Parties Battle Over Scope of Seller’s Post-Closing VCP Obligations

Carroll Co. v. Sherwin-Williams Co., 2013 U.S. Dist. LEXIS 47349 (D.Md. 4/2/13) involved a dispute over the cleanup obligations of a seller. This case illustrates the drawback of having of a seller complete a cleanup after closing.

In December 2005, Carroll Company (Carroll) entered into an Asset Purchase Agreement to purchase a chemical blending and packaging business from the defendant. Contemporaneous with the closing of the Asset Purchase Agreement, the parties entered into a separate purchase and sale agreement (PSA) where Carroll agreed to acquire the facility and underlying real property located in Havre de Grace, Maryland pending completion of environmental due diligence. Carroll formed, Ogden LLC (Ogden), to own the real property. After the closing of the Asset Purchase Agreement, Plaintiffs assumed control of Defendant’s business operation at the Property and leased the Property from the Defendant pending the closing of the PSA. After the closing for the property, Carroll assigned certain rights under the agreement to Ogden. Carroll then leased back the property from Ogden and continued operational control of the business operations at the Maryland property (Carroll and Ogden are collectively referred to as “Plaintiffs”).

Paragraph 10 of the PSA provided that Plaintiffs were acquiring the property “as is”, had not relied on any representations of the seller except as expressly set forth in the PSA, represented and warranted that it had not relied on any document, information, representation or statement other than expressly made in the PSA, acknowledged that Plaintiffs had the opportunity to fully inspect the Property and the decision to purchase the Property was based on their own judgment. Defendant agreed to indemnify and hold Plaintiffs harmless from any demands, claims, causes of action, etc. made against Carroll relating to pre-existing environmental conditions or violations of environmental law. Paragraph 3 of the PSA also provided that Plaintiffs had the right to tender a “Property Condition Notice” if their inspection of the Property was unsatisfactory. The Plaintiffs did not invoke this clause prior to the end of the property inspection period.

A month before the parties entered into the PSA, the Maryland Department of the Environment (“MDE”) sent a letter to the Defendant requesting a status report on investigation and remedial activities that had taken place on the property pursuant to a 1991 remedial action workplan.  MDE had conducted groundwater investigations in 1989 and 1991 when the property had been owned by Cello Corporation (Cello) and had discovered the presence of volatile organic compounds in the groundwater. As it turned out, Cello did not implement the workplan. The MDE invited Defendant which had acquired the property from Cello in 1996 to enroll the site in the MDE Voluntary Cleanup Program (VCP).

The Defendant forwarded the MDE letter to Plaintiffs a week before the closing. Three days before the closing, Plaintiffs sent an email advising Defendant that Plaintiffs expected Defendants to address the environmental issues in the MDE letter. The Plaintiffs also stated that if the VCP would provide them with liability protection, “we would like you to apply for that program and conduct the response under that program.” Concurrent with the signing of the PSA, Defendant notified Plaintiffs that it intended to enroll the property in the VCP as proposed by MDE in its letter (Confirmation Letter).

The parties initially planned to close on the Property on March 31, 2006 but extended the closing until July  2006 so Plaintiffs could complete environmental due diligence. Defendant hired Environmental Resources Management (“ERM”) to prepare VCP applications to be submitted to MDE on behalf of the Defendant and a separate but identical VCP application for the Plaintiffs (collectively the “VCP Application).

In June 2006, ERM emailed Defendant about issues it was encountering in preparing the VCP application. ERM suggested that it might not be realistic or practical to obtain a Tier 1 (unrestricted residential) cleanup standard. Defendant shared this email with Plaintiffs. On the day before the closing, Defendant provided Plaintiffs with a draft VCP application that proposed a Tier 3 (Industrial) remediation. Plaintiff’s environmental counsel returned the draft VCP Application with handwritten edits that changed the future use to “Tier 1 (Residential).”  Plaintiffs notified Defendant that they would not close unless the VCP Application was revised to reflect the Tier 1 standard.

Defendant forwarded the proposed changes to ERM. In an email, ERM advised Defendant that the change to Tier 1 might not be a major concern since it was only a “goal.” ERM further cautioned Defendant that achieving a residential would more costly if groundwater was more contaminate than envisioned. Again, ERM advised Defendant that the VCP Application “does not lock you in to having achieve the residential cleanup criteria.”

Defendant revised the VCP Application to reflect the Tier 1 standard and submitted it to the MDE. Contemporaneous with the execution and submission of the VCP Application, the parties executed a Site Access Agreement (SAA) that provided Defendant with ongoing access to fulfill its obligations under Paragraph 10 of the Purchase Agreement as well as to implement the VCP Remedial Action Plan.

In September 2008, MDE notified Plaintiffs that the VCP Tier 1 Applications had been denied because Defendant had failed to submit the required environmental site assessment and remediation action plan. Plaintiffs immediately contacted Defendant who assured Plaintiffs that it would respond to the MDE within the 60-day time frame. In October 2008, Defendant sent Plaintiffs an amended draft VCP application that reverted to a Tier 3 standard. It appears that this change was partially based on comments from MDE that it could not allow residential land use without a change in zoning and a schedule for decommissioning the current industrial operations. In any event, Plaintiffs objected to the VCP Tier 3 Applications but Defendant submitted the VCP Application with the Tier 3 remediation standard.

In February 2009, Plaintiffs submitted their own amended VCP application providing for a restricted residential cleanup (Tier 1A). In April 2009, the MDE accepted Defendant’s Tier 3B VCP Application that provided for  some additional testing and required defendant to submit a Response Action Plan (“RAP”) within 18 months. On the same day, the MDE rejected the Plaintiff’s amended VCP Application because the land use conflicted with the original Tier 3B VCP Application that had been previously accepted into the VCP. Plaintiffs requested MDE to reconsider its application. Ultimately, MDE denied both VCP applications until the parties resolved their legal dispute over future land use at the property since the “VCP will not act as a mediator resolving legal disputes between private parties.”

Plaintiffs filed a complaint for breach of an alleged remediation agreement, breach of the indemnity agreement, intentional misrepresentation, fraud in the inducement, negligent misrepresentation, and promissory estoppel arising from Defendant’s failure to remediate the property to Tier 1 residential status under the VCP. Plaintiffs also sought relief in the form of a declaratory judgment and attorneys’ fees.

In asserting that the Defendant breach a remediation agreement, Plaintiffs argued that the PSA, the Confirmation Letter, the SAA and the Tier 1 VCP Applications should be read together. In response to Defendant’s motion to dismiss, the court ruled in 2012 that Maryland law did not require the documents should be integrated. Moreover, even if the documents had to be read together, the court ruled that they did not plausibly create a binding obligation that Defendant remediate the property to a Tier 1 standard. The court said that the PSA simply required full indemnification by Defendant for all pre-existing environmental conditions at the Property. The Confirmation Letter, the court said, did not mention any remediation agreement but merely confirmed Defendant’s intent to pursue the VCP as proposed by the MDE and did not propose a Tier or future land use for the property. Finally, though the VCP Application indicated that Defendant applied to the VCP for a Tier 1 future property use, the application did not bind Defendant to the VCP program or to a Tier 1 standard remediation since the program was voluntary and a party can withdraw at any time. Thus, the court dismissed the breach of remediation agreement.

The court also dismissed the breach of indemnity claim, holding that the Plaintiffs’ proposed interpretation strained the limits of the concept of indemnity. The court explained that an indemnity gives the right of reimbursement to one party who has been compelled by law to pay what the other party should pay. In other words, the court said the indemnity obligation is not triggered until a third party makes a claim, seeks to hold Plaintiffs liable for environmental violations, or demands remediation of the preexisting contamination. The court said the indemnity did not impose an affirmative remediation obligation on Defendants and Plaintiffs could not trigger the reimbursement obligation by claiming a loss in the value of the Property.

The court preserved the claims and after discovery, the Defendant sought summary judgment on Plaintiffs’ remaining claims. On the misrepresentation and fraudulent inducement claims, Defendant argued its statement that it intended to “pursue” the VCP were simply statements of prediction or expectation that were not sufficiently definitive to rise to the level of an actionable representation. The court found the competing interpretations of the word “pursue” were sufficient to create a question of fact since there was sufficient evidence in the record from which a jury could reasonably find support for either of the parties’ interpretations.

Moreover, because the VCB was non-binding, the Defendant asserted that statements about achieving a Tier IA cleanup in the VCP Application were merely predictive or aspirational in nature and insufficient to bind Defendant to achieve a Tier 1A under the VCP. However, the court found there was not only sufficient evidence in the record from which a jury could find that Defendant made a definitive representation about its intent to remediate the property but that there was additional evidence suggesting that Defendant  lacked any intent to perform consistent with the alleged representations.

Defendant also argued that even if Plaintiffs could establish that it made the alleged misrepresentations for the purpose of defrauding Plaintiffs, any reliance by Plaintiffs  was “per se unreasonable” because the Plaintiffs expressly disclaimed both past and future reliance on representations by Defendant in the PSA. Defendant also pointed to the email exchange where ERM indicated that achieving unrestricted closure may not be “realistic or practical.” Furthermore, Defendant argued that Plaintiffs’ failure to submit a Property Condition Notice was further evidence that Plaintiffs’ claim of reliance was unreasonable. However, the court said these factual issues indicated that summary judgment was not appropriate.

On the negligent misrepresentation claim, Defendant argued that it did not owe a duty of care to Plaintiffs because they were sophisticated parties that were represented by counsel. However, said the court said the fact that parties are sophisticated commercial entities is not dispositive because the duty of a party not to negligently misrepresent its intentions stems from the “intimate nexus” created by the parties’ contractual privity and the circumstances surrounding the creation of that privity. The court said negotiations between commercial entities may give rise to the required “intimate nexus” where they invoke “considerations of personal trust and reliance.” The court said an “intimate nexus” upon which a duty of care is predicated may be found (1) based on the length and complexity of the parties’ negotiations, (2) when the parties have contemplated a long-term relationship, (3) when one party had exclusive control over information necessary for the other to understand the situation, or (4) when the defendant’s promises were an inducement to the plaintiff and provided the defendant with a business advantage when the plaintiff conformed to them.  Thus, the court determined that there was sufficient evidence in the record from which a reasonable jury could find that Sherwin-Williams owed Plaintiffs a duty of care based on several, if not all, of these factors.

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