Posted on March 24, 2023 by John M. Barkett
I have the unenviable honor of having read every Superfund allocation rendered in a reported decision. There is a lot of the same analysis in the case law, but every now and then a decision is rendered that catches my eye. Columbia Falls Aluminum Co. v. Atl. Richfield Co., 2021 U.S. Dist. LEXIS 160987 (D. Mont. Aug. 25, 2021) is one such case.
The case involved successive owners of an aluminum smelter near Columbia Falls, Montana. Arco (through its predecessor, Anaconda) operated the site from 1955 to 1985. CFAC acquired the facility in 1985. operated it until 2009, and was the current owner of the facility.
There were a number of allocation arguments that will sound familiar to Superfund practitioners.
Arco produced about 7.1 million lbs. of aluminum in its operations. CFAC produced about 6.3 million lbs. Id. at *5-8. (Think Gore factor: volume or amount.)
CFAC argued that in the period 1960-80, Arco disposed of 129,000 to 135,000 tons of spent potliners (SPL), “a principal waste generated by aluminum reduction which contained cyanide and fluoride in two unlined landfills: the West Landfill and the Center Landfill.” Id. at *10. It also argued that Arco alone disposed of sludge from wet scrubbers in the Wet Scrubber Sludge Pond from 1955 through approximately 1979. Id. CFAC added that ARCO alone disposed of another waste from its aluminum production operations—sludge from wet scrubbers that was composed of 80 percent calcium fluoride—in the Wet Scrubber Sludge Pond (“WSSP”) from the beginning of ARCO’s operations at the Site through approximately 1979. Id. (More Gore factor “amount” or “toxicity” or “fault” arguments.)
Arco argued that the suit was foreclosed by the parties’ 1986 Acquisition Agreement. In the alternative, it argued that CFAC’s costs were not recoverable or were covered by CFAC’s indemnity to ARCO, but, to the extent any costs were recoverable, “CFAC should be allocated greater responsibility for those costs based on the Acquisition Agreement, CFAC’s failure to exercise due care in its operation and closure of the facility, CFAC’s own discharges of hazardous materials, and the economic benefit CFAC realized or will realize from the Site.” (More Gore factor argument – care and fault – but, importantly here, contract-based and economic benefit arguments.)
Unfortunately for ARCO, the district court rejected the contract arguments. CFAC agreed not to make a claim with respect to Arco’s indemnity after 1990, but CFAC was not making such a contractual indemnity claim. Instead, CFAC was pursuing a right to contribution under CERCLA, and the assumption of liability clause was too narrow to include CERCLA liabilities. Id. at *33-34, *36. (Not all was lost here, as you will see below.)
The district court also rejected CFAC’s expert’s allocation (52.9% to CFAC and 47.1% to Arco).
The court then addressed the allocation. It first evaluated the Gore factors. As to the first four Gore factors (encompassing the nature and volume of waste), the court recognized that Arco’s SPL waste in the West Landfill was primarily responsible for the groundwater contamination, but that the remediation involved the construction of a slurry wall that would encompass both the West Landfill and the WSSP. And both parties disposed of waste in the WSSP. In addition, both parties disposed of cyanide and fluoride byproducts from daily operations, and CFAC was “independently responsible for the waste disposed of at the other on-Site landfills and the Former Drug Storage Area.” Id. at *146-47. Given these facts and the fact that the parties operated the same facility for similar amounts of time and produced the same product in similar quantities, the court held that the first four Gore factors did not favor either party.
The degree of care weighed “slightly in favor of allocating more responsibility to CFAC.” Id. at *148. Why? CFAC’s operations “generally conformed to regulatory requirements and industry practice,” and both parties engaged in unpermitted releases. Id. at *149. However, Arco operated the facility in accordance with prevailing environmental practices, made environmental improvements at the Stie that cut emissions, reduced solid and liquid waste volumes, and increased environmental monitoring. Id. at *148.
In response to Arco’s argument that CFAC did not act quickly enough to address cyanide in groundwater, the court found that CFAC did monitor groundwater beginning in the 1980s, added wells and increased the frequency of groundwater sampling, and ultimately implemented remedial action. Id. at *149-150. However, the court found that CFAC did not apply for a RCRA hazardous waste storage permit in 1989 as identified in an environmental report that it commissioned, and “the evidence suggests that CFAC knowingly avoided regulatory requirements and regulatory scrutiny because the alternative would have meant beginning site-wide environmental investigations and implementing RCRA corrective action measures to remediate some or all the environmental problems that the investigations identified. And, if this had been done in the proper time frame, it likely would have reduced both the scope and cost of the present CERCLA action. This fact therefore weighs in favor of allocating more responsibility to CFAC.” Id. at *151. (Parties whose actions or inaction increase CERCLA response costs never seem to do well in allocations.)
Regarding cooperation, CFAC was credited for voluntarily entering into an Administrative Order on Consent with EPA and “its consistent cooperation and coordination with EPA throughout the remediation process.” Id. at *152. On the other hand, Arco was invited to participate in the Superfund process and “chose not to,” and during operation of the facility, Arco “implemented certain environmentally friendly protections-such as its dry scrubber system-only after the facility emitted so much fluoride that it killed the surrounding vegetation.” Id. at *152 (record citation omitted). “Furthermore, while ARCO attempted to prove a history of cooperation with EPA at other CERLCA sites in Montana, a devastating cross-examination showed that claim to be untenable. ARCO has fought tooth-and-nail to avoid paying the $1,027,721,000 it has paid to cleanup former industrial sites in Montana.” Id. (record citation omitted). (Yikes! When a court calls a cross examination “devastating,” something went terribly wrong.)
The court concluded that the Gore factors warranted an equal assignment of liability.
But – and here is where the case caught my attention — then it determined that “qualitative considerations” tipped the scales in Arco’s favor.
Those considerations were the contractual indemnity and economic benefit. “The parties’ agreement on how they intended to allocate environmental liability among themselves can be considered in CERCLA equitable allocation even if their agreement does not shift the liability as a matter of contract law.” Id. at *153 (citation omitted). The court then explained that the 1985 Acquisition Agreement “contains a provision prohibiting CFAC from suing ARCO after August 31, 1990, for matters ‘with respect to’ ARCO’s time-limited indemnity of CFAC. The evidence shows that even though the language of the Agreement is not specific enough to waive CFAC’s statutory rights, the parties understood these obligations to include environmental liabilities, including the very environmental liabilities that are the subject of this case. Even if not enforceable as a matter of contract law to bar CFAC’s claims, the parties’ intent, as reflected in the circumstances of the sale and their subsequent conduct, was that ARCO would have no further liability to CFAC five years after the sale.” Id. at *154-55.
Moreover, the court added, CFAC’s indemnity was perpetual. “Even if the indemnity provisions are not enforceable as a matter of contract law to bar CFAC’s claims, the evidence shows that the parties intended for CFAC alone to have an indemnification obligation to ARCO after August 31, 1990. The parties’ intent behind their indemnity obligations is significant for allocating responsibility here.” Id. at *155.
In addition, the court explained that while not a complete defense under contract law, “the evidence also shows that the parties intended for CFAC to indemnify ARCO for any costs or liabilities related to CFAC’s operation of the smelter. While not enforced as a matter of contract law, the parties’ agreement on how to assign liability for these costs is considered in the equitable allocation context.” Id.
CERCLA allocations are always case specific and are left to the discretion of the district court judge. Nonetheless, the court’s analysis of what I assume was parol evidence bears remembering.
The court then considered the profits made by each party in the operation of the facility and the financial benefit from the increase in value of the property following remediation. CFAC enjoyed a greater economic benefit from operations (the court computed the net benefit to CFAC as 33% compared to ARCO’s economic benefits from its operations).
However, CFAC had paid $1 dollar for the property. ARCO sought to show that the property would increase in value significantly as a result of the remediation. Its expert suggest a post-remediation valuation of $15.5 million for the parcel as whole, but $3.75 million for the industrial portion of the property, which included the plant on the property. CFAC’s expert appraised just the main plant site and opined it would be valued at $1.3 million. Based on this evidence, the court concluded the post-remediation value of the industrial part of the site would be $2.25 million. And taking both benefit from operations and benefit from the future sale of the property into account, the court decided that the economic benefit factor was neutral.
Returning then to the effect of the parties’ intent, and recognizing that mathematical precision is “not realistic” for a CERCLA allocation, the court then held that the proof supported an allocation of 65% to CFAC and 35% to Arco. In other words, the equitable application of the parties’ intent saved Arco 15%.
But the court did not stop there. Past costs in the matter were $12.4 million. ARCO’s 35% share represented $4.3 million. The court said that these percentages were applicable to past and future costs with one significant caveat. In a single sentence without discussion, the court said that Arco “shall” receive a credit of 35% of the future sale value (35% of $2.25 million), or $787,500, “towards its outstanding CERCLA obligation.” It directed the parties to confer on how the credit should be applied. Id. at *161.
I have not conducted any research, but I did search my memory banks, and I was unable to recall another allocation decision where a party received a credit for its allocated share of the future value of property after a remediation, without any discussion of when the property might be sold or future real estate market conditions at the time of sale. And since this decision caught my eye, I am guessing it will at least raise an eyebrow among my Superfund brethren.
On to the next decision.