Federal Court Decision Restricts Ability to Recover Costs Associated with Environmental Contamination

Judicial interpretation of federal and state laws over the past few years has resulted in the manifestation of several obstacles for public entities or potentially responsible parties (PRP) to overcome in order to obtain funds to remediate, or pay for the remediation of, contaminated property. In response to these obstacles, PRPs have had to seek new ways to gather funds or obtain contribution from other PRPs using state nuisance laws and/or sections 107 and 113 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

On October 4, 2007, the Indiana federal district court decision of City of Gary v. Shafer, added another roadblock for PRPs to overcome when seeking costs under CERCLA and Indiana nuisance law. In Shafer, the City of Gary brought suit against Waste Management for delinquent taxes related to a property. The city eventually reached a settlement with Waste Management that gave the Property along with $ 100,000 to the city. After inspecting the property, the city filed suit for remediation costs against former property owners under CERCLA section 107 and 113; Indiana's Environmental Legal Action Statute, and Indiana nuisance law. The court threw out, or dismissed, the city's nuisance and CERCLA claims.

New Restrictions on a PRP's Right to Contribution under CERCLA

The court dismissed the city's CERCLA claim because a Voluntary Remediation Agreement (VRA) or settlement agreement between the city and the State of Indiana did not resolve liabilities for contaminants relating to "natural resource damages." The court opined that because the settlement did not resolve all of the city’s CERCLA liability, particularly with the Environmental Protection Agency, the city could not assert a CERCLA contribution claim.

Under Shafer a settlement reached by a PRP with the State of Indiana that does not resolve liability for natural resource damages will prohibit a party from getting contribution costs under CERCLA. As consent decrees between the State of Indiana and/or federal entities often do not resolve liability for natural resource damages, Shafer presents a real and new obstacles for PRPs in Indiana. Indeed, to obtain costs under CERCLA a PRP must now:

1. Be able to show that it has resolved all potential CERCLA liability through a VRA;

2. Have received a Certificate of Completion for the property in question; and

3. Present evidence that the Environmental Protection Agency does not, and will not, deem the property as posing an imminent and substantial threat to human health or the environment and therefore subject to natural resource damages.

Although Shafer may restrict a PRP's ability to seek costs under CERCLA section 113, PRPs may still be able to recover remediation or contribution costs under CERCLA section 107.  In United States v. Atlantic Research Corp. the United States Supreme Court recently held that where a PRP voluntarily incurs its own response costs, it can recover those costs from other PRPs pursuant to section 107.  Unfortunately, if a PRP reimburses costs incurred by another PRP under a settlement agreement or consent decree, the PRP may very well be limited to pursuing a CERCLA 113 claim allowed under the Shafer decision. Yet, in this regard it must be remembered that Shafer is only a federal district court opinion for Northern District of Indiana. Although future cases in the District Court for Northern Indiana will be bound by the limitations set out in Shafer, cases brought in the Seventh Circuit, the United States District Court for Southern Indiana, or another federal court will not as these courts have the authority to reach a different conclusion for these issues. Accordingly, it is likely that the issues raised in Shafer will be points of dispute in future Indiana state cases and cases filed in other federal courts.

Possible New Limits on Nuisance Claims for Environmental Contamination

In regard to the city's nuisance claim, Shafer noted that private nuisance law was developed based on the assumption that the parties to a nuisance do not have prior contractual relationships with one another in which their interests might have been resolved by agreement. As such, the court found that because the city was a "purchaser" of the property it could not bring a private nuisance claim against a former owner for property currently owned by the city.

Who is a "Purchaser" for Nuisance Purposes?

The court determined that for nuisance purposes a "purchaser" is not limited to a cash buyer, private entities, or individuals who obtain property through a conventional money transfer or purchase. Instead, a "purchaser" is "a party that obtains property from another for either money or other valuable consideration" or anyone who has the ability to negotiate with a property's owner/seller to account for any defects in the property. The court determined that municipalities obtaining property through a tax settlement are "purchasers" because they receive valuable consideration, i.e. the property and/or money, and give something in exchange for the valuable consideration -- settlement of tax debts.

Although the Shafer decision limits the ability of municipalities to pursue private nuisance claims against former property owners, it did not address the viability of public nuisance claims based on an interference with a "common right” of the public likely to exist when groundwater, multiple or adjacent properties, or parks are contaminated. Indeed, the court focused on the fact that the city's allegations focused on the nuisance affecting a single piece of property and its single municipal entity owner. Furthermore, Shafer may provide an avenue for adjacent property owners to recover damages for environmental contamination from former property owners.

Furthermore, it must be remembered that Shafer is only a federal district court opinion that has attempted to interpret Indiana nuisance law. Indiana state courts are the ultimate authority for Indiana law and can invalidate Shafer as to when, or what type, of nuisance claim can be brought for costs associated with environmental contamination.

Nonetheless, the Shafer decision may reduce the willingness of some municipalities, especially those who are risk-adverse, to enter into tax settlements allowing individuals or corporations to reduce their tax liability by transferring potentially contaminated property to the municipality. If a municipality enters into such an agreement, that municipality will need to address the limitations found in Shafer and may eventually have to pursue environmental costs by showing a public nuisance exists or that recovery is allowed under other applicable environmental laws.

If you have any questions regarding this article or other environmental contamination issues, you may contact your Ice Miller attorney or Kristina Maria Tridico.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.