Daily Development for Tuesday, March 16, 1999

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; CERCLA; DEFENSES; "INNOCENT OWNER:" Under CERCLA, a party who knows of contamination when it takes title to property in its own name is not entitled to claim the "innocent landowner's" defense even if, prior to taking title, that party was a partner in a partnership that purchased the property without knowledge of the contamination.

Grand Street Artists v. General Electric Company, 963774, 1998 WL 901734 (U.S. Dist. Ct. D. N.J. 1998).

Seventeen artists formed a partnership to purchase a former industrial building with the intention of converting it into residential condominium units and working lofts and, ultimately, to sell such units to the partners in their individual capacities. Each "Partnership Interest" gave each individual partner the right to acquire one condominium unit. After the partnership acquired the building, but before any of the individual units were conveyed, the partners became aware that the property was polluted with mercury. Nonetheless, almost all of the partners went forward with the purchase of individual condominium units. The property could not be remediated and was found unfit for human habitation, and it was recommended that it be demolished. As a result, the individual unit owners brought actions asserting claims under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), as well as under other statutes and state common law, against environmental consultants, the law firm retained by the partnership that sold units to the owners, and former owners of the premises.

There was no dispute that as current owners of units in the former industrial facility, each of the unit owners fell within the category of parties that may be held liable under CERCLA. In their law suit, the individual owners sought a declaratory judgment stating that they were each entitled to the "innocent owner" defense and thus, are not liable under CERCLA.

The former property owner sought a declaratory judgment finding that the individual owners were, in fact, liable under CERCLA, a strict liability statute with few affirmative defenses. A party asserting the "innocent owner" defense must prove the following elements by a preponderance of the evidence: (1) another party was the sole cause of the release of hazardous substances and the damages caused thereby; (2) the purchasing landowner did not actually know, or have reason to know, of the presence of the hazardous substance at the time of acquisition; (3) the purchasing landowner undertook appropriate inquiry at the time of acquisition, in order to minimize liability; and (4) the purchasing owner exercised due care once the hazardous substance was discovered.

Here, the former property owner asserted that the unit owners had actual knowledge of the presence of mercury at the facility when they acquired titles to their individual units and, thus, were not entitled to the "innocent owner" defense.

The critical issue here was whether, at the time that each partner acquired its condominium unit, that partner knew or had reason to know that any hazardous substance had been disposed of on, in or at the facility.

CERCLA does not define the word "acquire." Consequently, the Court looked for the ordinary meaning of the word. In its view, the verb "acquire" refers to coming into possession or ownership of real property. Furthermore, in its view, the phrase "at the time acquired" refers to the point in time when a party becomes the owner of the property. CERCLA liability is based in part on principles of ownership of real property. In interpreting the meaning of "owner," courts have looked to the plain meaning of the statute and held that "owner" should also be given its ordinary meaning.

The unit owners argued that their status as partners when the partnership purchased the facility changes the date they became owners, in their individual capacities, of their respective units. The Court, however, did not agree with that position. In the absence of any unique definition of "ownership" in CERCLA, the Court looked to state law to define the ownership interest of partners. Under New Jersey partnership law, title to real property is held by the partnership as is any corresponding real property interest. Furthermore, the interest of a partner is limited to a personal property interest in the partnership itself; partners hold no real property interest in real property owned by the partnership. Thus, when a partnership acquires title to real property, the partners, as individuals, do not acquire any real property interest in the property. Consequently, the Court held that although the partnership purchased the facility at a time that it was not aware of the mercury contamination, the partners, as individuals, did not purchase their units until title to each unit passed to the respective individual. As of those dates, each individual unit owner had knowledge of the presence of mercury. Consequently, the Court ruled that the unit owners were not entitled to the "innocent owner" defense.

The Court recognized that in this case, given the intention of the partners to convert the premises and sell the individual units to themselves, strict adherence to CERCLA law may appear to lead to an inequitable result. Nonetheless, the structure of CERCLA contemplated that CERCLA liability construction be tempered with the statutory right of contribution. With that in mind, the Court held that, under CERCLA, such equitable factors are more appropriately considered when adjudicating a contribution claim at which point liability will be apportioned. In its view, to hold otherwise would "surely broaden the innocent owner defense beyond its intended scope and, would be contrary to the judicial policy of narrow construction of affirmative defenses under CERCLA."

Comment: It is difficult to make reasoned decisions about CERCLA, because it is based upon a fundamental unreasonable premise: that it is appropriate to allocate the cost of protecting the public from hazardous substances to a group of parties that have in common only some haphazard physical or technical relationship to some contaminated property, regardless of fault or any other reasoned basis for such allocation.

Given that difficult constraint, it is hard to fault the court in its conclusion that the "equities of the case" approach to hard cases is a better approach than to build exceptions that could lead to loopholes for some but not others.

On the other hand, the issue of whether ownership of a partnership interest in real estate constitutes ownership of the real estate interest itself is one that varies from state to state, and it does seem anamolous that such a vital federal issue under CERCLA would be defined differently from one state to another. The question is what the Congress intended, and the Congress in this case likely did not intend that liability turn on vagaries of state partnership law, written for an entirely different set of problems.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.