Stigma Damages in Environmental Cases: Developing Issues and Implications for Industrial and Commercial Real Estate Transactions

Andrew N. Davis and Santo Longo

Editors' Summary: Environmental litigation is witnessing an increasing number of claims for "stigma" damages, which arise when the value of real property decreases due to a public perception that the property is contaminated or threatened with contamination. In the past, courts generally eschewed awarding such damages in the absence of other actionable harm. Recent decisions, however, reveal that courts have begun to recognize stigma damages in new contexts. After reviewing court decisions forming the basis of modern stigma damage claims, the authors discuss recent cases in which stigma damages were awarded in the absence of other actionable harm. The authors conclude that in light of these decisions, the number of stigma damage claims is likely to rise, but that federal and state environmental initiatives may relieve some of the stigma concerns associated with historically contaminated "brownfields."

The authors are environmental attorneys with the Hartford, Connecticut, office of LeBoeuf, Lamb, Greene & MacRae, L.L.P. Andrew N. Davis holds a J.D. from George Washington University's National Law Center, an M.S. and a Ph.D. from the University of Massachusetts at Amherst, and a B.S. from Trinity College. Santo Longo holds a J.D. from the University of Connecticut, an M.A. from the University of Massachusetts at Amherst, and a B.A. from Amherst College. The authors thank James A. Thompson Jr. for his valuable comments.

[25 ELR 10345]

There is an increasing amount of environmental litigation raising claims of "stigma" damages — which arise when the value of real property decreases or is eliminated due to a public perception that the property is contaminated, threatened with contamination, or there is a fear (whether rational or not) of contamination from a neighboring property. Until recently, it seemed clear that stigma injuries were not compensable in the absence of other actionable harm. Some courts, however, have begun to recognize stigma damages in new contexts. These cases have caught the attention of regulated industries, commercial property owners, lenders, and other entities with potential environmental liability.¹

This Article reviews the court decisions at the foundation of modern stigma claims. It then highlights recent cases awarding stigma damages and identifies the issues that courts have yet to resolve fully. Despite the uncertainty associated with the stigma concept and the relative paucity of successful claims, the number of stigma claims probably will increase in response to recent court decisions awarding stigma damages in the absence of other actionable harm, and as the "science" of appraising environmentally impaired properties improves. Federal and state initiatives associated with the "brownfields" redevelopment movement² may, however, relieve some of the concerns associated with the purchasing, leasing, and financing of contaminated sites, thereby diminishing the potential for stigma-related damages.

Stigma Damages

The meaning of the term "stigma" has changed over time and has been the subject of much debate.³ In some instances, the term is used to indicate a decrease in, or loss of, property value due to a perception that the property poses healthor safety risks. In other instances, stigma is used to refer to a decrease in, or loss of, property value caused by fear that a property owner may face future cleanup liability — for example, as a result of a government enforcement action or a third-party claim. However defined, stigma can stem from actual contamination, the potential for contamination, or fear of contamination on or near the property — even when no actual or potential environmental threat exists.⁴

[25 ELR 10346]

In some early cases, courts allowed property damage claims based solely on mental anguish, without any physical invasion or other tangible interference, e.g., odors or noise, with plaintiffs' use of their properties. Typically, these cases involved intentional conduct, such as the siting of prostitution houses and funeral homes.⁵ In the context of pollution, however, courts have generally followed the common-law doctrine of damnum absque injuria (loss without legal injury does not form the basis of a cognizable claim), holding that a decrease in property value caused by public fear of contamination is not actionable absent proof that the plaintiff faces some substantial interference with his or her property rights.⁶ This rule, however, has recently been subject to some important exceptions. Potential claims should now be analyzed according to whether properties: (1) have suffered actual contamination; (2) have been stigmatized by their proximity to contaminated sites; or (3) are subject to eminent domain proceedings.

Stigma Damages for Contaminated Property

When a plaintiff's property is actually contaminated and that contamination is actionable, the resulting decrease in the sale or rental value of the property can form the basis of a damage award. Traditionally, these damages did not include property devaluation attributable to public perception that the property remains environmentally impaired even after remediation. In Bixby Ranch Co. v. Spectrol Electronics Corp.,⁷ however, a California jury departed from this tradition by awarding a new type of stigma damages referred to as "permanent post-cleanup stigma" damages.⁸

The case involved property that Spectrol Electronics Corporation leased from Bixby Ranch from 1965 to 1990. In 1988, the Los Angeles Regional Water Quality Control Board issued a cleanup order to Spectrol requiring remediation of soil and groundwater contamination at the leased premises. Spectrol conceded that it was responsible for cleaning up the site, but Bixby claimed that remediation alone was not adequate compensation, because even after cleanup, buyers and tenants would be reluctant to be associated with the property, and its value was therefore diminished. In addition, Bixby's claim for stigma damages was premised on the theory that even though Spectrol agreed to clean up the property to current government standards, it remained possible that a government agency would order additional remediation at some time in the future.⁹

To support its claim, Bixby presented the expert testimony of a real estate appraiser that the sale and rental values of the property after remediation would be significantly lower than what they would have been if the contamination had never occurred. The expert's opinion was based on a comparison between the values of two comparable remediated sites and the values of comparable pristine sites, a comparison that the expert claimed showed that the stigma of contamination would significantly devalue the site even after cleanup. The jury agreed and awarded the property owner $ 826,500 in permanent post-cleanup stigma damages and $ 400,000 for taxes, maintenance expenses, and past and future lost rents.

Stigma Damages for Uncontaminated Property

Several courts have held that diminution in property value that is solely attributable to public fear of contamination is not compensable.¹⁰ The courts have taken different approaches to what, in addition to mere stigma-induced property devaluation, a plaintiff must allege to state an actionable claim for damages. Some courts have indicated that an actual threat of contamination is enough.¹¹ And a Maryland court upheld a nuisance claim based on the indirect impacts of the defendant's pollution on the plaintiffs' unpolluted properties as a result of city-imposed restrictions that prohibited the plaintiffs from building houses and using their groundwater.¹² Also, courts have held damages for stigma-induced property devaluation to be recoverable in cases involving inverse condemnation proceedings in which private property has been appropriated for the establishment of new public utility easements.¹³

In one important case, Adkins v. Thomas Solvent Co., the Michigan Supreme Court dismissed nuisance claims by plaintiffs whose properties were not, and would never be, polluted by nearby groundwater contamination.¹⁴ The court cited several policy reasons for its decision:

awarding damages for depreciation caused by unfounded fears of third parties would divert funds from remediation;

allowing the claims could open the door to decisions allowing nuisance claims against people with AIDS, group homes for the disabled, and unrelated persons living together merely because of third-party fears; and

numerous state and federal statutes provide sufficient remedies for environmental contamination.¹⁵

[25 ELR 10347]

Other courts have reached similar conclusions in cases involving property tort claims. In another groundwater contamination case, a federal district court in Mississippi disallowed nuisance claims that were based solely on property devaluation caused by the stigma of pollution.¹⁶ The plaintiffs failed to establish that the defendant was responsible for contaminating their properties. The court held that market-value loss due to stigma is not actionable absent actual or threatened physical property damage.¹⁷ Similarly, the Fourth Circuit recently affirmed a federal district court's dismissal of a claim for stigma damages allegedly caused by nearby pollution.¹⁸ The district court's opinion notes that there is "extensive authority for the proposition that negative publicity or stigma resulting from unfounded fear about dangers in the vicinity to property 'does not constitute a significant interference with the use and enjoyment of land.'"¹⁹ A federal district court in Pennsylvania reached the same conclusion, stating that Pennsylvania does not recognize an action for property damages where no actual and substantial impairment exists.²⁰

Takings claims based on allegations of stigma damages alone have not fared better than most property tort claims. In Twitty v. North Carolina,²¹ the plaintiffs claimed that their properties were "taken" when the state located a landfill containing polychlorinated biphenyls on adjacent land, even though no contaminants had migrated offsite. The court required some "actual interference" with the plaintiffs' use and enjoyment of their properties to support a takings claim. In rejecting the plaintiffs' claim, the court held that "a reduction in market value, standing alone, does not constitute an actual interference or disturbance of plaintiffs' use and enjoyment of their property."²²

In a recent landmark case, DeSario v. Industrial Excess Landfill, Inc.,²³ an Ohio jury awarded damages to the owners of properties that were not contaminated or even threatened with contamination, but were merely stigmatized by their proximity to a contaminated site. The $ 6.7 million award will go to 1,713 property owners whose lands are located within 9,000 feet of a 30-acre landfill at which over 300,000 tons of hazardous waste were dumped between 1966 and 1980. The property owners successfully contended that intense media coverage about the site led to widespread public perception that the area was undesirable and possibly unsafe. They presented testimony from a real estate appraiser and five economists that the value of affected properties had dropped by as much as 14 percent as a result of their proximity to the landfill.

The Industrial Excess decision has understandably alarmed regulated industries and commercial property owners. The possibility of neighboring property owners collecting damages even though their land is not contaminated could lead to a dramatic increase in the number of plaintiffs in pollution-related litigation, along with potential total damage awards. Opponents claim that in addition to being legally flawed, the decision was tainted by local political considerations.²⁴

Stigma Damages in Eminent Domain Proceedings

Due to the perceived health risks posed by electromagnetic fields (EMFs), litigation involving stigma damages stemming from the siting of power lines, among other things, is increasing. These cases generally involve determining the appropriate measure of damages in eminent domain proceedings,²⁵ which public utilities use to procure new easements for power line construction.²⁶ These cases stand for the proposition that courts will allow evidence of stigma-related devaluation when stigma damages are collateral to another actionable claim, regardless of whether the public's fears and perceptions are reasonable.²⁷

In the most celebrated EMF case to date, Criscuola v. Power Authority of New York,²⁸ the New York Court of Appeals ruled that in an eminent domain proceeding, how real the perceived potential for future adverse health effects may be makes no difference in the way damages are calculated. Rather, full compensation for the loss in property value a plaintiff suffers at the hands of a defendant is the only issue.²⁹ Criscuola echoes Willsey v. Kansas City Power & Light Co.,³⁰ in which the Kansas Court of Appeals stated:

logic and fairness . . . dictate that any loss of market value proven with a reasonable degree of probability should be compensable, regardless of its source. If no one will buy a residential lot because it has a high voltage line across it, the lot is a total loss even though the owner has the legal right to build a house on it. If buyers can be found, [25 ELR 10348] but at only half of the value it had before the line was installed, the owner has suffered a 50% loss.³¹

It is important to note that these EMF cases involved identifying the proper measure of damages where the defendants were acquiring power line easements over the plaintiffs' properties. Hence, while these cases support the proposition that stigma damages are compensable in cases involving other actionable injuries, i.e., compensable takings, no EMF case to date has held that stigma-induced property devaluation alone can form the basis of a valid claim.

Discussion

Industries and commercial property owners are closely watching the evolution of cases allowing stigma damages. In jurisdictions where stigma damages are allowed, the number of potential plaintiffs is likely to increase greatly, causing a significant rise in associated litigation costs and resulting in the payment of damage awards to large numbers of parties who may not have been directly injured by a defendant's activities. Consequently, the stigma associated with industrial and commercial contaminated sites will continue to hinder efforts to purchase, lease, or finance them.

While Bixby Ranch and Industrial Excess create new precedent in the area of stigma damages, they are not without their critics. For example, the analysis that the expert in Bixby Ranch used to support his conclusions has been challenged on several fronts. In particular, critics question whether there is an adequate "comparables market" in remediated sites on which to base a meaningful appraisal-by-comparison methodology.³² That the expert could only come up with two comparable sites on which to base his analysis suggests that no such market exists. Also, the plaintiff's expert was able to convince the jury that an established decrease in the property's sale value translates into a similar decrease in the property's rental value. One appraiser of contaminated and remediated sites has charged that this assertion has no basis in fact and is contrary to common sense.³³

Furthermore, there is little evidence showing how and to what extent, if at all, the stigma of pollution actually affects property values, and the evidence that has been developed is contradictory. In contrast to the evidence the plaintiffs proffered in Industrial Excess, one study suggests that there is no relationship between rental values and distance from contaminated sites.³⁴ Another, more comprehensive study looked at nearly 2,000 properties near the Industrial Excess Landfill site and found that during the period of intense news coverage, area property values declined by up to 10 percent.³⁵ Researchers also found, however, that the decrease was short-lived.³⁶ Within four years, values of properties located more than one-half mile from the site were returning to normal. And values of properties located within one-half mile of the site were returning to normal at a rate which, if it continued, would eliminate the impact of stigma within an additional two years.³⁷

In addition, valuation of contaminated real estate is replete with difficulties,³⁸ which are caused primarily by the complexities of assessing and cleaning up contamination and the broad reach of liability under the comprehensive scheme of federal and state environmental laws. This is a significant hurdle for those alleging stigma damages who must offer expert appraisals to demonstrate the effects of stigma on market value. As shown by Bixby Ranch and Industrial Excess, an award of stigma damages is likely to follow a continuous "battle of the experts" in which the trier of fact is asked to assess the validity of conflicting approaches to property appraisal in a relatively new field where only a small amount of inconclusive — and often contradictory — empirical evidence has been developed. Nevertheless, as more market data concerning sales, leases, and financing of environmentally impaired properties becomes available, more accurate appraisals of contaminated and remediated sites will allow more precise measurements of stigma damages.

Federal and state environmental initiatives may, however, relieve some of the stigma concerns associated with historically contaminated "brownfields."³⁹ These initiatives, which include prospective purchaser agreements,⁴⁰ covenants not to sue,⁴¹ and deed or use [25 ELR 10349] restrictions,⁴² may remove some of the concerns of prospective buyers, tenants, and lenders over future liability associated with contaminated properties, and concomitantly reduce the negative effect of contamination on the market value of certain properties. Although it is unlikely that claims for stigma damages will cease altogether, the application of these initiatives may ultimately reduce the popularity of such claims.

Conclusion

Recent cases raise unanswered questions about the extent and persistence of stigma-induced property devaluation. When and how stigma damages are awarded varies from state to state and is changing quickly in some jurisdictions. Whether stigma damages are compensable in the absence of other actionable harm can dramatically impact the potential number of plaintiffs and total damage awards in environmental pollution litigation. As a result, the outcome of claims for stigma damages will significantly affect those who are involved with contaminated industrial or commercial properties.

1. Such liability may arise in various contexts. A polluting owner or tenant may be liable to neighbors (or future owners) for devaluing their property. Or a tenant may be liable to the property owner for devaluing its property.

2. In older, particularly inner-city, neighborhoods throughout the United States, historical contamination of commercial and industrial sites is a major impediment to new investment. These abandoned "brownfields" arise when the perceived costs of cleaning up a site (and the associated liability) exceed the potential benefits.

3. See, e.g., Peter J. Patchin, Valuation of Contaminated Properties, APPRAISAL J. 7-16 (Jan. 1988); Peter J. Patchin, Contaminated Properties — Stigma Revisited, APPRAISAL J. 167-72 (Apr. 1991); Linnea Brown, Property Damages in Toxic Tort Cases: Traditional Rules and Developing Issues, A.B.A. SEC. NAT. RESOURCES, ENERGY & ENVTL. L. 24th Annual Conference, Keystone, Colo., Mar. 16-19, 1995, at 1-18.

4. In cases involving actual or potential contamination, stigma damages do not include cleanup costs, which are recoverable as actual damages. Rather, stigma only refers to any additional decrease in property value attributable to public apprehension that is shown by a decreased ability — or the inability — to sell, lease, or finance the subject property.

5. See Tedescki v. Berger, 43 So. 960 (Ala. 1907) (bawdy house); Powell v. Taylor, 263 S.W.2d 906 (Ark. 1954) (holding that a continuous suggestion of death presented by a funeral home destroyed the comfort and repose sought in home ownership).

6. Such an interference might result from actual or threatened contamination, or even from the physical invasion that occurs when public utilities use their powers of condemnation to create easements for the placement of power lines (a practice requiring compensation for a taking of private property).

7. No. BC052566 (Cal. Super. Ct., judgment entered Dec. 15, 1993).

8. Michael Elliott-Jones, Bixby Ranch: Some Observations on Plaintiffs' Expert's Appraisal of Post-Cleanup "Stigma" 2 (Foster Associates Inc., San Francisco, Cal.), 1995.

9. A common theme underlying stigma damage claims is the fear that residual or unknown contamination or a change in cleanup standards will lead to liability down the road even after a remedial effort that has been signed-off on by EPA or a state environmental agency.

10. See infra notes 14-22 and accompanying text.

11. See Adkins v. Thomas Solvent Co., 487 N.W.2d 715 (Mich. 1992); Allen v. Uni-First Corp., 558 A.2d 961 (Vt. 1988); see also Berry v. Armstrong Rubber Co., 780 F. Supp. 1097 (S.D. Miss. 1991), aff'd, 989 F.2d 822, 23 ELR 21117 (5th Cir. 1993); Exxon Corp. v. Yarema, 516 A.2d 990 (Md. Ct. Spec. App. 1986).

12. Yarema, 516 A.2d at 994-95.

13. See infra notes 26-31 and accompanying text.

14. 487 N.W.2d 715 (Mich. 1992).

15. Adkins, at 726-27. The court indicated, however, that the claims may not have been barred if these plaintiffs had alleged personal discomfort, a change for the worse in the character of their neighborhood, or an unusual number of abandoned and neglected properties in the area. Id. at 725-27.

16. Berry v. Armstrong Rubber Co., 780 F. Supp. 1097 (S.D. Miss. 1991), aff'd, 989 F.2d 822, 23 ELR 21117 (5th Cir. 1993).

17. Id. at 1104.

18. Adams v. Star Enterprise, 63 U.S.L.W. 2651 (4th Cir. Apr. 6, 1995) (applying Virginia law).

19. Adams v. Star Enterprise, 851 F. Supp. 770, 773 (E.D. Va. 1994), aff'd, 63 U.S.L.W. 2651 (4th Cir. Apr. 6, 1995) (quoting Adkins, 487 N.W.2d at 715, 721).

20. In re Paoli R.R. Yard PCB Litigation, 811 F. Supp. 1071, 1074-75, 23 ELR 20941, 20943 (E.D. Pa. 1992).

21. 354 S.E.2d 296 (N.C. 1987).

22. Id. at 304.

23. No. 89-570 (Ohio Ct. C.P. Dec. 6, 1994).

24. Critics have charged that because the judge was an elected official and the case affected a large part of his electorate, the award was the result of an unfair legal process. "Stigma" Suit Victory May Set Landmark in Landfill Law, ENV'T WK., Dec. 22, 1994.

25. Generally, landowners in eminent domain cases have raised the issue of damages caused by the presence of EMFs, through expert testimony, in one or more of the following manners: (1) the landowner contends that EMFs from the power line pose a health hazard within a specified distance from the line and that property within this "hazard zone" is uninhabitable and worth substantially less than without the power line; (2) the concept of "prudent avoidance" requires that homes or commercial facilities not be constructed within a certain distance of a power line and this "development setback" substantially reduces the market value of the property; or (3) whether or not EMFs actually cause adverse health effects, there is a fear of EMFs ("cancerphobia") in the real estate marketplace that reduces the marketability of property adjacent to power lines. Mark A. Warnquist and Chad M. Neuens, Litigating EMF Issues, 3 CONN. ENVTL. COMPLIANCE UPDATE 6 (1995).

26. See Florida Power & Light Co. v. Jennings, 518 So. 2d 895 (Fla. 1987); Criscuola v. Power Auth. of N.Y., 621 N.E.2d 1195 (N.Y. 1993); San Diego Gas & Elec. Co. v. Daley, 205 Cal. App. 3d 1334 (1988); Willsey v. Kansas City Power & Light Co., 631 P.2d 268 (Kan. Ct. App. 1981).

27. See Jennings, 518 So. 2d at 897; Ryan v. Kansas City Power & Light Co., 815 P.2d 528, 533 (Kan. 1991); Daley, 205 Cal. App. 3d at 1349; Criscuola, 621 N.E.2d at 1196.

28. 621 N.E.2d 1195 (N.Y. 1993).

29. Id. at 1196.

30. 631 P.2d 268 (Kan. Ct. App. 1981).

31. Id. at 277-78.

32. Elliott-Jones, supra note 8, at 3.

33. Id. at 4, 5.

34. Michael Elliott-Jones, Rents and Proximity to Toxic Sites 3 (Foster Associates Inc., San Francisco CA), 1991.

35. Kenneth T. Wise & Johannes P. Pfeifenberger, The Enigma of Stigma: The Case of the Industrial Excess Landfill, TOXIC L. REP., May 18, 1994, at 1435.

36. Id. at 1439. This occurrence has been referred to as "temporary" stigma.

37. Id. at 1440.

38. Traditionally, appraisers have used three methods for valuing property: (1) comparable sales (which involves evaluating sales of "comparable" properties, taking into consideration and making adjustments for variations); (2) income (which involves determining the expected cash flows, i.e., net operating income, form a property and deriving a present value); and (3) cost (which requires determining the cost of building similar structures on property, adjusting for depreciation, and adding the value of the land, to provide an estimate of the cost of duplicating the appraised site). Whichever approach is used, the appraisal of environmentally impaired properties, including the calculation of stigma damages, is extremely difficult and inexact.

39. In January 1995, EPA Administrator Carol Browner announced EPA's "Brownfields Action Agenda." Some of the steps EPA has taken include removing from CERCLIS — the Superfund tracking system list — numerous sites designated "no further remedial action planned" and funding at least 50 brownfields economic redevelopment projects. U.S. EPA, BROWNFIELDS ACTION AGENDA 1-4 (Jan. 25, 1995). The overall goal of EPA and state environmental agencies is to provide funding and other incentives for the voluntary cleanup of these abandoned urban sites and return them to productive use in a sustainable and environmentally sound manner.

40. EPA is currently developing new guidance on prospective purchaser agreements. Id. at 2. This guidance will expand the circumstances under which EPA will enter into agreements promising not to file a lawsuit against a prospective purchaser of contaminated property for the cleanup of contamination that existed before the purchase. Such agreements will encourage the purchase and redevelopment of sites for which there might otherwise be a high risk of incurring federal environmental liability.

41. A new program in Massachusetts, known as the "Clean Sites Initiative," provides a covenant between the state and prospective buyers and tenants that encourages cleanup and redevelopment of contaminated property in areas targeted for economic redevelopment, at the same time ending liability for response actions once cleanup is complete. With such a covenant, the prospective buyer/tenant agrees to ensure that currently known contamination of a property will be cleaned up to proper standards. In return, the state agrees not to sue the buyer/tenant for any costs or future discovered contamination-related damages to natural resources on and around the site once the site is cleaned up. The program does not, however, bar claims brought by third parties or for new releases of contamination. MASS. GEN. L. ch. 21E, § 3A(j).

42. As with other developing federal and state programs, the Massachusetts Clean Sites Initiative provides for flexible cleanup standards depending on the likely future uses of contaminated property. Where implemented, these "Activity and Use Limitations" will be recorded in the land records as deed restrictions and deed notices. MASS. GEN. L. ch. 21E, § 6.