Court Enlarges Third-Party Defense

The current owner of contaminated property can escape Superfund liability by showing that a prior occupant caused the problem, according to a federal appeals court ruling (New York v. Lashins Arcade Co., No. 95-7716, 2d Cir., Aug. 5, 1996).

New York State authorities sued Lash-ins Arcade, attempting to recoup investigative and groundwater cleanup costs they incurred at a shopping mall. However, a federal district court dismissed the state's claims, noting that "Lashins had no direct or indirect contractual relationship with either of the [businesses] who re-leased the [contaminants] or with the [property owners] ... when the pollution occurred."

Under Section 107 of the Super-fund law, the current owner of a site contaminated by hazardous substances is liable for all cleanup costs unless the owner can prove the contamination was caused solely by a third party with whom the owner had no contractual relationship. However, the owner must exercise "due care" regarding the substances and take precautions against the third party's foreseeable acts and consequences.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit unanimously ruled that the lower court was correct in blocking the state's attempt to make Lashins pay. The appellate panel also held that a current owner is not remiss by failing to exercise due diligence before purchase (i.e., conducting a site assessment) or by failing to contribute to the government's remedial investigation costs.

This decision significantly enlarges the third-party defense to Superfund liability. As a result, landowners in New York, Vermont and Connecticut, where Second Circuit rulings have direct impact, may be less likely to concede responsibility for cleaning up their contaminated property. "It is counterintuitive to suppose that a defendant is required to pay some or all of those response costs in order to establish ... [an] affirmative defense ... thereby rendering the affirmative defense partly or entirely academic," said the appeals court.

"A landowner is precluded from raising the third-party defense only if the contract between the landowner and the third party somehow is connected with the handling of hazardous substances," the opinion said.

As for the second requirement of the third-party defense - whether the defendant took adequate precautions against pollution by the third party - where "the last release ... happened more than fifteen years before Lashins [bought the property], there was obviously nothing Lashins could have done" to prevent it, the court explained.

The state urged that Lashins did not do enough to learn about the contamination before buying the site and, later on, to contain or clean it. However, the appeals court noted that, since the government investigation had been underway at least six months before Lashins' purchase, it would have been "pointless" for the buyer to conduct a simultaneous assessment of its own.

Meanwhile, in a ruling that a defense lawyer says "vastly expands the notion of corporate successor liability," a federal district court held Waste Management of Pennsylvania liable under Superfund for landfill contamination (U.S. v. Keystone Sanitation Co., No. l:CV-93-1482, M.D. Pa., Aug. 22, 1996).

Keystone Hauling dumped hazardous wastes at the Adams County, Pa., landfill from 1968 until 1990. A year later, Waste Management, which never operated the site, bought Keystone's assets (but not the landfill) and its customer list.

U.S. District Judge Sylvia Rambo ruled that Waste Management was liable for cleanup costs at the landfill because the transaction resembled an ordinary merger and because Waste Management simply continued Keystone's business.

A court is "obligated to ascertain the true nature of a business transaction, despite the parties' attempt to label a sale on an asset purchase," she said.

In essence, "what the court ... said is that there is no way to protect yourself against liability ... if you buy [a company's] assets and customer list," according to Andrew Levine, environmental counsel for Waste Management.

A Washington attorney not connected with the case agreed with Levine. "Waste Management did a fine job of structuring the transaction to avoid the landfill liability, even waiting to buy until Keystone had ceased its landfill Soperations, but it wasn't good enough," the lawyer said.

Waste Management purchased Keystone's assets with stock valued at $3.1 million. Levine described the purchase as a garden-variety transaction - "trucks, some containers and a customer list" and retaining some hauling company employees. In fact, Waste Management purposely declined to purchase Keystone's landfill after completing its due diligence review and learning that the site was subject to a Superfund cleanup.