Type: Law Bulletins
Date: 10/01/2018

Caveat Emptor: Ninth Circuit Finds CERCLA Third Party Defense Unavailable to Purchaser in Tax Sale

The basic principle of caveat emptor permeates the law of property. When title passes to the buyer, ordinarily, so do many of that parcel’s problems—including environmental liabilities. Under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), current owners are typically strictly liable for contamination on their property even if they did not cause it. Certain buyers, however, are exempt under the third-party defense. 42 U.S.C. §§ 9601 (35)(A), 9607(b). While this third-party defense offers safe harbor from the often harsh provisions of CERCLA to those who qualify, the Ninth Circuit in California Department of Toxic Substances Control v. Westside Delivery, LLC held that a tax sale purchaser does not qualify for the defense. 888 F.3d 1085, 1088 (9th Cir. 2018).

In Westside Delivery, the property was subject to an EPA preliminary assessment that identified "significant spillage" of hazardous substances. Id. at 1088–89. After the property was purchased at a tax sale, the state remediated the site and then sued the current owner under CERCLA. The current owner asserted the third-party defense, arguing that it was not liable because the releases were caused solely by third parties with whom it lacked a “contractual relationship” within the meaning of the statute. Id.

The district court agreed and granted summary judgment to the current owner. Id.
The Ninth Circuit first held that the “traditional” third-party defense was unavailable to the current owner because “the purported third-party's polluting activities occurred ‘in connection with a contractual relationship, existing directly or indirectly, with the defendant.’” Id. at 1099–100 (quoting 42 U.S.C. § 9607(b)(3)). In making this determination, the court stated that the characterization of the tax sale under California law was not determinative as to whether a contractual relationship existed. Next, the court emphasized that “the plain text of the definition of ‘contractual relationship’” as well as “its place in the statutory scheme” illustrated that “a tax-sale buyer such as [d]efendant has a ‘contractual relationship’ with the pre-tax-sale owner of that property.” Id. at 1098.

The current owner’s second main argument—“that it [was] entitled to the third-party defense because [the state’s] acts and omissions that contaminated the site did not occur ‘in connection with’ its contractual relationship with [d]efendant”—was also rejected by the court. Id. at 1099–1101. The current owner argued from Second Circuit precedent, which held “for [a] landowner to be barred from raising the third-party defense . . . the contract between the landowner and the third party must either relate to . . . hazardous substances or allow the landowner to exert some element of control over the third party’s activities.” Westwood Pharm., Inc. v. Nat’l Fuel Gas Distrib. Corp., 964 F.2d 85, 91–92 (2d Cir. 1992). In dismissing this argument, the court stated that the phrase “in connection with” was “intended to filter out those situations in which the previous owner’s polluting acts or omissions were unrelated to its status as a landowner.” Westside Delivery, 888 F.3d at 1101. The court held that the current owner was not entitled to CERCLA’s third-party defense under this argument because “[previous owner’s] actions that led to the release of hazardous pollutants occurred while it owned the site, and those actions occurred on the site” and that therefore “the acts or omissions of [previous owner] that caused the contamination occurred ‘in connection with’ its contractual relationship with the defendant.” Id. at 1088.

Westside Delivery—and its exception to the third-party defense—is a reminder of how the many harsh pitfalls in CERCLA and related state statutes can complicate transactions and cause major headaches for those who are purchasing property with known or unknown environmental issues.

This article was authored by John Huldin.

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