NY Court of Appeals Finds PRP Letter Triggers Contractual Indemnification

The New York State Court of Appeals held that a PRP letter issued by the New York State Department of Environmental Conservation (NYSDEC) was sufficient to trigger an indemnity obligation under a purchase and sale agreement. While lower courts have found PRP letters to constitute “suits” within the meaning of  a Comprehensive General Liability policy so as to trigger a duty to defend, this is the first time the a PRP letter has been interpreted within the context of a private indemnity agreement.

In Remet Corp. v. Estate of Pyne, 26 N.Y.3d 58 (N.Y. 2015), James R. Pyne sold all of his stock in Remet Corporation (Remet) and real property to Burmah Castro Holding (BCH) for approximately roughly $28 million. During pre-acquisition due diligence, BCH learned that a leased facility in Utica was located adjacent to the Old Erie Canal site, a parcel that was listed on the New York State List of Inactive Hazardous Waste Sites. BCH became concerned that Remet could become responsible for the remediating the Old Erie Canal site which BCH’s consultant estimated could cost as much as $29MM.  After BCH proposed excluding the site from the transaction, Pyne agreed to provide a ten-year indemnity to BCH for losses related to pre-existing environmental conditions provided that the losses resulted from actions that the purchaser was “required to take under or in connection with any Environmental Law.” The indemnity also contained a “muzzle” clause that provided that such required actions could not be a result of  communication by BCH with NYSDEC.  A $2.7 million environmental escrow account was established.

In October 2002, the NYSDEC sent Remet and four other parties a notice letter identifying them as a generator PRPs for the Old Erie Canal site.  The notice letter provided in part that if the PRPs did not enter into a signed Consent Order within 30 days, NYSDEC would terminate discussions and implement a remedy using the state superfund. The letter warned that NYSDEC would seek cost recovery for its costs and that the letter constituted a demand for payment of all monies the NYSDEC might expend for the investigation and remediation of this site, plus any and all interest.

Remet tendered an indemnification claim to Pyne in accordance with the indemnification procedures under the purchase and sale agreement (PSA). Pyne declined to assume control of the defense but cooperated with Remet in implementing the company’s initial response to the PRP letter. Remet, three other PRPs, and Mr. Pyne investigated the Old Erie Canal site and prepared a report with Pyne and Remet splitting 25% of the costs. In discussions with NYSDEC, Remet and Pyne argued that Remet should not be considered a PRP because Remet did not generate any waste stream from its processes and the chemicals it used did not match the contaminants identified at the Old Eric Canal site. The NYSDEC negotiations were unsuccessful. Pyne died in March 2003. Later that year, Remet’s management team acquired all of Remet’s stock and the Pyne estate agreed to assume the Pyne’s indemnification obligations under the PSA.

NYSDEC subsequently issued a letter indicating that since none of the PRPs had agreed to perform any work, the agency would use state funds to complete the investigation and implement the remedy.  Eventually, NYSDEC selected a remedy estimated to cost $12.5MM

With its indemnification claim still pending, Remet filed a claim against the Pyne estate in the Surrogate Court seeking to bar distributions from the estate until the indemnification claim was resolved. The Pyne estate objected to any release of funds from the escrow account to cover the approximately $550K demanded by NYSDEC for a portion of the work and instructed Remet that any unilateral contact with the NYSDEC would constitute a waiver of any right to indemnification under the PSA.

Remet then commenced an action against the Pyne estate to enforce the estate’s indemnification obligations of $550K as well as a declaration that it was entitled to reimbursement for all future costs. The trial court granted summary judgment to Remet, holding that Remet would have to expend money since it would either have to respond to the PRP letter or defend a NYSDEC cost recovery action. The court also noted that Pyne’s cooperation following the PRP Letter was inconsistent with the estate’s position that the PRP letter did not “require” action. The estate appealed and the appellate court reversed, ruling that the DEC did not “require” any action but merely informed Remet of its potential liability and sought voluntary action.

Before the Court of Appeals, Remet relied heavily on a line of insurance cases holding involving that PRP letters were “suits” within the meaning of Comprehensive General Liability policies that triggered an insurer’s duty to defend. Remet analogized that if a PRP letter was coercive and adversarial enough to constitute a “suit,” it is coercive and adversarial enough to “require” responsive action. Moreover, Remet argued that if the appellate decision was affirmed, “every business insured under a liability policy that provides coverage for defense of environmental claims will have an incentive to resist cooperating with DEC upon receipt of a PRP letter, until there has been a final determination of liability.”

The estate argued that the NYSDEC letter simply indicated that Remet was a PRP and that it had no indemnification obligation under the PSA until a court actually held that Remet was found to actually be a  responsible party. The estate pointed out that the NYSDEC never categorized or ever asserted that Remet was anything other than a PRP. Indeed, the estate emphasized that NYSDEC had not taken any enforcement action against Remet or any other of the PRPs.

The Court of Appeals rejected this creative but strained interpretation, holding that the PRP letter was sufficiently coercive and adversarial as to “require” action ” under Environmental Law as provided under the PSA. The court noted that the PRP letter, which was labeled “Urgent Legal Matter,” demanded either a consent order or payment. It further indicated that a prompt reply was “necessary” and set forth imminent legal and financial consequences that would occur if Remet refused to act. Thus, even though Remet was labeled a “potentially responsible party,” it responses to the letter were coerced and  not voluntary. The court also found persuasive the circumstances surrounding the execution of the indemnification clause and the funding of the environmental escrow account as evidence that the parties were aware of the potential for substantial expenses relating to the Erie Canal Site, and that Pyne’s cooperation after receipt of the PRP letter was evidence that Pyne thought action was required action.