Trial court may select the method of accounting for prior settlement in allocating response costs among liable parties, but claims to recover settlement payments are limited to costs consistent with the National Contingency Plan.

In an April 2 decision creating a circuit split, the US Court of Appeals for the Ninth Circuit held that a court has discretion to select the method it finds most equitable when accounting for prior settlements between private parties in contribution actions under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), provided that the method selected is consistent with CERCLA’s purposes. In reaching this holding, the court rejected the approach adopted by the US Court of Appeals for the Seventh Circuit that requires that any recovery be reduced by the full amount of prior settlement payments. The court also held that settlement payments are only recoverable from other potentially responsible parties (PRPs) when the plaintiff can establish that the costs underlying the settlement were necessary and consistent with the National Contingency Plan (NCP).

Background on the Case

The case, AmeriPride Services. v. Texas Eastern Overseas, No. 12-17245 (9th Cir. April 2, 2015), involves contamination cleanup on the site of a former industrial dry cleaner in Sacramento, California. The current owner of the site, AmeriPride, performed investigation and remediation at and near the site and then sought both cost recovery and contribution under CERCLA §§ 107(a) and 113(f) from responsible parties, including Texas Eastern Overseas (TEO). While its suit against TEO was pending, AmeriPride settled its claims against two other responsible parties (Chromalloy and Petrolane). AmeriPride also settled a lawsuit brought against it by neighboring landowners who complained of migrating contamination. All settlements included mutual releases. In the order approving these settlements, the US District Court for the Eastern District of California determined that, in accordance with the Uniform Comparative Fault Act (UCFA), AmeriPride’s claims against the remaining PRPs would be reduced by the amount of the settling parties’ proportionate share of liability.

On AmeriPride’s subsequent motion for summary judgment against TEO, the district court held that TEO was not only liable for AmeriPride’s response costs under CERCLA § 107(a), but also that AmeriPride could file an amended complaint seeking to recover the costs of its settlements with the neighbors under CERCLA § 113(f). The court did not indicate whether AmeriPride’s contribution claim must arise from costs incurred consistent with the NCP.

Following this order, TEO brought two motions. The first sought to clarify that, pursuant to the UCFA, AmeriPride’s claims against it must be reduced by the equitable shares of Chromalloy and Petrolane. The court denied the motion and held that AmeriPride’s claims would be reduced not by the equitable portion of liability attributable to Chromalloy and Petrolane, but rather by the dollar value of their settlements (the “pro tanto” approach). TEO’s second motion sought to limit AmeriPride’s potential recovery arising from its settlements with the neighbors only to necessary costs that were consistent with the NCP. The court also rejected this motion, finding that because the response action at the site as a whole was NCP compliant, AmeriPride would not have to show that the settlements were independently based on NCP-compliant response costs.

After a bench trial, the court entered judgment against TEO and calculated the total damages subject to equitable apportionment to be (1) AmeriPride’s total response costs, plus (2) the dollar value of AmeriPride’s settlements with the neighbors (without considering whether those costs were NCP compliant), less (3) the settlement money AmeriPride received from Chromalloy and Petrolane. The court then split that figure evenly between TEO and AmeriPride. The court also held TEO liable for prejudgment interest accruing from the date that AmeriPride incurred the response costs.

TEO argued on appeal that CERCLA mandates that the court apply the UCFA’s proportionate-share method to determine the liability of a nonsettling party. If the court has discretion in choosing a method, TEO further argued, the court here abused that discretion by selecting one method in the final order approving the settlements and then applying another at trial. TEO also asserted that the district court erred in not determining whether all of the response costs included in the settlement with the neighboring landowners were necessary and consistent with the NCP and in assessing the time at which prejudgment interest begins to accrue.

The Ninth Circuit’s Ruling

Judges Have Discretion to Select an Equitable Allocation Method

The Ninth Circuit held that courts have discretion to choose an appropriate method for allocating liability among nonsettling responsible parties after other responsible private parties have entered settlement agreements. The court analyzed statutory language and policy goals to conclude that, despite contrary Supreme Court precedent regarding other statutes, Congress did not intend for CERCLA to impose a single standard for how a private party settlement agreement affects the liability of nonsettling PRPs. The court held that CERCLA § 113(f)(1) guides liability allocation in stating that when “resolving contribution claims, the court may allocate response costs among liable parties using such equitable factors as the court determines are appropriate.” Thus, courts are free to apply the pro tanto approach, the proportionate-share approach, or any other approach consistent with CERCLA’s purposes.

Here, however, the district court formally chose the proportionate-share approach to allocating nonsettling PRPs’ liability, but subsequently applied the pro tanto approach. The Court of Appeals found that this inconsistency deprived TEO of a “reasonable opportunity to present evidence and argument regarding the fairness of such an allocation.” Although the district court had discretion to select its method of allocation, its failure to explain how the inconsistent approach was consistent with CERCLA foreclosed appellate review, and the Court of Appeals therefore remanded to the district court for further proceedings.

Settlement Payments Are Recoverable Only if Consistent With the National Contingency Plan

The court next held that AmeriPride’s settlement payments to the neighbors were only recoverable if they were found to be necessary and consistent with the NCP. Under CERCLA § 113(f), a plaintiff may “seek contribution from any other person who is liable or potentially liable under” § 107(a), which permits recovery only of “necessary costs of response incurred . . . consistent with the national contingency plan.” Thus, contribution is available only where the costs underlying the claim were necessary and consistent with the NCP. Because the district court failed to determine whether the settlement payments to the neighbors arose from such costs, the Court of Appeals remanded with instructions to determine “what portion of AmeriPride’s settlements with [the neighbors] reimbursed them for necessary response costs they incurred consistent with the NCP.”

Interest Accrues as Stated in the CERCLA Statute

The court looked to the same cost recovery and contribution statutes, CERCLA §§ 107(a) and 113(f)(1), respectively, to conclude that they also determine when prejudgment interest on response costs begins to accrue. The court found no room for judicial discretion on this point. Rather, prejudgment interest accrues as described in the statute: starting on the later of (1) the date that the plaintiff demanded a specified amount in writing or (2) the date that the plaintiff incurred the costs. Here, however, the district court awarded prejudgment interest accruing when AmeriPride incurred the relevant costs, without determining whether that date was before or after AmeriPride made a written demand of TEO. The Court of Appeals therefore remanded to the district court for further findings on this issue.

Conclusion

This decision gives wide latitude to district courts to determine how settlements may affect the dollar amounts potentially recoverable from other parties, requiring only that the selected method be justifiable in light of CERCLA’s purposes and basic principles of fairness. Without explicitly saying so, the opinion hints that either the proportionate-share or the pro tanto methods can be appropriate. Therefore, responsible parties should not necessarily assume that a court will deduct the dollar value of its past settlements in calculating damages in future litigation, but may instead look to other factors to determine whether a settlement is an accurate reflection of a settling party’s “true” liability. Notably, this decision creates a split with the Seventh Circuit, which requires the pro tanto approach in every case.

The ruling also clarifies that a CERCLA plaintiff cannot recover all or part of a settlement that it pays out without showing that the costs were necessary and consistent with the NCP. Because responsible parties risk bearing the full weight of any non-NCP-consistent costs that they include in settlement agreements with third parties, the value of such settlements, from the payor’s perspective, will decline.