Third Circuit Holds New Property Owner on the Hook for Old Cleanup Costs

David J. Oberly

Is a purchaser of contaminated property on the hook for environmental cleanup costs that take place prior to the time the property was acquired? In Pennsylvania Dept. of Environmental Protection v. Trainer Custom Chemical, LLC, No. 1702607 (3d Cir. Oct. 5, 2018), the Third Circuit Court of Appeals recently considered this issue—and answered the question in the affirmative, holding that a current owner of real property is liable under both the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and Pennsylvania’s Hazardous Sites Cleanup Act (“HSCA”) for all response costs in an environmental cleanup, including those costs incurred prior to the landowner’s purchase of the contaminated property. The Third Circuit’s decision is a noteworthy one—and one that undoubtedly has a significant impact on entities considering the purchase of property where hazardous substances have been released, as such purchasers run the significant risk of being on the hook for the entirety of the cost to remediate the contaminated property, including even those costs that were incurred prior to the time the buyer assumed ownership of the property.

Trainer Custom Chemical, LLC, acquired a property located in Trainer Borough, Pennsylvania, known as the “Stoney Creek Site,” for $20,000 from Stoney Creek Technologies (“SCT”) after Pennsylvania’s Department of Environmental Protection (“PADEP”) had already incurred over $818,000 in environmental cleanup costs at the Site. SCT was in financial trouble and could not afford the expenses involved in the cleanup, and as such the pre-sale cleanup expenses remained unpaid when Trainer took possession of the property. In addition, the cleanup costs continued to mount following Trainer’s acquisition of the property, both because of pre-existing pollution and because buildings on the Site were demolished by one or both of Trainer’s principals, which caused further contamination.

PADEP sued Trainer and the two principals for violations of CERCLA and HSCA, and sought to recover all of its response costs related to the Site, regardless of when those costs arose. At the summary judgment stage, the District Court drew a temporal line, holding Trainer liable under both statutes for the response costs incurred after Trainer took ownership of the Site, but not for the costs that arose before. PADEP appealed.

On appeal, the Third Circuit was required to determine whether the owner of a piece of land is liable for the costs of an environmental cleanup that took place there before the owner acquired it. Section 107(a) of CERCLA provides that “the owner . . . of . . . a facility . . . shall be liable for . . . all costs of removal or remedial action incurred by . . . a State . . . not inconsistent with the national contingency plan[.]” Section 107(a)(4)(A) of CERCLA gives states “the right to recover costs incurred in cleaning up a waste site from ‘potentially responsible parties’ (PRPs)—four broad classes of persons who may be held strictly liable for releases of hazardous substances that occur at a facility.” The first of those four classes of PRPs is the owner or operator of a facility. HSCA is Pennsylvania’s state law counterpart to CERCLA. Although CERCLA and HSCA have differences, there are instances in which “liability under . . . HSCA mirrors liability under CERCLA” because “§ 702(a) of . . . HSCA mirrors § 107(a) of CERCLA.” Under HSCA, a current owner is strictly liable for environmental response costs, including those incurred by the Commonwealth of Pennsylvania.

Applied to the case at hand, the court was tasked with deciding whether the meaning of “all costs” in § 107(a) includes response costs incurred before Trainer acquired the Site. The Court answered this question with a resounding yes, finding that—given the structure and text of CERCLA—a current owner under § 107(a)(1) is indeed liable for all response costs, whether incurred before or after acquiring the property. In reaching this conclusion, the Third Circuit relied on four independent, primary rationales.

First, the court concluded that the text of CERCLA provided definitive support for the conclusion that Trainer was responsible for those cleanup expenses that occurred prior to the time that Trainer assumed ownership of the Site. Importantly, the court found that the term “all costs” meant just that, in that it did not distinguish between costs that were incurred before ownership and those incurred afterwards. Because of the lack of any distinction, the court declined to create a temporal limitation on the liability for costs. Instead, the plain language led the court to conclude that the words “all costs” include costs incurred before ownership and costs incurred after ownership.

Second, the court found that the structure of CERCLA, as amended, reinforced the court’s reading of the statute. Here, the court noted that where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent. The court further highlighted the fact that there were statutes of limitations for § 107 cost recovery actions, the innocent owner defense to § 107(a) liability, and the bona fide prospective purchaser defense to § 107(a)(1) current owner liability. As such, the court declined to read an additional limitation into the statute by imposing a new temporal frame on the meaning of “all” in the term “all costs.”

Third, the court pointed to the provision in CERCLA for contribution actions, § 113(f), as further support for reading “all costs” to include costs incurred before a current owner acquired a property. Here, the court found important the fact that when a PRP must bear “more than its fair share” of cleanup costs resulting from a § 107 cost recovery action, it can seek a more equitable distribution of those costs through a contribution action against other PRPs.

Finally, the court also found that the Small Business Liability Relief and Brownfields Revitalization Act of 2002 provided further logical support for the conclusion that a current owner is liable for response costs incurred before the change in ownership of the property. In this regard, Congress added a provision from that Act—the bona fide prospective purchaser defense—to CERCLA to allow a prospective purchaser to be exempted from § 107(a)(1) liability, if that purchaser, among other requirements, “made all appropriate inquiries into the previous ownership and uses of the facility” and “exercise[d] appropriate care with respect to hazardous substances found at the facility[.]” But that defense is limited because even a careful prospective purchaser is not totally off the hook—the amendment allows the United States to obtain a lien on the property for its “unrecovered response costs.” Accordingly, that provision, by its very existence, indicates that Congress contemplated scenarios in which a current owner could be liable for response costs incurred before ownership transferred.

Taken together, the court concluded that based on CERCLA’s text and structure, the meaning of “all costs” in § 107(a) includes the costs incurred both before and after a current owner acquired the property. As such, the court held that Trainer was liable for the removal costs at the Site, regardless of when those costs were incurred, making it liable under both CERCLA and HSCA.

 The Trainer decision is significant for both prospective purchasers and current owners of contaminated property, as the opinion makes crystal clear that property owners and developers may be responsible for all environmental cleanup costs for a given property, even if those costs were incurred prior to the time the property was acquired. As such, prospective buyers of contaminated property must now consider not only the possibility that they may be responsible for cleaning up contamination that was not caused by the buyer, but also that they can be on the hook for reimbursing the government for the entirety of response costs incurred at the property, including those incurred prior to the buyer’s purchase of the property.

In addition, the Trainer opinion also clearly illustrates the importance of environmental due diligence in real estate transactions, which is essential in order to determine a property’s history and condition, as a purchaser of property will assume responsibility for the entirety of the property’s environmental history unless appropriate precautions are taken by the purchaser. Similarly, parties must be extremely cautious and careful during the drafting phase of the transactional process to avoid the potential pitfalls posed by commercial sites, which can be minimized or extinguished through the use of appropriate indemnification, risk shifting, or cost-allocation measures.

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