Loss of Innocence: Environmental Liability for the Unsuspecting

Item

Title

Eng Loss of Innocence: Environmental Liability for the Unsuspecting

Date

1991

Creator

Eng Leigh, Jeffrey

Subject

Eng Environmental Studies

extracted text

This Essay for the Masters of Environmental Studies Degree
by

Jeffrey Leigh
has been approved for
The Evergreen State College
by

Tom Womeldorff

LOSS OF INNOCENCE: ENVIRONMENTAL

LIABILITY FOR THE UNSUSPECTING


BY
JEFFREY LEIGH

AN ESSAY SUBMITTED IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
MASTERS OF ENVIRONMENTAL STUDIES
THE EVERGREEN STATE COLLEGE 1991

TABLE OF CONTENTS

Page
lV


LIST OF FIGURES .

v


ACKNOWLEDGEMENTS
Chapter 1

INTRODUCTION

1


Chapter 2

THE STATUTORY BASIS

OF LIABILITY
. . .

6

6


Liability under CERCLA
Changes wrought by SARA

16


State Statutes .

19


.

Chapter 4

Early Decisions

24


Lenders as Owners

26


Lessor/Lessee Liability

35


Corporate Successor Liability

36


Innocent Landowner Defense

38


Summary of Liability .

39


.

45

.

45


The Battle over Insurance Coverage

47


Recommendations

48


CONCLUSION
.

.

IMPLICATIONS OF LIABILITY
Costs of Liability .

NOTES .

22


JUDICIAL INTERPRETATION

Chapter 3

49

.

53


REFERENCES CITED

56


III

FIGURES

Page

Figure

. 5


1.

CERCLA Liability Scheme . . . .

2.

Parameters of CERCLA Liability

14


3.

Flow Chart of Judicial Decisions

Relating to CERCLA Liability . .

23


Owner Liability under CERCLA/SARA

41


4.

lV

ABSTRACT

This essay examines the environmental liability of
owners
look at

of real property.

The methodology employed is to

the federal and state statutes pertaining to

hazardous waste sites and then the pertinent case law.
Based on these sources an analysis of liability is made.
The

first

statute

explored

1S

the

Comprehensive

Environmental Response, Compensation, and Liability Act
of 1980 (CERCLA).

Definitions, the liability scheme and

defenses are addressed.
Superfund Amendments
(SARA)

for

defenses.

CERCLA is then compared to the

and Reauthorization Act

differences

in definitions /

of

1986

liability and

Both the Washington State Model Toxic Control

Act and the California Carpenter-Presley-Tanner Hazardous
Substance Act

are

examined

for

differences

from

the

federal law.
Judicial decisions a r e then reviewed with a focus on
parties

such

as

lenders

and

insurers

principals in real estate transactions.
retroactive,

joint,

strict

and

liable.

parties are liable for remediation,

who

are

not

Liability is
Responsible

natural resources

damages and the cost of environmental risk assessment.
The

analysis

operators

of

liability

as well

as

former

reveals
owners

that

owners

and operators

and
of

hazardous waste facilities are strictly liable with very
limited defenses even if they had nothing to do with the
pollution.

In

light

of

some very creative

judicial

interpretations,

lenders,

successor

corporations

and

insurers have also been found liable for cleanup.
At present the only viable defense to liability

1S

the exercise of environmental due diligence in the form
of an environmental site audit.

This defense is still

untested in court, and is not specifically defined in the
statutes.

A bill to be attached to the 1991 Superfund

reauthorization will define site audits for the purpose
of environmental due diligence.

In the moving target of

judicial interpretation and the muddy statutory language,
there is some uncertainty about liability.
With liability unclear, the following policy issues
emerge.

Uncertainty may drive some business offshore.

Further,

the high transaction costs attached with SARA

may put the U.S. at a competitive disadvantage with the
European Community which has adopted a cooperative system
for dealing with wastes rather than an adversarial one.
Finally

there

is

the

question

of

purported to make the polluter pay.
innocent are guilty as well.

CERCLA

As it stands, the

Is it fair to target the

innocent in pursuit of a social goal?
cleanup is a national problem.

equity.

Hazardous waste

The enormous costs should

be spread more evenly around society.

ACKNOWLEDGEMENTS
This has been a long process covering a great deal
of material on environmental liability.

I wish to

thank the staff of the Stanford University Libraries
for their support.
for his help.

Special thanks to Peter Sylvester

Thanks also to Jimmy Mateson and Norman

Parks for their encouragement and Peter Olive for the
quiet space on the prairie.

Thank you Margaret Bustion

for helping with the graphics and final layout.

Thanks

also to Ralph Murphy and especially Tom Womeldorff for
their patience and input.

Finally many thanks to my

folks for all their help.

v

INTRODUCTION
In response to public outcry over the chemical
emergency at Love Canal, Congress passed the Comprehen­
sive Environmental Response, Compensation, and Liabili­
ty Act (CERCLA) ln 1980.

The Resource Conservation and

Recovery Act of 1976 was designed to deal with hazard­
ous wastes generated in the present, but did not ad­
dress previously produced wastes.

CERCLA was drafted

to deal with the wastes from the past (Josephson 1986) .
CERCLA was a compromise hammered out by a lame duck .
Congress and ratified just as it adjourned.

CERCLA

shows the signs of its hurried birth, replete with
ambiguities, interesting construction and confusing
grammar (Glass 1987).
CERCLA established a Superfund to pay for cleaning
up hazardous wastes when no responsible parties could
be found.

CERCLA also granted EPA wide powers to

enforce the new law (GAO 1989).

Two major goals emerge

from the Act: to clean up hazardous waste sites and
have the private sector pay the cost (Moskowitz 1989).
Ostensibly the polluter should pay, but CERCLA was
designed to ensnare as many liable parties as possible
with the narrowest of defenses as the Superfund was
woefully underfunded to clean up the nation's toxic
waste sites (Summers 1990).

Since many polluters

could not be found, EPA looked for so called deep
1


pockets that could pay now and in the future (Hammers
1990).

Judicial interpretation has been instrumental

in widening the circle of liability.

One need merely

own a p1ece of contaminated property, and having had
nothing whatever to do with the hazardous waste on the
site, to be liable for the entire cleanup (Summers
1990)
My goal in this essay 1S to examine the state of
liability for owners of real property under CERCLA, as
amended.

In so doing I shall look at the appropriate

statutes and judicial interpretations.

Of particular

interest are those parties that are 'innocent' of
polluting but are nevertheless liable for cleanup costs
under CERCLA.

The current state of liability and its

implications are examined. The prospects for future
liability under CERCLA are my final points.

The con­

clusion is that there is great uncertainty as to the
extent of liability, particularly for lenders and
corporations.

This issue is important because a degree

of certainty is crucial for business decisions, and
unfavorable environmental laws tend to foster a hostile
and costly business climate that drives business off­
shore.

In addition, it is inherently unfair to target

the innocent to pay for the guilty.
The chapters are presented in an order represent­
ing a logical progression in the argument.
2


The first

chapter examines state and federal statutes dealing
with hazardous waste liability.

Then follows a lengthy

chapter detailing the judicial interpretations of the
statutes.

A brief chapter on the costs associated with

CERCLA is next, followed by the conclusion.

Environ­

mental liability for real property owners is a compli­
cated and important issue; it is my hope that it is
clarified by this essay.
Methodology
The focus of this essay is the liability imposed
by CERCLA and the implications of this liability.
Liability for the purpose of this essay means imposi­
tion of financial responsibility for the cleanup of
environmental degradation resulting from hazardous
wastes.

Federal and state statutes will be addressed

as each potentially could invoke liability.

The inter­

pretation of the courts is crucial because the combina­
tion of statute and judicial interpretation indicates
the actual state of liability.
The liability will be elucidated by examination of
the appropriate statutes, beginning with CERCLA/SARA on
the federal level.

By looking at the pertinent defini­

tions and sections, I will show the liability scheme
and defenses set down by the Act and its Amendments.
As the state laws can also invoke liability the Wash­
ington State Model Toxics Act and the California Car­
3


penter-Presley-Tanner Hazardous Substance Act will be
analysed for differences from the federal legislation
that pertain to the liability issue.
Relevant judicial interpretations of the law will
be discussed.

Important decisions regarding owners,

corporations, lenders and insurers require scrutiny to
see the legal landscape we live in.

The reason for the

review of case law is that the statutes are given life
by their interpretation by the courts;

the current

state of liability derives from the hazardous waste
legislation and legal precedent.
The analysis of liability then lies within the
framework supplied by the statutes and the guidance
given by the judiciary.

From these twin sources I will

ascertain the liability of the principals in real
estate transactions: owners, buyers, and sellers.
Figure 1 depicts the CERCLA liability scheme.

The

vertical axis shows the time frame of liability.

The

horizontal axis represents the progression of the essay
beginning at the left and ending at the right.

Not to

be forgotten are other parties who may have liability
such as lenders, successor corporations and lnsurers.
What are the trends in liability, what direction are we
heading?

What are the implications for Potentially

Responsible Parties and indeed the country?
the issues to be addressed.

4

These are

Figure 1

CERCLA Liability Scheme

1990

Judicial
Interpretatio n

Liability

Not liable

No cases

Not liable

Owner

Liable

Liable

Liable

During

Operator

Liable

Liable

Liable

During

Lender

Exempt

Uncertain

Uncertain

During

Insurer

Not liable

Uncertain

Uncertain

Intervening

Owner/kn­
ows about
pollution

May be liable

Uncertain

Uncertain

Intervening

Owner/doe­
sn't know
about pollu­
tion

Not liable

Uncertain

Uncertain

Intervening

Lender

Exempt

Uncertain

Uncertain

Intervening

Insurer

Not liable

Uncertain

Uncertain

Present

Owner

Liable

Uncertain

Uncertain

Present

Operator

Liable

Uncertain

Uncertain

Present

Lender

Exempt

Uncertain

Uncertain

Present

Insurer

Not liable

Uncertain

Uncertain

Future

Owner

Liable

Uncertain

Uncertain

Future

Lender

Exempt

Uncertain

Uncertain

Time
Frame

Party

Before
Dumping

Owner

During
Dumping

Statute

5


CHAPTER 2

THE STATUTORY BASIS OF LIABILITY
The purpose of this chapter is to establish
through an examination of the appropriate statutes
what the federal and state laws say about the environ­
mental liability of the parties to real estate transac­
tions.

First CERCLA is examined for the basic condi­

tions and definitions leading to liability:

Potential­

ly Responsible Parties must be responsible for a
,

'release' of a 'hazardous substance' from a 'facility'.
Costs of liability and defenses are also covered.

Then

the changes in the law resulting from the Superfund
Amendments and Reauthorization Act of 1986 are ad­
dressed,
ity.

focusing on the changes in defenses to liabil­

To complete the section, the counterpart state

Superfund laws of Washington and California are charac­
terised for the differences from the federal law.
Liability under CERCLA
Liability under Section 107 of CERCLA is based on
the 'release' of 'hazardous substances' at a 'facil­
ity'.

Under CERCLA Section 101.9:
The term "facility" means (A) any building, struc­
ture, installation, equipment, pipe or pipeline
(including any pipe into a sewer or publicly owned
treatment works), well, pit, pond, lagoon, im­
poundment, ditch, landfill, storage container,
motor vehicle, rolling stock, or aircraft, or (B)
any site or area where a hazardous substance has
been deposited, stored, disposed of, or placed, or
otherwise come to be located; but does not include
6

any consumer product in consumer use or any ves­
sel. (42 § USCA 9601.9, West Publishing 1989) .
Looking carefully at the language here, between Parts A
and B the word 'or' is used suggesting that all of A is
considered a 'facility' even without any hazardous
waste being involved.

While not clearly stated, it

must be assumed that Congress intended that category A
contain hazardous waste to be considered a facility .
While subparagraph A is an extensive listing of specif­
ic examples, subparagraph B is encompassing in its
sweep: if hazardous wastes are present , then it's a
facility, excepting consumer products and vessels.
CERCLA Section 101.14 defines 'hazardous sub­
stance' as:
(A) any substance designated pursuant to section
1321(b) (2) (A) of Title 33,
(B) any element, com­
pound, mixture, solution, or substance designated
pursuant to section 9602 of this title, (C) any
hazardous waste having the characteristics identi ­
fied under or listed pursuant to section 3001 of
the Solid Waste Disposal Act [42 § USCA 6921] (but
not including any waste the regulation of which
under the Solid Waste Disposal Act [42 § USCA 6901
et seq.] has been suspended by an Act of Con­
gress), (D) any toxic pollutant listed under sec­
tion 1317(a) of Title 33, (E) any hazardous air
pollutant listed under section 112 of the Clean
Air Act [42 § USCA 7412], and (F) any imminently
hazardous chemical substance or mixture with re­
spect to which the Administrator has taken action
pursuant to section 2606 of Title 15. The term
does not include petroleum, including crude oil or
any fraction thereof which is not otherwise spe­
cifically listed as a hazardous substance under
subparagraphs (A) through (F) of this paragraph,
and the term does not include natural gas, natural
gas liquids, liquefied natural gas, or synthetic
gas usable for fuel (or mixtures of natural gas

7

and such synthetic gas).
Publishing 1989).

(42

§

USCA 9601.14, West

Most of the definition is ln terms of other Acts or
other Sections of CERCLA.

Federal standards are based

on hazard due to corrosivity, reactivity, toxicity and
flammability.

Petroleum products are specifically

exempted from CERCLA liability.

The petroleum exemp­

tion aside, substances that pose public health or
environmental risks are subject to hazardous listing by
the government (Nanney 1990) .
The lists of hazardous substances maintained by
state and federal agencies are constantly expanding.
Many more compounds will surely be added (Nanney 1990) .
As CERCLA applies retroactively, any substance added to
the hazardous list will be covered under the Act.

This

leaves the prospect of incurring Superfund liability in
the future for a presently nonlisted compound very real
indeed.

The implication specifically is the danger for

a Potentially Responsible Party of buying a property
where certain categories of substances not currently
considered hazardous are present.

More generally, the

significance is the uncertainty engendered by the
expansive and retroactive nature of the Act, as there
is no provision for grandfathering of substances not
previously listed (See 42

USCA 9601.14 as above) .

§

The mere presence of a hazardous substance does
not invoke liability; a 'release' or 'threatened re­
8

lease' must occur.

CERCLA Section 101.22 defines

'release' as:
any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leach­
ing, dumping, or disposing into the environment
(including the abandonment or discarding of bar­
rels, containers, and other closed receptacles
containing any hazardous substance or pollutant or
contaminant), but excludes (A) any release which
results in exposure to persons solely within a
workplace, with respect to a claim which such
persons may assert against the employer of such
persons, (B) emissions from the engine exhaust of
a motor vehicle, rolling stock, aircraft, vessel,
or pipeline pumping station engine, (C) release of
source, byproduct, or special nuclear material
from a nuclear incident, as those terms are de­
fined in the Atomic Energy Act ... and (D) the
normal application of fertilizer. (42
USCA
9601.22, West Publishing 1989) .
This definition limits individuals in CERCLA cause of
action for workplace releases as well as exempting
vehicle emissions.
and fertilizers.

Also excluded are nuclear incidents
EPA estimated that over 22

·

pounds of hazardous chemicals were 'released' into the
environment in 1987 (EPA 1989).

The enormity of this

figure indicates in part the size of the problem, as
well as the breadth of the definition.
Liability for 'releases' of hazardous substances
extends to those EPA refers to as Potentially Responsi­
ble Parties (PRPs).

Figure 1 on page 5 outlines the
Potentially Responsible

liability scheme for PRPs.

Parties under CERCLA Section 107(a) include:
(1) the owner and operator of a vessel or a fa­
cility,
9


(2)
any person who at the time of disposal of any
hazardous substance owned or operated any facility
at which such hazardous substances were disposed
of,
(3)
any person who by contract, agreement, or
otherwise arranged for disposal or treatment, or
arranged with a transporter for transport for
disposal or treatment, of hazardous substances
owned or possessed by such person, by any other
party or entity, at any facility or incineration
vessel owned or operated by another party or enti­
ty and containing such hazardous substances, and
(4)
any person who accepts or accepted any haz­
ardous substances for transport to disposal or
treatment facilities, incineration vessels or
sites selected by such person, from which there is
a release, or a threatened release which causes
the incurrence of response costs, of a hazardous
substance ... (42 § USCA 9607a, West Publishing
1989) .
The wording in subsections 1 and 2 is not consistent.
In subsection 1,

'owner and operator' are listed.

Must

one be both?

Under subsection 2 comes those who 'owned

or operated'.

This type of ambiguity is common within

the Superfund law.

The courts must decide the intent

and thus the application of the legislation (Peck
1989).

The law does specify that all present owners

are PRPs without evidence of fault.

Innocent owners

having no knowledge of hazardous waste disposal on
their property are considered fully liable under
CERCLA, as under subsection 1 ownership alone incurs
liability.

Former owners must have been associated

with the site at the time of contamination to incur
liability.

The original law left intervening owners

out of the liability scenario.

Generators and trans­

porters are off-site contributors and are beyond the
10


scope of this essay.

At issue are owners and/or opera­

tors.
There are several parties to real estate transac­
tions that could be considered owners or operators.
The principals are the buyer and the seller.

Then

there is the lender, should one be required.

All of

these players have been found to be owners and/or
operators under CERCLA.

In a lease situation, it is

possible to have different owners and operators, with
the lessor the owner, and the lessee the operator.
Lessees can even be owners in a sub-lease situation.
Figure 1 illustrates the different stages of liability
by party and time sequence.
Under CERCLA Section 101.20:
(A)
The term 'owner or operator' means (i) in the
case of a vessel, any person owning, operating, or
chartering by demise, such vessel, (ii)
in the
case of an onshore facility or an offshore facili­
ty, any person owning or operating such facility,
and (iii) in the case of any facility, title or
control of which was conveyed due to bankruptcy,
foreclosure, tax delinquency, abandonment, or
similar means to a unit of State or local govern­
ment, any person who owned, operated, or otherwise
controlled activities at such facility immediately
beforehand. Such term does not include a person,
who without participating in the management of a
vessel or facility, holds indicia of ownership
primarily to protect his security interest in the
vessel or facility. (42 § USCA 9601 West Publish­
ing 1989) .
By this definition, any person who owns or operates a
facility is covered.

The definition of facility is

11


quite broad, and so by implication is the definition of
owner.

Further, an owner cannot abandon liability by

walking away from the site and leaving it to the vaga­
ries of foreclosure.

The previous owner is still

responsible rather than the government entity that
acquires the property.

In what is known as the securi­

ty interest exemption, parties holding title as collat­
eral against a loan are exempt from CERCLA liability.
The Act does not make clear whether the exemption
applies to lenders should they foreclose on a property
(Alvino 1988).

As we shall see, this determination is

left to the courts.
The extent of liability for PRPs follows.
Potentially Responsible Parties:
. .. shall be liable for
(A)
all costs of removal or remedial action in­
curred by the United States Government or a State
or an Indian tribe not inconsistent with the na­
tional contingency plan;
(B)
any other necessary costs of response incur­
red by any other person consistent with the na­
tional contingency plan;
(C)
damages for injury to, destruction of, or
loss of natural resources, including the reason­
able costs of assessing such injury, destruction,
or loss resulting from such a release. (42 § USCA
9607a West Publishing 1989) .
Removal under CERCLA can be characterised as an emer­
gency or short term response to an imminent threat to
the environment.

Remediation is the result of a plan­

ning process attempting a long term solution to a toxic
release (King 1988).

Liability under this section
12


includes not only public sector costs, but actions of
private parties as well.

Natural resources damage

claims are brought by the government as trustee for the
public with a limit of $50 million (Simons 1989).

With

the cost of cleaning up sites having risen to an aver­
age of $20-30 million, the potential costs are tremen­
dous (Klotz 1989).
The nature of liability under CERCLA is summarized
in Figure 2.

While the language was left out of the

final bill, the courts have decided that CERCLA liabil­
ity is retroactive and strict.

That the contamination

occurred before the enactment of the legislation is
irrelevant (Glass 1987).

The courts have held that the

social goal of cleanup overrides other legal consider­
ations, including retroactivity (Weber 1989).

Strict

liability implies that it is absolute; under CERCLA the
defenses are very sparse, even for the innocent land­
owner (i.e., the owner having contributed none of the
pollution and having no knowledge of the pollution) .
Owners claiming adherence to accepted standards of the
past are not immune from CERCLA liability (Hitt 1989).
Liability is joint and several, meaning all parties are
individually liable for the entire cost of cleanup.

In

theory this means a party contributing one barrel out .
of a million could be charged for the whole remediation
(Weber 1989) .

13

Figure 2

Parameters of CERCLA Liability

STRICT

Fault not an issue;
limited defenses

RETROACTIVE

Applies to all hazardous waste
sites including those created
before passage of the Act

JOINT &

Each defendant is liable for

SEVERAL

the entire cost of cleanup
despite the size of
contribution

UNENDING

No statute of limitations;
continuing liability

CERCLA Section 107 b provides very limited defens­
es to liability:
There shall be no liability under subsection (a)
of this section for a person otherwise liable who
can establish by a preponderance of the evidence
that the release or threat of release of a hazard­
ous substance and the damages resulting therefrom
were caused solely by­
(1) an act of God;
(2) an act of war;
(3) an act or omission of third party other than
an employee or agent of the defendant, or than one
whose act of omission occurs in connection with a
contractual relationship, existing directly or
indirectly, with the defendant (except where the
sole contractual arrangement arises from a pub­
lished tariff and acceptance for carriage by a

14

common carrier by rail), if the defendant estab­
lishes by a preponderance of the evidence that
(a) he exercised due care with respect to the
hazardous substance concerned, taking into consid­
eration the characteristics of such hazardous
substance, in light of all relevant facts and
circumstances, and (b) he took precautions against
foreseeable acts or omissions of any such third
party and the consequences that could foreseeably
result from such acts or omissions; or
(4) any combination of the foregoing paragraphs.
(42 § USCA 9607b West Publishing 1989) .
With the God and War defenses unavailable to most PRPs,
the Third Party defense was the only available relief
under CERCLA.

A Third Party defense entails showing

that a party not connected with the defendant was
actually responsible for the contamination.

As writ­

ten, the Third Party defense was of little use.
the original Act,

Under

'contractual relationship' was un­

clear, especially pertaining to real estate contracts.
This meant it was difficult to show that a seller was a
Third Party (Smith 1989).

The Superfund Amendments and

Reauthorization Act of 1986 (SARA) provided a measure
of relief by defining the term 'contractual relation­
ship'.

This definition is the basis of the 'innocent

landowner' defense.

To qualify for this defense, the

buyer must have had no knowledge of the contamination
and also thoroughly inspected the property to ascertain
its environmental condition (Peck 1989) .

15


Changes Wrought by SARA
After wrangling over the legislation for two years
and battling with Reagan over the final provisions, the
Superfund Amendments and Reauthorization Act (SARA) was
passed by the Congress in 1986.

This section deals

with the changes in liability brought by SARA.

Along

with setting precise cleanup standards, SARA also ad­
dressed the liability issue of 'innocent landowners'
(as described above) as well as 'almost innocent land­
owners' .

'Almost innocent landowners', those with no

knowledge of contamination but who had not conducted an
environmental inspection, could now be granted a 'de
minimus' settlement, indicating only minor culpability
(McDavid 1989).

EPA at its discretion could now sepa­

rate the major polluters from those only technically
guilty (Steinway 1987).
In amending CERCLA, Congress sought to mitigate
the extreme liability for innocent landowners under
Section 107.

The new definition of 'contractual rela­

tionship' provided new exemptions and the basis for a
usable defense, as well as a new PRP:
The term "contractual relationship" ... includes,
but is not limited to, land contracts, deeds or
other instruments transferring title or posses­
sion, unless the real property on which the facil­
ity concerned is located was acquired by the de­
fendant after the disposal or placement of the
hazardous substance on, in, or at the facility ...
(42 § USCA 9601.35 West Publishing).

16

Under SARA 'contractual relationship' does include real
estate contracts and deeds except when the contamina­
tion occurred before the transaction.

The definition

goes on to require that the defendant did not know of
the pollution.

The PRP is thus required to investigate

the past owners and uses of the property following
'good commercial or customary practice' before buying
it in order to qualify for the defense.

The court

instructed to take into account the price and ease of
detectability of the contamination to determine whether
the defendant should be allowed to use this defense.
In addition, governmental bodies and those acquiring
facilities by inheritance are exempted from Superfund
liability under this definition. 1
Far from precise, the definition welcomes inter­
pretation by the courts.

The requirement of

'good

commercial or customary practice' is quite broad, open
to many interpretations.

This indicates the importance

of the judicial role in interpreting the Act.

The

conditions regarding price and detectability of contam­
ination are made for litigation, as appraisal and
environmental inspection are not exact sciences.

The

price issue does show a sensitivity to the plight of a
buyer paying full market for tainted property, and
conversely, that a low price could imply knowledge of a
defect.

EPA has been reluctant to go beyond very loose
17


guidelines, instead preferring for standards to evolve
over time.

To settle the uncertainty of what consti­

tutes environmental due diligence for the purpose of
the innocent landowner defense, Rep. Curt Weldon has
introduced legislation that would define the term
(Baker 1990) .
The above definition of 'contractual relationship'
does address the question of intervening owners ignored
by CERCLA.

With the advent of SARA, disclosure became

a key element for intervening owners not responsible
for contamination.

The new liability scheme is this:

if a party owns contaminated property, knows about it,
and does not disclose this fact upon transfer of the
property, then the party is liable under CERCLA/SARA.
If the party does disclose the contamination, he is not
liable.

If the party had no knowledge of the contamin­

ation, there

lS

no liability (Glass 1987).

Unlike most

areas of the Act, In this case ignorance is a defense.
SARA did add an 'almost innocent' provision that
could help those who do not qualify for the innocent
landowner defense.

Under CERCLA 122(g) (1) (B), a defen­

dant could be granted a de minimus settlement if the
PRP owns the facility but did not know of the contami­
nation upon purchase or contribute to any release. 2
This defense is appropriate for parties that did not
conduct appropriate inquiry into the environmental
18

condition of the property they purchased but had no
knowledge of contamination.

EPA guidelines will not

completely absolve the landowner of liability, but this
does represent some relief from strict liability.

In

exchange for a settlement and cooperation in the clean­
up, EPA is authorised to enter into a covenant not to
sue with the PRP (Civins 1990).
State Statutes
In order to deal with hazardous waste sites at the
state level, many states now have their own Superfund
laws.

This allows state environmental agencies to

initiate cleanups and pursue polluters.

A comparison

between CERCLA and the state statutes is important
because while CERCLA applies in the entire nation, the
state law applies in the specific state should the
state take the lead on the cleanup action.

If EPA is

the lead agency at a site, CERCLA applies.

If the

state agency takes, the lead the state statute is
invoked.

The statutes of California and Washington are

compared to CERCLA, with the result that the Acts are
very similar, with some minor differences (Nanney
1990) .
State laws regarding hazardous waste sites tend to
follow the federal example of CERCLA/SARA.

While

CERCLA is not a paragon of clarity, it does offer the
advantage of a decade of judicial interpretation (Mac­
19


Intyre 1989).

The California Carpenter-Presley-Tanner

Hazardous Substance Account Act is California's version
of Superfund.

The California Act actually refers

directly to CERCLA for its definitions of liability and
defenses to liability.

The innocent landowner defense

is identical to the federal example.

Under the Act,

liability is strict and expressly codified unlike the
federal law.

The California Act also explicitly re­

lieves residential owners of liability unless the state
proves the responsibility of the individual, a reversal
of federal law (Nanney 1990) .
The Washington State Model Toxics Control Act of
1988 borrows heavily from CERCLA.

Section 4 of the

Act, which enumerates liability, is very similar to
CERCLA Section 107. One key difference is in the defi­
nition of 'owner or operator'.

The Washington Act's

definition adds "any person with any ownership interest
in the facility or who exercises any control over the
facility.

II

(WAC 70.105d.020

(6)

(a)

(1989)).

This is

important because it appears to obviate the corporate
veil and expose even stockholders to liability (Mac­
Intyre 1989).

Corporate successor liability could thus

be very extreme.

The Washington Act's requirements for

the innocent landowner defense are more stringent than
the federal law.

Instead of 'due care' as required by

Section 107 of CERCLA regarding the handling of hazard­
20


ous substances, Section 4 of the Model Toxics Act
requires 'utmost care', in legal terms a more stringent
standard.

It could be very difficult to prove 'utmost

care' in court, greatly reducing the utility of the
innocent landowner defense (MacIntyre 1989).

The Model

Toxics Act codifies strict, joint and several liabili­
ty, which is instead implied in CERCLA (WAC 70.105D.040
1989) .
Whether state or federal law is applied depends on
which agency takes the lead at the site, EPA or the
state.

The states do follow CERCLA, and even clarify

some of the ambiguities in the federal law.

The ten­

dency for the states is to follow judicial interpreta­
tion of CERCLA, codifying what the courts expressed as
the legislative intent of Congress.

The statutes

present a confusing and ambiguous picture of liability
(MacIntyre 1989).
The courts have the thankless job of making sense
of the compromise that is CERCLA.

One court com­

plained:
... numerous important features were deleted during
the closing hours of the Congressional session ...
The courts are once again placed in the undesir­
able and onerous position of construing inade­
quately drawn legislation. (US vs Northeastern
Pharmaceutical & Chern, 579 F. Supp. 823, from Peck
1989) .
It is to the courts we now turn for clarification.

21

CHAPTER 3

JUDICIAL INTERPRETATION

With CERCLA enacted, it fell to the courts to give
it meanlng.

The courts could either strictly interpret

the Act, or broaden the interpretation in the belief
that this more closely followed the intent of Congress.
The tendency has clearly been for a broad interpreta­
tion.

The courts have gone beyond the letter of the

law to assign liability to those able to pay, banks and
corporations (Glass 1987).

As this is relatively new

legislation, the Judicial review is somewhat scanty.
The following cases are presented because of their
influence as evidenced by their repeated appearances in
law journal articles on the subject of CERCLA liabili­
ty.

The cases examined are divided into sections as

follows: early decisions affecting liability, lenders
as owners, lessor/lessee liability, corporate successor
liability, the innocent landowner defense and finishing
with a summary of liability.

Figure 3 summarizes the

judicial decisions that are reviewed.

The figure is a

flow chart of the cases examined in the chapter with
the horizontal axis representing liability increasing
from left to right.

22


Figure 3

Flow Chart of Judicial Decisions

Relating to CERCLA Liability

Early Decisions

u.s.

v. Caro/awn
Involvement of officers
incurred corporate
liability

Lender
Liability

Lessor/Lessee Liability

Corporate
Successor
Liability
Anspec v. Montgomery
EPA lost assertion that

asset acquisition included

environmental liabilities


Increasing Liability

23

Early Decisions
An early case indicating the direction of judicial
interpretation of CERCLA was U.S. v. Carolawn in 1984.
The finding was that a corporation being used as a go
between in the sale of a waste dump was fully liable
for cleanup under CERCLA even though it held title for
a mere hour.

The site, owned by the bankrupt South­

eastern Pollution Control Company, was sold to Columbia
Organic Chemical Company on June 2, 1976.

Title was

immediately signed over to three principals of Columbia
Organic.

Columbia Organic subsequently sought relief

from liability as an owner of the site.

The court held

Columbia Organic liable with the admonition that hold­
ing " .. . title, or lack thereof, is not necessarily
dispositive ... of ownership or control.
Inst. 1984 from Summers 1990).

II

(Env. Law

In fact the court

viewed Columbia Organic as an operator of the site
because of the personal involvement of Columbia offi­
cers in hazardous disposal on-site.

This interpreta­

tion was a precursor to the tendency of the courts to
search beyond record of title to practice and intent in
widening the circle of liability (Summers 1990).
The accepted precedent for strict liability for
landowners under CERCLA is New York v. Shore Realty
(Hayes 1990).

Shore Realty purchased a waste site

intending to develop it.

Shore not only was aware of
24

the pollution, but in addition let the tenants remain
and utilise the facilities and store more toxics on the
site.

The state sued Shore and a principle stockholder

for cleanup costs.

Shore argued that it was not re­

sponsible under Section 107(a) (1) of CERCLA as it
neither owned the site when the release occurred or
caused the release.

The court disagreed, stating the

opinion that CERCLA "unequivocally imposes strict
liability on the current owner of a facility ... without
regard to causation."
from Summers 1990).

(759 F.2d 1044 (2nd Cir. 1985)
The court added further:

... Shore's arguments would open a huge loophole
in CERCLA's coverage ... If the current owner of a
site could avoid liability merely by having pur­
chased the site after chemical dumping had ceased,
waste sites certainly would be sold, following
cessation of dumping, to new owners who could
avoid liability otherwise required by CERCLA.
Congress had well in mind that persons who dump or
store hazardous waste sometimes cannot be located
or may be deceased or judgement-proof. (759 F.2d
1045 (2nd Cir. 1985) from Summers 1990).
The court thus decided Congress' intent and held for
strict liability.
are liable;

The key is that owners and operators

how then do the courts decide the question

of ownership?
Lenders as Owners
As previously discussed, CERCLA exempts from
liability parties holding title for the purpose of
protecting a security interest in property.

The case

law indicates that there is great uncertainty for
25

lenders in the courts.

If a lender forecloses on a

property, does it then become an owner liable under
CERCLA?

(Ditto

1989).

The interpretation of the

courts is of course crucial to this question.

An

early test case was In Re T.P. Long Chemical Inc.
Chemical filed for bankruptcy.

Long

BancOhio held a per­

fected security interest in Long's personal property,
which included drums of chemicals.

The bankruptcy

trustee sold everything except the drums, some of which
were buried on the site.

An above ground tank spilled

and EPA responded and cleaned up the site.

EPA then

sought to recover its costs from the bankrupt estate
and BancOhio.

The court found the estate liable, but

BancOhio was dismissed (King 1988).

First, BancOhio

did not benefit from the cleanup , as its interest was
in personal property that did not increase in value as
a result of the cleanup and had been sold previously
anyway.

Since BancOhio did not participate in the

management of the facility,

the court found that it

"sought primarily to protect its security interest." (45
Bankr. 288-9

(Bankr.N.D. Ohio 1985) from Moelis 1990).

BancOhio thus retained its security exemption.

u.s.

v. Mirabile was a complex case involving

three lenders and two owners.

Turco Coatings was a

paint factory repossessed by American Bank and Trust in
1981. American Bank and Trust sold the plant to the
26


Mirabiles four months later.

EPA then informed the

Mirabiles that the toxics on-site must be cleaned up.
Finally EPA cleaned up the site and then sued the
Mirabiles to recover the costs (King 1988).

This led

the Mirabiles to sue American Bank and Trust and the
Mellon Bank, another lender of Turcos.

American Bank

and Trust and Mellon then sued the Small Business
Administration, which had also lent money to Turco.
The Mirabiles wanted American Bank and Trust and Mellon
as fellow PRPs, while the banks wanted the Small Busi­
ness Administration named as an operator as well (Ditto
1989) .
The court then had to rule on which parties were
liable as owners and/or operators of the site.

Though

American Bank and Trust had actually held title to the
property, the court found its actions consistent with
maintaining its security interest.

Because it did not

participate In the operations of the plant, American
Bank and Trust was absolved of liability (Hammers
1990).

The court found that the Small Business Admin­

istration was mandated to participate in the management
of its clients; further, it was not clear that the SBA
had ever been involved in Turco's operations, so the
SBA was also dismissed (Alvino 1988).
not so fortunate.

Mellon Bank was

Mellon had participated in Turco's

operations and one of its officers was closely involved

27


at the plant.

The court allowed the Mirabile's suit

against Mellon (King 1988).

The decision in this case

was a warning to lenders to take care not to become too
involved in operations as opposed to the financial
aspects of a borrower's business, but it is unclear
just how far a lender may go without incurring liabili­
ty (Ditto 1989) .
The question of ownership liability arose again in

u.s.

v. Maryland Bank and Trust.

Here the question was

whether the security interest exemption held even when
the lender continued to own the property after foreclo­
sure.

Maryland Bank and Trust foreclosed on the McLeod

family dump site after loaning the son the money to buy
the operation from his father.

Maryland Bank and Trust

took title to the property in 1982.

In 1983 EPA in­

formed Maryland Bank and Trust that the property was
contaminated and would have to be remediated.

Upon

Maryland Bank and Trust's refusal to comply, EPA under­
took remedial efforts and then sued the bank to recover
cleanup costs (Moelis 1990, King 1988).

Maryland Bank

and Trust still owned the property when the court
decision carne down in 1986.
claimed

Maryland Bank and Trust

should receive the same exemption as Ameri­

can Bank and Trust had in the Mirabile decision.
court did not agree.

The

Since the bank had benefitted

28


from the cleanup and continued to hold title, it was
liable for the costs incurred by EPA (Hammers 1990).
The Maryland Bank and Trust case also confirmed
the doctrine of joint and several liability, as the
bank was held completely liable despite the fact it
contributed none of the toxic contamination (Laseter
1990).

Also addressed was the question of the confus­

ing construction in Section 107(a) of CERCLA where
subsection 1 requires the PRP to be an owner and opera­
tor while subsection 2 calls for owner or operator.

In

its defense the bank claimed in order to be held liable
it must be both an owner and an operator of the facili­
ty.

The court found that:
notwithstanding the language 'the owner and opera­
tor,' a party need not be both an owner and opera­
tor to incur liability under this subsection ... The
structure of section 107(a) of this hastily
patched together compromise Act, is not a model of
statutory clarity.
It is unclear from its face
whether subsection (1) holds liable both owners
and operators or only parties who are both owners
and operators ... But by no means does Congress
always follow the rules of grammar when enacting
laws of this nation.
(632 F. Supp. 573 (D. Md.
1986) from Glass 1987).

The court gave a broad interpretation based on the
somewhat spotty legislative history.

One need be only

an owner or an operator to be found liable and need not
have caused the hazardous release (Glass 1987).
With the Mirabile and Maryland Bank and Trust
decisions at odds over the lender's security exemption,
the financial community awaited judicial guidance as to
29


the state of liability.

Two 1990 decisions served to

further confuse the issue.

u.s.

v. Fleet Factors

greatly expanded lender liability.

Conversely, In Re

Bergsoe carne down for the security interest exemption.
The long awaited decision in
was announced on May 23, 1990.

u.s.

v. Fleet Factors

The Eleventh Circuit

Court of Appeals handed down a decision on the extent
of a creditor's involvement in a borrower's operations.
Fleet Factors had agreed with Swainsboro Print Works to
lend operating capital in exchange for Swainsboro's
receivables.

In addition, Fleet received a security

interest in Swainsboro's inventory, equipment and site.
Swainsboro filed for bankruptcy in 1979.

Fleet contin­

ued with the advances, but also became involved in
Swainsboro's operations as well as controlling access
to the site (Berz 1991).
down.

In 1981, Swainsboro shut

A trustee was appointed to take control of the

facility.

Fleet Factors foreclosed on its interest in

the inventory and equipment in 1982 and engaged a
liquidator to handle the matter (Moelis 1990).

The

liquidator moved hundreds of barrels of hazardous
chemicals and allegedly caused the release of friable
asbestos into the environment.

An EPA inspection in

1984 revealed the presence of the chemicals and asbes­
tos that posed a dangerous environmental risk.

EPA

cleaned up the site and then sued Fleet Factors as both
30


"owner and operator" under CERCLA Section 107 (a) (1) and
an "owner or operator" under Section 107(a) (2) to
recover the $400,000 cleanup cost (Berz 1991).

In the

meantime, Emanuel County took title to the property at
tax foreclosure (Moelis 1990).
The Federal District Court found that Fleet Fac­
tors was not liable under Section 107(a) (1) because it
did not "own, operate or otherwise control activities
at the facility immediately before the tax foreclo­
sure."

(724 F. Supp., 960 (SD Georgia 1988) from

Moelis 1990).

Further, the court decided Fleet Fac­

tors was not liable under 107(a) (2) as an "owner"
because it was not involved in management of the facil­
ity.

The issue of whether Fleet was an "operator"

because of the movement of the drums and asbestos was
left undecided and the case went to the 11th Circuit
Court of Appeals.

The Appeals judge upheld the lower

court's ruling and agreed that the issue of the hazard­
ous wastes and asbestos must still be decided.

The

Eleventh Circuit disagreed with the interpretations of
CERCLA made by the lower court.

The lower court had

followed Mirabile in requiring a high standard of proof
of involvement with management to trigger CERCLA liabi­
lity.

The Appeals Court instead made a sweeping expan­

sion of the scope of liability by citing "capacity to
control" rather than actual control (Berz 1991).
31

The court held that a lender could be held liable
as a former owner:
by participating in the financial management of a
facility to a degree indicating a capacity to
influence the corporation's treatment of hazardous
wastes ... a secured creditor will be liable if
its involvement with the management of the facili­
ty is sufficiently broad to support the inference
that it could affect hazardous waste disposal
decisions if it so chose." (901 F.2d 1550 (11th
Cir. 1990) from Berz 1991).
This decision invoked liability surpassing Maryland
Bank and Trust.

The lender did not need to be involved

in operations, but merely have the implied ability to
control management decisions, to incur liability
(Moelis 1990).

The expansion of lender liability

indicated by Fleet Factors sent shock waves through the
banking community.

After years of doubt because of

the tension between the Mirabile and Maryland Bank and
Trust decisions, Fleet Factors appeared to be a signal
that the secured interest exemption was of very dubious
utility

(Berz 1991).

In August 1990, the Ninth Circuit Court of Appeals
provided some relief with the ruling on In Re Bergsoe
Metal.

The Ninth Circuit rejected the "capacity to

control" doctrine of Fleet Factors. The court instead
followed Mirabile in finding that a lender foreclosing
"primarily" to protect a security interest was not
liable under CERCLA 107 (a) (1) or 9607 (a) (2)
1990) .
32


(Moelis

In Re Bergsoe Metal involved a lead recycling

facility that was financed by municipal bonds issued by
a port authority.

Bergsoe Metal Corporation was owned

by a consortium headed by East Asiatic Company.

The

Port of St. Helens Oregon, sold fifty acres to Bergsoe
on which to build the plant, Bergsoe sold the land back
to the Port, and the Port assigned the lease back
rights to US Bank of Oregon while the bank bought the
Port's bonds.

After the complex transaction was com­

pleted in 1981, the Port held the deed, and the Bank
held a first trust position on the facility (Moelis
1990, Berz 1991).
After starting up in 1982 Bergsoe began having
cash flow problems.

A workout agreement whereby Front

Street Management Corporation took over operations also
faltered.

The plant shut down in 1986 and the Bank

forced Bergsoe into bankruptcy.

At this point the

Department of Environmental Quality concluded that the
site was an environmental health hazard and the bank
sued Bergsoe's owners, the East Asiatic Company demand­
ing they take responsibility for the cleanup (Moelis
1990).

East Asiatic Company countered back against the

Bank as well as filing a third party claim against the
Port, claiming the Port was liable as "owner or opera­
tor" under CERCLA.

The Port argued that it owned the

property only as security in the arrangement with
33

Bergsoe and that it did not participate in management.
The court agreed and dismissed Bergsoe's claim (Berz
1991) .
Essentially the court held that the Port's rights
under the sale/lease back deal with Bergsoe did not
constitute "owner or operator" status under CERCLA.
Under the net lease agreement, Bergsoe was responsible
for the property.

The Port did own the property on

paper, but was not responsible in the sense of paying
taxes and insurance (Moelis 1990).

The court also

found that the Port's rights of inspection and foreclo­
sure under the lease did not constitute management, but
instead were consistent with the rights of secured
creditors (Berz 1991).

For the Ninth Circuit,

"Merely

having the power to get involved in management, but
failing to exercise it, is not enough [to incur liabil­
ity.]"

(In Re Bergsoe Metal Corp. No. 89-35397, 8637-8

no. 3 (9th Cir. Aug. 9, 1990) from Moelis 1990).
The status of lender liability has corne full
circle from Mirabile to In Re Bergsoe Metals with the
intervening Maryland Bank and Trust and Fleet Factors
cases, as seen in Figure 3.

Mirabile and Bergsoe both

strengthened the security interest exemption, while
Maryland Bank and Trust and Fleet Factors expanded
liability.

Fleet Factors and Bergsoe are in direct

conflict, Fleet Factors requiring only the broad capac­
34


ity to control while Bergsoe requires evidence of
actions indicating control in order to incur liability.
With these cases in opposition, lenders face an uncer­
tain fate in the courts should they become embroiled in
litigation over hazardous waste site liability.
Lessor/Lessee Liability
While it is obvious that lessors are owners and
therefore liable under CERCLA, lessees have been found
to be owners as well.

(Of course lessees can also be

operators.) In U.S. v. South Carolina Recycling and
Disposal , Columbia Organic Chemical Co. leased a site
for storage of chemicals and then sublet to South
Carolina Recycling which also stored chemicals at the
site.

South Carolina Recycling took over the site and

continued to store chemicals there.

Ultimately a large

amount of hazardous chemicals were dumped on the prop­
erty and EPA cleaned the site and then sued Columbia
and South Carolina Recycling for the costs.

Columbia

was judged an owner under CERCLA because it:
maintained control over ... the property and, essen­
tially, stood in the shoes of the property own­
ers ... To conclude otherwise would frustrate Con­
gress' intent that persons with responsibility for
hazardous conditions bear the cost of remedying
those conditions. (653 F. Supp. 1003 (DSC 1984)
from Feder 1988).
Control was thus equated with ownership.

In U.S. v.

Monsanto the court found that Monsanto as lessor was
still liable as owner even though it had no knowledge
35

of the contamination occurring.

(Prescott 1990)

Be­

cause of the 'contractual relationship' clause ln
CERCLA, neither lessors nor lessees can easily use the
innocent landowner defense (Feder 1988) .
Corporate Successor Liability
The doctrine of limited liability that has been
the basis of corporate planning throughout the indus­
trialisation of America is under attack in the courts
(Cross 1990).

This is a very complex issue that delves

into legal theories of corporate responsibility beyond
the scope of this essay.

Yet the importance to busi­

ness of the corporate veil cannot be understated.

The

desire of the EPA to obviate corporate protection as a
matter of policy strikes at the heart of u.S. business
practices and engenders uncertainty. This has only
become a concern in the past decade with the advent of
CERCLA.

Despite the established principle that in an

asset acquisition the purchaser is not acquiring the
seller's liabilities, EPA has taken the position that
often environmental liability attaches despite deal
structure.

The EPA is thus asserting that environmen­

tal liabilities are ln a different class and merit
special treatment.

EPA lost this assertion in Anspec

v. Montgomery when the court held that CERCLA does not
define successor corporations as PRPs.

Conversely, in

cases involving mergers the government has been very
36


successful in arguing for liability for successor
corporations (Moskowitz 1989).
The precedent for mergers and the subsequent fate
of attendant environmental liabilities was Smith Land &
Improvement v. Celotex Corporation.

In this case the

court did not insist on CERCLA successor liability but
noted that the intent of CERCLA was served by having
the corporation pay (Squire 1990).

The decision read

in part:
... when two corporations merge pursuant to statu­
tory provisions, liabilities become the responsi­
bility of the surviving company ... Congressional
intent supports the conclusion that, when choosing
between the taxpayers or a successor corporation,
the successor should bear the cost. Benefits from
use of the pollutant as well as savings resulting
from the failure to use non-hazardous disposal
methods inured to the original corporation, its
successors, and their respective stockholders and
accrued only indirectly, if at all, to the general
public. (851 f.2d 86 (8th cir. 1988) from Cross
1990) .
The logic invoked in this case has had an extensive
following in other court decisions.

The courts have

not been reticent to ignore the machinations of corpo­
rations reshuffling into new forms and still lmpose
liability upon the successor (Squire 1990).
A case that addressed the question of responsibil­
ity of a parent corporation for the liabilities of a
subsidiary was State of Idaho v. Bunker Hill.

To be

free of liability, the entities must operate indepen­
dently and truly be at arm's length.

37


The court used a

capacity to control test to determine if the parent,
Gulf Oil, was liable.

The court found that:

Gulf was in a position to be, and was, intimately
familiar with hazardous waste disposal and releas­
es at the Bunker Hill facility; and had the capac­
ity to control such disposal and releases; and had
the capacity, if not total reserved authority, to
make decisions and implement actions and mecha­
nisms to prevent and abate the damage caused by
the aisposal and releases of hazardous wastes at
the facility ... approval from Gulf was necessary
before more than $500 could be spent on pollution
matters ... With respect to Congress's intent that
those who bore the fruits must also bear the bur­
dens of hazardous waste disposal, it must be noted
that Bunker Hill's authorized capital was a mere
$1100 (sic) while Gulf received $27 million in
dividends from Bunker Hill. Gulf fully owned
Bunker Hill. (635 F. Supp. 665 (D. Idaho 1986)
from Cross 1990).
While warning that normal transactions between parent
and subsidiary corporations should not be misconstrued
or twisted to the aim of invoking liability for the
parent, in this case the evidence of control was so
clear, the benefit so great and behaviour of the parent
so egregious that Gulf was found fully liable for the
cleanup (Alvino 1988).

The courts are clearly finding

reasons to pierce the corporate veil and assign liabil­
ity to guilty parties.
Innocent Landowner Defense
To invoke the innocent landowner defense, the PRP
must have exercised environmental due diligence in the
form of an environmental site audit and have been
unaware of the toxic contamination.

The case law

regarding the innocent landowner defense is still very
38


scant/ as this defense is quite new and site audits a
recent addition to the process of closing a real estate
transaction.

In International Clinical Labs v. Ste­

vens/ the buyer of a contaminated property brought suit
against the seller/ the corporate lessee and the presi­
dent of the corporation.

The buyer was found to have

had no knowledge of the pollution before the sale/ and
have no part in any subsequent release.

The defendants

were found liable for a long term release at the site/
where computer hardware was manufactured/ and were
fully liable for response costs.

The buyer was ab­

solved from liability under CERCLA Section 107(b) (3)
despite the lack of an environmental site assessment
because the evidence was overwhelming that the defen­
dants were responsible for the release (Hayes 1990).
No true test of environmental due diligence has yet
been tried in court/ principally because it is a new
concept (Baker 1990)
of Liability
While the decisions rendered by the courts have
been inconsistent/ some guiding principles emerge.
First/ of overriding concern is the issue of control.
If a party has control of a facility/
incurred.

then liability is

The difficulty is in ascertaining how much

control must be exerted to be liable.

The decisions

are contradictory on this point/ as evidenced by Fleet
39


Factors and Bergsoe.

Congress.

Second, there is the intent of

The courts have consistently found that

Congress' intent was for the private sector to pay for
cleanup, and have decided cases on that basis and gone
beyond the strict letter of the law, as in Smith Land.
Clearly the tendency has been for an expansion of
liability as serving the intent of the Act.
benefit has been a crucial factor.

Finally,

Parties seen to

have benefitted from the pollution as did Gulf Oil In
the Bunker Hill case or subsequent cleanup such as
Maryland Bank and Trust, were found fully liable.
With limited defenses, the owner of real property
where hazardous substances are found is strictly liable
for the costs of investigating and cleaning up the
site, as indicated in u.S. v. Shore Realty.

These

costs are now averaging from $20-30 million per site.
Under SARA, owners who disregard an order to clean a
facility are also liable for treble damages (Civins
1990).

Owner liability is summarized in Figure 4.

Liability under CERCLA is retroactive, affecting past
as well as present owners.

Past owners are liable if

they owned the property at the time of disposal, or
knew of the contamination and sold the property without
disclosure (Alvino 1988).

Intervening owners with no

knowledge of the pollution are not liable, seemingly
the only parties with connection to the site in that
40

Figure 4

Owner Liability under CERCLA/SARA

Fully liable

Owner at time of dumping

Not liable

Intervening owner/
didn't know of contamina­
tion

Not liable

Intervening owner/ knew
of contamination, dis­
closed upon sale
Intervening owner/ knew

Fully liable

of contamination, didn't
disclose
Present owner, knew of

Fully liable

contamination
Present owner, didn't

Could be liable

know of contamination, no
due diligence
Present owner, didn't

Very likely not liable

know of contamination,
practiced due diligence

41


position (Civins 1990).

EPA considers lessees to be

owners even though the courts have found lessees to be
owners only in cases where they have sublet the site as
in u.s. v. South Carolina Recycling and Disposal.
Lessors are considered owners under CERCLA and are
liable for contamination caused by their lessees, as
demonstrated in New York v. Shore Realty and u.S. v.
Monsanto.

Lessees still remain liable as operators and

may be sued in private action by their landlords.
Lessees are considered operators when involved with a
hazardous waste facility (Feder 1988) .

The situation

becomes complicated by any pre-existing pollution on
the site.

Both lessor and lessee are considered PRPs

in this case.

Despite any contractual agreement with

the lessee, the lessor is still responsible as owner
(Glass 1987).
Despite the security interest exemption delineated
in CERCLA, lenders who foreclose have been found to be
owners under the Act as in u.S. v. Maryland Bank and
Trust.

Clouding the issue is the decision in u.S. v.

Mirabile granting the bank its security exemption (Berz
1991) .

More chilling for lenders is the prospect of

being held liable as an operator of a facility for
exercising too much control over a borrower's business.
The extreme example of this is the 1990 decision in
u.S. v. Fleet Factors where capacity to control was
42


deemed sufficient to glve operator status to the lend­
er.

In re Bergsoe Metal however carne to the opposite

conclusion about management participation and read a
narrower construction of CERCLA (Moelis 1990).
For corporations the liability issues focus on
officers, successor corporations and parents of envi­
ronmentally unsound subsidiaries.

u.s.

As demonstrated in

v. Carol awn , officers can be held personally

liable if directly responsible for operations.

Corpo­

rate law exempts successors from the liabilities of
predecessors with certain exceptions (Cross 1990).

In

cases such as Smith Land & Improvement v. Celotex Corp.
the courts have expanded corporate liability to further
the legislative aims of environmental cleanup paid for
by the polluter and held successors liable.

Where

parent corporations have been clearly involved with the
subsidiary such as State of Idaho v. Bunker Hill, the
parent has been held strictly liable as owner.

While

the courts have followed successor rules to a point,
the application has -been uneven with resulting uncer­
tainty in the business community (Squire 1990).

The

tendency has been to expand liability with many corpo­
rations unaware of this potential exposure (Barnard
1987) .
A law as confusing and contradictory as CERCLA
desperately needs clarification from the courts.
43


Yet

the expansion of liability afforded CERCLA by the
courts is beyond rational application of the law and
instead looks to banks and corporations as parties
capable of footing the enormous bill for toxics cleanup
(Glass 1987).
the

Indeed, the Fleet Factors court cited

"overwhelmingly remedial goal of the CERCLA statu­

tory scheme," and argued that "ambiguous statutory
terms should be construed to favor liability for costs
incurred by the government."
1990) from Hayes 1990).

(901 F.2d 1550 (11th Cir.

The implications of this

expansive view of liability follow.

44


CHAPTER 4
IMPLICATIONS OF LIABILITY
Clearly there are costs attached to the liability
resulting from CERCLA.

This chapter explores the

effects on the parties to real estate transactions.
Always the uncertainty for business is of paramount
concern, particularly for lenders.

The attempt of

business to shift the burden of cleanup costs to the
insurance industry and the resulting battle is then
examined.

Finally, recommendations are made regarding

defenses and protections the various parties can avail
themselves of.
Costs of Liability
Buyers, sellers and lenders all face potentially
huge transaction costs as a result of the spectre of
Superfund liability.

The primary costs are for legal

fees and environmental audits.

At present the only

affirmative defense to liability is the innocent land­
owner defense under which the purchaser undertakes
environmental due diligence in the form of a site audit
(Baker 1990). 3

The buyer requires the site audit in

order to qualify for the innocent landowner defense.
The potential liabilities of past owners indicates that
sellers should take great care to know the condition of
their property lest greater environmental damage be
caused by the buyer which the seller could be liable
45

for.

Sellers also may be liable to private cause of

action, meaning that the buyer or other affected citi­
zens could sue for damages resulting from environmental
degradation (Hayes 1989).
As a result of the uncertainty surrounding lender
liability under CERCLA, lenders are far more cautious
in making new loans and generally require at least a
Phase I site audit before making a commitment.

This

adds time and cost to the transaction (King 1988).

As

far as old paper is concerned, lenders have to be very
wary about foreclosing on properties with environmental
liabilities as the cost of cleanup can often be far
more than the property is worth.

When a borrower is In

bankruptcy the lender must be careful not to become too
involved in the operations of the facility (Glass
1987).

It is possible to write the loan document so

that the borrower indemnifies the lender against envi­
ronmental liabilities, yet this does not excuse liabil­
ity under CERCLA (Hammers 1990).
The uncertainty instilled by CERCLA for business
and particularly for lenders makes planning difficult
and prompts changes in business practices to allow for
the uncertainty.

This of course costs time and money.

The irony is that despite site audits and environmental
indemnification clauses, there is still uncertainty
about the liabilities imposed by the Act, now and in
46

the future.

A clearer picture of liability would be

beneficial.

As it stands a great deal of energy is

expended guessing as to the extent of liability and
attempting to protect against a worst case scenario.
The Battle over Insurance Coverage
The insurance industry, while not directly liable
under CERCLA has much at stake in the ongoing battle
over who shall pay for toxics cleanup.

As PRPs are

targeted for the costs of cleanups, they are turning to
their insurance carriers to share the burden (Cheek
1988).

After initial setbacks in court, insurers are

now winning cases and thus being absolved of liability.
(Hoskins 1989).

The conflict is over Comprehensive

General Liability (CGL) policies and the definitions
they contain.

Since these are standard form policies,

the definitions are the same throughout the country and
the arguments then come down to differences between
jurisdictions as the courts try to sort through the
complexities and ambiguities of the policies (Hoskins
1989) .

While the major corporations and large insur­

ance companies are fighting on equal ground at this
point, there is a strong possibility that local courts
may find for the smaller PRPs when their cases come to
trial, because juries may be sympathetic to the little
guy (Cheek 1988).

A more progressive approach may be

negotiation of cost sharing as opposed to the huge
47

unproductive transaction costs of extended litigation.
It should be noted that because of the uncertainty and
tremendous costs involved with toxics cleanup, insur­
ance for environmental damage is virtually unavailable
at this time (Barnard 1987, Davis 1990).
Recommendations
While the potential liabilities arising from
CERCLA are great, defenses are few.

In practical

terms, all parties potentially open to CERCLA liability
should take the all available steps to protect them­
selves.

For the buyer in a real estate transaction, an

environmental site audit is essential.

The seller

should desire this step as well, even if it brings bad
news, because the cost could be higher if the problem
is left untended.

The lender should also demand a site

audit as a condition of the loan, as well as require an
environmental inspection easement to allow access , to
the site for an audit should foreclosure be necessary
(Gebhardt 1990).4

Lessors and lessees should also

perform an audit before concluding a lease agreement so
each party will be aware of the initial condition of
the property (Hayes 1989).

While there is no assur­

ance that an environmental audit affords ironclad
protection, it is the only protection available at this
time and with the extremely costly risk associated with
CERCLA liability, a prudent move.
48

CONCLUSION

The potential environmental liabilities imposed by
CERCLA are tremendous.

CERCLA broadly defines Poten­

tially Responsible Parties while allowing narrow de­
fenses to liability (Summers 1990).

The courts have

greatly expanded liability with very little legislative
history to guide them (Glass 1987).

The effect is one

of great uncertainty for the business community.

The

Act was designed to clean up the hazardous waste prob­
lem with the polluters paying the bill.

In reality

very few sites have been cleaned up and the government
record on collecting from polluters is dismal

(Smith

1989).
The EPA policy of hunting for deep pockets, par­
ticularly in the lending industry, is actually having
the opposite to its intended effect of promoting clean­
ups

(Corash 1990).

Lenders avoid foreclosure to avoid

liability, and hazardous waste sites go unreported.
The situation for lenders is very much in doubt and as
such lending practices have changed to reflect the
uncertainty.

Capital is not available to those at

risk of CERCLA liability, and innocent parties are made
to pay for problems they did not cause (Corash 1990) .
This is a conflict inherent in CERCLA between the goal
of cleaning up hazardous waste and the rights of inno­
cent property owners (Cornell 1989).
49


While the purpose

of CERCLA is to clean up sites, the major result at
this time is costly litigation (Lyons 1987).
CERCLA is onerous in comparison with the European
approach.

The European Community recently enacted

legislation to deal with its hazardous waste problems
that is cooperative and includes cost-benefit analysis.
The cost of this program will be lower than the ad­
versarial CERCLA in the U.S.

This does not bode well

for competitiveness of the U.S. compared to the EC
(Freeman 1990) .
The uncertainty spawned by CERCLA makes business
planning difficult

will continue to drive business­

es that are potentially liable under U.S. environmental
laws offshore.

Some would favor this.

The costs of

compliance may represent an excuse to export jobs and
capital with the standard explanation about an un­
friendly business climate at home.

It may be better to

keep business here and promote cleaner and more effi­
cient processes rather than polluting the Third World
even more.

If the spectre of Superfund liability looms

over companies and capital is unavailable, this will
not be possible.
Congress has the power to change the hazardous
waste statutes.
year.

CERCLA is due for reauthorization this

The last reauthorization was two years late and

the expectation is that it may be 1992 before action is
50


finalised this time (Berz 1991).

There are two amend­

ments pending to provide relief to innocent parties to
real estate transactions, one dealing with the innocent
landowner defense and the other with lender liability.
Rep. Curt Weldon's H.R. 2787 defines environmental due
diligence for the purpose of qualifying for the inno­
cent landowner defense.

The steps of a Phase I audit

are specifically enumerated (Hayes 1990).5

This bill

would give far more certainty to the innocent landowner
defense, in which there is some doubt at this point.
Another amendment being offered is a strengthening of
the security interest exemption.

H.R. 2085, offered by

Rep. John LaFalce, changes the definition of 'owner or
operator' by specifically exempting "any designated
lending institution which acquires ownership or control
of the facility pursuant to the terms of a security
interest held by the person in that facility."
2085 from Berz 1991).

(H.R.

This bill is plagued by ambigu­

ity and fails to delineate between past and present
lenders (Berz 1991, Moelis 1990).

Despite these possi­

ble amendments, it is unlikely Congress will change
much of the complex Act.
Cleaning up hazardous waste sites in the United
States is now estimated to cost $500 billion to $1
trillion and may take up to 50 years

(Cheek 1988). This

is a long term project that should be carefully planned
51


and monies expended for cleanup rather than on law­
suits.

The present law wastes huge amounts of money on

lawyers and experts arguing over who should pay (Lyons
1987).

The costs must eventually be spread more evenly

across society.

As unpalatable as taxes may be, no

pocket is deep enough to pay this price.

This is a

national problem, we need a national solution.

52


NOTES

1. The complete definition of 42 § USCA 9601.35:

liThe term /contractual relationship / for the purpose

of section 9607 (b) (3) [107 (b) (3)] of this title/ in­

cludes/ but is not limited to/ land contracts/ deeds or

other instruments transferring title or possession/

unless the real property on which the facility
cerned is located was acquired by the defendant after

the disposal or placement of the hazardous substance

on/ in/ or at the facility/ and one or more of the

circumstances described in clause (i) / (ii) / or (iii)

is also established by the defendant by a preponderance

of the evidence:

(i)
At the time the defendant acquired the facility

the defendant did not know and had no reason to know

that any hazardous substance which is the subject of

the release or threatened release was disposed of on/

in or at the facility.

(ii)
The defendant is a government entity which ac­

quired the facility by escheat/ or through any other

involuntary transfer or acquisition/ or through the

exercise of eminent domain authority by purchase or

condemnation.

(iii)
The defendant acquired the facility by inheri­

tance or bequest.

In addition to the foregoing/ the defendant must estab­

lish that he has satisfied the requirements of section

9607 (b) (3) (a) and (b) of this title.

(B)
To establish that the defendant had no reason to

know/ as provided in clause (i) of subparagraph (A) of

this paragraph/ the defendant must have undertaken/ at

the time of acquisition/ all appropriate inquiry into

the previous ownership and uses of the property consis­

tent with good commercial or customary practice in an

effort to minimize liability. For purposes of the

preceding sentence the court shall take into account

any specialized knowledge or experience on the part of

the defendant/ the relationship of the purchase price

to the value of the property if uncontaminated/ common­

ly known or reasonably ascertainable information about

the property/ the obviousness of the presence or likely

presence of contamination at the property/ and the

ability to detect such contamination by appropriate

inspection.

(C)
Nothing in this paragraph or in section 9607(b) (3)

of this title shall diminish the liability of any

previous owner or operator of such facility who would

otherwise be liable under this chapter. Not withstand­

ing this paragraph/ if the defendant obtained actual

knowledge of the release or threatened release of a

hazardous substance at such facility when the defendant

53


owned the real property and then subsequently trans­
ferred ownership of the property to another person
without disclosing such knowledge, such defendant shall
be treated as liable under section 9607(a) (1) of this
title and no defense under section 9607(b) (3) of this
title shall be available to such defendant." (West
Publishing 1989) .
2. De minimus settlements under section 42 § USCA
9622(g) (1) (B) may be granted if "[t]he Potentially
Responsible Party­
(i) is the owner of the real property on or in which
the facility is located;
(ii) did not conduct or permit the generation, trans­
portation, storage, treatment, or disposal of any
hazardous substance at the facility; and (iii) did not
contribute to the release or threat of a hazardous
substance at the facility through any action or omis­
sion. This subparagraph (B) does not apply if the
potentially responsible party purchased the real prop­
erty with actual or constructive knowledge that the
property was used for the generation, transportation,
storage, or disposal of any hazardous substance." (West
Publishing 1989).
3. Environmental due diligence involves a site inves­
tigation in the form of a Phase I environmental site
audit. While not
at this time, a site audit
generally involves a check of previous uses of the site
and a basic physical inspection of the property.
See
Moskowitz, 1989 and Nanney, 1990 for further details.
4. An environmental inspection easement allows the
lender to inspect the facility prior to foreclosure.
Without this document, the lender has no legal right to
inspection; in practical terms, during a hostile fore­
closure action this could preclude an environmental
audit. Without the audit there is the danger of envi­
ronmental liability for the lender.
See Gebhardt, 1990
for more detail.
5. Rep. Weldon's bill would codify environmental due
diligence for the purpose of the innocent landowner
defense. Under H.R. 2787, a Phase I audit would in­
clude the following elements: title history, previous
uses, adjacent property uses, aerial photographs,
interviews with neighboring property owners and employ­
ees of the facility, government agency listings, site
inspection and recommendations as to the necessity of a
Phase II audit.
If further study is indicated and the
PRP ignores this, the PRP is disqualified from using
54

the defense.
ney, 1990.

For complete text of the bill, see Nan­

55


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