law.

In Lancaster v Northern States Power Company, 2011 U.S. Dist. LEXIS 130128 (D. Minn. 11/9/11), Axicor Trihus, had electrical engineer employed by Excel Energy, transported and stored PCB-containing capacitors on his property located in Roseville, Minnesota. After Mr. Trihus died, his widow contacted the defendant and requested that it remove certain electrical equipment at the property, including the capacitors. One week later, Mrs. Trihus entered into an agreement to sell the property to the plaintiffs. In connection with the sale, Mrs. Trihus completed a required Property Disclosure Statement but did not mention the capacitors. In late 2009 or early 2010, the defendant removed the capacitors from the Trihus property and collected soil samples. The closing took place on January 4, 2010.

On February 25, 2010, the defendant sent a letter to the plaintiffs advising them a “tar like substance” had been observed leaking from one of the capacitors during the removal and that the sampling analysis determined that the substance contained PCBs. Subsequent sampling identified the presence of PCBs at other locations on the Roseville property

Plaintiffs filed a complaint against the defendant alleging that the presence of the PCB-containing capacitors had caused the property to lose substantially all its value and that the plaintiffs suffered substantial economic, physical, and emotional damages. The complaint included a CERCLA count along with a variety of common law claims. The court granted the defendant filed a motion to dismiss all of the claims.

On the CERCLA arranger claim, the court noted that the complaint alleged that the capacitors had been in the defendant’s possession and control before Mr. Trihus had removed them. However, the court said that under the United States Supreme Court decision in Burlington N. & Santa Fe Railroad v. United States, 556 U.S. 599 (2009), mere possession of hazardous substances is not enough but instead the plaintiffs had to show that the defendant had “intentional steps to dispose of a hazardous substance.” Since the complaint did not set forth any facts indicating how Mr. Trihus came into possession of the capacitors much less that the defendant had any knowledge or involvement in the transportation of the capacitors to the Roseville property, the court ruled that the plaintiffs fail to plead sufficient facts to support its arranger claim.

The court also held that the plaintiffs had not pled sufficient facts to support their common law claims. For example, the court said the facts alleged in the complaint did not establish that the defendant owed a duty to Plaintiffs, or that Mr. Trihus’ transportation or storage of the capacitors was in the scope of his employment. On the trespass claim, the court said the plaintiffs did not allege that Defendant entered onto the Roseville property after Plaintiffs took ownership. On the nuisance claim, the court said the Plaintiffs have not alleged any facts to support the claim that the defendant had intentionally or negligently released or disposed of hazardous substance on the Roseville property, or was otherwise responsible for Mr. Trihus’ placement of the capacitors on his property.

This case is another example of heightened pleading requirements that plaintiffs must comply with in the wake of the Supreme Court decisions in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009). While plaintiffs do not have to provide detailed factual allegations to survive a motion to dismiss, the complaint must contain enough facts to show that the claim is “plausible on its face” and that there is a reasonable expectation that discovery will reveal evidence of the claim. Under Twombly, threadbare recitals of the elements of a cause of action that are supported by mere conclusory statements will no longer be sufficient to survive a motion to dismiss. Plaintiffs need to be prepared to plead sufficient facts for each of the elements of the CERCLA cause of action.

One of the underpinnings of corporate law is that a purchaser of assets is not normally liable for the liabilities of the predecessor while a stock purchaser will take on the pre-existing liabilities. Courts have fashioned four exceptions to the no liability for asset purchaser rule. The exceptions are:

• express or implied assumption of liability
• de facto merger
• fraud
• mere continuation

During the 1990s, courts also began applying a 5th test to environmental cases known as the “Continuity of Enterprise” theory which had its origins in product liability and labor law. (Note-visit our corporate transaction page for more detailed information on successor liability).

Like piercing the corporate veil, successor liability is an equitable remedy where the court decides if fairness requires ignoring the corporate form. Courts are loathe to disregard the corporate form and plaintiffs generally need to produce substantial evidence that will offend the court’s sense of justice to convince the court to impose liability on a corporate entity that would not generally be liable under traditional norms of corporate law.

One basis that has been successfully used by plaintiffs to impose successor liability on purchasers of corporate assets has been when the seller is dissolved or no longer in existence after the sale to the purchaser. In these transactions, the buyer will often trade on the goodwill of the seller by holding itself out as a continuation of the business and may even retain the same employees and facilities. The courts will look to see if the injured party is deprived of a remedy by the transaction. For example, a customer may seek damages for a product manufactured by the seller but injured after the purchaser owned the business. If the seller is no longer viable and the purchaser otherwise is holding itself as the same business, the court may conclude that the equities of the case are such that the purchaser should be held liable for the plaintiff’s injury even though the purchaser did not manufacture the particular product that caused the plaintiff’s injury. In the environmental context, the “damage” is often environmental contamination caused by the predecessor’s operations.

What happens if the seller is still around? Can the purchaser still be liable? In US v NCR Corp, 2011 U.S. Dist. LEXIS 14653 (E.D.Wi. 12/19/2011), NCR sold its Appleton Paper Division to a predecessor of defendant Appleton Papers, Inc (API). The purchase and sale agreement contained an assumption clause and a schedule to the agreement disclosed that the division facilities “may be operating in violation” of applicable laws and that they have received notices that have resulted in “fines and corrective actions”. EPA subsequently determined that the facility in Wisconsin had resulted in PCB contamination of river sediments and filed a lawsuit against NCR. In 1995, NCR filed a lawsuit against API as successor. The parties agreed to a two-step settlement. First, they agreed to split the first $75MM in liability and submit the allocation of liability for costs above that threshold to binding arbitration. The arbitration panel found that API was liable for 60& and NCR 40% for costs above $75MM.

The federal government sought a preliminary declaration that API was liable as a successor. In July 2011, the federal district court for the eastern district of wisconson ruled that the equitable purposes underlying successor liability did not apply in this case because there was no fraud or injustice, and NCR remained solvent.

The court sought reconsideration on the basis of the express assumption of liability in the contract, arguing that the continued existence of the seller was irrelevant for purposes of this particular exception to the rule of non-asset purchaser liability. The court agreed, finding that this was really a contract case that did not invoke the concerns for preventing injustice that were at the core of the successor liability theory. The court said that CERCLA 107(e) did not prevent contracting parties from allocating liability among themselves (though they cannot “eliminate” liability with respect to the government). The court also said the existence of the seller was not a relevant concern in an assumption agreement.

Turning to the agreement, the court found that API’s predecessor was put on notice of potential environmental issues. Though CERCLA had not yet been enacted, the language was broad enough to include iability that might arise in the future. Moreover, the court found that by entering into a settlement agreement that led to arbitration, API had essentially altered the terms of the 1978 agreement when it agreed to be bound by the terms of the arbitration panel.