In California Dep’t of Toxic Substances Control v. Westside Delivery, LLC, the Ninth Circuit recently reversed the District Court for the Central District of California and held that a defendant that purchases contaminated real estate at a tax sale has a “contractual relationship” with the previous owner “in connection with” the previous owner’s polluting activities, and therefore was not entitled to CERCLA’s “third party defense.” As a result, the tax-sale purchaser is potentially liable for clean-up costs.
The property was the Davis Chemical Site in Los Angeles, CA, a former spent solvents recycling facility. In the 1990s the EPA and the California Department of Toxic Substances Control (DTSC), lead environmental investigations to evaluate releases of hazardous substances on the property. From 2010 through 2015 DTSC conducted a clean-up of those hazardous substances. Before clean-up started, however, the owner of the Davis Chemical Site stopped paying property taxes. As a result, in 2009, the property was sold at a tax-sale auction to Westside Delivery, LLC (Westside).
Later, DTSC sued Westside to recover its clean-up costs under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). CERCLA, however, provides the “third party defense” which shields a defendant from liability if it can establish that the release of hazardous substances was caused solely by an act of a third party who was not acting in connection with a contractual relationship with the defendant. Westside invoked the third party defense, arguing that because it purchased the property through a tax-sale, it had no contractual relationship with the former owner that caused the release. The District Court agreed and granted summary judgment to Westside.
The Ninth Circuit reversed, finding that CERCLA’s definition of a “contractual relationship” is broad – sufficiently broad to encompass a tax deed. Thus, the court held that the tax deed transferring property ownership to Westside created a contractual relationship between Westside and the Davis Chemical Site’s previous owner. Further, the court found that because the previous owner’s actions that lead to the release of hazardous substances were related to the previous owner's status as a landowner, those actions were “in connection with” the “contractual relationship” with Westside. As a result, the Court held that Westside was not entitled to CERCLA’s third-party defense.
The Court noted that, in addition to the third party defense, CERCLA provides the Bona Fide Prospective Purchaser (BFPP) defense which protects purchasers who knowingly buy a contaminated property. However, Westside did not contend that it qualifies for the BFPP defense. To receive liability protection under the BFPP defense, a purchaser must, among other things, demonstrate completion of "all appropriate inquiries" before acquiring the property. Performing “all appropriate inquiries” can be time and resource intensive, but does not have to be. At the Kimmell Law Firm, LLC we have significant experience counseling clients on performing all appropriate inquiries and taking other steps to protect against CERCLA liability – all in a cost-effective manner. Please contact us if we can be of assistance.