It is no secret that distressed debt investors are eagerly looking for opportunities to purchase defaulted or underwater loans. One strategy used by investors with a healthy risk appetite is to purchase promissory notes secured by contaminated property at deeply discounted pricing. The investor then brings an RCRA 7002 action seeking an order requiring the responsible party to remediate the site. If the investor prevails, the investor can then either sell the note at full face value or foreclose on the remediated property and sell it for a significant profit. Moreover, the prevailing plaintiff/investor can recovery its attorney fees under RCRA 7002.

RCRA 7002 is not the only remedy available to pursue this business model. Investors may be able to use state common laws such as nuisance to seek injunctive relief. However, courts in a number of states have ruled that holders of notes do not have sufficient interest in the property to bring nuisance actions (known in legal parlance as “standing”). A recent example of this line of cases is Cox v. Louisian, 2011 Cal. App. Unpub. LEXIS 3207 (Ct.App-2^nd Div 4/27/11).

In this case, Douglas Oil Company (Douglas) constructed and operated a gas station from 1964 until 1980 when Douglass old the property to the Harpers who subsequently conveyed the site to the Bodamer Family Trust (the Trust). It appears that the property continued to be operated as a gas station during this period.

In 1991, the Trust sold the property to the current owners. As part of this transaction, the current owners executed a promissory note to the Trust (the Note), secured by a deed of trust (the California version of a mortgage). Sometime around the turn of the century, the current owners abandoned the property.  The Los Angeles Department of Public Works (DPW) issued written notices to the current owners in 2002 and 2003 advising them that they had improperly abandoned the gas station without removing the underground storage tanks

In July 2004, the plaintiff purchased the Note and received an assignment of Deed of Trust. The face value of the Note was approximately $467K but it is unclear if the plaintiff purchased the Note at a discounted price. Upon learning that the property was scheduled to be sold at a tax auction, the plaintiff filed a lawsuit asserting a variety of common law claims including nuisance, strict liability and negligence against Douglas and its parent corporation, ConocoPhillips (Conoco). The plaintiff sought a preliminary injunction requiring Douglas and Conoco to remove the USTs and remediate the contamination. The plaintiff argued that was prevented from proceeding with a judicial foreclosure because of the existence of the USTs and associated contamination, and that his security interest would be extinguished if he did not foreclose and the property was sold at auction. Of course, there was nothing PREVENTING the plaintiff from foreclosing. Instead, the plaintiff simply wanted to AVOID becoming liable for the cleanup.

The trial court denied the plaintiff’s motion for a preliminary injunction, concluding that the plaintiff failed to present evidence that it was likely to prevail and also that the plaintiff as a mere note holder did not have standing to bring a nuisance action. The appeals court affirmed the denial of the motion.

Plaintiff argued that Douglass and Conoco had failed to comply with the state Underground Storage Law (UST Law) that had been enacted two years after the property was sold, and that this violation constituted a nuisance. The appeals court ruled that there was no evidence that Conoco ever owned, leased, occupied or controlled the Property. In addition, the plaintiff had not established any basis to hold Conoco liable for its subsidiary under a corporate veil piercing theory.

Turning to Douglas, the court said that there was no evidence that the legislature intended the UST Law to impose retroactive obligations on former owners or operators of USTs. Moreover, the court said the plaintiff had failed to produce any admissible evidence of the existence of leaks or release of hazardous materials at the Property during the period Douglas owned and operated the property.

More importantly, the court held that the plaintiff failed to show that it had standing to pursue its nuisance claim. Since a private nuisance involves an unreasonable and significant interference with the use and enjoyment of land, the court said the plaintiff had to prove that it owned, leased, occupied or controlled real property. However, the court said the plaintiff had failed to cite to any authority that a holder of a deed of trust can maintain a private nuisance cause of action. The court said a person with a security interest in real property does not “use and enjoy” real property, and thus lacks the kind of interest in real property that is protected by a private nuisance cause of action. Furthermore, the court ruled that while the UST Law did allow for issuance of preliminary injunction or permanent injunctions without a showing of irreparable damage, this exception did not apply to a private person with a security interest in real property.

The court also noted that a preliminary injunction was intended to preserve the status quo but granting the preliminary injunction would have resulted in plaintiff receiving the ultimate relief it sought-a cleanup. Also weighing against the preliminary injunction was that the preliminary injunction would have caused Douglas to spend a significant amount of money and time dealing with a potentially serious environmental problem at a site it had not owned in 30 years and that Conoco had never held an interest. The court said Douglas and ConocoPhillips in all likelihood would have been compelled to incur the significant costs and that this task would have been further complicated by the apparent lack of cooperation of the current owners, who abandoned the Property long ago.

Finally, the plaintiff’s task was further complicated by a problem that has been frequently encountered in the wake of the credit crisis-namely, the plaintiff could not locate the Note. Without the Note, the court explained, there was no evidence if its terms so the plaintiff could not prove when payments were due, whether the owners have defaulted or the balance due on the Note. In addition, the plaintiff had not produced any evidence about the fair market value of the property. Thus, the court reasoned, there was no way to determine if the proceeds from a foreclosure sale would cover the balance due, if any, under the Note. Without this information, the court explained, the plaintiff could not prove that the alleged nuisance has caused him any injury.

It is unclear why the plaintiff did not consider bringing a RCRA 7002 action instead of proceeding under state law. It may be the plaintiff determined that while the contamination constituted an “unreasonable” interference with the use of the property, it did not rise to the level of an “imminent and substantial endangerment” given that the plaintiff took six years to file its action.

The most recent decision in Flake v. Schrader-Bridgeport Int’l, Inc., 2011 U.S. Dist. LEXIS 30372  (M.D. Tenn., Mar. 23, 2011) is just another chapter in this long-running environmental saga involving a successor liability, bankruptcy, toxic tort and environmental justice issues along with a piece of American automotive history. This well-traveled case began in a Tennessee county court in 1994, moved to the federal bankruptcy court and federal district court in New York, went back to Tennessee for rulings by a federal district court, and is now on appeal to the Court of Appeals for the Sixth Circuit.

The story begins simply enough in the 1920s when Scovill, Inc acquired the A. Schrader Co, a manufacturer of the Schrader pneumatic tire valve (a/k/a the American valve). From 1964 to 1985, the Schrader Automotive division of Scovill, Inc. operated a plant located in Dickson, Tennessee. The plant was leased from the Dickson County Industrial Development Authority (IDA). The plant used TCE as a degreaser.

In 1985, Scovill was acquired by First City Industries (First City) who began to divest the firm of its non-core assets. As part of this strategy, the Dickson plant was closed. Around this time, the state started to become concern about potential groundwater contamination from a local landfill that had received wastes from the Dickson plant and other manufacturers in the areas.

Scovill decided to spin-off its Schrader Automotive division into a newly formed subsidiary, Schrader Automotive, Inc. (SAI). Pursuant to an October 1985 transfer agreement, SAI acquired all of the assets and liabilities of the Schrader Automotive division. SAI agreed to indemnify Scovill from all known and unknown liabilities relating to the Schrader Automotive Division’s business.

In March 1986, ArvinMeritor, Inc. (Arvin) agreed to purchase SAI. The purchase Agreement attempted to disclaim any liability on the part of Arvin relating to Dickson County by expressly affirming that SAI was not the owner of the Dickson Plant and that Arvin would not be assuming any liabilities relating to the operation of the Dickson Plant. To facilitate the transaction, SAI and Scovill entered amended the 1985 Transfer Agreement to unwind or rescind the SAI’s obligation to indemnify Scovill for claims arising from the Dickson Plant. Scovill released SAI and also agreed to indemnify SAI as well as Arvin for any breach of any representation or warranty by Scovill under the 1986 Agreement. Scovill’s indemnification obligation was guaranteed by First City.

In 1988, Scovill exercised its option to purchase the Dickson Plant from the IDA and then sold the Plant to Tennsco Corporation (“Tennsco”). In the mid-1990s Arvin sold SAI which was merged with Bridge Products, Inc. SAI was the surviving entity and changed its corporate name to Schrader-Bridgeport International, Inc (SBI).

Between 1985 and 1988, Saltire worked with the state to obtain closure of the facility’s hazardous waste management units. However, the closure did not include groundwater analysis and EPA launched its own RCRA Facility Assessment in 1987 that resulted in the identification of 15 solid waste management units. Scovill entered into a RCRA 3008(h) order to implement corrective actions.

First City filed for bankruptcy protection and as part of pre-packaged chapter 11 plan of reorganization, Alper Holdings (Alper) began the controlling shareholder of First City and assumed the obligations of First City under the Arvin Guaranty. By this time, Scovill changed its name to Saltire Industries, Inc. (Saltire). Alper and Saltire entered into a management agreement in where Alper agreed to manage Saltire’s various environmental matters. Nicholas Bauer was appointed as Saltire’s Vice President of Environmental Affairs but he was paid by Alper and sometimes represented himself as an Alper official. He also worked out of an office in Virginia where Alper was authorized to do business.

In December 2003, a number of plaintiffs filed suit against Saltire and Alper Holdings, alleging property damage and personal injuries from TCE in the groundwater. Partly to manage the environmental liabilities related to the Dickson plant, Saltire filed a chapter 11 petition in 2004. Arvin filed a claim against Saltire pursuant to the Indemnity that was disallowed after Saltire filed an objection and Arvin decided not to oppose the motion. Arvin reasoned it had a full guarantee from Alper that would provide greater protection than an unsecured claim in the bankruptcy proceeding. SBI did not file a proof of claim, though. A liquidating plan of reorganization was confirmed in 2006. As part of the plan, Alper negotiated a settlement on behalf of Saltire with the creditors committee where Alper agreed to forego its claims against Saltire and to pay $1 million to Saltire.

In 2004 and 2005, residents filed claims against Saltire, Alper, Schrader and ArvinMeritor alleging personal injury and property damage claims arising out of the contamination of a spring flowing through their property by the Dickson manufacturing plant. The Flake plaintiffs wanted to bottle and sell water from the spring and asserted their plans were upended when they learned that the wells on their property were contaminated. Other plaintiffs asserted property damage and personal injury claims.

In 2007, Scovill reached a $15MM settlement with its insurer that resolved the plaintiffs’ claims arising out of remediation of the Dickson Plant as well as liabilities associated with other facilities. The bankruptcy court issued a Stipulation and Order Approving Settlement that allowed plaintiffs’ claims for personal injury and property damage in the aggregate amount of $1.5 million, and expressly released Scovill/Saltire from any and all other claims.

Schrader notified Alper of a claim under the Guarantee in 2006 and then filed a complaint against Alper in 2007. This action prompted Alper to file its own chapter 11. The plaintiffs filed claims in the Alper bankruptcy case. Schrader also filed claims for past and future defense costs relating to the toxic tort litigation as well as indemnification. In a series of opinions in 2008, the bankruptcy court ruled that Alper could not be held liable for claims arising out of the Dickson plant and disallowed the claims. In re Alper Holdings USA, 2008 Bankr. LEXIS 86, (Bankr. S.D.N.Y. Jan. 15, 2008); In Re Alper, 2008 Bankr. LEXIS 522 (Bank. S.D.N.Y. 2/25/08), In re Alper Holdings USA, Inc., 386 B.R. 441 (Bankr. S.D.N.Y. 2008). The rulings said that Alper could not be directly liable for causing the contamination because Alper had no connection or relationship to Saltire or Dickson County until seven years after the Dickson Plant closed in 1985. The court also concluded that Alper’s “indirect, incidental” ownership interest in Saltire through First City did not retroactively make Alper liable for what went on in the Dickson Plant prior to its closure. The court also said that the plaintiffs had failed to plead sufficient facts to show that Alper had direct liability for negligent remediation when it effectively loaned Bauer, its employee, to Saltire to supervise the remediation. Finally, the court found that Alper had no indirect liability to the on either an alter ego or veil piercing theory, holding that neither the existence of a management agreement nor the common employee between the parent and subsidiary justified the extraordinary remedy of piercing the corporate veil. The plaintiffs appealed but the bankruptcy court rulings were affirmed. In re Alper Holdings USA, 398 B.R. 736 (S.D.N.Y. 2008).

Alper also objected to the Schrader claim, asserting they should be disallowed under section 502(e)(1)(B) of the Bankruptcy Code because they were contingent claims for reimbursement or contribution from an entity that is co-liable with the debtor. The bankruptcy court found that Alper was obligated under the Guaranty to indemnify Schrader for its past legal fees and expenses and that these were not contingent liabilities since these costs had already been incurred. Thus, the court overruled the objection. However, the court said the claims for future costs and indemnification were clearly claims for contribution or reimbursement, and contingent since the amount of the ultimate liability was unknown. Schrader argued that it could not be co-liable with Alper under 502(e)(1)(B) because Tennessee law no longer recognizes the common law doctrine of joint and several liability. However, the court said that the toxic tort plaintiffs had alleged that Alper and Schrader were liable as the corporate successors to Saltire for the negligent actions of Saltire. These allegations were in stark contrast to those asserted against ArvinMeritor which had been sued based upon its own subsequent and independent negligent and grossly negligent conduct. Accordingly, the court disallowed the Schrader claims for future costs and indemnity. In re Alper Holdings USA, 2008 Bankr. LEXIS 2634 (Bank. S.D.N.Y 9/18/08).

Plaintiffs then turned their attention to Schrader-Bridgeport International, Inc (SBI), its parent, Tomkins plc, and Arvin. First, the district court disposed with the claims against Tomkins, ruling in 2010 that general involvement with the subsidiary corporation’s performance, finance and budget decisions, and general policies and procedures was insufficient basis to assert personal jurisdiction over the parent much less pierce the corporate veil. Flake v. Schrader-Bridgeport Int’l, Inc, 2010 U.S. Dist. LEXIS 23951 (M.D.Tenn. 3/15/10).

Turning to the claims against SBI and Arvin, the court also rejected plaintiff’s motion for partial summary judgment that the defendants were the successor in interest to Scovill, and Schrader Automotive. The court agreed with SBI that none of the exceptions to the general rule of non-liability for purchasers of corporate assets applied. The court said that Scovill retained responsibility for the Dickson Plant under the 1986 agreement. Likewise, Arvin did not acquire the plant in the 1995 agreement. Indeed, the court observed that Scovill continued to list the plant on its insurance policy after the 1986 transaction. Thus, the court held, so there was no assumption of liability.

The plaintiffs also asserted that SBI and Arvin were liable under the mere continuation theory. The facts that plaintiffs relied on were that Schrader Automotive Group employees became SAI employees and performed the same work after the transfer to SAI, Plaintiffs also pointed to the fact that Arvin and Schrader Automotive Group had the same general manager. The court ruled there was no successor liability under a mere continuation theory because there was no common identity of stock, shareholders and directors among SBI and Scovill or Arvin.

Plaintiffs had also pointed to an affidavit that SAI removed waste materials from the Dickson Plant. However, the court said the public records reflected that Scovill was the cleanup lead for the property. Moreover, the court said the contamination described in the affidavit related to metal sludge materials deposited offsite from the Dickson Plant and was unrelated to plaintiffs’ claims about TCE-contaminated groundwater.

Finally, the court said that even if SBI or Arvin could be considered to be successors to SBI’s, their liability would be limited to the extent of Scovill’s liability. However, the court explained, plaintiff’s settlement with Scovill settled SBI’s liability. As a result, the settlement also extinguished SBI’s and ArvinMeritor’s liability for those claims.

The movement and disposal of fill material from demolition sites tends not to be well-regulated. During the real estate bubble when demand for aggregate was at a premium, unsavory actors in the industry exploited the regulatory gaps. These companies would charge clients to dispose of contaminated fill, pocket the fees and then sell the materials to sites needing “clean fill”. This practice led to a number couple of high profile projects that were slated for redevelopment. It can be particularly frustrating to a brownfield developer to incur costs to remediate a site only to then have it re-contaminated from importing dirty fill.  

A recent example of the problems with contaminated fill was Knoll v. MTS Trucking, Inc., 2011Minn. App. Unpub. LEXIS 767 (Minn. Ct. App., Aug. 15, 2011), Midwest Asphalt Corporation (Midwest) needed to dispose of asphalt millings and fill generated from road reconstruction project. The Minnesota Pollution Control Agency (MPCA) considered the excavated fill to be a regulated waste due because of the presence of asphalt in the soil.

The owner of MTS Trucking informed Midwest that Thomas Knoll was looking for fill material to prepare his property for potential development. MTS then deposited several thousand cubic yards of fill on Knoll’s property in 2003 and 2004.

In February 2005, a commercial development company agreed purchase Knoll’s property. During its pre-acquisition due diligence, the developer learned the filled areas of the property had elevated levels of diesel range organics (DROs). The developer refused to purchase the property at the price listed in the purchase agreement unless Knoll removed the impacted soil.

Knoll retained his own consultant who determined that 90% of the fill contained low-level DRO contamination along with some benzo(a)pyrene (BaP) equivalents. Knoll reported then enrolled in the state voluntary cleanup program to remove the contaminated soil at a cost of approximately $296K. After the state confirmed no further action was required, the developer the purchase the property.

In 2007, Knoll filed a complaint againstMidwest and MTS alleging negligence, misrepresentation, common-law trespass along with a cost recovery under the state superfund law (MERLA).  Knoll alleged that MTS andMidwest misrepresented to him that the fill deposited on his property was clean, and that the fill was the cause of the contamination on his property.

The defendants filed a motion for summary judgment on the grounds that the common law claims were barred by the statute of limitations. The trial court ruled that since the fill intended to improve Knoll’s property, the two-year statute of limitations applied. Since Knoll served his complaint more than two years after learning of the contamination, the court ruled the common-law claims were time-barred.

The case then proceeded to a jury trial on the sole issue of whether respondents were liable under MERLA claim. The jury found that the contamination derived from petroleum. As a result, the court ruled contamination was not a hazardous substance because it fell within the MERLA petroleum exclusion. Thus, the district court dismissed Knoll’s MERLA claim.

On appeal, Knoll argued that the six-year statute of limitation should apply since the fill material constituted a trespass. The appeals court said that the longer period applied to invasions of possessory interests and that despite the contaminated soil, Knoll still enjoyed the exclusive right to possession of his property. Indeed, the court said while the developer initially declined to purchase the property at the price agreed upon in the purchase agreement, the record indicated that the developer would have purchased the property with the contaminated soil for a lesser price. The fact that Knoll could have sold the property at a lesser price despite the alleged contaminated soil demonstrates that the alleged injury was the physical injury to his property in the form of defective fill material.

Knoll also argued the presence of the fill constituted a continuing trespass that should have tolled the statute of limitation. However, the court said under Minnesota law, a continuing trespass applied to a continuing or reoccurring wrongful act. Here, the court said, the wrong complained of was the act of depositing contaminated soil instead of clean fill on Knoll’s property. Once the fill was deposited, the alleged trespass ended and there was no reoccurring intrusion. Therefore, the court concluded that the alleged trespass was permanent rather than continuous, and the district court properly concluded that Knoll’s trespass claim was barred by the two-year statute of limitations. The Minnesota Supreme Court recently declined to hear the case.

Anyone who has negotiated the purchase of a gas station is aware that these agreements are incredibly complex. The contracts have dense definitions, dependent and inter-related provisions, and grant broad discretion to the sellers in determining the scope and conduct of the cleanup.

A buyer who does not retain an environmental attorney who has previously worked on one of these agreements runs the risk of committing G. Gordy Liddy’s infamous aphorism of being unarmed in the battle of the minds.  The recent decision of D& H Ventures v Exxon Mobil, 2011 Cal. App. Unpub. LEXIS 8580 (Ct.App-2nd^h Div 11/8/11) illustrates this point.

In this case, D&H Ventures purchased a gasoline service station site from Exxon in 1995. D&H was owned by the franchisee that had been operating the property since 1989. Exxon had been remediating the contamination at the property since 1991 and had submitted a summary report to the Los Angeles County Department of Public Works (Regional Board in 1994. The Regional Board eventually issued an NFA letter in October 1997.

The agreement provided that the sale was “as-is” and the purchaser acknowledged that some spills had occurred that resulted in soil or groundwater contamination. Section 10 of the Agreement outlined the parties’ remediation rights and obligations. Exxon was obligated to conduct an environmental site assessment prior to closing and provide the results to the purchaser before closing. If the initial assessment or any additional assessment was unacceptable to D&H, it had the right to terminate the Agreement prior to closing. The environmental assessments served as the “Baseline Condition” for the contamination. If the Regional Board required further testing or remediation, the agreement provided that the Baseline Condition would be amended to reflect the additional sampling. Exxon made no representation or warranty regarding any aspect of any reports delivered to the purchaser and the purchaser had the right to conduct its own investigation.

Exxon was obligated to remediate the Baseline Conditions as it reasonably deemed necessary or appropriate to comply with “Legal Requirements”. Exxon’s remedial obligations under the agreement would be satisfied (1) upon receipt written notice from the appropriate Government Authority that either no further remediation and monitoring of the Baseline Condition was required or (2) when Exxon provided written notice to D&H that remediation had been completed, Exxon had submitted a written request for closure indicating that the soil and/or groundwater had been remediated to the applicable levels but  Government Authority had not provided a written notice within a reasonable time.

The agreement also provided that Exxon was not responsible for investigation or remediation of contamination occurring after the closing date or for increases in contaminant levels above the Baseline Condition.  In addition, the agreement indicated that Exxon’s remediation responsibilities inured only to the benefit of D&H and its lender, and did not extend to subsequent purchasers or assignees.

Exxon agreed to indemnify the purchaser until October 31, 2003 from third parties claims resulting from contamination occurring from Exxon’s use, operation or remediation of the property. However, Exxon would not indemnify purchaser for environmental contamination occurring after closing unless the contamination resulted from the remediation activities or negligence of Exxon. In exchange for the indemnity, purchaser provided a general release for itself, its representatives, successors and assigns except for any obligations of Exxon relating to the Baseline Conditions. The deed conveying title incorporated the environmental provisions of the agreement and provided that the environmental provisions were covenants that ran with the land.

In October 2006, D&H sold the Property to Fry’s Petroleum, Inc (Fry’s). One month later, the Regional Board advised D&H that groundwater contamination had been detected at a former service station site near the property and that the Regional Board was re-opening the case to determine if some of the contamination had migrated from the site. In April 2007, the Regional Board directed both D&H and Exxon to install additional groundwater monitoring wells to determine the direction of groundwater flow and groundwater quality. Exxon refused D&H’s request to resume its assessment and remedial activities at the Property.

D&H then filed its lawsuit, claiming Exxon had breached the agreement and asserting other common law claims. In the breach of contract claim, D&H argued that the 2006 reopener triggered section 10.B providing that if further testing or remediation is required by any government authority, the Baseline Condition would be modified by the results of any such tests. D&H also argued that even if Exxon had no contractual obligation to remediate the Property in 2006, Exxon was not entitled to summary judgment because there were triable issues of fact whether Exxon had breached the Agreement in 1997 and 1998 by failing to properly remediate the contamination.

The trial court rejected all of D&H’s claims and granted summary judgment in favor of Exxon. The court ruled that Exxon had completed its obligations under the agreement when the Regional Board issued the NFA letter. The court said the purchaser was relying on clauses outlining Exxon’s initial assessment obligations as well as pre-closing obligations but not relating to regulatory site closure

Exxon had asserted that D&H’s inadequate remediation claim was barred by the statute of limitations. D&H responded that the discovery rule should have operated to toll the statute of limitations. The court found for Exxon, finding that there was undisputed evidence that D&H was aware of the environmental conditions of the property, including the Baseline Condition, when it purchased the site in 1995, when the application for closure was submitted in 1997 and when Exxon ceased all remediation activities in 1998. The court said that the delayed discovery rule typically did not apply to breach of contract actions, which ordinarily accrue at the time of breach. The trial court also ruled that the broad release clearly and explicitly applied to bar D&H’s the common law claims. Likewise, the court held the release precluded Fry’s claims since the release specifically applied to successors and assigns, and was incorporated into the deed.

The appeals court affirmed. Looking at the entire agreement, the court said the only reasonable construction of the agreement was that the NFA letter relieved Exxon from any further remediation obligation. The court noted that Exxon was required to conduct an assessment, the results of the assessment would establish the Baseline Condition, that Exxon was to remediate the Baseline Condition and that Exxon’s remedial obligations continued until an NFA letter was issued by the appropriate Government Authority. The court said that to impose an indefinite remedial obligation on Exxon for an unidentified period of time was patently inconsistent with the provisions of Section 10 as well as other clauses of the Agreement

On the statute of limitations issue, the appeals court said that even though D&H knew the property was heavily contaminated at the time of purchase, it conducted no independent environmental investigation prior to purchase. Moreover, the court said, the purchaser did not investigate the requirements for site closure when Exxon submitted its request and did not object to Exxon’s representation that it had satisfied all the requirements for site closure. On the basis of this undisputed evidence, the court agreed that the doctrine of delayed discovery did not apply, and that any claim for breach of contract accrued more than 10 years before D&H filed its action

In FPL Farming Ltd v Environmental Processing Systems, L.C., 54 Tex. Sup. J. 1744 (2011), the petitioner FPL Farming (FPL) owned two tracts of land that it used for rice farming. In 1996, Environmental Processing Systems (EPS) applied for a permit to operate two Class III injection wells on land adjoining one of FPL’s tracts. The purpose of the wells was to inject wastewater containing non-hazardous wastes such as acetone and naphthalene into salt water approximately a mile and a half below the surface, below any drinking water. FPL originally objected to the permit request but subsequently reached a settlement with EPS where EPS agreed to pay FPL $185,000 to avoid delays and the expense of an administrative hearing.

In 1999, EPS sought to amend the permits to increase the allowed injection rate and FPL challenged the permit modification. Following an administrative hearing, the administrative law judge (ALJ) recommended that the agency grant the amendments. Although the ALJ found that the waste plume would radiate 3,021 feet from the well facility after ten years and extend below FPL’s property, the ALJ ruled that FPL had no right to exclude others from the deep subsurface. The ALJ also found that FPL’s rights would not be impaired by the amended permits and that operation of the wells would not amount to an unconstitutional taking. The TCEQ then approved the permits. FPL appealed to the district court which affirmed the agency’s decision as did the Austin Court of Appeals.

In 2006, FPL filed suit against EPS alleging various causes of action, including trespass, negligence, and unjust enrichment, and requesting a permanent injunction and damages. A jury found no trespass and the district denied FPL’s motion for a new trial. On appeal, Austin Court of Appeals ruled the permits shielded EPS from tort liability. The court reasoned that when a state agency authorized deep subsurface injections, no trespass could occur when fluids that were injected at deep levels and then migrated at those deep levels into the deep subsurface of nearby tracts.

The Texas Supreme Court reversed the appeals court decision and remanded the case for further proceedings on the trespass claim. The Texas Supreme Court began its analysis by stating that the general rule was that permit does not act to immunize the permit holder from civil tort liability from private parties for actions arising out of the use of the permit because a permit is simply a “negative pronouncement” that grants no affirmative rights to the permittee.

The court also noted that statute authorizing the TCEQ to issue injection wells specifically provided that holders of wastewater injection well permits were not immune from civil liability.  The court said the fact that EPS may have permission to inject authorized wastewater did not mean that the company was free from the consequences of acting under the permit.

The Court also said that the appeals court had improperly interpreted its prior opinions finding no trespass when injected substances had migrated beneath an adjacent property. The Texas Supreme said those prior decisions involved the extraction of minerals in the oil and gas industry, and implicated the rule of capture.  The court said the rule of capture was not applicable to wastewater injection because mineral owners can protect their interests from drainage through means such as pooling or drilling their own wells but that was not necessarily the case when a landowner is trying to protect their subsurface from migrating wastewater. Moreover, the court explained, permits for injecting substances to aid in the extraction of minerals served a different purpose than permits for injecting wastewater

The court said it was not deciding if subsurface wastewater migration can constitute a trespass and if a trespass had occurred in this case. Instead, it remanded the matter for consideration of issues related to the trespass claim

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.