Legal Briefs

Ruling Raises Issues About Who Pays CERCLA Cleanup Costs

Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 to make those who created environmentally impacted properties responsible for cleaning them up. In particular, CERCLA allows current property owners to recover full or partial cleanup costs from prior owners.

However, in July 1999, the U.S. District Court for the Northern District of Georgia denied a property owner’s action seeking partial cleanup costs from the prior landowner under CERCLA. In Southfund Partners III v. Sears, Roebuck, and Co., the court ruled in favor of Sears, even though hazardous materials had leaked from underground storage tanks on the property during the company’s ownership — and even though the court found that Sears should have known about the tanks.

Property owners and managers should be familiar with the various issues that this case raises.

Southfund Background
In 1966, Sears, Roebuck, and Co. purchased a two-story brick building and converted it into a carpentry shop, which it used until it sold the property in 1988 to Southfund Partners III. That same year, Southfund discovered and arranged for the removal of three underground storage tanks: two 500-gallon dry-cleaning solvent tanks and a 20,000-gallon fuel tank.

Two years later, Southfund tried to sell the property to the U.S. Postal Service, but the deal fell through after investigations revealed substantial hazardous waste contamination on the property. Subsequently, the Georgia Department of Natural Resources placed the site on its hazardous site inventory list.

Numerous factors determine placement on the hazardous site inventory list, including the extent to which the contaminated portion of the property is accessible. After Southfund’s legal counsel pointed out that the property was enclosed in a fence and covered in asphalt, the property was removed from the list.

In fall 1995, Southfund began to clean up the property to enhance its marketability and avoid having it placed back on the list once access became unrestricted. Southfund subsequently sued Sears to recover costs associated with the cleanup.

In response, Sears argued, among other things, that an "as-is" provision included in the sales contract should release it from any CERCLA liability. The provision stated that Sears made no warranties or representations regarding the property’s condition.

However, the court disagreed, holding that an as-is provision only relieves a seller from liability for breach-of-warranty claims and does not waive rights to recover under nonwarranty claims, including CERCLA claims. Although the court noted other cases involving purchase contracts with as-is provisions where CERCLA liability was imposed, it noted that the purchase contracts in those cases contained language that clearly explained that the buyer agreed to release the seller from all liability and not just liability for breach-of-warranty claims.

CERCLA Issues
The court then turned to the issue of whether Sears was a "covered person," which is a defined term referring to persons and legal entities subject to liability under CERCLA. CERCLA defines four classes of covered persons, including a "person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of." Sears argued that it was not a covered person under this definition because it did not know about the tanks or leaks and did not actively participate in any activity that caused the leaks to occur.

The court disagreed, saying that the evidence revealed that Sears knew or should have known about the tanks because the tops protruded from the ground and the company possessed a 1950 plat indicating their existence. In addition, the court held that a landowner is a covered person under CERCLA if it owned property when hazardous materials leaked or spilled, regardless of whether it committed acts causing the leak or spill.

The court stated that holding otherwise "would permit a landowner to contaminate the environment by ignoring open drums of hazardous materials on his property while rainwater displaced the materials and caused them to spill onto the ground. Permitting a landowner to avoid liability in this context simply because it did not actively participate in the contamination would frustrate the statutory policy of encouraging voluntary private action to remedy environmental hazards."

Even though the court agreed with Southfund that Sears was a covered person under CERCLA, the court denied Southfund’s claim for costs on two bases. First, the court held that Southfund’s cleanup costs were not necessary costs of response. Second, the court held that Southfund’s cleanup was not performed in accordance with National Contingency Plan hazardous substance cleanup procedures.

CERCLA allows private parties to recover necessary remediation costs from prior landowners. To qualify, claimants must demonstrate that the costs were incurred in response to a threat to public health or the environment that existed before the response action began and that the costs were necessary to address that threat.

Sears argued that Southfund’s costs were incurred not to reduce threats to health or the environment but instead to make the property more attractive to potential buyers. The court agreed with Sears, saying that Southfund produced no evidence to suggest that the contaminated ground water posed a threat to the environment or public health. In addition, no evidence demonstrated that the ground water had contaminated any downstream creeks, lakes, or ponds or any underground sources of drinking water, the court found.

Further, the court said that the contaminated soil posed no threat to the environment or public health because it was covered with asphalt and enclosed in a fence. Although Southfund argued that a threat would exist after the fence and asphalt were removed to prepare the land for redevelopment to residential use, the court held that Southfund’s costs were not necessary.

The court implied that only those costs that are incurred to clean up a site for the same use are considered necessary under CERCLA. The court noted, "Landowners cannot remove contamination to upgrade the use of the property and then recover its response costs under CERCLA."

The court also barred Southfund’s action for recovery because its remediation efforts failed to comply with several of the National Contingency Plan’s regulations. Among other things, the plan requires that landowners allow for a public-comment period before cleanup. The court determined that Southfund failed to do so.

Although Southfund argued that the involvement of the Georgia Department of Natural Resources in the remediation satisfied the public-comment requirement, the court disagreed, saying that the department was not "actively involved in all aspects of the investigation, planning, and remediation." Therefore, the department’s involvement was not sufficient to satisfy the public-comment requirement. The court also noted that Southfund’s cleanup failed to comply with various other procedural requirements of the National Contingency Plan.

As Southfund demonstrates, it is critical for property owners and managers to be familiar with CERCLA as well as state requirements relating to hazardous waste cleanup. This knowledge can be important not only at the cleanup stage, but also during the due diligence and drafting period of property acquisitions.

Camellia K. Schuk, JD

Camellia K. Schuk, JD, is a senior associate in the Irvine, Calif., office of Cox, Castle, & Nicholson LLP. Contact her at (949) 260-4623 or cschuk@ccnlaw.com.The discussion of legal issues in this column is for informational purposes only. Results may vary depending on state laws and individual circumstances.

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