Northeast Doran, Inc. v. Key Bank of Maine

No. 92-0247-B (D. Me. March 31, 1993)

Adopting the recommendations of a magistrate judge, the court holds that a bank is not liable under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) as an "owner or operator" of property it acquired in foreclosure and then sold without revealing to the purchaser that it was contaminated. The bank is a "holder" under CERCLA § 101(20)(A)'s security interest exemption, and not an owner or operator, because it owned the property in the past, but not at the time the hazardous substance was disposed of. The court holds that CERCLA § 101(35)(C), on which plaintiff bases its cause of action, did not change the definition of "owner or operator," because such a change could have been explicit in § 101(35) or by amendment to § 101(20).

Counsel for Plaintiff
Alfred Frawley
Brann & Issacson
P.O. Box 3070, Lewiston ME 04243
(207) 786-3566

Counsel for Defendant
David Vanslyke
Preti, Flaherty, Beliveau & Pachios
P.O. Box 11410, Portland ME 04104
(207) 775-5831

[24 ELR 20003]

Beaulieu, J.:

Recommended Decision on Defendant's Motion to Dismiss

This action arises out of a dispute regarding liability for environmental contamination under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. §§ 9601 et seq., ["CERCLA"], as amended by the Superfund Amendments and Reauthorization Act of 1986 ["SARA"].

Plaintiff's Complaint alleges in general the following facts. Plaintiff purchased the property in question at public auction on November 21, 1991, following entry of a judgment of foreclosure in favor of Defendant on July 8, 1991. Defendant subsequently conducted an environmental audit of the property which revealed the existence of hazardous waste contamination. Without disclosing the results of the audit to Plaintiff, Defendant executed a quit claim deed to Plaintiff on December 19, 1991. Since that time, Plaintiff has become embroiled in an expensive hazardous waste cleanup under the supervision of the Maine Department of Environmental Protection pursuant to its authority under 39 M.R.S.A. §§ 1361 et seq.

Plaintiff seeks to hold Defendant liable for damages already incurred, all future costs of removal of the hazardous waste, and attorneys fees. The basis for liability alleged in Count I of the Complaint is that Defendant is a "responsible party" under CERCLA. The other seven Counts allege claims arising under state statutory and common law. In light of our recommendation that Plaintiff's claim as alleged in Count I be dismissed, we recommend without further discussion that these pendent claims be dismissed as well.

Discussion

In evaluating a Motion to Dismiss, this Court construes the factual averments of the Complaint in the light most favorable to the Plaintiff. Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 52 (1st Cir. 1990); Dartmouth Review v. Dartmouth College, 889 F.2d 13, 16 (1st Cir. 1989). Dismissal is appropriate only if the Complaint, so viewed, presents no set of facts justifying recovery. Dartmouth Review, 889 F.2d at 16.

In order to state a claim under CERCLA, Plaintiff must allege three separate elements. First, Plaintiff must allege that Defendant is a responsible party under 42 U.S.C. § 9607(a)(1)-(4). Second, it mustallege a "release" or "threatened release" of a "hazardous substance." Finally, it must allege that this release has made Plaintiff liable for "response costs." 42 U.S.C. § 9607(a). Defendant argues that it is not a responsible party, so that Plaintiff's Complaint fails on the first of these three elements.

Plaintiff argues that it has stated a valid cause of action arising under 42 U.S.C. § 9601(35)(c) in that it has alleged Defendant knew of the contamination of the property and failed to disclose this information to Plaintiff. The Court disagrees.

CERCLA provides that liability for environmental cleanup shall attach to:

(1) the owner and operator of a vessel or a facility,

(2) any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of, . . .

42 U.S.C. § 9607(a). Excluded from the list of responsible parties are "intervening owners"; those who owned the property in the past, but not at the time the hazardous substance was disposed of. State of New York v. Shore Realty, 759 F.2d 1032, 1044 [15 ELR 20358] (2d Cir. 1985), quoted in Westwood Pharmaceuticals, Inc. v. National Fuel [24 ELR 20004] Gas Dist., 767 F. Supp. 456, 462 (W.D.N.Y. 1991), aff'd, 964 F.2d 85 [22 ELR 20813] (2d Cir. 1992). Excluded from the definition of "owner or operator" are those "who, without participating in the management of a vessel or facility, hold[] indicia of ownership primarily to protect their security interest in the vessel or facility." 42 U.S.C. § 9601(20)(A). Such persons are known as "holders." 40 C.F.R. § 300.1100(a)(1). A holder "can incur liability [under] CERCLA in connection with its activities at such foreclosed vessel or facility only by arranging for disposal or treatment of a hazardous substance, . . . or by accepting for transportation and disposing of hazardous [sic] substances at a facility selected by the holder."

However, by way of background, even "owners or operators" may assert certain defenses. One of these is a "third-party" defense under 42 U.S.C. § 9607(b)(3), which essentially provides that an owner may escape liability if the release of the hazardous substances was caused by a third party, and the owner can show that it took due care with regard to the risk of environmental contamination. With the enactment of SARA, Congress endeavored to clarify the applicability of the third-party defense by adding to CERCLA's general definition section a provision which has become known as the "innocent-purchaser" defense. 42 U.S.C. § 9601(35). It is this definition section that Plaintiff argues grants a cause of action against this Defendant. The section provides as follows:

(c) Nothing in this paragraph or in section 9607(b)(3) of this title shall diminish the liability of any previous owner or operator of such facility who would otherwise be liable under this chapter. Notwithstanding this paragraph, if the defendant obtained actual knowledge of the release or threatened release of a hazardous substance at such facility when the defendant owned the real property and then subsequently transferred ownership of the property to another person without disclosing such knowledge, such defendant shall be treated as liable under section 9607(a)(1) of this title and no defense under section 9607(b)(3) of this title shall be available to such defendant.

42 U.S.C. § 9601(35).

In support of its argument, Plaintiff cites a decision from the Second Circuit for the proposition that § 9601(35) "closes a loophole" by rendering liable those defendants who transfer the property without divulging their knowledge of its contamination, apparently regardless of whether they would otherwise be currently liable under § 9607(a)(1) or (2). Westwood Pharmaceuticals, 767 F. Supp. 456 (W.D.N.Y. 1991). The Court has reviewed that case, and agrees with its rationale.

In Westwood Pharmaceuticals, the court concluded that:

an "innocent" intervening owner, which [defendant] claims to be, may transfer property without incurring liability unless it, as the intervening owner, "obtained actual knowledge of the release or threatened release of a hazardous substance at such facility when the [intervening owner] owned the real property and then subsequently transferred ownership of the property to another person without disclosing such knowledge." 42 U.S.C. § 9601(35)(C). Under those circumstances, the intervening owner "shall be treated as liable under section [9607(a)(1)] of [CERCLA] and no defense under section [9607(b)(3)] of [CERCLA] shall be available to such defendant." Id.

Id. at 462.

The deciding issue in this Motion to Dismiss is therefore whether the definition of "owner" is the same under § 9601(35)(C) as it is under § 9607(a)(1). That is, would the "secured creditor exemption" serve to relieve Defendant of liability otherwise imposed under § 9601(35)(C) in the same way that it would relieve Defendant of liability under § 9607(a)(1) or (2)?¹

Plaintiff argues that CERCLA is ambiguous in that regard, and that the Court should resolve that ambiguity in favor of imposing liability on Defendant. The Court disagrees. As the court stated in Westwood Pharmaceuticals:

[I]t would make little sense for Congress to provide a defense for an "innocent" land purchaser but fail to provide corresponding protection for that same landowner when he or she becomes an "innocent" seller — that is, when he or she transfers the property without ever having learned of a release or threatened release of a hazardous substance thereon, or having learned of such a release or threatened release, discloses such knowledge to the person to whom the land is transferred.

Westwood Pharmaceuticals, 767 F. Supp. at 462. (The "innocent land purchaser" is an "owner or operator" under § 9607(a)(1) who has a defense under § 9601(35).)

More to the point in this case, this Court feels it would make little sense to allow an "owner or operator" who is not innocent to avoid liability by transferring the property without disclosing his or her knowledge of contamination. It is this loophole which we believe Congress intended to close with SARA. But it would be a severe stretch of this logic to find that § 9601(35(C) also changes the definition of "owner or operator," when that change could have been explicit in § 9601(35), or by amendment to § 9601(20).

Finally, we address Plaintiff's argument that the Environmental Protection Agency's Comment to recent rule changes supports its interpretation of § 9601(35)(C) by quoting the remainder of Plaintiff's chosen passage:

By asserting this ["innocent landowner"] defense, however, the foreclosing holder is not acting within the security interest exemption as an exempt owner under section 101(20)(A), but is instead relying on a defense under section 107(b)(3) as an "innocent" owner of the property. Nevertheless, a decision to perform an environmental audit or inspection for the purpose of preserving the capacity to assert the "innocent landowner" defense does not void or in any way compromise a holder's eligibility for the [secured creditor] exemption.

57 Fed. Reg. 18344, 18353 (1992). Under Plaintiff's alleged facts, Defendant may have attempted to "preserve its capacity to assert the 'innocent landowner' defense," and that attempt may have failed in that the audit revealed the presence of hazardous substances on the property.² Regardless, Defendant is a secured creditor who is a holder, rather than an "owner or operator" for purposes of CERCLA. Defendant cannot be liable under those circumstances.

Conclusion

Accordingly, I recommend that the Court GRANT Defendant Key Bank of Maine's Motion to Dismiss as to Count I of Plaintiff's Complaint for failure to state a cause of action under Fed. R. Civ. P. 12(b)(6), and GRANT Defendant's Motion to Dismiss as to the remainder of Plaintiff's claims for lack of pendent jurisdiction.

NOTICE

A party may file objections to those specified portions of a magistrate judge's report or proposed findings or recommended decisions entered pursuant to 28 U.S.C. § 636(b)(1)(B) (1988) for which de novo review by the district court is sought, together with a supporting memorandum, within ten (10) days of being served with a copy thereof. A responsive memorandum shall be filed within ten (10) days after the filing of the objection.

Failure to file a timely objection shall constitute a waiver of the right to de novo review by the district court and to appeal the district court's order.

Brody, J.:

Order Affirming the Recommended Decision of the Magistrate Judge

On March 30, 1993, the United States Magistrate Judge filed his Recommended Decision with the Court with copies to counsel. Plaintiff filed its Objections to the Recommended Decision on April 12, 1993, and Defendant filed its Response to the Objections to the Recommended Decision on April 27, 1993. The Court has reviewed and considered the Magistrate Judge's Recommended Decision, together with the entire record. The Court has made a de novo determination [24 ELR 20005] of all matters adjudicated by the Magistrate Judge's Recommended Decision. In accordance with de novo review, the Court modifies the Magistrate Judge's discussion of the facts as alleged in the Complaint. For clarification purposes, the second paragraph on page 1 of the Recommended Decision dated March 30, 1993, should be modified to read as follows:

Plaintiff's Complaint alleges in general the following facts. Following entry of a judgment of foreclosure in favor of Defendant on July 8, 1991, Plaintiff purchased the property in question at a public auction on November 21, 1991. On November 18, 1991, a Maine Superlien Site Assessment was submitted to Defendant, revealing evidence of the release or threatened release of hazardous waste on the property. At the auction on November 21, 1991, Defendant made no mention of the site assessment and potential hazardous waste.

In connection with an application for financing in or about November and December, 1991, Defendant notified Plaintiff that there were potential environmental hazards at the property, disclosing the fact that a site assessment had been obtained. On December 19, 1991, Defendant executed a quitclaim deed to Plaintiff. Since that time, Plaintiff has become embroiled in an expensive hazardous waste cleanup under the supervision of the Maine Department of Environmental Protection pursuant to its authority under 39 M.R.S.A. §§ 1361 et seq.

Other than the above modification, the Court concurs with the recommendations of the United States Magistrate Judge for the reasons set forth in his Recommended Decision, particularly in light of the First Circuit's recent decision in Waterville Indus., Inc. v. Finance Auth. of Maine, 984 F.2d 549 [23 ELR 20752] (1st Cir. 1993).³ The Court determines that no further proceeding is necessary.

1. It is therefore ORDERED that the Recommended Decision of the Magistrate Judge is ADOPTED as MODIFIED.

2. It is further ORDERED that defendant's motion to dismiss is GRANTED.

JUDGMENT

Pursuant to the Order Affirming the Recommended Decision of the Magistrate filed by the Court on June 4, 1993,

JUDGMENT is hereby entered for the Defendant and against the Plaintiff.

1. The Court notes that the foreclosure, in and of itself, did not deprive Defendant of the secured creditor exemption, particularly where Plaintiff, and not Defendant, acquired fee simple title after the auction. See 40 C.F.R. 300.1100(d); Guidice v. BFG Electroplating & Mfg., 732 F. Supp. 556 [20 ELR 20439] (W.D. Pa. 1989).

2. Plaintiff's argument that Defendant may have commissioned the audit because it considered retaining the property for investment purposes is not helpful to its cause. Even if Plaintiff were correct, Defendant would have had to successfully bid for the property at the foreclosure auction, which would have removed the secured creditor exemption. As a prospective purchaser, Defendant would be reasonably cautious in conducting the environmental audit for the purpose of determining its potential liability as an "owner or operator" of the property. Presumably, Plaintiff was free to do the same.

3. Waterville Industries suggests that the security interest exemption under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. § 9601(20)(A) ["CERCLA"], protects qualified lenders from CERCLA liability even if those lenders, as titleholders, failed to disclose the presence of hazardous waste to potential buyers prior to sale. 984 F.2d at 554.