Owner Incurs $1MM On Cleanup But Ct Says No “Due Care”-Owner Waited Too Long to Act

The second our series of recent cases involving the due care element of the CERCLA third party defense is State of New York v Adamowicz, 2011 U.S. Dist. LEXIS 102988 (E.D.N.Y. 9/13/11) where a property owner was unable to establish that it exercised due care despite spending over $1MM addressing environmental concerns at its site. The problem was that it waited too long to respond to the environmental concerns caused by its tenant.

In this case, National Heatset Printing (NHP) entered into a five-year lease in 1983 for a building located in East Farmingdale, New York.  NHP used the premises for lithographic tri-color printing and generated a variety of hazardous wastes including wastes solvents and used inks. A the time of the lease, the property was owned by the Michael Adams Co., Inc with partial ownership interests held by Michael Adamowicz individually and as trustee of the Michael Adamowicz IV trust, and Mary Adamowicz, as trustee for the Bonnie Anne Fraser and Mary Margaret Fraser trusts. The One Adams Blvd. Realty Co (OABR) partnership managed the property.

Soon after the lease, the Suffolk County Department of Health Services (“SCDHS”) notified NHP that its discharge of wastewater into the on-site leaching pools was a violation of state and county environmental laws. The SCDHS advised NHP that it either had to connect the discharge to the municipal sewer system or cease all industrial discharge. Two years later, the SCDHS observed waste drums stored outside without secondary containment and soil stained from inks and oils. MHP entered into an Order on Consent with SCDHS that required NHP to clean out the leaching pools and bring its facility into compliance. The property was eventually connected to the municipal sewer system in January 1987 but the liquids and sludges in the leaching pools were not removed despite a series of notices in 1988 from the SCDHS to both NHP and the property owner. In November 1988, SCDHS issued a complaint against Adamowicz.

Meanwhile, NHP filed a chapter 11 bankruptcy petition in November 1987 that was converted to a Chapter 7 case in 1988. The bankruptcy court ruled that the NHP lease was terminated as of June 17, 1988 and that OABR could take possession of the property by that date. The court issued the final decree for the Chapter 7 bankruptcy in December 1992.

In 1988, OABR began implementing response actions at the site. These actions included retaining consultants to remove the contents of the leaching pool, investigating the pool’s connection to an overflow pool, removing drums and containers abandoned by NHP, implementing a remedial investigation and a treatment system for the PCE.

In 1990, the OABR partnership acquired title to the site. Also that year, Elizabeth Fraser succeeded Mary Adamowicz as trustee. In 1996, the OABR partnership conveyed the Site to OABR Corp.

In February 1994, the New York State Department of Environmental Conservation (“NYDEC”) notified Adamowicz that the agency was considering placing the site on the state superfund list but offered OABR the opportunity to voluntary undertake cleanup. When OABR Corp declined to remediate the site, the NYSDEC implemented response actions. During the investigation, the NYSDEC identified contaminated groundwater migrating toward a residential area that was served by private wells. In response, the Suffolk County Water Authority connected six residences and three businesses served by these wells to the public water supply at a cost of $24MM. By the 2009, the NYSDEC incurred $4MM in response costs and sought cost recovery under CERCLA.

The State of New York filed a motion for summary judgment against OABR Corp as the current owner and the trust beneficiaries. In an unpublished order dated March 31, 2011 (doc. 222), the court granted but denied the motion against the trust beneficiaries. The court denied a motion for reconsideration that is cited above.

The court found that OABR was liable both as a current owner and as a successor to the OABR partnership who had owned the property at the time of the releases identified by SCDHS. OABR asserted the third party defense, claiming it had not been in a contractual relationship with NHA when SCHDS had confirmed contamination in early 1988 because the November 1987 bankruptcy filing had the effect of terminating the lease. However, the court said the lease did not terminate until the lease was deemed rejected by the court in June 1988.

Moe relevant to our discussion, the court said that even if the lease had been severed by the bankruptcy filing in 1987 and that release occurred after that date, the OAB Defendants had failed to demonstrate that they satisfied the “due care” and “precautions” elements of the third party defense. In supporting its due care argument, the OABR defendants contend that they had spent over $1MM to address concerns of the state and country regulators since early 1988. The State responded that the February 1988 SCDHS letter had directed NHP and the owner to immediately remove all liquids and sludge from the leaching pools, that OABR Corp knew that NHP operated a photo-plate making and printing business, that the building was not connected to the public sewer system until 1987, and that NHP used leeching pools at the Site.

The Court agreed with the NYSDEC that OABR Corp had not established the due care and precautionary elements. First, the court said the defendant owners knew the nature of NHP’s business from the lease and periodic inspections by Adamowicz or his father. Second, the court noted the lease expressly gave the landlord the right to enter the premises if it was abandoned or the tenant had defaulted on its rent payments, and that this right of re-entry had been triggered by that time the state inspectors had observed staining and improperly stored drums. Despite knowing the site contained numerous leeching pools, that discharges to cesspool system where prohibited and the environmental conditions at the site, the court said the OABR defendants failed to take any action for five years. The court also observed that these events took place prior to NHP’s filing for bankruptcy and prior to the February 1988 SCDHS letter. Moreover, the noted that unlike other “due care” cases, OABR Corp was not a new owner confronting the scope of its duty to investigate a new property acquisition but instead it or its predecessor had been in possession of the site since at least 1980 and charged with the knowledge of the environmental conditions at the site. Accordingly, the court ruled that OABR Corp has not shown it is entitled to the protection of an affirmative defense under CERCLA.

The portion of the decision ruling that the trust beneficiaries of a distributed trust was also interesting and will be the subject of later post.