District Court Instructed to Revisit CERCLA Definition of "Owner" With Reference to State Law
UNITED STATES V. CAPITAL TAX CORP. (September 19, 2008)
National Lacquer operated a paint and coatings business on Chicago’s south side for years. Hazardous materials were used, stored, and spilled at the site. When National Lacquer fell on hard times and lagged on its property taxes, the county made five of the seven separate parcels comprising the site available at a tax scavenger sale. Capital Tax Corporation (“Capital”), which buys and sells distressed properties, acquired tax certificates to the five parcels. The certificates did not pass title but gave Capital the option, if the parcels were not redeemed by the owner, to petition for a tax deed. Capital then (it is alleged) entered into an oral agreement for the sale of the parcels to Dukatt. Capital obtained the tax deeds only after receiving a payment from Dukatt, ostensibly a partial payment for the property. Beginning in 2002, the local and federal environmental authorities became interested and inspected the property. The EPA ordered Capital to clean up the property. After Capital refused, the EPA conducted its own cleanup. It sued Capital (and the owners of the other two parcels) to recover the costs of cleanup, civil penalties, and punitive damages. The district court granted summary judgment to the government on liability and damages. It found Capital jointly and severally liable for response costs in excess of $2.6 million and assessed civil penalties of $230,250. Capital appeals.
In their opinion, Judges Cudahy, Posner, and Rovner vacated the decision of the district court and remanded. After a brief statement regarding the government’s authority to conduct the cleanup and impose strict joint and several liability in defined circumstances, the court moved directly to the government’s basis for holding Capital liable. The government argued that Capital was liable as an “owner” because it held legal title to several of the parcels. Capital, on the other hand, argued that it held title only as security for the balance of the agreed sales price. It therefore fit into an exception whereby a person who “holds indicia of ownership primarily to protect his security interest” in land is not an “owner.” The district court had rejected Capital’s argument because it did not hold title as a traditional security interest.
The Court decided that the parties' reliance on the "security interest" exemption to the definition of owner was the wrong way to analyze the issue. In fact, the Court declined to decide that issue, although it found Capital's argument "colorable." Instead, it defined the issue as whether Capital was even an "owner" under section 107(a)(1) of CERCLA. The Court recognized the long-held principle that the equitable interest in the five parcels passed from Capital to Dukatt at the time of the contract for sale. The more difficult questions it faced were whether that doctrine, equitable conversion, was recognized by CERCLA and, if so, whether the court should develop a federal common law or rely on state law. On the first question, the Court noted that CERCLA did rely on common law analogies. The court cited favorably to two federal appellate cases and a number of district court cases that had held that a holder of legal title in a non-traditional arrangement was not an owner under CERCLA. Relying on these cases as well as general principles of common sense and common law analogies, the court found a sufficient basis to proceed in its analysis. On the second question, it saw no need for a federal common law. It held that state property law should apply in determining property ownership under CERCLA. Because neither the equitable conversion nor the Illinois property law issues were fully developed in the court below, the Court remanded for a full consideration by the district court of whether there was an enforceable land sales contract under Illinois law and whether the doctrine of equitable conversion applies in the case.
Capital also argued that it should have been liable for only a portion of the costs of cleanup. The Court recognized the CERCLA principle that a party can avoid joint and several liability if it can carry the burden of establishing divisibility of harm. Capital relied on an EPA document that tracked the parcels from which each of thousands of containers was removed. But the fact that the document did not include many other costs of cleanup, as well as the facts that a) many of the containers had been moved, b) the facility was historically operated as a single enterprise, and c) spills and leaks caused the product to cross parcel lines led the court to reject Capital’s divisibility argument.
Finally, the Court did not rule on Capital’s objection to the imposition of costs and penalties related to the two parcels it did not own. Given that it was remanding on liability, it vacated the district court’s award of damages for reassessment, if necessary, after the determination of liability.
