On November 24, 2010, the Indiana Court of Appeals ruled in Neal v. Cure. The case involved claims brought by Sam and Delores Neal (owners of a transmission repair shop in Martinsville, Indiana) against the owner of an adjacent commercial building, William Cure, who was represented by Taft. From 1990 to 1995, Mr. Cure leased his commercial building, which he had previously used as space for his family’s retail furniture store, to a commercial dry cleaner and laundry, Masterwear Corp. Unbeknownst to Mr. Cure, Masterwear’s dry cleaning equipment released a cleaning solvent, Perchloroethylene (PERC or PCE) into the soil and groundwater at the site. This contamination eventually migrated off-site and impacted the City of Martinsville’s wellfield. The City, the United States Environmental Protection Agency, and a bevy of nearby residents – including the Neals – sued Masterwear, the Cures and their respective insurers.

The Neals settled their claims against Masterwear, the party unquestionably responsible for releasing PCE. At issue in their remaining claims against the Cures was the extent to which a landlord can be responsible for its tenant’s tortious conduct. The Neals argued that the Cures “should have known” or “had reason to know” that Masterwear was using PCE unsafely and releasing PCE into the environment. According to the Neals, this was apparent based on complaints from the Cures other tenants related to Masterwear’s day-to-day operations (although not involving PCE) and on Mr. Cure’s monthly observations of Masterwear’s “poor housekeeping.” The Neals also maintained that the Cures had knowledge of a 1991 release of wastewater and that this too should have put the Cures on notice that something sinister was afoot. Finally, the Neals pointed to an environmental report a local bank had commissioned for the Cure property in 1996, when the bank was looking to purchase the Cure building for expansion. The report, the Neals argued, gave the Cures actual knowledge of PCE contamination at their property that the Cures then failed to investigate.

The Cures maintained that none of these facts gave rise to tort liability or to statutory liability pursuant to Indiana’s Environmental Legal Action Statute (ELA). The Cures relied on existing Indiana law that clearly refuses to extend liability for a tenant’s conduct to a landlord absent a showing that the landlord had “actual knowledge” and affirmatively consented to the tenant’s tortious conduct. The Cures successfully argued against the Neals’ ambiguous “should have known” standard employed by only a few jurisdictions and the ALI’s Second Restatement of Torts. The Cures then argued that liability under the ELA only attaches when a party “causes or contributes to” the release of a hazardous substance meaning that an ELA defendant must have actual involvement in the release.

The Court of Appeals agreed with the Cures and refused the invitation to rewrite Indiana law. The Court ruled that the designated evidence did not demonstrate that the Cures had actual knowledge or that the Cures were involved in Masterwear’s release of PCE. The Neals have until December 27, 2010, in which to appeal their case to the Indiana Supreme Court.

For more information on the landlord liability for toxic torts, please contact Brad Sugarman or any member of Taft’s environmental practice group.