Posted on February 28, 2014 by William Hyatt
In the words of Justice Thomas in United States v. Atlantic Research Corp., the Circuit Courts have “frequently grappled” with the interplay between Sections 107(a) and 113 of CERCLA. These are the two provisions of the Statute that enable “covered persons”, commonly referred to as potentially responsible parties or “PRPs”, to recover response costs from other PRPs. In Atlantic Research, the Court held that Section 107(a)(4)(B) provides PRPs with a cost recovery cause of action; whereas, Section 113 provides PRPs with two separate contribution claims. One right to contribution exists under Section 113(f)(1) but, according to the Court in Cooper Indus., Inc. v. Aviall Servs., Inc., only “during or following” a Section 106 or 107 enforcement action. The second contribution remedy is found in Section 113(f)(3)(B) for a PRP who has “resolved its liability” for some or all of a response action or for some or all of the costs of such an action in a consent decree or an administrative order on consent (“AOC”). The Court, in Atlantic Research, explained that Section 107(a) allows a PRP to recover costs that it has itself incurred from other PRPs; whereas, the Section 113 contribution remedies allow a PRP to recover amounts it has paid to reimburse others who have actually incurred the costs. These distinctions would seem clear enough, but the lower courts have struggled to apply them.
At least part of the explanation for that struggle can be traced to the statement of the Court in Atlantic Research, that “[w]e do not suggest that 107(a)(4)(B) and 113(f) have no overlap at all,” citing the case where a PRP incurs its own costs pursuant to a consent decree following a Section 106 or 107 suit:
“In such a case, the PRP does not incur costs voluntarily, but does not reimburse the costs of another party. We do not decide whether these compelled costs of response are recoverable under 113(f), 107(a), or both.” (emphasis added).
In Bernstein v. Bankert, the Seventh Circuit resolved that issue, ruling, consistently with most other Circuit Courts, that after Atlantic Research, a plaintiff cannot pursue a cost recovery claim when a contribution claim is available. Thus, CERCLA plaintiffs cannot have “both,” as the Atlantic States footnote had suggested might be the case. For many Superfund practitioners, however, much of the rest of the amended panel decision in Bernstein appears to be novel.
The plaintiffs in Bernstein entered into two AOCs with EPA under Section 113(f)(3)(B), one in 1999, the other in 2002. Under the 1999 AOC, the plaintiffs performed a study to identify a removal action to be conducted at the site. In 2000, EPA determined that the plaintiffs had successfully completed the requirements of the 1999 AOC. Plaintiffs then agreed to perform the selected removal action pursuant to a 2002 AOC. At the time of the Seventh Circuit decision, the plaintiffs were continuing to perform the work required by the 2002 AOC. Plaintiffs brought suit in 2008, seeking cost recovery and contribution from other PRPs with respect to both AOCs.
The Seventh Circuit concluded that the plaintiffs had a Section 113(f)(3)(B) contribution claim as to the 1999 AOC because they had “resolved” their liability to EPA, but the claim was barred by the statute of limitations. Plaintiffs argued that Section 113(g)(3), the statute of limitations applicable to contribution claims, contained a “gap” which should be filled by applying Section 113(g)(2), the statute of limitations applicable to removal actions, such as the work required by the 1999 AOC. The Seventh Circuit concluded that it need not resolve the “gap” argument because the claims under the 1999 AOC, filed in 2008, were barred under either Section 113(g)(2) (three years from the 2000 completion of the removal action) or Section 113(g)(3) (three years from the date of the 1999 AOC).
As to contribution claims under the 2002 AOC, the Seventh Circuit focused on the statutory phrase “resolved its liability” as a limitation on the availability of the contribution remedy under that section. Analyzing the language of the AOC (which appears to have been based upon EPA’s model AOC for removal actions), the court concluded that a party “resolved its liability” when it completed the requirements of the AOC to the satisfaction of EPA, an event which had not yet occurred. Only then would EPA’s “conditional covenant not to sue” the settling parties become effective. Since work in fulfillment of the requirement of the 2002 AOC was ongoing, the court held that the plaintiffs had not “resolved” their liability and therefore had no contribution claim under Section 113(f)(3)(B). Moreover, the Court concluded that a party has not “resolved its liability,” within the meaning of that provision, until “the nature, extent or amount of [the] PRP’s liability” is determined, or settled at least in part with EPA. The 2002 AOC, like virtually all other AOCs entered in the Superfund program, contained a reservation of rights on the part of the settling parties to contest their liability. The Court then went on to conclude that since the plaintiffs did not have a contribution claim under Section 113(f)(3)(B), they had a cost recovery claim under Section 107(a)(4)(B) because they had incurred necessary costs of response consistent with the National Contingency Plan.
The defendants-appellees moved the Seventh Circuit for a panel rehearing of its first decision, supported by EPA as amicus. The Seventh Circuit denied reconsideration, but granted rehearing, “in part, to address some issues raised by the EPA:
Specifically, the EPA identified certain passages of our original opinion which suggested that a party may never structure a settlement agreement with EPA in such a way as to resolve their liability immediately upon execution of that agreement. That is not the case. A party responsible for an instance of environmental contamination may obtain an immediately effective release from the EPA in a settlement, or it may obtain only a performance-dependent conditional covenant not to sue with an accompanying disclaimer of liability. Whether, and when, a given settlement ‘resolves’ a party’s liability is ultimately a case-specific question dependent on the terms of the settlement before the court. In this case, the terms of the settlement did not provide for a resolution upon entering into the agreement.
The Seventh Circuit panel interpreted Section 113(f)(3)(B) to authorize contribution actions only once a contribution plaintiff has “resolved its liability” in a settlement, but then went on to conclude that resolution of liability does not occur until the requirements of the settlement have been completed and accepted by EPA and until the liability of the PRP has been “determined.” Given the fact that response actions can take decades to complete, this reading of the statute could result in very substantial and likely unanticipated delays in the effectiveness of the covenants not to sue contained in Section 113(f)(3)(B) settlements. Moreover, the same statutory phrase, “resolved its liability,” also appears in Section 113(f)(2), the provision affording protection for settling parties against contribution claims. Before this decision, most Superfund practitioners are likely to have thought that the benefits of a settlement under Sections 113(f)(3)(B) and Section 113(f)(2) accrued when the settlement agreement was signed. Many will be surprised to learn that, at least in the Seventh Circuit, they will not enjoy those benefits until they finish the work required by their settlements and until that work is approved by EPA. Even then, they may not have those benefits if they reserved their right to contest liability, as is commonly the case in Superfund AOCs.
The interpretations of Section 113 in Bernstein appear to be contrary to commonly held understandings of Section 113 (even by EPA) and contrary to the analysis of the Sixth Circuit in RSR Corp. v. Commercial Metals Co. Therefore, many Superfund practitioners believed that such a split might motivate the Supreme Court to grant the petition for certiorari; however, the petition was denied on January 27. While EPA had served as amicus curiae in support of reconsideration of the original panel decision, EPA did not file an amicus brief in support of the petition.
The Seventh Circuit decision is surprising for several reasons:
- Although the Seventh Circuit did not have occasion in Bernstein to analyze the impact of the phrase “resolved its liability” on consent decrees, the reasoning of the court would suggest that the benefits of Section 113(f)(3)(B) will not accrue to signatories of consent decrees until the requirements of the consent decree have been completed and accepted by EPA. Since CERCLA requires that settlements involving remedial actions be documented in consent decrees, that effectiveness could easily be delayed for many decades. In the meantime, signatories to consent decrees in the Seventh Circuit may not have contribution rights under Section 113(f)(3)(B) or contribution protection under Section 113(f)(2).
- The Seventh Circuit reasoned that such delays could be avoided by specific language in AOCs or consent decrees, making the covenants not to sue in settlements effective immediately. This reasoning, however, would appear to overlook Section 122(f)(1) which requires that discretionary covenants not to sue contain reservations of rights for “future liability.” The reasoning also appears to overlook the fact that there are many hundreds, if not thousands, of AOCs and consent decrees that have been signed over the years which contain the same EPA “model” language found in the Bernstein AOCs. If the reasoning of the Seventh Circuit in Bernstein is followed elsewhere, those settling parties may have a major surprise awaiting them.
- No other circuit court has interpreted Section 113(f)(3)(B) in the way the Seventh Circuit did in Bernstein. No other circuit court has placed such emphasis on the term “resolved its liability” to shift the effectiveness of settlements from the point when the settlement agreement is signed until potentially decades later.
- The Seventh Circuit decision logically defers contribution protection, a key incentive for PRPs to settle with EPA, potentially for decades. Will settlements with EPA be more difficult to achieve in the Seventh Circuit?
- Under Bernstein, settling parties do not obtain the benefits of Section 113 unless their liability is “determined.” Forcing settling parties to concede their liability may prove to be a major deterrent to settlements.
- The Seventh Circuit ruled that the plaintiffs had a Section 107(a)(4)(B) cost recovery claim even though their Section 113(f)(3(B) contribution claim had not yet matured. What happens when that contribution claim matures? Do the Bernstein settling parties then lose their Section 107(a)(4)(B) claim? What statute of limitations will then apply? What standard of liability will then apply?
CERCLA is notorious for its ambiguities and lack of clarity. This decision by the Seventh Circuit will likely do little to shed light on the interplay between CERCLA cost recovery and contribution. In the meantime, settling parties in the Seventh Circuit may have different rights than settling parties in other circuits.