Daily Development for Monday, April 3, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

HAZARDOUS SUBSTANCES; INDEMNIFICATION; ADJACENT PROPERTY: Under terms of broad indemnification agreement, a tenant whose underground tanks polluted the leasehold premises is liable to landlord not only for damages to that premises, but also for loss of access to adjacent premises owned by landlord during the remediation period.

NRC Corp. v. Amoco Oil Co., 2000 WL 260635 (March 9, 2000)

Tenant leased property for gas station purposes for 30 years. During that time, it operated a number of underground storage tanks. Near the end of the lease period, tenant identified potential leakage problems from these tanks, and undertook remediation activities, reporting the leakage and the remediation to state environmental authorities. Ultimately, at lease end, an expert hydrologist recommended that tenant actually remove the tanks and undertake an extended remediation process, which would take from one to three years.

About three years after the lease ended, tenant was still engaged in remediation, but delays in implementing the plan had occurred, and ultimately the State fined tenant for failure to comply with its remediation responsibilities. The State and tenant agreed upon a plan. Six years after the lease terminated, remediation was still ongoing. Estimates were that another five years of remediation activity would be needed.

Although the leased area had reduced in size over time, it always had been a relatively small part of landlord's overall holdings, representing a fraction of one acre of a 35 acre parcel which landlord had plans to develop comprehensively. Following the final steps of the remediation efforts, tenant's experts concluded that the contamination was limited to the site of the gas station lease, and that the balance of landlord's property was not touched by any leakage.

The lease contained a general indemnification clause that obligated tenant to pay for injury to landlord caused by tenant's business. The lease required tenant to: "save harmless the Lessor from all claims, mechanic liens, damages, demands, actions, costs and charges arising out or by reason of the . . . operation of the business herein authorized on the premises . . . during the term of this lease.

Landlord argued, and the trial court agreed, that the indemnification under this language covered not only the leased premises by adjacent premises to the extent that such premises were rendered less valuable by clean up efforts, even though not themselves contaminated. It alleged that there were two acres in the area of the service station site that were rendered valueless during the priod of the clean up. These two acres constituted the "smallest parcel that would bear the brunt of the stigma of contamination" because visual and physical access to those acres necessarily included the area in which remediation was occuring. Landlord's experts contended that there was essentially no market for this two acre parcel until remediation was complete unless tenant signed a blanket indemnification running to potential users of that acreage, which tenant had refused to do. Therefore, landlord argued, the tenant owed the lost rental value of the whole two acres, and not just for the loss involved in the small point of land that constituted the station site.

The trial court agreed, and the Seventh Circuit affirmed.

The court did not see any limit in the indemnification agreement to the station site itself. Instead, the "plain language" of the indemnification clause comprehended any injury to landlord caused by tenant's activities. The appeals court found adequate evidence to support the trial court's evidence that the two acre parcel was indeed rendered valueless during the contamination period and that landlord otherwise might have enjoyed some income from it.

Tenant argued that Indiana law precedent precluded the award of "stigma" damages. The appeals court responded that although the trial court (and the appeals court as well, in an earlier section of the opinion) had used the term "stigma," the damages award in this case was not for "stigma," and that therefore cases refusing to award "stigma" damages are inapposite.

Here is the complete statement of the court's ruling on the point:

"The fact that [Landlord] could not prove contamination beyond the boundaries of the leased parcel was irrelevant to the district court's finding that the contamination on that parcel eliminated [landlord's ] ability to sell or lease the surrounding property. The court relied on the indeminification clause and [tenant] did not challenge that reliance on appeal." This rather murky statement appears to conclude that the concept of "stigma" is only present in cases involving nuisance or negligence, and that the same concept is not involved when one is measuring simply the forseeable injury measured by contract standards. The court does say at an earlier point that the impact of the contamination rendered the entire two acres unusable becasue the gas station site necessarily would be included in any use that anyone would make of the rest of the two acres. This is not exactly the same, of course, as saying that buyers or lessees of the two acres were "frightened off" by the presence of contamination on the gas station site, but only that they were not interested in making use of the gas station site, and without that site the balance of the two acres had no value.

Submitter's Comment: Jack Murray, who submitted the case to the editor, termed the case "astounding" in part apparently because Amoco could be so dumb as to do lease a gas station under such a broad indemnity clause, even in 1959.

Editor's Comment 1: The case cites authority in the Fourth and Fifth Circuit finding that "stigma" damages cannot be claimed for nuisance or trespass claims due to ground contamination on adjacent property. The editor concurs, however, that we have a different case here. It was a forseeable business risk to landlord that a misuse of the leased site would cause economic injury to the landlord with respect to the use and enjoyment of the other sites because, on reversion, the landlord would be unable to combine other property with the leased site.

But would it also be possible to read this case as holding that even "stigma" damages where the landlord would argue that the balance of its site was unusable because of proximity to a polluted area would be recoverable in contract? The cases denying "stigma" damages are tort cases, and there are policy constraints upon the scope of damages that perhaps should not apply when a party undertakes to indemnify its contracting counterpart for forseeable business losses.

In Walker Drug Co., Inc. v. La Sal Oil Co., 972 P.2d 1238 (Utah 1998), the DIRT DD for 10/15/99, where the court denied stigma damages in a trespass case as to a landowner's adjacent premises (measured by separate tax lots), the editor complained about the lack of a "principled" distinction between stigma injury to the contaminated (but cleaned up) property (compensable) and similar injury to landlowner's other property (non compensable). But even if that distinction holds in a tort case, it perhaps should not be viewed as the probable intent of a party who agrees to an indemnification as broad as that signed here.

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