Review of Recent CERCLA Third Party Defense “Due Care” Caselaw-Part 1

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 20th 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.

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