Pre-CERCLA Sale Agreement Held to Transfer Liabilities Arising Under Later Laws

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Pre-CERCLA Sale Agreement Held to Transfer Liabilities Arising Under Later Laws
August 1, 1999
Area(s) of Practice:
Environmental Law

In a recent opinion, White Consolidated Industries, Inc. v. Westinghouse Electric Corporation, the Sixth Circuit held that an action by a purchaser of real property for remediation and indemnification pursuant to a 1975 sale agreement was barred by the buyer's assumption of responsibility for future remediation costs, even where those costs were caused by a pre-transfer release.  Since the release had occurred prior to the enactment of CERCLA and the Spill Act, and the seller had not been aware of the presence of any residual contamination at the time of the 1975 contract, the seller cannot be said to have known at that time that the release constituted a violation of applicable environmental requirements.

Westinghouse owned and operated a facility in Edison, New Jersey from 1951 through 1974.  Westinghouse used trichloroethylene ("TCE") as a degreaser in its operations.  In 1970, the facility experienced a TCE spill from a ruptured 2,000 gallon tank.  Westinghouse evacuated part of the facility, opened windows and ran fans to allow the TCE to evaporate.  The next day no contamination was visible and Westinghouse took no further actions to clean up the spill.

In 1975, White Consolidated Industries, Inc. ("WCI") purchased a portion of Westinghouse's business, including the Edison facility.  Pursuant to the sale agreement, Westinghouse represented that, to the best of its knowledge, there were no existing facts or conditions which might give rise to any claims or investigations, and that none of the operations conducted on the properties violated any applicable anti-pollution requirements.  Westinghouse further agreed to indemnify WCI for any and all damages and liabilities resulting from any misrepresentation.  Westinghouse did not disclose to WCI the 1970 TCE spill.  For its part, WCI assumed all liabilities associated with the business that were not disclosed or known to Westinghouse as of the closing date and which were not discovered by WCI within one year after closing.

Approximately 15 years after its purchase of the Edison facility, WCI discovered evidence of TCE contamination in the surrounding soil and groundwater.  WCI entered into a Memorandum of Agreement with NJDEP, pursuant to which it agreed to clean up the contaminated soil and groundwater.  WCI concluded that the likely source of the contamination was the 1970 TCE spill, and demanded that Westinghouse assume liability for the TCE contamination and contribute response costs.  Westinghouse denied that it was liable for any remediation costs at the Edison facility and WCI filed suit against Westinghouse.

The trial court determined that Westinghouse could not have known in 1975 that the 1970 TCE spill could give rise to liability for environmental remediation because CERCLA and the Spill Act, the laws that created such liabilities, did not exist in 1975.  Furthermore, the District Court determined that Westinghouse could rely on language in the sale agreement which stated that WCI assumed responsibility for all future liabilities.

On appeal, WCI challenged the District Court's holding that the assumption and indemnification clauses in the sale agreement placed the liability for cleanup on WCI.  Specifically, WCI argued that the terms of the sale agreement did address the allocation of such future environmental liabilities and that WCI did not assume responsibility for future remediation costs where those costs were based upon a pre-transfer release.  WCI also claimed that Westinghouse breached the sale agreement because it constructively "knew" of a fact or condition that would give rise to liability but failed to disclose it.  Namely, WCI argued that Westinghouse knew that TCE was dangerous and knew that a TCE spill had occurred at the facility, and the failure to disclose those facts constituted a breach of Westinghouse's representation.

The Sixth Circuit rejected WCI's arguments, affirming the District Court's findings and, in addition, rejecting WCI's "constructive knowledge" argument.  The Court focused on the language in the sale agreement in which Westinghouse represented "to the best of its knowledge and belief" there were no facts or conditions which might give rise to a claim of liability.  Without proof that Westinghouse knew of contamination caused by the spill, or knew that the spill itself could give rise to any existing environmental liabilities, WCI could not show that Westinghouse breached the sale agreement.

This decision will limit claims by purchasers based upon sale contracts that were consummated prior to enactment of environmental liability statutes.  The Sixth Circuit has echoed other federal circuits in refusing to hold sellers to later-enacted standards of liability, where sellers contractually represented a lack of knowledge of liability and liability later was imposed by statute, even where the sellers may have known that the substances discharged were hazardous to health or the environment.