9th Circuit Finds Shopping Center Owner Did Not Establish BFPP Status for Dry Cleaner Contamination

We have previously discussed the series of district court rulings in Voggenthaler v Maryland Square LLC where homeowners and the Nevada Department of Environmental Protection (NDEP) sued past and former owners of a shopping center and operators of a former dry cleaner because of a mile-long groundwater plume resulting from PCE spills from the dry cleaner in the 1980s has migrated into a high end residential neighborhood.

Now in what may be the most important vapor intrusion case decided to date, the United States Court of Appeals for the Ninth Circuit affirmed the summary judgment in favor of homeowner plaintiffs who obtained injunctive relief under RCRA 7002 and to the Nevada Department of Environmental Protection for past response costs. However, the appeals panel vacated the grant of summary judgment against the current owner and remanded that aspect of the case back to the district court for further proceedings on the bona fide prospective purchaser (BFPP) landowner protection. The three-judge panel also reversed on procedural grounds the grant of summary judgment under RCRA against the current owner and the operators because those defendants did not have an adequate opportunity to respond to plaintiffs’ claims. Finally, the panel reversed the grant of summary judgment against a guarantor because there was no evidence of spills during the term of the guaranty. The court also ruled on state law issues but we are limiting our discussion to the more significant CERCLA and RCRA rulings. Voggenthaler v. Md. Square LLC, 2013 U.S. App. LEXIS 15307 (9th Cir. 7/26/13).

In the case, the Herman Kishner Trust (“Trust”) owned the shopping center between 1968 and 2002 when the releases from the dry the cleaner occurred. The documented spills consisted of an approximately 100-gallon spill in 1982 during a filter change. There were also occasional spills from clogged button traps from 1969 to 1984 that flowed into a trench drain that was connected to sewer pipes beneath the shopping center.

During the period when the spills occurred, Shapiro Bros. Investment Co. (“SBIC”) operated the dry cleaner pursuant to a lease where SBIC agreed to indemnify the Trust for all claims arising from SBIC’s actions, omissions, or negligence. SBIC signed a replacement lease in 1982 where it agreed to indemnify the Trust for violations of law. In 1984, Johnson Group, Inc., a predecessor of DCI USA, Inc., (collectively “DCI”) purchased the dry cleaning business and operated it until 2000. While DCI used PCE, no confirmed spills have been documented. When SBIC sold the dry cleaning business to DCI in 1984, the SBIC controlling shareholder, Melvin Shapiro, personally guaranteed DCI’s performance of the lease obligations, including the indemnity obligation.

PCE contamination was first reported to NDEP in November 2000 during a pre-purchase investigation by Clark County School District. NDEP commenced an investigation that identified PCE in the soil and groundwater with the highest concentrations around the floor drain and drain pipes beneath the former dry cleaning facility. In late 2002, NDEP determined that PCE had migrated off site. Groundwater wells installed in the adjacent the Boulevard Mall property in 2003 and 2004 showed that the PCE plume had traveled due east beneath the property. A July 2005 report indicated that the PCE plume had extended further east under the residential neighborhood. In October 2006, NDEP directed DCI to prepare complete a remedial investigation of the dry cleaner, prepare a groundwater corrective action plan and characterize the extent of the off-site plume. In 2007, DCI also completed an off-site soil gas survey that revealed that there was a potential for PCE vapor intrusion at the residential neighborhood.

In the meantime, Maryland Square LLC (Maryland Square) purchased the property from the School District in 2005. After taking title, Maryland Square demolished the building containing the former dry cleaner in 2006, leaving contaminated soil exposed.

In April 2007, NDEP also sent PRP notices to the current and former owners and operators stating that NDEP had expended approximately $160,000, that it intended to incur additional response costs to address human exposure, and that it planned to seek recovery of its expenses.

The plaintiff homeowners filed their RCRA 7002 action in November 2008 and the district court granted summary judgment on the plaintiff homeowners RCRA injunctive action claim in July 2010. Maryland Square moved for a rehearing after the entry of the RCRA summary judgment, contending that it was in a different position from the other owners because it did not acquire title until after the dry cleaning facility had closed down. The homeowners responded that Maryland Square “contributed to” the imminent and substantial endangerment because its demolition of the building in 2006 had exacerbated the situation by exposing the contamination and allowing it to spread. In October 2010, the district court said it lacked jurisdiction to hear the motion for reconsideration because other defendants had already filed a notice of appeal of the RCRA summary judgment order and denied the motion. On the contractual indemnification issues, though, the court ruled that SBIC was obligated to indemnify the owners under the lease. The court also held Melvin Shapiro liable under the 1984 guaranty signed in connection with the sale of the business from SBIC to DCI. The court rejected his position that the guaranty acted only prospectively and did not take effect until after the spills occurred.  In December 2010, the district court then entered a permanent injunction under RCRA, ordering the owners and operators to remediate the contamination.

Following is a summary of the significant CERCLA and RCRA rulings of the Ninth Circuit.

Commerce Clause Ruling

Maryland Square asserted that CERCLA could not apply to purely intra-state contamination under the Commerce Clause of the Constitution on the grounds that groundwater within a state could not be an article of commerce. The court quickly dispensed with this argument, citing opinions of the Second and Eleventh Circuits that held that the generation and disposal of waste in connection with the operation of a business are economic activities properly regulated under the Commerce Clause.

BFPP Ruling-

In the district court proceedings, Maryland Square had attempted to establish it satisfied the requirements of the BFPP defense by submitting an affidavit of its manager that stated that Clark County School District had disclosed the PCE contamination during the sale negotiations, that Maryland Square had retained counsel and hired an environmental consultant to review and report on the NDEP files concerning the Site. The affidavit also stated that after purchasing the Site, Maryland Square hired an environmental contractor to demolish the building. However, the affidavit did not indicate that Maryland Square took any steps such as removing the soil after demolishing the building to prevent ongoing releases but simply stated that Maryland Square followed the remedial progress of the previous owners and that Maryland Square had some correspondence with NDEP. Because the affidavit was not notarized, the district court barred Maryland Square from introducing the affidavit into evidence. The court then held that Maryland Square had failed to meet its burden of establishing that it qualified for BFPP status.

The Ninth Circuit ruled that the statements in the unnotarized affidavit were insufficient to establish the BFPP because Maryland Square failed to show that it had complied with its appropriate care/continuing obligations. Specifically, the appeals court said that Maryland Square failed to limit human and environmental exposure to the pre-existing contamination when it demolished the building but did not identify any steps that it took to remove the contaminated soil or limit the spread of PCE. The court went on to say that as a result of this failure, NDEP was forced to remove the contaminated soil six years after the building was destroyed, thereby creating a situation contemplated by Congress when enacting CERCLA—reimbursement of a government entity forced to clean up a site because the owner refused to take action.

In addition, the appeals court said that the affidavit did not establish that Maryland Square complied with the all appropriate inquiries (AAI) requirement of the BFPP. The court noted that affidavit merely stated that Maryland Square retained the environmental consultant to review files and prepare a report but did not indicate if the consultant qualified as environmental professional, the substance of the report, or any description of the assessment conducted.  As a result, the court held that the affidavit was “woefully insufficient” to establish that Maryland Square was a BFPP under CERCLA.

Because the district court rejected the submission on the basis of its form rather than its substance, though, the appeals court vacated the district court’s grant of summary judgment against Maryland Square and remanded the issue back to the district court so that Maryland Square may have an opportunity to cure the deficiency of its prior submission and establish that it has met the statutory and regulatory requirements for qualifying for the BFPP.

SBIC Liability as Former CERCLA Operator-

SBIC argued it could not be liable as an operator “at the time of disposal” because the PCE leaked onto the contaminant onto the floor and not directly onto land or water. Since there was no disposal of PCE directly onto land or water, SBIC asserted there could not be a “disposal” as that term is defined under CERCLA.

The appeals court rejected this interpretation, noting the definition of “disposal” included any discharge or spill of waste may enter the environment.  Because the phrase “enter the environment” is qualified by the word “may” in the definition of “disposal,” the court ruled the statute could not be interpreted to cover only spills that go directly and immediately into the  groundwater. The court also said that SBIC’s cramped interpretation conflicted with the Ninth Circuit’s jurisprudence of liberally construing CERCLA liberally to achieve the legislative goals of cleaning up hazardous waste sites promptly and ensuring that the responsible parties pay the costs of the clean up.

Lease Indemnification

The 1968 indemnification provision provided that SBIC would indemnity the owner “from and against all claims arising from any act, omission or negligence of lessee . . . or arising from any accident, injury or damage whatsoever caused to any person, or to the property of any person during the demised term, in or about the demised premises . . . from and against all costs, expenses and liabilities incurred in or in connection with any such claim or proceeding brought thereon.” SBIC argued it was not liable under the indemnity because the previous owners had not proved that the spills that occurred when SBIC operated the dry cleaner had not resulted in contamination of the soil and groundwater happened during the term of its lease. The appeals court, though, held that the basis for liability under the guaranty was the RCRA claim that arose from conduct of SBIC’s employees during the lease.

SBIC also contended that the 1982 lease replacement cutoff any liability it might have under the 1968 lease. The 1982 termination provision provided, inter alia, that “upon the commencement of the lease term… any rights and obligations… arising out of the [1968 lease] shall be deemed terminated as if said lease as amended had expired by its term, i.e., lapse of time . . . .” The appeals court said this 1982 lease terminated the provisions of the prior lease but did not extinguish the obligations SBIC incurred during its term.

SBIC also challenged its liability under the 1982 lease. The indemnification provision provided that SBIC would indemnify the landlord for “….liability, loss, cost, …. damage, claim or demand of any kind whatsoever in connection with, arising out of, or by reason of any violation of law, ordinance or regulation…. during the term of this Lease.”SBIC argued that the RCRA 7002 action did not arise out of a “violation of law”. The appeals court disagreed, finding that RCRA imposed liability for failure to clean up contamination. SBIC thus must indemnify the owners for the obligations they incurred as a result of SBIC’s RCRA violations.

It is unclear if the court was aware of that RCRA 7002 has two provisions-7002(a)(1)(A) addresses failing to comply with RCRA while 7002(a)(1)(B) authorizes injunctive relief against persons “contributing to” an imminent and substantial endangerment. The homeowner plaintiffs only obtained summary judgment under 7002(a)(1)(B). It is unclear of if the cross-claim filed by Maryland Square against SBIC cited to 7002(a)(1)(A). Thus, SBIC might have had a good argument to seek en banc review.

Shapiro Guaranty-

On the personal guaranty, the appeals court said a guaranty agreement is prospective unless it expressly states otherwise. The previous owners did not identify any violation of the 1982 lease that occurred after the effective date of the Assignment and the only documented spills occurred during SBIC’s operation of the facility. Because the violations occurred before Melvin Shapiro signed the guaranty, and the guaranty did not apply retroactively, the court reversed the judgment against Melvin Shapiro.