State Appeals Ct Affirms Note Purchaser Cannot Bring Nuisance Action For Contamination

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-2nd 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.




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