Insider’s Perspective – Negotiation Strategies for Contaminated Properties in the Post Cooper v. Aviall Age
Holland & Knight Newsletter
Imagine life in a snow globe. Imagine your everyday world has been turned upside down. That’s where we are today in terms of understanding whether a party who “voluntarily” remediates someone else’s contaminated property ever has a right to seek recovery of those costs from the “truly” responsible party.
Over the past 25 years, we thought we’d come to know how to recover voluntary cleanup costs from another party. We watched the evolution of the courts’ thinking from the days when one could bring an action under either Section 107 or 113 of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), to the days in the mid-1990s when most courts felt that a party could bring an action only under Section 113 unless that party could demonstrate that it was an “innocent” party (in which case it could bring a cost recovery action under Section 107 of CERCLA).
It is well understood that there are differences between a Section 107 cost recovery action and a Section 113 contribution action. Some of these differences include the kinds of costs that can be recovered (essentially all cleanup costs under Section 107, and only an equitable share of the cleanup costs under Section 113) and the applicable statute of limitations (Section 107 cost recovery actions must be brought within three years of completion of a removal action, or within six years of initiation of on-site construction of a remedial action; Section 113 contribution actions must be brought within three years of the date of judgment or date of an administrative order, or entry of a judicially approved settlement). Prior to the Superfund Amendments and Reauthorization Act (SARA) in 1986, parties argued that Section 107 contains an implied right of contribution. With the enactment of an explicit contribution provision (Section 113) in the SARA Amendments, parties have not felt the need to rely on an implied right of contribution in Section 107. And given the availability of an express right of contribution, the courts have generally held since the mid-1990s that Section 107 actions may only be brought by “innocent” parties under CERCLA; PRPs could seek contribution under Section 113.
The U.S. Supreme Court has now fundamentally reinterpreted these rules. As demonstrated in its decision in Cooper Industries, Inc. v. Aviall Services, Inc., 125 S. Ct. 577, 160 L. Ed. 2d 548 (2004), the guiding purposes and objectives of CERCLA are no longer relevant. The language of the statute is paramount; textualism and “natural meaning” are the new themes. At the same time, the Court has discouraged the creation of any federal “common law” that would govern cost recovery or contribution actions. The impact of this ruling upon voluntary cleanups remains to be seen.
Everything we thought we knew about CERCLA cost recovery and contribution claims is now up for grabs. The continuing viability of earlier decisions interpreting parties’ rights under Sections 107 and 113 is questionable. Early academic analysis of the Court’s decision has already suggested that there will be even more questions in the future, not fewer, and therefore undoubtedly more litigation. The bottom line: there will be even more confusion and uncertainty will prevail as the “rules” which have guided decision-making for the past 25 years are re-examined and dissected and new rules are developed.
The Supreme Court’s Decision and the Question It has Raised About Cost Recovery and Contribution Actions
The Supreme Court’s Decision
On December 13, 2004, the Supreme Court issued its landmark decision in Cooper Industries, Inc. v. Aviall Services, Inc., 125 S. Ct. 577, interpreting the Section 113 contribution provisions of CERCLA. The Court ruled that, under Section 113(f)(1) of CERCLA, a PRP may bring a contribution action against another PRP only “during or after” a civil action involving either Section 106 or Section 107(a) of CERCLA.
The Aviall case began when Cooper sold four aircraft engine maintenance facilities to Aviall, which soon discovered that the purchased properties were contaminated with hazardous substances that had leaked into the ground and groundwater from underground storage tanks and spills. State environmental regulators in Texas threatened an enforcement action if Aviall failed to clean up the properties. After incurring more than $5 million in costs to clean up the sites, Aviall sued Cooper to recoup some of its costs in a contribution action.
Aviall argued that an adverse determination would undermine one of the fundamental purposes of CERCLA by discouraging voluntary cleanups. The Fifth Circuit Court of Appeals ruled en banc that Aviall could pursue its claim against Cooper pursuant to Section 113(f)(1) of CERCLA. The Supreme Court reversed, holding that the express language of Section 113(f) precluded a party from filing an action for contribution unless a civil action under Section 106 or 107 had been previously filed against the party seeking contribution, or unless the party had resolved its liability in an administrative or judicially approved settlement. Based upon its strict reading of the statute, the Court concluded that the express statutory language in CERCLA was controlling, not the legislature’s intent.
Open Issues in Light of the Court’s Decision
CERCLA contains three mechanisms that may allow a voluntary remediating party to recoup its clean-up costs: (1) a Section 113(f)(1) contribution action that may be brought “during or following any civil action” under CERCLA Section 106 or Section 107; (2) a Section 113(f)(3) contribution action that may be brought if a party has resolved its liability to the United States or state for a response action in an “administrative or judicially approved settlement”; and (3) a Section 107(a) cost recovery action.
Issuance of the Court’s Aviall decision almost a year ago led to a flurry of lower court rulings; the results have been mixed to date. The post-Aviall decisions have focused on several issues:
• can an administrative order constitute a “civil action”?
• can a settlement with a state agency constitute a settlement for purposes of Section 113(f)(3) of CERCLA?
• can a PRP sue another PRP under Section 107 of CERCLA?
What Constitutes an “Administrative Settlement” for Purposes of CERCLA Section 113(f)(3)?
Because Section 113(f)(3)(B) provides a right of contribution if a party has “resolved its liability to the Unites States or a State for some or all of a response action … in an administrative … settlement,” several courts have wrestled with the issue of what exactly constitutes an “administrative settlement.” In one of the earliest post-Aviall decisions on this issue, the U.S. District Court for the Southern District of Illinois ruled that an Administrative Order on Consent (AOC) for a Remedial Investigation and Feasibility Study (RI/FS) entered after a Section 122(e)(1) Special Notice Letter had been issued was not an “administrative settlement” and therefore did not satisfy the Section 113(f)(3)(B) prerequisite for a contribution claim. See Pharmacia Corp. v. Clayton Chem. Acquisition LLC, U.S. Dist. LEXIS 5286 (S.D. Ill. March 8, 2005). In Pharmacia Corporation, the plaintiff and 18 other PRPs had entered into an AOC under Section 106 to undertake an RI/FS at a Superfund site. EPA subsequently issued a Unilateral Administrative Order (UAO) as well. The plaintiffs then brought a contribution action against other previously unnamed PRPs to recover some of the $3 million they had spent implementing the AOC and the UAO. The District Court concluded that the AOC was not an “administrative settlement” because it had been issued under CERCLA Section 106 [abatement actions], not under CERCLA Section 122 [settlements]. The Court offered the following reasons for its conclusion: (1) if the AOC had been intended to be an administrative settlement, the caption on the AOC would have stated that it was being issued pursuant to Section 122(d)(3);(2) the document was always referred to as an “order” not a “settlement”; (3) a provision in the AOC stipulated that penalties were based on Section 106; and (4) the AOC contained standard language stating that the AOC did not constitute an admission of liability by a party.
In City of Waukesha v. Viacom International, Inc., 362 F. Supp.2d 1025 (E.D.Wis. March 23, 2005), the city had entered into a cost-sharing pilot program with the Wisconsin Department of Natural Resources (WDNR) to clean up a landfill. The city filed a lawsuit against successor companies that had arranged to dispose of hazardous substances in the landfill. The lower court ruled that the city could file a contribution action; however, following issuance of the Supreme Court’s decision, the defendants filed a motion to dismiss the earlier decision, citing the Aviall decision. The District Court ruled that the WDNR contract was not an administrative settlement because the contract did not refer to CERCLA on its face. In addition, the statute that authorized the WDNR to enter into such contracts provided that the agency’s contract would not affect any common laws or other laws pertaining to liability for damages.
Care also must be taken when fashioning settlements with states, as state courts have also taken narrow readings of Section 113(f)(3)(B). For example, in W.R. Grace & Co.-Conn. v. Zotos Int’l Inc., U.S. Dist. LEXIS 1076177 (W.D. N.Y. May 3, 2005), a state consent order appearing to resolve only claims under state law did not trigger a contribution right under CERCLA.
What Constitutes a “Civil Action” That Would Trigger Contribution Rights Under Section 113(f)(1)? Does a Section 106 Order Constitute a “Civil Action”?
At least two courts have ruled that a UAO under Section 106 of CERCLA would not constitute a “civil action.” See Pharmacia Corp., U.S. Dist. LEXIS 5286 (an AOC, while an order and not a settlement, is also not a civil action); see also, Blue Tee Corp. v. Asarco, Inc., U.S. Dist. LEXIS 15360 (W.D. Mos. June 27, 2005)(a UAO is not a civil action). In Pharmacia Corporation, the court indicated that Section 106 authorized bringing an action in district court or taking “other action … including such orders.” The court found that a UAO did not constitute a civil action under Section 113(f)(1) because Congress was clear to differentiate between bringing a civil action and an order.
More recently, the U.S. District Court for the District of Connecticut held that a state administrative order did not constitute a civil action pursuant to Section 106 or 107 of CERCLA. See Cadlerock Properties Joint Venture, LP v. Schilberg, U.S. Dist. LEXIS 14701 (D.Conn. July 18, 2005). In Cadlerock, the property owner argued that he had a viable contribution claim because the state environmental agency had issued an administrative order against him. Not persuaded, the District Court held that the order was not the same as an EPA-issued administrative order under CERCLA Section 106. Further, the District Court found that the owner had filed his contribution claim before, not during or following, a civil action under either Sections 106 or 107, and therefore dismissed the claim. According to the Court, the owner did not have an implied right of contribution under Section 107(a), either.
Can Section 107 of CERCLA Be Used to Recover Costs?
In Elementis Chemicals v. TH Agriculture and Nutrition LLC, 373 F. Supp. 2d 257 (S.D. N.Y. January 31, 2005), the U.S. District Court for the Southern District of New York ruled that the Second Circuit had precedent restricting Section 107 actions strictly to “innocent landowners.” The Supreme Court’s decision in Aviall had not overruled this precedent, so it remained binding in the Second Circuit. Ignoring this decision, the Second Circuit Court of Appeals recently held in Consolidated Edison Company of New York, Inc. v. UGI Utilities, Inc., U.S. App. LEXIS 19477 (2d. Cir. September 9, 2005), that a PRP may pursue a cost recovery claim against other PRPs under CERCLA when it voluntarily incurs costs associated with the cleanup of a contaminated site. In Consolidated Edison, the Second Circuit concluded that in light of Aviall, “it no longer makes sense to view section 113(f)(1) as the means by which the Section 107(a) cost recovery remedy is effected by parties that would themselves be liable if sued under section 107(a). Each of those Sections, 107(a) and 113(f)(1), embodies a mechanism for cost recovery available to persons in different procedural circumstances.” Thus the Court held that a party that has not been sued, but that if sued would be held liable under Section 107(a), “to recover necessary response costs incurred voluntarily, not under a court or administrative order or judgment.”
In a comment that warrants close attention, the U.S. District Court for the Eastern District of Texas stated in Vine Street LLC v. Keeling, 362 F. Supp. 2d 754 (E.D. Tex. March 24, 2005) that such precedents may no longer be applicable because they involved cases where responsible parties sought to use both Section 113 and Section 107. The Vine Street court cited prior rulings in the First Circuit in making its decision that a Section 107 claim could move forward. The Vine Street court determined that Section 113(f) must be read to create a specific claim for contribution under certain circumstances, while Section 107(a) contemplates a wider range of actions, including parties seeking contribution for costs incurred in voluntary cleanups.
Similarly, in Viacom, Inc. v. U.S., U.S. Dist. Ct. LEXIS 16877 (D.D.C. July 19, 2005), the District Court held that, in light of the Supreme Court’s ruling in Aviall, a PRP that cannot sue for contribution for voluntary cleanup costs under Section 113 may nevertheless seek cost recovery in a Section 107 proceeding. The Court’s conclusion was based upon its belief that not to allow any remedy would render CERCLA moot. The analysis in this decision appears to be inconsistent with the Supreme Court’s new focus upon the plain language of the CERCLA statute in Aviall, rather than the statute’s ultimate “purposes and objectives.”
In Metropolitan Water Reclamation District of Greater Chicago v. Lake River Corp., 365 F. Supp. 2d 913 (N.D. Ill. April 12, 2005), the U.S. District Court for the Northern District of Illinois allowed a Section 107 claim to move forward. Similar to the District Court’s decision in Vine Street, this Court determined that there was an implied right of contribution under Section 107(a)(4)(B). These Courts seem to have been persuaded by the fact that the plaintiffs had already performed the voluntary cleanups and could no longer sue under Section 113(f). As a result, the Courts allowed the plaintiffs to bring Section 107 implied contribution actions instead.
Other Unanswered Questions
Commentators have raised other questions and concerns. They point out that there is a well-established body of case law governing contribution rights. This case law provides, in part, that a person may seek contribution from another responsible person when he or she has extinguished the liability and paid more than his or her fair share of those costs. In the context of CERCLA and a “volunteer’s” ability to recoup its cleanup costs from a truly responsible party, does this mean that the volunteer needs to have paid the cleanup costs in full, and then seek to recover the excessive amount from the truly responsible party? In the context of a PRP at a Superfund site, does this mean that the PRP has to have been sued and paid the cleanup costs in full, before it may sue any other PRPs who have not paid their fair share of the cleanup costs?
Another question is whether a PRP can be considered to be “any other person” under CERCLA Section 107(a)(4)(B). Shortly after the enactment of CERCLA, a district court in Pennsylvania recognized that there are two ways to interpret the term “any other person” in Section 107(a)(4)(B). See City of Philadelphia v. Stepan Chemical Company, 544 F. Supp. 1135 (E.D. Pa. 1982). First, the term could refer to persons other than those “persons” who are liable under Section 107(a). If one follows this interpretation, a PRP could not bring a cost recovery action under Section 107(a)(4)(B). In the City of Philadelphia court’s second interpretation, the provision sets forth three categories of “persons” entitled to recover response costs from those parties designated as liable for those costs. The first category described in Section 107(a)(4)(A) consists of federal and state governments, which are entitled to recoup “all costs of removal or remedial action ... not inconsistent with the national contingency plan.” The provision in question that follows immediately thereafter permits recovery of “any other necessary costs of response incurred by any other person consistent with the national contingency plan.” Under 42 U.S.C. § 9601(21), both federal and state governments are subsumed under the definition of a person. Under this interpretation, the term “any other person” refers to persons other than the federal and state governments and not to persons other than those responsible under the Act. The City of Philadelphia court followed the second interpretation because following the first “cuts directly against CERCLA’s objectives and the environmental concerns which prompted its enactment.”
Another question is whether courts would frown on a “friendly” civil action brought by the government in order to trigger the “civil action” requirement under Section 113. Does such an action present a true “case and controversy”?
Negotiation Strategies for Private Parties
With the rapid growth of state voluntary cleanup programs beginning in the late 1980s, the passage of statutory liability protections for lenders, and the arrival of EPA brownfields funding and related regulatory relief in the mid-1990s, the focus has been upon the voluntary cleanup of contaminated properties with little or no regulatory oversight from EPA. Some commentators have questioned whether the voluntary cleanup and brownfields movement is likely to continue, given the new uncertainty about a “volunteer’s” ability to recoup its cleanup costs from truly responsible parties. Property owners can no longer count on being able to recoup cleanup costs that they “voluntarily” incur by initiating a judicial cost recovery or contribution action.
For this reason, private parties conducting contaminated property cleanups will need to place an even greater emphasis on environmental due diligence and obtaining as many contractual protections as possible to cover their likely cleanup costs. It will be more important than ever for prospective purchasers to conduct “all appropriate inquiries” in accordance with ASTM E 1527-00 or EPA’s final AAI rule (issued on November 1, 2005) and to collect enough Phase II data in order to be able to quantify likely cleanup costs and evaluate unexpected risks (such as hidden tanks). Prospective purchasers are also likely to seek additional contractual protections as well, such as broader environmental representations and warranties, indemnification agreements, escrowed funds and/or environmental insurance. They are also likely to seek a cost reduction in the purchase price for anticipated cleanup costs.
Parties who qualify for one of the Landowner Liability Protections (LLPs) under the Brownfields Amendments of 2002 are likely to be able to sue under Section 107 of CERCLA as well as an “innocent” party. Because Aviall did not affect the right of “innocent” parties to bring Section 107(a)(4)(B) cost recovery actions, the LLP defenses under CERCLA will have increasing importance during real estate negotiations. Parties wishing to invoke these defenses will need to pay particular attention to the “reasonable steps” and “appropriate care” requirements of the Brownfields Amendments of 2002 in order to be able to preserve these defenses.
For more complicated and expensive cleanups, purchasers of contaminated property will want to work with their federal and state environmental regulators to be sure that they are maximizing their ability to recover their cleanup costs in either a Section 107 or 113 action. EPA has been willing to add language to its model Administrative Order on Consent (AOC) in order to enhance parties’ ability to seek contribution for cleanup costs. It has also been willing to issue Bona Fide Prospective Purchaser (BFPP) letters so that “innocent” parties will be able to bring Section 107 cost recovery actions.
The court decisions issued post-Aviall underscore the importance of fashioning settlement agreements in a manner that maximizes one’s ability to seek contribution from other responsible parties. One way is to enter into a Consent Order that preserves the settling party’s ability to seek contribution from other PRPs. Recent changes to EPA’s model AOC should help clarify contribution rights. The negotiated AOC could then be lodged with a court as part of a judicial proceeding. EPA may nevertheless be unwilling to devote the resources to developing an AOC unless the cleanup dollars involved are substantial.
As the above cases illustrate, at least in the short term, it will be more difficult than ever for plaintiffs to obtain cost recovery or contribution from other PRPs in the wake of the Aviall decision. Parties who are involved in pending contribution claim litigation, or who are considering cleaning up properties voluntarily, should consult with experienced environmental counsel to develop an effective strategy for meeting the strict requirements of the CERCLA statute (as interpreted by the Court in Aviall and subsequent lower court decisions) if they wish to recoup their costs from other parties.