Ninth Circuit Defines “Current Ownership” for Purposes of CERCLA Liability

In Dept. of Toxic Substances Control v. Hearthside Residential Corp., No. 09-55389 (9th Cir. July 22, 2010), the Ninth Circuit has clarified the issue of whether “owner and operator” status under CERCLA is defined at the time cleanup costs are incurred or instead at the time that a recovery lawsuit seeking reimbursement is filed, a question of first impression. The Ninth Circuit held that current ownership is measured at the time of cleanup, and therefore “the owner of the property at the time cleanup costs are incurred is the current owner for purposes of determining CERCLA liability.”

The litigation relates to undeveloped wetlands known as the Fieldstone Property, and certain adjacent residential parcels (“Residential Site”). The defendant, Hearthside Residential Corporation (“Hearthside”), purchased the Fieldstone Property in 1999 knowing that the property was contaminated with polychlorinated biphenyls (“PCBs”). In 2002, Hearthside entered into a consent order with the State of California, Department of Toxic Substances Control (“DTSC”), in which Hearthside agreed to remediate the PCB contamination on the Fieldstone Property. DTSC further alleged that the PCBs from the Fieldstone Property had migrated onto the adjacent Residential Site. Hearthside disputed DTSC’s allegation, and remediated only the Fieldstone Property. DTSC certified Hearthside’s completion of the Fieldstone Property on December 1, 2005, and Hearthside sold that property later that month. Meanwhile, DTSC contracted to remediate the Residential Site and incurred cleanup expenses between July 2002 and October 2003, while Hearthside still owned the Fieldstone property. In October, 2006, DTSC filed a complaint against Hearthside seeking reimbursement for the Residential Site cleanup, among other relief. Thus, Hearthside owned the Fieldstone Property at the time of DTSC’s cleanup, but not when DTSC filed its complaint.

DTSC’s complaint was based, in relevant part, on (1) DTSC’s allegation that the Fieldstone Property was the source of the contamination on the Residential Site, and (2) the fact that Hearthside owned the Fieldstone Property at the time the Residential Site was cleaned. CERCLA imposes strict liability for environmental contamination upon four classes of potentially responsible parties, one of which is the “owner and operator of a vessel or a facility.” 42 U.S.C. § 9607(a)(1). Other courts have defined this category of responsible parties to refer to “current” owners or operators. Hearthside, citing Carson Harbor Vill., Ltd. v. Unocal Corp., 270 F.3d 863, 881 (9th Cir. 2001) (en banc); accord, e.g., United States v. Capital Tax Corp., 545 F.3d 525, 530 (7th Cir. 2008); ITT Indus., Inc. v. BorgWarner, Inc., 506 F.3d 452, 456 (6th Cir. 2007). However, CERCLA does not define the date from which to measure ownership. The district court granted partial summary judgment in favor of DTSC, finding that “owner” status is determined at the time a response-recovery claim accrues (when the cleanup occurs), not at the time the lawsuit is initiated. The parties jointly requested immediate certification of the issue for appeal, which the trial court granted. The 9th Circuit accepted the appeal of this question of law.

The 9th Circuit noted that CERCLA is silent on the issue of the date from which ownership is measured, and therefore looked to the statutory context and CERCLA’s purposes to deduce Congress’s intent. Regarding Congress’s intent, the court reasoned that because the applicable statute of limitations is triggered at the time of cleanup, this suggests Congress’s intent was to make the owner at the time of cleanup the “current owner.”

Regarding CERCLA’s purposes, the Court reasoned that CERCLA encourages early settlements rather than litigation. However, by attaching “current owner” status to a potentially responsible party only at the time of the filing of a lawsuit could cause many premature suits to be filed, contrary to CERCLA’s the goal of encouraging early settlements. In addition, settlement requires the responsible party’s agreement to remediate the property; the owner at the time of cleanup can select from alternative remedial plans, and therefore that owner should be responsible for the cost of the cleanup. The Court also reasoned that CERCLA discourages delay of remediation, and attaching “current owner” status at the time of remediation would not encourage delay, stating:

“[A] landowner that knows it will ultimately be responsible for the cleanup costs has no incentive to delay the completion of that process once it has begun. Conversely, . . . a landowner seeking to avoid liability by transferring the property before a lawsuit is filed has every incentive to delay completing the cleanup process until it has found a buyer; the recovery suit is likely to be filed once cleanup is complete and the total cost is known.”

The decision does not address the second category of “owner” liability under CERCLA, namely “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…” 42 U.S.C. § 9607(a)(2). Any former property owner evaluating its potential liability under CERCLA must consider the possible applicability of both categories of “owner” liability, along with the timing of any remedial actions taken on that property or adjoining properties pursuant to this decision.