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U.S. District Court Finds Seller of Property Liable as CERCLA Arranger For Response Costs and Punitive Damages

The U.S. District Court for the Southern District of Iowa, on remand, recently found that corporate defendants intentionally sold buildings contaminated with polychlorinated bipehnyls (PCBs) to a third party in order to dispose of a hazardous substance and were liable as arrangers to the government for response costs and punitive damages. [U.S. v. Dico, Inc., ___F.Supp.3d___, Case No. 4:10-cv-00503 (S.D. Iowa Sep. 5, 2017).]

Factual and Procedural Background

In 1984, the Dico, Inc. site (Dico Site) located at 200 Southwest 16th Street in Des Moines, Iowa was designated a Superfund Site after an investigation uncovered volatile organic compounds had polluted the water supply. Further investigation revealed the presence of PCBs in the insulation of several buildings. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the U.S. Environmental Protection Agency (EPA) initiated a removal action and issued a unilateral administrative order (1994 Order) that required Dico to address the contamination, repair and seal the exposed insulation to prevent further release of PCBs. Dico completed the remediation work and in 1997, the EPA issued a Notice of Completion and expressly stated that Dico had continuing obligations under the 1994 Order, including post-removal activities and annual reporting in an operation and maintenance plan.

In 2003, the EPA approved a revised work plan that reduced Dico’s inspection and testing requirements because Dico had ceased manufacturing operations inside the buildings. The plan stipulated that Dico had to:

…coordinate any plans for demolition of the buildings with the EPA. Certain disposal requirements may apply for building debris, and the EPA or state would want to oversee the demolition.

Dico responded in writing that it would:

…notify the EPA by phone and writing at least one week prior to any future site activity regarding building dismantling or demolition, improvements, and/or re-use.

In response to growing redevelopment interest in the Dico Site, the EPA performed a reuse assessment for the property. The report was issued in March 2007 and indicated a contamination inspection would need to be performed before existing structures could be demolished or deconstructed to determine “whether the building materials could be reused… or the appropriate method of disposal.”

In May 2007, Dico sold the contaminated buildings subject to the 1994 Order to the Southern Iowa Mechanical, L.L.C. (SIM). SIM intended to dismantle the buildings, dispose of the materials except the steel beams, and relocate the beams to its property in Ottuma, Iowa (SIM Site) for reuse. Dico signed a bid proposal from SIM to “demo and remove” the buildings, but did not disclose to SIM that the buildings were contaminated. In addition, Dico did not inform the EPA of the building sale or proposed demolition. SIM employees dismantled the buildings over the course of 162 days between June and November 2007.

At a Dico Site visit in September 2007, the EPA learned for the first time that buildings subject to the 1994 Order had been or were being dismantled without prior EPA notification. The EPA began investigating whether Dico had taken adequate precautionary measures to safely dismantle the buildings and dispose of the resulting waste. Soon afterward, Dico notified SIM that there was an environmental issue with the insulation. The EPA tested the steel beams transported to the SIM Site and determined that the levels of PCBs posed a direct threat to SIM workers, visitors and trespassers. In December 2008, the EPA issued a unilateral administrative order requiring Dico and its affiliate, Titan Tire Corporation (collectively: defendants) to perform a removal action at the SIM Site. Out of 2,281 beams transported to the SIM Site, 1,555 beams (~ 68 percent) required decontamination. Defendants paid $537,266.96 for the decontamination.

The U.S. District Court granted partial summary judgment to the government on its arranger liability claim and on the question of whether Dico had violated the 1994 Order.

The Court of Appeals affirmed in part and reversed in part. It affirmed summary judgment to the government on whether Dico violated the 1994 Order, but vacated the punitive damages award on the ground that a causal connection between response costs associated with the SIM Site and the 1994 Order violations had not been established.

The Court of Appeals reversed and vacated the summary judgment to the government on the question of arranger liability. It determined that the issue of intent, the central question to determining whether arranger liability exists, should not have been decided at summary judgment because intent was disputed.

The District Court’s Decision

The issue on remand is whether defendants intended to arrange for the disposal of a hazardous substance when it sold the contaminated buildings covered by the 1994 Order to SIM. When the requisite intent for arranger liability exists, the defendant is liable for all response costs of removal or remedial action incurred by the government resulting from the release of a hazardous substance. The parties disputed two factors related to intent—the usefulness of the buildings and the disposal costs defendants avoided by selling them.


Usefulness of the Building

The court found that the buildings subject to the 1994 Order lacked commercial usefulness, were unfit for its intended industrial use, represented ongoing liabilities to defendants, and possessed limited resale value without further sampling and decontamination at a cost of $537,266. The court concluded that the facts on usefulness of the buildings weighed slightly in favor of defendants not arranging for the disposal of a hazardous substance through the sale of the buildings. However, the court concluded that since the costs of $988,567 Dico avoided for proper removal and disposal of the insulation greatly exceeded the value of $117,000 Dico received from SIM for the sale of the buildings, it constituted strong evidence that defendants intended to avoid environmental liability through the sale of the contaminated buildings.


Due Diligence

The court found that defendants failed to perform due diligence, research environmental restrictions prior to the sale of the buildings on a Superfund site, and disclose that the buildings were contaminated to SIM. In addition, the removal of the contaminated buildings increased the property value and lowered the property tax assessment of the Dico Site, and made it more attractive to potential developers.

Conclusion and Implications

Thus, the facts taken together, weighed in favor of concluding that defendants intended to dispose of a hazardous substance when they sold the contaminated buildings subject to the 1994 Order to SIM. The court held that defendants arranged for the disposal of a hazardous substance in violation of CERCLA. The court also held that defendants were jointly and severally liable for $5.45 million in response costs previously incurred, future response costs and $5.45 million in punitive damages.

This case demonstrates that    although CERCLA is a strict liability statute, in order for arranger liability to apply, intent to arrange for the disposal of a hazardous substance must be established. In addition, a determination of a violation of an administrative order alone is insufficient to award punitive damages. Punitive damages require a causal connection between the response costs and the violation of the administrative order.

(Danielle Sakai, Joanna Gin)