Type: Law Bulletins
Date: 11/10/2014

Can Landlords With Knowledge of Tenant's Pollution be Liable for Cleanup Under Indiana's Environmental Legal Action Statute?

A recent ruling by the Indiana Court of Appeals could expand liability under Indiana’s Environmental Legal Action statute (“ELA”). The ruling in JDN Properties, Inc. v. VanMeter Enterprises, Inc., 2014 WL 4656543 (Ind. App. Sept. 19, 2014), potentially extends ELA liability to landlords who have knowledge that their tenants have created pollution, even if the landlords had no involvement in “causing” the contamination.

The ELA was enacted by the Indiana General Assembly in 1997 (effective 1998) as a part of the “Brownfield Revitalization Zone Tax Abatement – Environmental Loan Program” bill. Cooper Indus., LLC v. City of South Bend, 899 N.E.2d 1274, 1280 (Ind. 2009). The legislature enacted the ELA statute “to shift the financial burden of environmental remediation to the parties responsible for creating contaminations.” Id. at 1284. Under the ELA, a person who “caused or contributed to the release” of a “hazardous substance or petroleum into the surface or subsurface soil or groundwater” may be liable for reasonable costs of removal or remedial actions if those releases pose “a risk to human health and the environment.” Ind. Code § 13-30-9-2. As explained below, the VanMeter court held that “knowledge of pollution is one way in which an owner of land may be held liable under the ELA for causing or contributing to hazardous pollution, under circumstances like those present here.” 2014 WL 4656543 at *5.

The question addressed by the court in VanMeter was the reach of “cause or contribute” under the ELA. The case involved historical leaks from two heating oil underground storage tanks (“USTs”) on a parcel (the “Parcel”) owned and leased by two closely-held companies. Prior to 1983, J. Brock VanMeter, Sr. (“Senior”) was the president of Farm Tech, Inc. (“FTI”), the owner of the Parcel. In 1983, FTI sold the Parcel to VanMeter Enterprises, Inc. (“VEI”), of which Senior was the sole shareholder, director and incorporator. VEI then leased the Parcel back to FTI, whereupon FTI conducted its day-to-day business operations on the Parcel.

The USTs leaked heating oil prior to 1988 because, according to the record, sometime between 1988 and 1991 Senior hired a contractor to relocate underground water lines. According to an affidavit from the contractor, Senior stated at the time that the heating oil levels had dropped significantly within the USTs and also that the nearby well had become so contaminated with petroleum “as to be unusable.” Id. at *1.

Senior died in 1994 and all of his stock in VEI was transferred to his estate. His son, J. Brock VanMeter, Jr. (“Junior”), was named executor of the estate. It does not appear from the court’s opinion that Junior was involved in the business operations of FTI or VEI. VEI sold the Parcel in 1995 to the eventual incorporators of JDN Properties, LLC (“JDN”). As part of the transfer, Junior represented that there had never been a reportable release of any hazardous substance or petroleum as required under state or federal laws. Again, the opinion did not indicate whether Junior had been made aware of the petroleum releases.

JDN ultimately took title to the Parcel and leased it to a company that conducted soil testing. The testing revealed petroleum contamination and JDN incurred $67,479 in remediation costs, plus attorney fees. JDN sued VEI under the ELA. The trial court granted summary judgment in favor of VEI on the ELA claim and JDN appealed.

The Court of Appeals reversed, stating that “[i]n light of the conflicting designated evidence in this case, it is consistent with the purposes of the ELA to permit JDN’s suit against VEI to move forward.” Id. at *4. In doing so, the court concluded that “a landlord who has knowledge that a tenant’s use of land is causing environmental contamination, but does nothing to halt or remediate such contamination and goes on to sell that property to a third party without disclosing the property’s condition, may fairly be said to ‘share responsibility’ for or contribute to such contamination.” Id. The court cited an earlier decision from the Court of Appeals, Neal v. Cure, 937 N.E.2d 1227 (Ind. Ct. App. 2010), trans. denied, which held landlords could not be liable under the ELA where “there was no evidence the landlords had any knowledge that their tenant was contaminating the ground with a toxic chemical.” Interestingly, Judge Barnes authored the VanMeter decision and also was on the three-judge panel deciding Neal v. Cure. In VanMeter, the court was persuaded that there was a genuine issue of fact as to whether Senior was aware of petroleum release at the site, and the court held that Senior’s personal knowledge of the releases could be imputed to VEI since he had been the sole shareholder, director and incorporator of the corporation. The VanMeter court rejected an argument that for ELA liability to attach, a plaintiff must establish that a defendant both caused or contributed and had knowledge of such pollution. The court found that “the plain language of the statute does not require both.” Id. at *5.

The potential ramifications of VanMeter are significant. A common example would be landlords with dry cleaner tenants who have acquired knowledge of contamination through bank-finance testing or through property management communications. If such landlords do “nothing to halt or remediate such contamination” and subsequently sell the property without disclosing the contamination, they could face ELA liability under the VanMeter holding.

For decades, federal courts have grappled with the issue of whether the passive migration of previously-deposited contamination constitutes a “disposal” that creates liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). Many courts have held that a former landowner is not liable under CERCLA unless the landowner took some affirmative act to “dispose” of hazardous substances, i.e., that the mere passive migration of previously-released contamination is not enough to trigger CERCLA liability. See, e.g., U.S. v. CDMG Realty Co., 96 F.3d 706 (3d. Cir. 1996).

However, the VanMeter decision could impose liability on landowners who fail to stop migrating contamination with knowledge of its existence, even though they otherwise played no active role in creating the pollution. The court’s holding arguably could be limited to the unusual facts of the case, where the same individual with actual knowledge of the pollution (Senior) served as both president of the tenant business and as sole shareholder of the landlord corporation. But the opinion’s legal conclusions were not expressly limited, perhaps leading other courts to extend the “contribute” element to landowners merely possessing knowledge of the pollution — ostensibly because the failure to arrest the contamination is tantamount to sharing in the responsibility for cleanup. In fact, the court observed that “[t]he ELA clearly was intended to broaden the avenues for purchasers of property to recoup hazardous waste remediation costs and to shift the costs of such remediation onto those who were in the better position to prevent or alleviate the pollution.” Id. at *4. It appears that the VanMeter court’s belief is that a landlord with knowledge of its tenant’s pollution is “in a better position to prevent or alleviate the pollution” than an innocent third party purchaser.

Another potential issue raised by VanMeter is the degree of knowledge required to create ELA liability. The Indiana Supreme Court previously has held that “the element of actual knowledge can be inferred or ‘may be proven by circumstantial evidence notwithstanding the absence of a [party’s] admission of such knowledge.’” Johnson v. Wysocki, 990 N.E.2d 456, 466 (Ind. 2013). Could knowledge of perchloroethylene (“PERC”) releases be inferred upon commercial landlords when the landlords have prior knowledge or experience with historic PERC releases at dry cleaner tenants’ facilities? Perhaps, but as the Supreme Court also has observed, “[t]he standard of ‘should have known’ is lower than ‘actual knowledge.’” Id. at 467. Nevertheless, at the summary judgment stage, a plaintiff need not “submit conclusive proof” of a landlord’s knowledge but may establish a genuine issue of fact by designating evidence permitting reasonable inferences that the landlord possessed actual knowledge. JDN Properties,Inc., 2014 WL 4656543 at *4.

Transfer to the Indiana Supreme Court was not sought, so the state’s highest court was not given the opportunity to reconsider the ruling. Thus, as the law now stands, commercial landlords who have knowledge that their tenants have caused contamination would be well-advised to take action, in writing, to direct those tenants to immediately address or investigate the pollution. In addition, VanMeter teaches that such landlords must also disclose their knowledge during any transfer of title of such parcels to a third party.

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