Seventh Circuit Applies Equity to CERCLA

September 26, 2008

Continuing its long tradition of unusual CERCLA decisions, the Seventh Circuit recently overruled a summary judgment on liability and damages in favor of the United States, ruling that there were issues of material fact as to whether the actual title holder of contaminated property was an “owner” under CERCLA, (U.S. v. Capital Tax Corporation, ___ F.3d __, 2008 WL 4276583 (C.A.7, September 19, 2008). Defendant Capital Tax purchases distressed property and, after viewing the National Laquer site on the south side of Chicago, decided to purchase tax certificates at a county scavenger sale. The tax certificates allow the purchaser to obtain tax deeds if the original owner does not reclaim the property by paying unpaid taxes and penalties within a statutory period. Capital Tax struck an oral contract to sell the property to an individual and obtained the tax deeds giving Capital Tax title to the property. The buyer paid some portion of the price to Capital Tax and began making small improvements on the property. His improvements did not include dealing with the more than 10,000 drums, vats, buckets, storage tanks, gas cylinders, jars and bottles other than to move some portion of them to another area on an adjacent property from which they were traced to the original property through the visible trails of waste fluids. The City brought in the USEPA which issued a Unilateral Order to Capital Tax to clean up the mess. Capital Tax refused and the USEPA performed a removal action costing over $2 million. The EPA brought an action to recover their response costs and for penalties for failing to comply with the Unilateral Order and succeeded in obtaining judgments for both on motions for summary judgment.

Capital Tax argued on appeal that it was not an “owner” under CERCLA (and thus not liable) because it only held title as security for future payment, which would bring it into the “security interest” exclusion to the CERCLA definition of owner. While the Court held that this was a plausible if underwhelming argument, they focused on the concept that by entering into an enforceable contract to sell, Capital Tax had transferred equitable ownership to the buyer and therefore was no longer an “owner.” The Court ruled that in evaluating issues of property ownership, courts should look to state law and not create federal common law especially where the state law issues are well settled. The Court then looked to the doctrine of equitable conversion in Illinois and found it applicable to the situation here. Under this doctrine, the execution of an enforceable sales agreement transfers equitable ownership to the buyer while the seller holds the title in trust for that buyer. The Court acknowledged that an oral contract for the sale of land is generally not enforceable under the Statute of Frauds, but held that unresolved factual issues, such as part performance, precluded the Court from ruling on this ultimate issue. The Court then vacated the judgments and remanded the matter to the trial court for further proceedings.

The decision is remarkable on numerous levels. First, EPA almost always wins these types of cases, especially as compared to private parties seeking cost recovery. Courts generally give EPA the benefit of the legal and factual doubt, so it is surprising to see the EPA not prevail, especially when the defendants have no apparent factors in their favor. Courts have been adopting a stricter attitude in forcing the government to prove CERCLA cases and perhaps this reflects that attitude. Second, the decision is surprising since there is a sound basis for liability on other grounds. The Court acknowledged that its analysis made Capital Tax a “former owner,” which is one of the four bases for CERCLA liability. There is much divided law on whether parties which hold title briefly while “flipping” properties are liable as former owners, but the Court did not even address this issue.

Finally, the Court’s ruling has potentially significant repercussions for evaluating CERCLA liability in transactions. Conventional wisdom is that CERCLA liability for the owner of a given property does not pass until title does and there may be significant periods of time in transactions between the execution of a sales contract and actual passage of title. Under the Court’s ruling however, ownership liability could pass with the execution of an enforceable sales contract, imposing that liability on buyers who neither expect it nor are prepared to accept it. In order to protect such buyers, it may be necessary to add language to sales contracts to clarify that environmental liability does not pass until title is transferred.