The United States Court of Appeals for the Third Circuit recently handed down two noteworthy decisions on environmental liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). One involves the appropriate methodology for allocation of cleanup costs between two responsible parties based on equitable factors; the other involves whether a new owner of contaminated property is responsible for governmental response costs incurred prior to its purchase of the relevant property. Both set new precedent that should be of interest to the regulated community.
Equitable Allocation Methodology
In a relatively rare occurrence, the Third Circuit issued an opinion on allocation of environmental liability between successive landowners pursuant to CERCLA, and, even more surprising, the Third Circuit rejected the allocation methodology used by the District Court. Trinity Industries, Inc. v. Greenlease Holding Co., 903 F.3d 333 (3d Cir. 2018). The Third Circuit’s decision provides important guidance on the proper methodologies for equitable cost allocation. According to the decision, while precise calculations are not required, allocation methodology cannot be speculative. Further, the Third Circuit’s decision disfavors a strict volumetric approach to allocation except in straightforward cases where, for example, there is only one contaminant being addressed using one remedial technique.
Trinity Industries, Inc. (“Trinity”) brought a contribution action against the prior owner and operator of a railcar manufacturing plant, Greenlease Holding Co. (“Greenlease”), for approximately $9,000,000 in remediation costs Trinity incurred at the property. Both parties used the parcel for painting railcars with lead paint and other toxic chemicals. Greenlease owned and operated the parcel from 1910 until 1986, when Trinity purchased the parcel. Trinity operated until 2000.
After a bench trial regarding the equitable allocation of remediation costs, the District Court rejected both parties’ asserted allocations (Trinity’s expert allocated 99% of the costs to Greenlease and Greenlease’s expert allocated 88% to Trinity) and conducted its own analysis. The District Court devised a formula to attribute the remediation costs by multiplying the percentage of responsibility allocated to each party by either the square footage or cubic yardage for each remediation activity undertaken at 45 different “impact areas.” The District Court then added the results and divided by the total square footage or cubic yardage for all remediation activities to find that Greenlease’s overall cost allocation percentage was 83%. The District Court then reduced this number relying on three equitable factors: 1) that Trinity did not account for a subsequent purchaser’s actions, which allegedly caused contamination; 2) that, in their contract of sale, Trinity and Greenlease intended to shift some liability to Trinity; and 3) that remediation increased the value of the property. As a result, the District Court reduced Greenlease’s liability to 62% of the remediation costs. Both parties appealed.
Finding the District Court’s methodology “arbitrary” and “speculative,” the Third Circuit found the District Court abused its discretion in allocating responsibility based upon the quantities of contaminants in each impact area without regard for the actual costs each party was responsible for causing. Failing to account for the costs associated with different remedial activities employed (e.g., placing asphalt caps vs. placing topsoil) or different contaminants at issue “leads to an allocation that is inequitable because it is divorced from the record evidence and analytically unsound.” Compounding the initial error, when determining the quantities of contamination attributable to each party, the District Court erroneously treated square feet (units of area) as equivalent to cubic yards (units of volume). Rather, under the Third Circuit’s guidance an appropriate methodology should use volumetric and cost data specific to each remediation activity to determine how much of that activity each party is responsible for. Once a determination is made for each remediation activity, the respective shares can be added together to calculate an overall percentage.
While the Third Circuit has not adopted a standard allocation methodology appropriate for all facts and circumstances, its decision provides sound considerations and guideposts for parties who will be putting forth allocation arguments in their own cases.
Owner Liability for Pre-Ownership Response Costs
In a second recent decision, the Third Circuit again overturned the District Court in determining the costs a current owner is liable for under CERCLA. Pennsylvania Department of Environmental Protection v. Trainer Custom Chemical, LLC, 906 F.3d 85 (3d Cir. 2018). Trainer Custom Chemical, LLC (“Trainer”) purchased a former chemical manufacturing site at a tax sale for $20,000. The property, however, had been contaminated and, while the remedial action was essentially complete at the time Trainer purchased the property, the prior owner had defaulted on its environmental obligations, causing the Pennsylvania Department of Environmental Protection (“PADEP”) to have spent over $800,000 in remediation costs at the property prior to the tax sale. After the transfer of the property, Trainer was alleged to have caused new contamination at the property, again requiring the PADEP to incur costs. PADEP sued Trainer seeking recovery of all of its pre- and post-acquisition remediation costs.
The District Court drew a temporal line and ruled that Trainer was only liable for response costs PADEP incurred after Trainer became the owner of the property. In reaching its holding, the District Court relied on a Ninth Circuit decision that found that whether a party is an “owner” under Section 107 of CERCLA is measured at the time of cleanup. The Third Circuit, however, looked to the statutory language of CERCLA that holds a current property owner liable for “all costs” incurred to remediate property. Accordingly, the Third Circuit found that CERCLA does not draw a temporal line and that “all costs” means “all” costs regardless of the timing of property ownership.
This decision highlights the need for pre-acquisition due diligence not only to determine the potential responsibility to remediate contamination caused by prior owners, but also whether the government has unreimbursed costs for which a new owner may become responsible. Further, while Trainer did not assert the innocent or bona fide purchaser defense, these defenses as well as divisibility and apportionment may limit a current owner’s liability for “all costs” including pre-acquisition response costs.