Third Quarter 2007

High Court Finds Cause of Action for PRPs Under CERCLA § 107

Holland & Knight Newsletter
Amy L. Edwards

On June 11, 2007, the United States Supreme Court issued its long-awaited decision in United States v. Atlantic Research Corp., No. 06-526, 551 U.S. ____, 127 S.Ct. 2331, addressing the question of who has a cause of action for recovery of clean-up costs under CERCLA when those costs were not incurred pursuant to an order or a settlement with state or federal governments. The Court found that such parties do have a cause of action under CERCLA Section 107.

Despite putting that issue to rest, however, several legal issues remain unsettled and will undoubtedly make their way through the courts in coming years. All of this has implications for potential purchasers in real estate transactions as well as current owners of property and other Potentially Responsible Parties (PRPs) under CERCLA.

Legal Issues

The issue of whether a PRP could bring a claim under CERCLA Section 107 had been thrown into confusion by the earlier Supreme Court decision in Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157. That case, decided in 2004, held that a person could not sue another for contribution pursuant to Section 113 of CERCLA – unless that person is being or has been sued by another person under Sections 106 or 107 of CERCLA or has resolved his/her liability to the United States or a state in a settlement under Section 113 of CERCLA. A person who voluntarily incurs cleanup costs generally will not have a right of contribution under Section 113 of CERCLA.

Cooper Industries declined to address whether a PRP could seek cost recovery pursuant to Section 107 of CERCLA. Thus, in the wake of Cooper Industries, courts struggled with this question, and came to differing results. The U.S. Courts of Appeals for the 2nd, 7th and 8th Circuits all found that a PRP who had voluntarily cleaned up a contaminated site could sue under Section 107; the 3rd U.S. Circuit Court of Appeals (and several district courts around the country) found that a PRP could not sue under Section 107.1

In the Atlantic Research Corp. (ARC) case, Atlantic Research brought suit claiming that the United States was partially responsible for contamination at a facility where Atlantic Research had retrofitted rocket motors under a contract with the United States. Atlantic Research did not perform the remediation pursuant to an order or lawsuit under Section 106 or 107. In 2002, Atlantic Research brought claims pursuant to both Sections 107(a) and 113(f). After the Aviall decision, Atlantic Research dropped its Section 113(f) claim, and the United States moved to dismiss the Section 107(a) claim, asserting that Atlantic Research was a PRP and thus unable to bring a claim for cost recovery. The District of Arkansas dismissed ARC’s claim, but on appeal, the 8th Circuit reinstated it – holding that Section 107 provided a right of cost recovery to PRPs, or in the alternative, that it provided an implied right of contribution. Thus, the issue of whether a cause of action exists under Section 107 for PRPs, and if so, whether it is one for cost recovery or contribution, was squarely presented to the Supreme Court.

The Court’s unanimous decision focused on the plain language of Section 107(a)(4)(B), which allows for recovery of response costs by “any other person.” The Court held that “any other person” means any person other than the governmental entities identified in the preceding paragraph, Section 107(a)(4)(A). 127 S.Ct. at 2335-36. Thus, the Court held, Section 107(a)(4)(B) provides a cause of action for any person, including PRPs, other than those governmental entities. It was guided by the maxim that one should read the statute as a whole. Id. at 2336.

The Court made clear, however, that Sections 113 and 107 are not interchangeable, but instead provide different relief in different circumstances. Id. at 2337-38. A Section 113 right to contribution is available when a party has been required to reimburse a third party for more than its fair share of costs as a result of an action instituted under Section 106 or 107. A Section 107 cost recovery action, by contrast, is available where a party has incurred its own costs of response, without any need for a third party to have established its liability. Thus, as a general matter, a party will not be able to pick and choose between Sections 113 and 107, but will be limited to the cause of action that suits its circumstances. Id. at 2338.

The Court did acknowledge in a footnote, however, that there may be some overlap, such as when a party under a Section 106 order performs cleanup itself, thus directly incurring costs of response, rather than reimbursing a governmental entity for work already performed. Id. n.6. The Court declined to decide whether such costs would be recoverable under Section 113, Section 107, or both. The Court also noted that parties would not be able to avoid equitable apportionment by bringing a Section 107 cause of action. Id. 2338-39. The Court assumed, without deciding, that Section 107 allows for joint and several liability, but stated that a party sued under Section 107 could bring a Section 113 counter-claim, thus providing for equitable apportionment of liability.2 Id. at 239 n.7.

Certain questions remain unanswered, however. As the Supreme Court itself acknowledged, it is unclear what cause of action will be available to those who perform work and incur costs directly under an order or pursuant to a settlement, rather than reimbursing the government. In addition, the Court assumed, but pointedly did not decide, that joint and several liability is available under Section 107. Id. at 2339 n. 7. Other questions include whether the filing of a counterclaim in a Section 107 (cost recovery) action will convert it into a Section 113 (contribution) action? How will equitable apportionment be addressed? Who has the burden of proof? Is there an implied right of contribution? Will there be an impact on the contribution protection afforded by Section 113 to those who have settled their liability?

Thus, while the Court has addressed the issue of whether those who perform “voluntary” remediations have a cause of action under Section 107 of CERCLA, and has in many ways restored the legal landscape to its pre-Cooper Industries status, there is much yet to be settled.

Transactional Issues

So where does that leave us in terms of environmental liabilities associated with real estate transactions? First, of course, this is good news for purchasers of property since it means that if they discover contamination they can voluntarily remediate the property and then seek reimbursement from those responsible for the contamination. The ARC decision will also restore leverage to buyers in purchase and sale negotiations to have existing contamination addressed and to receive stronger indemnities or price reductions for pre-existing contamination on property. But it is not a panacea.

In order to recover costs under CERCLA, the cleanup costs incurred have to be “necessary” and “consistent with the National Contingency Plan (NCP),” with all the process and participation by government and the public that compliance with the NCP entails. This means development of a Preliminary Assessment/Site Investigation (PA/SI), an Economic Evaluation/Cost Assessment (EE/CA), a Remedial Investigation/Feasibility Study (RI/FS) and a Remedial Design/Remedial Action (RD/RA). It also means compliance with ARARs, comparison of cleanup alternatives, and public notice and comment requirements.

In addition, a right to recovery is only as good as the party one is pursuing. If a responsible party is no longer available to pursue or has insufficient assets, a cause of action will not be worth much.

Moreover, some of the unanswered questions from the ARC case may impact this analysis. For example, in determining whether a party qualifies to bring an action under Section 113 or Section 107, it may still be necessary to ascertain what types of settlements (including remediation performed pursuant to state voluntary cleanup programs) qualify as “administrative settlements” under Section 113(f)(3)(B), and whether an administrative order constitutes a “civil action” under Section 106.

So, is it still necessary to undertake “all appropriate inquiries” under ASTM E-1527? Yes, for three reasons.

First and foremost, undertaking all appropriate inquiries will give buyers and lenders the information they need to assess the value of a transaction. Second, undertaking all appropriate inquiries is a necessary first step to qualifying for one of the Landowner Liability Protections (LLPs) (e.g., bona fide prospective purchaser, contiguous property owner or innocent land owner defenses) offered by the 2002 Brownfields Amendments to CERCLA. Purchasers who qualify for one of these defenses cannot be required to remediate contamination. Note, however, that to qualify for the defense, property owners must conduct “all appropriate inquiries” prior to acquiring title to the property, and must also exercise “due care” and comply with “continuing obligations” under the Brownfields Amendments with respect to any hazardous substances that are known or discovered after taking title to the property. Third, in the event of an allocation between the parties, a showing that all appropriate inquiries were undertaken prior to purchase is likely to be a strong equitable factor in favor of a purchaser.

Thus, the ARC decision provides real estate purchasers with some relief, but does not eliminate the requirement to make a careful investigation prior to purchasing property.

1 See, e.g., Consolidated Edison Co. of New York v. UGI Utilities, 423 F.3d 90 (2nd Cir. 2005); Metropolitan Water Reclamation District of Greater Chicago v. North American Galvanizing & Coatings Inc., 473 F.3d 824 (7th Cir. 2007); E.I. du Pont de Nemours & Co. v. United States, 460 F.3d 515 (3rd Cir. 2006).

, 423 F.3d 90 (2nd Cir. 2005); ., 473 F.3d 824 (7th Cir. 2007); , 460 F.3d 515 (3rd Cir. 2006).

2 Two other cases raising the issue of whether a Section 107 claim is available to parties who perform voluntary cleanups had petitions for certiorari granted pending the ARC decision. On June 18, the Court granted cert in E.I. du Pont de Nemours & Co. v. United States, 460 F.3d 515 (3d Cir. 2006), summarily vacated the Circuit Court decision, and remanded to the 3rd Circuit for reconsideration in light of its ruling in ARC. At the same time, the Supreme Court denied the petition for cert that had been filed in UGI Util., Inc. v. Consol. Ed. Co. of New York, No. 05-1323.

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