After an insurer settled an environmental contamination case against its policyholder for $165,000, a jury awarded the policyholder $3.4 million for emotional distress and punitive damages due to unfair claims settlement practices by the insurer. The multi-million dollar verdict was recently affirmed on appeal. Indiana Insurance Company v. Demetre, Case No. 2013-CA-338 (Ky. Ct. App. Jan. 30, 2015).
Most states have adopted the model Unfair Claims Settlement Practices Act. The Act sets forth standards for investigating and disposing of claims arising under insurance policies, and identifies unfair claims settlement practices as including:
In Indiana Insurance v. Demetre, the policyholder sought to insure two pieces of property with Indiana Insurance. (The policyholder already had $2.5 million of liability insurance coverage with Indiana Insurance, including his home, auto, and umbrella policies.) When he applied for the additional coverage, the policyholder told Indiana Insurance that a gas station had previously operated on one of the properties. When the policyholder bought the additional insurance, the gas station no longer existed on the property, the underground gasoline storage tanks had been removed, and state environmental agencies were monitoring the property. Indiana Insurance decided to insure both properties. The policyholder made all of his premium payments timely, and Indiana Insurance continued to renew the policies even while the lawsuit was pending.
Six months after buying insurance, the policyholder received a letter from an attorney representing a neighboring family that lived next door to the gas station property. The neighbors, including a mother, six children, and her adult partner claimed to have suffered injuries from gasoline emanating from the policyholder’s property and stigma damages from the loss of the fair market value of their home as a result of the contamination.
The policyholder promptly notified Indiana Insurance of the neighbors’ claims. The assigned claim adjuster notified Indiana Insurance’s special claims unit of the claim. The special claims unit told the adjuster that “there may be no coverage.” Instead of taking any action to protect the policyholder and investigate the neighbors’ claims, Indiana Insurance decided to protect itself and assigned a field investigator to determine whether the policyholder was aware of the loss prior to insuring the property.
After almost of year with their claims still unresolved by Indiana Insurance, the neighbors filed suit against the policyholder and asserted a third-party bad faith claim against Indiana Insurance. At this point, Indiana Insurance had two choices. It could have defended the policyholder under a reservation of rights, or it could have denied coverage and abandoned its policyholder. If no coverage was owed, the insurer was in no worse position. If coverage was owed and the insurer wrongfully refused to defend its policyholder, the insurer would have been responsible for any damages incurred as a result of its refusal to defend. In addition, the insurance company would have been responsible for breach of contract damages, possibly tort damages for breach of the implied duties of good faith and fair dealing, and it would have waived its right to challenge any litigation decisions of the insured, including whether the settle the case and for how much.
Approximately two years after receiving the neighbors’ claims, Indiana Insurance sued the policyholder seeking a declaration that it did not owe coverage because the policyholder may have known of the contamination on the property prior to buying insurance. (This is commonly referred to as the “known loss” rule that precludes a policyholder from buying insurance to cover a known loss.) Eventually, the trial court denied Indiana Insurance’s motion on the issue, and the insurer abandoned the defense of no coverage.
Indiana Insurance then launched a time-on-loss defense in a cross-claim to the policyholder in an attempt to apportion any of the neighbor’s damages to a time period outside the effective dates of the policies. Indiana Insurance filed a second and then third cross-claim against the policyholder after several more months. The policyholder eventually responded by filing cross-claims for violations of Kentucky’s Unfair Claims Settlement Practices Act, violation of Kentucky’s Consumer Protection Act, and breach of contract based on implied covenants of good faith and fair dealing.
In the meantime, Indiana Insurance eventually settled the neighbors’ claims for $165,000. With the coverage issue resolved by the settlement, Indiana Insurance’s cross-claim against the policyholder for declaratory judgment was dismissed. The case, however, went to trial on the policyholder’s cross-claims against Indiana Insurance. The jury eventually awarded the policyholder $925,000 for emotional pain and suffering, stress, worry, anxiety or mental anguish and $2.5 million in punitive damages as a result of Indiana Insurance’s poor claims handling.
The facts in the policyholder’s favor showed that Indiana Insurance ignored a red flag by insuring the property even though the policyholder advised that a gas station had operated on the property when he applied for insurance. Indiana Insurance apparently did no due diligence prior to deciding to insure the property.
Second, the insurance company did nothing to protect the policyholder after receiving notice of the neighbors’ claims. Instead of taking any action for approximately a year to investigate the neighbors’ claims, Indiana Insurance simply protected itself by promptly assigned a field investigator to determine whether the policyholder was aware of the contamination before insuring the property.
Third, after the neighbors filed a lawsuit, the evidence showed that the attorney the insurance company hired to represent the policyholder was not acting as independent counsel, but was at all times controlled by Indiana Insurance adjusters who intended to deny coverage. The policyholder became dissatisfied with the insurer’s appointed attorney and, represented by personal counsel, filed a motion to discharge the attorney. The attorney filed a motion to withdraw because of a “conflict of interest.” The policyholder then spent approximately $400,000 of his own money to have his own attorney defend him.
Fourth, Indiana Insurance had one adjuster handling the coverage issues, the liability issues, and the bad faith issues. The evidence at trial showed that this particular adjuster, who was a member of the special claims unit and handled environmental claims, closed 72% of all insurance claims assigned to him without payment.
All of these acts and omissions led the Kentucky Court of Appeals to affirm the jury award. This case shows why it may be important for policyholders to negotiate “choice of counsel” coverage when buying insurance because the policyholder can choose its own attorney to defend claims, or simply hire their own attorney to monitor the insurance company’s assigned attorney to make sure the assigned attorney is pursuing a vigorous defense.
Purchasing commercial real estate requires buyer due diligence to reduce the risk of catastrophic financial ruin caused by environmental contamination. In order to fulfill this diligence, most buyers engage a qualified environmental consultant to perform a Phase I Environmental Site Assessment (ESA) of the property and the surrounding area before the purchase. This is because a properly conducted Phase I ESA may allow the buyer to qualify for certain defenses under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. §§ 9601 et seq., which imposes liability on current and certain past owners and operators of property for the release of hazardous substances into the environment, without regard to fault. In a California case, Cappola v. Smith, buyers recently learned a due diligence lesson the hard way for property they purchased 20 years ago that turned out to be contaminated.
In 1995, Martin and Martin Properties, LP (M&M), a local real estate investment company that had previously invested in only farmland, decided to purchase a commercial office building in downtown Visalia, California. The purchase price was approximately $1.4 million, and was supported by an appraisal. An image from Google maps shows the property at the corner of Main Street and Willis Street.
Before purchasing the property in 1995, the buyers reviewed three reports (all prepared four years prior), including a Preliminary Site Assessment, a Subsurface Investigation Report, and a Preliminary Structural Evaluation. They also physically inspected the property, walked the streets, spoke with local business owners, and consulted with a financial consultant regarding the past use and history of the property. But, what they did not do was retain their own environmental professional to perform a Phase I ESA.
A dry cleaning business called Miller’s Dry Cleaning had operated at the site from 1959 until 1971, but had a street address of 110 North Willis Street. During the construction of the commercial building at 520 North Main, the area known as 110 North Willis became part of the northern portion of 520 North Main. The plaintiffs’ expert said this fact was discernable by reviewing old Sanborn insurance maps. However, there was no evidence that M&M had ever looked at the Sanborn maps or otherwise knew of the presence of the dry cleaning business at 110 North Willis.
Dry cleaning businesses, like Miller’s Dry Cleaning, commonly used tetrachloroethylene (also referred to as perchloroethylene, perc, or PCE) in their operations. Old dry cleaning businesses are notorious for releases of PCE into the environment, often through no fault or intent of the business owners. Solvents like PCE are known to travel quickly to groundwater and migrate offsite. I have had several cases where PCE has migrated more than a mile from the source of the contamination.
In 2008, the California Department of Toxic Substances Control (DTSC) discovered PCE contamination surrounding another dry cleaning business in downtown Visalia, namely Coppola’s One Hour Martinizing, located at 717 West Main Street. Coppola and owners of the 717 West Main entered into a consent decree with DTSC to clean up the contamination. In its search for other responsible parties, a subsurface study discovered contamination from Miller’s Dry Cleaning and another nearby dry cleaner approximately a block away. As is common in environmental cases, Coppola brought suit against the other dry cleaning businesses, current and past property owners where the dry cleaners were located, including M&M as the current property owner from whose property there was a release of hazardous substances, and others.
M&M filed a motion for summary judgment to be dismissed from the lawsuit on the basis of CERCLA’s “innocent landowner” defense. To prevail on this defense, M&M had to prove that it had no reason to know of the contamination on the property at the time of purchase, and that it performed “all appropriate inquiries” in accordance with generally accepted good commercial and customary standards and practices, into the previous ownership and uses of the property. Case law holds that what constitutes “good commercial standards and practices” are generally those prevailing commercial standards at the relevant time and in the relevant location.
The court denied M&M’s motion finding that there were factual issues that had to be resolved by a trial. Namely, the court was uncertain whether it was reasonable for M&M to rely on four year old reports at the time of its purchase decision, whether M&M should have hired an environmental professional to investigate the past uses of the property, whether M&M should have investigated the Sanborn maps that would have disclosed the Miller’s Dry Cleaning business, and other factual issues. For example, in addition to being four years old at the time it was reviewed, the Preliminary Site Assessment stated that it was prepared for a particular client and others who wished to rely on the findings had a duty to determine the adequacy of the report for their intended use (and there was no evidence regarding M&M’s determination that the report was adequate for its purchase of the property); PCE was detected in nearby wells below regulatory limits (but there was no analysis whether further investigation was warranted); and that no onsite soil or groundwater samples had been taken (which would have provided the best evidence of soil and groundwater conditions).
Also, the case arose just after ASTM E-1527-93 (Phase I ESAs) came into existence and just before compliance with this ASTM standard was deemed good commercial practice for compliance with CECLA’s obligation for all appropriate inquiries. There was no evidence that M&M’s actions complied with the ASTM standard. Had M&M conducted all appropriate inquiries using the ASTM E-1527-93 standard for Phase I ESAs, it is likely the court would have granted the motion. Moreover, without an expert witness to tie up the factual issues, the court was left with too many unanswered questions and denied M&M’s motion.
As of the date of this article, all appropriate inquiries can be established by having a Phase I ESA in compliance with ASTM E-1527-05 (the 2005 standard) or ASTM E-1527-13 (the 2013 standard). As of October 6, 2015, the ASTM E-1527-05 standard will no longer be recognized by EPA as compliant with the industry standard. See 79 Fed. Reg. 60090 (Oct. 6, 2014). Accordingly, many environmental professionals and prospective purchasers of real property are conducting their Phase I ESAs in compliance with 2013 standard, i.e., ASTM E-1527-13.
Nothing serves as a death knell for lawsuits in federal court more often than exaggerated claims propped up by wobbly expert testimony. This rang true for the City of San Diego’s lawsuit seeking approximately $250 million in damages from Kinder Morgan and its predecessor companies for the contamination of approximately 166 acres of City-owned land surrounding and underlying Qualcomm Stadium (the “Property”). On January 25, 2013, the United States District Court for the Southern District of California entered summary judgment in favor of Kinder Morgan against all of the City’s claims. California v. Kinder Morgan Energy Partners, L.P., et al., 2013 WL 314825 (Jan. 25, 2013)
The facts giving rise to City’s lawsuit showed that Kinder Morgan and its predecessors operated the Mission Valley Terminal, located next to the Property, since the 1960s. The Mission Valley Terminal serves as the central hub for distributing gasoline in San Diego County. As early as 1992, the City was on notice that Kinder Morgan and its predecessors released petroleum products into the soil, contaminating the Property and groundwater. In 1992, the California Regional Water Quality and Control Board (“Water Board”) ordered the investigation and remediation of the contamination at the Mission Valley Terminal. To comply with this order, Kinder Morgan and its predecessors spent approximately $60 million addressing the contamination.
Unhappy with the progress of the remediation, in 2007, the City sued Kinder Morgan and its predecessor alleging the petroleum releases from the Mission Valley Terminal contaminated the Property and damaged the City. The City claimed approximately $250 million in damages, including $126 million in damages to remediate its water supply and $120 million in real estate “loss of use” damages.
Kinder Morgan dismantled the City’s claims. It began by moving to strike the City’s expert for having offered unreliable opinions. Then, Kinder Morgan attacked the City’s damages claims as speculative, pie-in-the-sky aspirations, with no footing grounded in fact.
The Court began its opinion by granting Kinder Morgan’s Daubert motion striking the testimony of the City’s damages expert, Mr. Ray Forrester. The expert argued that on top of the $60 million spent to date addressing the contamination, Kinder Morgan should be required to spend another $126 million dollars cleaning up the contamination to “background” levels. The Court rejected the expert’s opinion as “personal” and “subjective” finding that: (1) outside of this litigation, the expert had never previously offered an opinion that the required cleanup standard was to background conditions; (2) the Water Board does not require remediation to background conditions; and (3) the expert was not aware of any petroleum site in California—or the country for that matter—where the stated goal was to clean up to background. The Court struck the expert’s opinions as unreliable deciding “the lack of support for Forrester’s opinion indicates that he is not employing the same level of intellectual rigor of someone in his field, as his conclusions are predetermined by unsupported propositions.”
The Court then entered summary judgment against the City’s $126 million water damages claim finding it speculative, merely possible, and contingent. The evidence showed that while the City wanted to use the aquifer, it had not used the aquifer for drinking water purposes since 1936. The undisputed evidence showed that the City has had “no operational water supply wells in the ground since that time, had no comprehensive water project developed, and has not performed any feasibility studies to determine whether such a project could be implemented. … Since that time, the population of the City has grown exponentially, the area over and around the Basin has been developed for commercial and residential purposes, numerous new environmental and regulatory rules and laws have been enacted, a stadium was built on top of the aquifer, and the size and complexity of the City government and fiscal situation has changed significantly.” Therefore, the Court concluded that the City could not show that using the groundwater was even feasible, let alone hampered by Kinder Morgan’s actions, stating:
"Ultimately, the link between Kinder Morgan’s conduct (petroleum discharges) and the City’s water damages and injury (inability to use the Mission Valley basin for water extraction and storage) is speculative, merely possible, and contingent. The City could decide to abandon its water project after it conducts the necessary tests, could be unable to finance the project, could have difficulty during the political approval process, or could decide that the project is not feasible after all. Further, if the City could not obtain permits or gain regulatory approval, the water project would never be implemented. Under these circumstances, the City would not have suffered damages because the City could not have used the basin for water extraction and storage in any event. Because the City lacks evidence of a viable water project, it cannot establish at trial that its damages comply with the basic tenet of California law against speculative, merely possible, or contingent damages."
The Court observed that “the City could have cured the speculative nature of its water damages by either presenting a fully-developed, ready-to-build water project that has passed all technical, regulatory, political, and fiscal hurdles or by proffering evidence that a water project on the Property is viable and could be implemented.”
Finally, the Court rejected the City’s $120 million loss of use damages claim. The Court reasoned that the City was only entitled to the rental value of its land as it existed during the time of Kinder Morgan’s wrongful occupation. During that time, the City used the property as a stadium. The City failed to present any evidence that the land suffered a decrease in rental value, “likely because the City has collected rent under its existing leases on the lot, and has not lost any revenue due to the contamination or remediation efforts. Further, the City has never cancelled or interrupted any other use of the Property due to the contamination or remediation, including collect football games, Monster Jam or Supercross events, or Major League Soccer games.” Ultimately, the Court entered judgment in favor of Kinder Morgan and its predecessors “because the City has not complied with applicable statutes of limitation nor gathered the evidence necessary to meet its burden of proof at trial.”
Since the order, the City filed notice of its intent to appeal the decision to the U.S. Court of Appeals for the Ninth Circuit, while Kinder Morgan has filed a bill of costs seeking reimbursement of over $327,000 in costs from the City. The City is reported to have spent approximately $4.75 million over the past five years pursuing the lawsuit, and will incur additional costs appealing the order.
 Kinder Morgan Prevails in City’s Qualcomm Stadium Suit, Scoop San Diego, Feb. 27, 2013.
Lawsuits for personal injuries, medical monitoring, and remediation claims resulting from historic environmental contamination often involve successor liability claims, where the corporation that caused the pollution no longer exists, but there appears to be a successor corporation operating the same or a similar business. Below is a general summary of the legal rules pertaining to successor liability claims, with the caveat that the common law in your jurisdiction may vary.
Under traditional common law, when a corporation purchases another corporation’s assets, the assets are typically bought free and clear of any unrecorded liens, and the buyer is generally not liable for the seller’s debts or other liabilities. However, under the successor liability doctrine, a buyer of another corporation’s assets may be held liable to answer for the seller’s debts or other liabilities where:
(1) the buyer expressly or impliedly agrees to assume them;
(2) the transaction amounts to a de facto merger or consolidation of the buyer and the seller;
(3) the buyer is a mere continuance of the seller corporation; or
(4) the transaction is fraudulent to escape such obligations.
See Yankee Gas Servs. Co. v. UGI Utilities, Inc., 852 F.Supp.2d 229, 246 (D. Conn. 2012) (finding de facto merger occurred sufficient to impose CERCLA and Connecticut state environmental law liability on buyer under federal common law and either Connecticut or Pennsylvania law); Reed v. Reid, __N.E.2d __, 2012 WL 6607927, *16 (Ind. 2012) (finding genuine issue of material fact concerning successor liability under Indiana law for claim asserted under the Indiana Environmental Legal Action statute); New York v. Nat’l Serv. Indus., Inc., 460 F.3d 201, 209 (2d Cir. 2006) (corporation that bought the assets of a dry cleaning business was not liable for seller’s liability under CERCLA and New York state law under a de facto merger theory of liability); Opportunity Fund, LLC v. Epitome Systems, Inc., __ F.Supp.2d __, 2012 WL 5930592, *7 (S.D. Ohio 2012) (applying Ohio law). The hallmarks for each exception are noted below.
1. An Express or Implied Assumption of Liability.
The Yankee Gas decision held that to transfer CERCLA liability, the transaction agreement must contain language broad enough to allow a court to say that the parties intended to transfer either contingent environmental liability or all liability. 852 F.Supp.2d at 244. This requires a thorough analysis of the language used in the purchase agreement.
2. A De Facto Merger.
A de facto merger happens where a transaction is essentially a merger in all but name. The concept is frequently applied in cases where "the seller’s shareholders retained their interest in the transferred assets through an ownership interest in the [new] corporation, while freeing the assets from the claims of the seller’s creditors by disguising the transaction as an asset sale." Opportunity Fund, 2012 WL 5930592, *13 (internal citations omitted). Generally, at common law, the hallmarks of a de facto merger include: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation as soon as possible; (3) assumption by the purchaser of the debts and liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets, and general business operation. (A distinction under Indiana common law, for instance, is that a de facto merger does not require continuity of ownership. Reed, 2012 WL 6607927 at *16.)
3. The Mere Continuation.
The mere continuation exception asks whether the successor corporation is a reincarnation of the acquired corporation. The mere continuation exception is based on the continuation of the corporate entity, and not the business operation. This happens, for example, when one corporation sells its assets to another corporation with the same people owning both corporations. Considerations include whether there is a continuation of shareholders, directors, and officers into the new corporate entity, and the adequacy of the consideration paid for the assets.
4. A Fraudulent Transaction.
The fraudulent transaction exception asks whether the transaction is structured with the intent to escape the seller’s debts and liability and has hallmarks of fraud such as inadequate consideration and lack of good faith.
For buyer’s considering whether to purchase the assets of an existing corporation, the best time to consider whether the asset sale may result in successor liability is when the parties are negotiating the purchase agreement because a transaction can be structured in a variety of ways to avoid successor liability.
One of your most valuable rights under an insurance policy is having your insurance company defend you from a covered claim, no matter how frivolous. This is known as the "duty to defend." The Alabama Supreme Court recently joined the majority of jurisdictions in holding that a potentially responsible party (PRP) letter from USEPA under the Superfund (CERCLA) law satisfies the "suit" requirement under a commercial general liability insurance policy, triggering the duty to defend. Travelers Casualty and Surety Co. v. Alabama Gas Corp., 2012 WL 6720790 (Ala. Dec. 28, 2012).
The duty to defend is separate and broader than the duty to indemnify. Commercial general liability (CGL) policies generally impose on the insurer two duties: a duty to defend a claim potentially covered by the policy, and a duty to indemnify the insured for damages the insured is legally obligated to pay. The duty to defend its insured from any suit alleging bodily injury, property damage, or personal injury covered by the policy terms is triggered no matter how frivolous the claim. The duty to defend has generally been held to be separate from and broader than the insurer’s duty to indemnify the insured for damages.
A PRP letter from USEPA has dire consequences. A PRP letter is not your garden variety demand letter. Under CERCLA and equivalent state laws, a PRP’s substantive rights and ultimate liability are affected from the start of the administrative process. CERCLA is a strict liability statute meaning liability is imposed regardless of fault. Liability can be joint and several, and defenses are very limited. The failure to comply with an EPA Section 106 administrative order directing a response action can result in substantial fines ($25,000 per day) and treble damages. Furthermore, if the PRP refuses, USEPA may implement any investigatory and remedial action it deems necessary at a site, subject only to an abuse of discretion review. That means, if challenged, a district court only determines whether USEPA’s actions were arbitrary and capricious. This is a very low threshold for the agency, and a very high threshold for a PRP to overcome. USEPA-conducted CERCLA response actions tend to be significantly more expensive than actions conducted by PRPs.
In Travelers v. Alabama Gas Corp. (Alagasco), Alagasco was a corporate successor to a company that long ago operated a gas manufacturing process at the site. The gas manufacturing plant was demolished and eventually replaced by public housing in 1970. Almost 40 years later, USEPA issued a Section 104(e) information request to regarding the site and a Pollution Report. The Pollution Report advised that USEPA’s Enforcement Section was assessing PRP liability and ability to pay to complete a removal action. Further, the report advised that if USEPA determined that one or more PRPs were able to complete a removal action, the agency may pursue an Administrative Order on Consent with the PRPs to carry out a time-critical removal action and provide reimbursement of past response costs. When Alagasco demanded that its insurers (all subsidiaries of Travelers) defend this claim and provide coverage, the insurers refused arguing that the PRP letter was not a "suit" under the CGL policies because no lawsuit had been filed against Alagasco. The issue eventually made its way to the Alabama Supreme Court, which rejected Travelers’ arguments.
The majority of jurisdictions hold that a PRP letter triggers a duty to defend. With Alabama, thirteen state supreme courts have now determined that a PRP letter issued by USEPA or an equivalent state agency constitute a "suit" under CGL policies sufficient to trigger an insurance company’s duty to defend its insured – Alabama, Colorado, Connecticut, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Vermont, and Wisconsin. State trial and appellate courts and federal courts have interpreted the law of the following states as similarly triggering a duty to defend – Georgia, Hawaii, Idaho, Indiana, Kansas, New Jersey, New York, Oklahoma, Oregon, Texas, Utah, Washington, and Wyoming.
Only three state supreme courts have rejected this view – California, Illinois, and Maine. Other state and federal courts have interpreted the state laws of Delaware, Florida, Louisiana, Missouri, Ohio, Pennsylvania, South Carolina, and Utah as not triggering a duty to defend. (Yes, there are conflicting opinions concerning Utah law.)
In practice, anyone receiving a PRP letter should contact their lawyer to determine how to proceed to notify their insurance company of the claim and demand a defense and indemnification. Environmental professionals should also be alert to ask their clients whether they have spoken to a lawyer practicing environmental law and/or insurance coverage law to determine their respective rights under CGL policies and whether the claim can be paid under the client’s insurance policies.
Treatises have been written on the duties of defense and indemnity. For a thorough discussion of these duties for environmental claims, see Environmental Liability and Insurance Recovery, Frank J. Deveau and David L. Guevara (ABA Book Publishing 2012). You can also read my prior blog posts on the subject: Using Insurance to Pay for Environmental Response Costs, Including a Remedial Investigation / Feasibility Study; Environmental Services: Costs of Defense or Indemnification?; Beware of Your Insurer’s Reservation of Rights; Using Insurance to Pay for Environmental Cleanups: California Approves All Sums With Stacking.
Bill Wagner has been recognized by Best Lawyers in America in several categories including Insurance Law and has achieved a Chartered Property and Casualty Underwriter (CPCU) designation from the American Institute of Chartered Property and Casualty Underwriters, Inc. (AICPCU).
Having represented environmental contractors accused of malpractice, I welcomed a recent federal court decision finding that an environmental contractor is not liable under RCRA simply because it hired a subcontractor that performed a wrongful act, even though the act resulted in the release of a hazardous waste into the environment.
In National Exchange Bank and Trust v. Petro-Chemical Systems, Inc., et al., 2012 WL 6020023 (E.D. Wisc. Dec. 3, 2012), a contractor, Petro-Chemical Systems, was hired to test the tightness of an underground fuel oil storage tank. Petro-Chemical subcontracted this work to Tanknology, Inc. Tanknology’s technician performed the test, which included disconnecting pipes to the furnace and reconnecting them. An investigation showed that the piping from the tank was reconnected backwards, which the parties agreed led to a buildup of pressure that caused the seals on the pumps to fail. Approximately 550 gallons of fuel oil spilled from the broken seals and entered into the basement. Some of the fuel oil was suspected of having seeped into the soil below the basement.
The bank that hired Petro-Chemical filed a lawsuit against Petro-Chemical, Tanknology, and their respective insurers asserting claims under Wisconsin state law for breach of contract, negligence, and nuisance, and a claim under the federal Resource Conservation and Recovery Act (RCRA). Of particular importance was the court’s analysis of the RCRA claims, which unlike the common law claims provides a statutory remedy that includes reimbursement of litigation expenses, such as attorneys’ fees and costs.
The bank alleged that Petro-Chemical was responsible for damages under RCRA because it “contributed” to the spill by subcontracting the work to Tanknology and then failing to properly supervise and inspect Tanknology’s work. Under RCRA,
any person may commence a civil action on this own behalf … against any person, … including any past or present generator, past or present transporter, or past or present owner or operator of a treatment, storage, or disposal facility, who has contributed or is contributing to the past or present handling, storage, treatment, or transportation, or disposal of any solid or hazardous waste which may present an imminent and substantial endangerment to health or the environment.
42 U.S.C. § 6972(a)(1)(B).
The court rejected the bank’s RCRA claim as to Petro-Chemical. The court concluded that while Congress intended the term “contributed” to be interpreted liberally, “the court finds no reason to conclude that Congress intended the term ‘contributed’ to be an invitation to string together an expansive causal chain of tangential defendants.” In so holding, the court rejected the bank’s argument that RCRA liability exists “simply because [Petro-Chemical] hired an allegedly malfeasant subcontractor.” Instead, the court noted the absence of evidence that Petro-Chemical contributed to the waste—“Petro-Chemical did not generate the waste, nor is there any evidence that Tanknology has a record of unlawful actions, much less that Petro-Chemical knew this. Here, Petro-Chemical simply hired Tanknology as a subcontractor.”
The court also denied the bank’s motion for summary judgment on its RCRA claim against Tanknology, but for a different reason. The court concluded that Tanknology’s switching of the piping,
is plainly sufficient to support a conclusion that Tanknology contributed to the spill. Congress certainly did not intend to allow a polluter to avoid liability through, for example, a creative use of timed release valves and ensuring to be a good distance away when the hazardous waste is dumped. Tanknology’s alleged actions led directly to the spill and in the court’s view this is quite obviously within the scope of the statute.
But, there was a factual dispute over whether Tanknology, or someone else, switched the piping. Tanknology presented evidence that the property was unoccupied and left insecure during the relevant time period. For this reason, the court denied the bank’s summary judgment motion and held that a trial was necessary to determine Tanknology’s liability under RCRA.
Post-closing diligence is critically important when buying or selling environmentally-contaminated property. Whenever contaminated property changes hands, one of the first questions asked is who will be responsible for cleaning up the contamination and obtaining closure from the appropriate regulatory agency. Clients often turn to their lawyers to come up with the appropriate terms and conditions to best protect their interests, but ultimately the clients make the decision of the terms they are willing to accept and the risks they are willing to take. But what happens post-closing?
For example, assume a seller will remain obligated to “remediate the contamination in a diligent and commercially reasonable manner so as to promptly achieve closure with the responsible regulatory agency.” Will the seller’s post-closing proposal to achieve closure by a decade of monitoring and natural attenuation, as compared to an active remediation system that can achieve closure in half the time, be interpreted by the appropriate regulatory agency or the courts in your jurisdiction as “diligent and commercially reasonable”?
A recent case examining the problems that can arise when post-closing diligence goes astray is Houston Auto M. Imports North, LTD. v. R & A Harris South, L.P., 2012 WL 3628878 (Tex. Ct. App. Aug. 23, 2012). There, the seller sold an automobile dealership to a buyer for $3.1 million. The parties each had their own environmental consultant conduct pre-closing environmental due diligence. As a result of their investigations, they discovered soil and groundwater contamination and suspected the contamination source to be a former underground storage tank. Solvents used to clean automobiles were stored in the tank.
The buyer turned to its environmental consultant for a “best case” and “worst case” assessment of the time and cost to remediate the contamination. The consultant’s best case scenario involved a plan consisting of 5 years of monitoring with natural attenuation at a cost of approximately $180,000. The worst case scenario, which assumed the contamination migrated offsite, involved more than 10 years of monitoring and an active remediation system to achieve closure at a cost of approximately $730,000. As you might imagine, the closing was delayed while the parties haggled over the details.
Eventually, the parties agreed to amend their purchase agreement and enter into an environmental indemnification agreement. They agreed that the seller would be responsible for achieving regulatory closure through a proposal for monitoring with natural attenuation, for interacting with the regulatory agency, and directing the remediation to immediately commence and be conducted in a reasonably diligent and commercially reasonable manner. Further, the seller agreed to indemnify and defend the buyer from and against all losses, including but not limited to, attorneys’ fees and environmental consultant expenses “incurred in investigating, preparing for, … or defending against any action” arising from or in connection with the removal of any hazardous substance on or released from the property prior to the effective date of the agreement.
To make a long story short, the regulatory agency approved the remediation plan, but the seller failed to abide by the plan by failing to conduct quarterly groundwater monitoring for a period of 3 consecutive quarters. What was once thought to be a localized area of contamination with concentrations above regulatory closure levels increased in concentration by an order of magnitude and the contamination spread to the southern edge of the property at concentrations higher than regulatory closure levels. Over the course of the next few years, the buyer had its consultant install borings and take its own groundwater samples and submit a competing site investigation and remediation plan to the agency.
In 2008, 6 years after the closing and 4 years after the agency first approved the remediation plan of natural attenuation and monitoring, the buyer filed a lawsuit against the seller for breach of contract and declaratory judgment. The buyer sought to recover almost $86,000 in attorneys’ fees and about $80,000 in environmental consultant fees, costs, and expenses. The buyer's damages were incurred as a result of the environmental contamination on the property and the seller’s alleged failure to diligently pursue remediation of the property and complete the remediation within a reasonable time after closing.
The seller raised several defenses. The seller first argued that the delays in the beginning of the remediation activity were ordinary delays typically experienced when dealing with a government agency. Second, the seller argued that while it missed some groundwater monitoring events, no enforcement action was filed against it by the agency. Finally, based on the seller’s analysis of other properties in the State’s voluntary cleanup program, 15 years was a reasonable time for remediation and achieving closure so that the remediation was, in fact, progressing diligently.
The trial court rejected each of the defenses and ruled for the buyer. The trial court concluded that the seller’s failure to obtain a certificate of completion within 4 years constituted a breach of its contractual obligations and awarded the buyer approximately $117,000 in damages. The trial court also declared that the seller would be required to indemnify the buyer for future costs and expenses the buyer may incur as a result of the seller’s cleanup and remediation activities.
Ten years to the day after the August 23, 2002 closing on the real estate transaction, the Texas Court of Appeals affirmed the trial court’s decision finding that “the trial court could have reasonably concluded that it was not ordinarily prudent or diligent for [the seller] to go over one year without conducting groundwater monitoring as required by [the agency], especially when the chance for expansion of the contamination plume was known.” And, in the years between the closing and the beginning of trial, the contamination spread from a localized area near 2 monitoring wells to the southern boundary of the property with results above the protected concentration levels. In addition, the Court of Appeals held that the failure to conduct the groundwater monitoring and reporting to the agency constituted a breach of contract. Finally, the Court of Appeals upheld the finding on the declaratory judgment claim.
In summary, it is often critically important that the seller and the buyer each have a knowledgeable and experienced environmental consultant for post-closing advice and to make sure the post-closing obligations are diligently pursued. In the long run, the cost of a great consultant who can work with the other party’s consultant, pulling or prodding to keep the project moving toward closure, will likely be less expensive and time consuming than the cost of resolving a dispute through a lawsuit.
Victims of federally-prosecuted environmental crimes have the right to full and timely restitution under the federal Crime Victims’ Rights Acts (the "Act"). A recent case raises the issue of what specific damages are recoverable under the Act. In United States v. CITGO Petroleum Corp., et al., Case No. 2:06-00563, pending in the Southern District of Texas, 15 crime victims have asked the Court to order CITGO to fund two trusts with approximately $30 million for restitution damages.
The Facts – A jury found CITGO Petroleum Corp. and CITGO Refining and Chemicals Co., LP (collectively, "CITGO") guilty of two felony Clean Air Act violations for conduct occurring between January 1994 and May 2003. CITGO illegally used open-top tanks at its East Plant refinery in Corpus Christi, Texas to remove oil from water without required emission equipment. Chemical emissions from the tanks blew into the neighborhood surrounding the plant and caused health effects to people living around the refinery. The Court identified 15 crime victims who suffered injuries from CITGO’s crimes, including "burning eyes, bad taste in the mouth, nose burning, sore throat, skin rashes, shortness of breath, vomiting, dizziness, nausea, fatigue, and headaches." (Docket Entry ("DE") 819, at p. 7.) These symptoms resulted from what prosecutors called a "chemical cocktail" containing the by-products of petroleum refining, including benzene; ethyl-benzene; toluene; 1,2,4 tri-methyl-benzene; xylenes (total); styrene; 1, 3 butadiene; methyl butyl ether; and a host of other hazardous compounds.
The Crime Victims’ Rights Act of 2004, 18 U.S.C. § 3771, grants crime victims certain rights, including "the right to full and timely restitution as provided by law." On September 25, 2012, the Court entered an order establishing a time limit for the Government to identify additional crime victims. To meet its obligations, the Government planned to hold a series of community meetings. In preparation for the meetings, the Government sought the Court’s blessing of its proposed instructions to public (DE 836), which stated in part:
[Y]ou may also believe that CITGO should pay for the harm its crimes did to you directly. In a criminal case, this is called "restitution." Restitution is different from (and typically smaller than) the kind of award you could get if you sued CITGO and won. If you think you have other claims against CITGO, you should consult an attorney."
(DE 836-1.) The Government then gave some examples of appropriate restitution damages in a draft victim’s affidavit. These examples included $90 for the cost to visit a doctor because of breathing problems and $375 for the cost to repaint a car that suffered surface damage.
The Requested Restitution – The 15 crime victims instead sought much broader restitution damages than that proposed by the Government according to the "Community Victims’ Sentencing Memorandum, Requests for Restitution, and a Remedial Order Addressing the Harms Created By CITGO." (DE 831.) There, the 15 crime victims asked for reimbursement of out-of-pocket losses for future medical screening costs and attorneys’ fees, and approximately $30 million to establish two trust funds for themselves and other similarly situated crime victims (estimated to be 300 people in total).
First, the 15 crime victims claimed restitution for themselves for medical screening of $80,900 based on figures from the Texas Department of State Health Services for cancer screening. This amounted to $250 per person per year. Second, they asked for attorneys’ fees and costs, but claimed the amount would be unknown until the case concluded. Third, they asked the Court to create the two trust funds for an estimated 300 total crime victims (including the 15 who filed the request) for:
The crime victims argued that the United States Sentencing Guidelines § 5E1.1(b)(2) "sets a high bar for declining to provide restitution" (DE 831, p. 12), and pointed to CITGO’s profits of more than $1 billion earned by its East Plant Refinery during the relevant time period as justification for their request for almost $30 million.
Analysis – Interestingly, the 15 crime victims have not sought any restitution for past out-of-pocket medical or other expenses incurred between January 1994 and May 2003. And, ordinarily, the question of whether a person has suffered an injury from a chemical exposure involves complicated questions of medicine and science. Yet, the 15 crime victims have not submitted any of the traditional causation proof evidence typically offered in a toxic tort case, e.g., testimony from a medical expert, toxicologist, or epidemiologist, and have instead simply sought a summary award of restitution. It will be interesting to see how the Court rules.
Writing great business letters that will withstand the test of a lawsuit, look favorably on the author, and be admitted into evidence is both an art and a science. I just finished a three-week trial where the parties were looking at requests for proposals (RFPs), responses, purchase orders, letters, and emails written seven years ago to prove the intent of the parties at the time of their communications. While sophisticated parties often look to their lawyers for input on the RFPs, responses, and purchase orders, business people often take the lead in the accompanying correspondence without their lawyers’ guidance. These communications can often make or break a case and should be written cautiously. You never know if an author of a company’s business letter will be available years from now to explain his or her intentions so great business letters have to be written to stand on their own and withstand the test of time. Below is a list of elements often contained in great pre-lawsuit business letters.
1. Use a professional and respectful tone. No matter how mad you are at the other party for breaking their promise and causing you or your company damages, you want your correspondence to convey to a judge or jury that you are a credible and professional business person trying to deal with a serious issue in a business-like and respectful manner. Don’t write anything that will detract from your professionalism. Don’t write anything that could be misconstrued or that will hurt your case. (If you do, write a follow-up letter to clear up any confusion.) Finally, don’t write anything that you would be embarrassed to see republished on the front page of the newspaper.
2. Lead with your main point and explain in an introductory paragraph why you are writing and what you want the other person to do or not do in response. It is hard to convince a judge or jury that the main point of your letter is an idea buried in the middle of a paragraph on page five of a seven-page letter. Instead, communicate your main point up front. Tell the person you are writing and what you want them to do or not do in response.
3. Explain the context of the events surrounding why you are writing. A great business letter will stand on its own and explain the surrounding context of events. How often have you seen a chain of back-and-forth emails, none of which really sets forth the dispute in a clear and understandable manner. For example, if you hired a company to work as a subcontractor for a particular project and the company’s delays lead to big-time damages, a great business letter would explain to the judge or jury reading the letter that the subcontractor knew that the time for performance was of the essence and that the subcontractor knew that if they failed to work in a timely fashion, all kinds of damages could result as a consequence. You might write:
My corporation asked XYZ Company to perform certain work as its subcontractor in regards to the ABC project. As set forth in letters to XYZ Company dated January 15, March 15, and April 1, 2010, you were advised you that time was of the essence as five other contractors were basing their work schedules off of XYZ Company’s construction schedule. XYZ Company was advised that the owner would incur costs of $100,000 per week for each week the project was delayed past the October 1, 2012 deadline. XYZ Company acknowledged and accepted these risks in letters and emails dated January 16, March 22, and April 2, 2010, copies of which are attached….
Pulling together a complete and accurate summary of the facts showing the context of events behind your letter will save you time and money years from now should you have to recreate what the dispute was all about. This is especially true for companies where there is a risk of employee turnover or where key players may retire or not be otherwise available to testify years after the dispute arose. Also, a letter explaining the context of events occurring at the time will be viewed as more credible to a judge or jury than correspondence created after a lawsuit in filed with the benefit of 20-20 hindsight. A detailed letter may even refresh a witness’s memory of events from long ago and be allowed to be read into evidence because of the indicia of credibility surrounding the preparation of the correspondence.
4. End your letter with a request that if the other person disputes any of the facts or conclusions in your letter, they should immediately contact you. The rules of evidence allow parties to introduce adoptive admissions; that is, the failure to respond to a false statement is seen as a tacit acknowledgement that the statement must be true. The idea is that if a statement were not true, the party should have refuted it quickly. This is one of those instances where a party’s silence can be used against it. For example, if the subcontractor failed to respond to the statements set forth above, the prime contractor could argue that the subcontractor’s silence was an acknowledgement that the time for performance was of the essence and the subcontractor knew of the dire consequences for failing to timely perform.
5. Keep all related correspondence in one central location. Make sure that everyone involved in a project that looks like it is headed to a lawsuit keep copies of all letters and emails in one central location in addition to their individual files. If someone writes an email in response to a letter, you need to make sure you have it with the other correspondence to get a full picture of the events leading to the dispute.
As one of my many mentors once said, “If it’s not in writing, it didn’t happen.” Writing great business letters is a skill that should be stressed in every business.
An environmental contamination case set for trial based on liability under the Resource Conservation and Recovery Act ("RCRA") for “passive inaction and studied indifference” recently settled, but the court filings provide a valuable lesson to property owners to address contamination promptly and to document delays outside of their control (such as agency review and approval of work plans) rather than being second-guessed for delays.
To establish a claim for injunctive relief under RCRA, 42 U.S.C. § 6972(a)(1)(B), a plaintiff must show that: (1) the conditions at the site may present an imminent and substantial endangerment; (2) the endangerment stems from the handling, storage, treatment, transportation, or disposal of any solid or hazardous waste; and (3) the defendant has contributed or is contributing to such handling, storage, treatment, transportation, or disposal.
In Sisters of Notre Dame de Namur v. Garnett-Murray, 2012 WL 2050377 (N.D. Cal. 2012), the Sisters inherited contaminated property through a charitable bequest in a will. The property was located next to a long-standing dry cleaning business (operated since about 1960) that used tetrachloroethylene (also known as perchloroethylene, perc, or PCE) in its business until 2009. PCE from contaminated soil below the dry cleaning business migrated in the form of PCE vapor into the soil beneath the Sisters’ property next door. From there, the PCE vapor migrated up and into the indoor air of the Sisters’ property. The PCE vapor inside the Sisters’ property was at a level of 15 times the local Environmental Screening Level.
The Sisters discovered the PCE contamination shortly after inheriting the land in October 2007. They intended to sell the property to a local residential developer to fund their charitable activities, but building permits could not be issued until the contamination was reduced below “non-dangerous levels”. The owners of the shopping center that leased the property to the dry cleaning business obtained reports of the contamination beneath the shopping center in 2006 and 2007 while negotiating with potential buyers, but made no remediation efforts until 2010. According to the opinion, the Sisters filed their lawsuit after the remediation plan was approved but before remediation began. The remediation was ongoing as of the June 2012 decision.
The decision is attached below, but one interesting point dealt with whether the shopping center owners “contributed” to the handling, storage, treatment, transportation, or disposal of hazardous waste or whether they were simply a drop box for monthly checks. When the Sisters moved for summary judgment on their RCRA claim, the court noted that “passive inaction or studied indifference can create liability under RCRA." Id. at *6. This is because
RCRA is not primarily targeted at punishing environmentally unsound acts, but rather at reducing the generation of hazardous waste and ensuring the property treatment, storage, and disposal of waste which is nonetheless generated. Therefore, an owner’s potential culpability is irrelevant.”
The court noted that undisputed evidence showed the shopping center owners knew of PCE contamination in 2006, the PCE vapor may have caused or may still be causing further damage to the land and surrounding environment, and defendants took no steps to remediate the contamination until 2010. The court then held that it was "not prepared to hold as a matter of law that plaintiff’s evidence establishes liability through passive inaction or studied indifference, although it might well persuade a jury.” Id. at *7.
The case recently settled, but, according to the Sisters’ pretrial brief, the Sisters intended to offer the following evidence in support of the owners’ passive inaction or studied indifference:
The lesson for property owners is to take claims of environmental contamination seriously and to document your files appropriately to note delays outside of your control, including administrative agency review and approval of work plans and other submissions.
 Sisters of Notre Dame de Namur v. Garnett-Murray, Case 5:10-C-01807 (N.D. Cal.), Docket Entry 107, filed July 10, 2012.