Legal Briefs

Who Pays for the Stigma of Environmental Contamination?

A national effort to identify and clean up environmental contamination has raised several issues relating to cleanup costs. Recently, a debate has emerged over who is responsible for covering costs when a property loses market value because of its proximity to a contaminated site. The costs, known as stigma damages, sometimes can be passed on to the owners of the contaminated sites.

Environmental stigma cases generally fall into two categories. The first, incomplete cleanup stigma, occurs when contamination spreads from one parcel to a neighboring property. After the neighboring property has been cleaned up to the satisfaction of all regulatory agencies, it still cannot recover its former value because of lingering public fears that contamination remains. The second, called marketplace stigma, occurs when a property has not been contaminated but is close enough to contaminated property to lose value if the public fears the contamination will spread.

Recovering Stigma Damages
The ability to recover stigma damages varies based on which category a situation falls into. A tendency exists to allow recovery in incomplete cleanup cases, such as in the landmark 1994 decision from the 3rd U.S. Circuit Court of Appeals, In re: Paoli RR. Yard PCB Litigation. In Paoli, high levels of PCBs had spread from the defendant's railroad yard to the plaintiffs' neighboring properties.

The court held that a plaintiff may recover stigma damages if the plaintiff's property had physical damage with a possibility that not all contamination was removed, and if remediation did not restore the property's value. Other courts have awarded damages in similar circumstances.

Courts have been reluctant, however, to award damages to the owners of property that never was contaminated. In Berry v. Armstrong Rubber Co. , the 5th U.S. Circuit Court of Appeals held that property owners could not recover damages under Mississippi law without evidence of physical damage to the owners' land.

A significant problem in marketplace stigma cases is the difficulty in establishing limits to the defendant's liability if marketplace stigma is accepted as grounds for recovery. Thus, in Golen v. Union Corp., the Pennsylvania Superior Court held that no recovery could be made for loss of market value when the defendant's contaminated site did not interfere with the plaintiff's use of the property.

Still, recovery has been allowed for marketplace stigma. The best known case is DeSario v. Industrial Excess Landfill, in which more than 1,700 landowners within a two-mile radius of a contaminated landfill were awarded damages.

Recent Developments
In March, the 7th U.S. Circuit Court of Appeals allowed a property owner to recover what amounted to marketplace stigma damages in NRC Corp. v. Amoco Oil Co. NRC Corp. owned a large tract of undeveloped farmland in Indiana, of which it leased a corner parcel to Amoco for a gas station and permitted the installation of underground storage tanks.

In 1986, about 30 gallons of gasoline spilled onto the parcel while the storage tanks were being filled. Amoco reported the spill to state authorities and undertook some cleanup measures. NRC requested a remediation plan on several occasions and a commitment for remediation, but Amoco did not respond. Ultimately, Amoco implemented a corrective plan that the state's department of environmental management approved.

NRC sued Amoco for loss of use of the property during remediation. The court found that the property was unmarketable until the corrective plan was approved. The court further found that the market demanded a full indemnification agreement for any possible environmental contamination during remediation, and because no such agreement was in place, the property remained unmarketable.

The court then determined that although there was no evidence the gasoline had spread, the stigma affected a 2-acre area. The court calculated the parcel's rental value from the date Amoco's lease terminated to the date remediation was projected to be done. NRC was allowed to recover damages even though Amoco had sought to renew its lease (NRC declined) and even though NRC made no attempt to lease the parcel during remediation. NRC was awarded just over a half million dollars in lost rent and response costs.

However, the court took pains to indicate that NRC is not a stigma damages case. Its ruling was based on language in the lease that required Amoco to indemnify and “save harmless [NRC] from all claims, mechanics liens, damages, demands, actions, costs, and charges arising out of or by reason of the operation of the business herein authorized during the term of this lease.” The court found that nothing in the indemnification provision limited Amoco's liability to the leased property when calculating damages or costs arising from the gas station.

Many courts will recognize incomplete cleanup damages, but stigma cases vary depending on the affected property's location and the courts there. As NRC shows, other ways may exist to award what appear to be stigma damages without adopting marketplace stigma as a valid basis for recovery.

Carol C. Honigberg, JD, and Steven M. Nolan, JD

Carol C. Honigberg, JD, is a partner in the real estate group at Reed, Smith, Hazel, & Thomas LLP in Falls Church, Va. Contact her at (703) 641-4220 or chonigberg@rssm.com. Leonard A. Bernstein, JD, is the administrative partner in the New Jersey office and a member of the firm\'s E-Commerce & Technology Law Group. Contact him at (609) 520-6005 or lbernstein@reedsmith.com. Gary L. Kaplan, JD, is a partner in the Pittsburgh office and heads the firm\'s Information Technology Group. Contact him at (412) 288-4268 or gkaplan@reedsmith.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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