On March 31, 2021, the Court of Appeals for the Seventh Circuit upheld a district court decision interpreting the term “claim” in an indemnification agreement to require some threat of suit or assertion of liability under Minnesota law. Finding that mere notice of potential liability failed to meet that standard, the Court held that under the terms of the agreement, the buyer, Wisconsin Central, Ltd. (“Wisconsin Central”), must indemnify a seller, Soo Line Railroad Company (“Soo Line”), for liability arising under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Wisconsin Central LTD v. Soo Line Railroad Co., No. 19-3129 (7th Cir. Mar. 31, 2021).

On October 11, 1987, Wisconsin Central, Ltd. (“Wisconsin Central”) finalized an Asset Purchase Agreement (“Agreement”), pursuant to which it purchased various assets from Soo Line Railroad Company (“Soo Line”), “including physical rail lines in Minnesota, Wisconsin, and Michigan (‘LST’).” The Agreement contained a detailed indemnification provision, which required Soo Line to indemnify Wisconsin Central for “‘all claims for environmental matters relating to ownership of the Assets or the operation of LST that are asserted’ within ten years of the closing of the deal (the ‘claim period’).” Pursuant to the Agreement, Wisconsin Central would then indemnify Soo Line for any such claims after the expiration of the ten-year claim period. The claim period ran through October 11, 1997.

Prior to the expiration of the ten-year claim period, local and state authorities discovered contamination at a site that included a railroad right-of-way that Wisconsin Central had purchased from Soo Line. The Wisconsin Department of Natural Resources (“WDNR”) issued a “potentially responsible party” (“PRP”) letter to Northern States Power Company (“Northern States”), the owner of an old manufactured gas plant at the site. The PRP letter required Northern States “to investigate and potentially clean up the contamination.”

After being identified as a PRP, Northern States urged WDNR to also name Wisconsin Central as a PRP. Northern States also requested that Wisconsin Central voluntarily assist with the clean-up of the site. Given the indemnification provision, Wisconsin Central informed Soo Line of Northern States’ attempts to have Wisconsin Central identified as a PRP, and made a formal demand to Soo Lines prior to the expiration of the ten-year period. However, Northern States took no direct action against Wisconsin Central, and the WDNR never identified Wisconsin Central as a PRP. .

In 2002, the Environmental Protection Agency (“EPA”) investigated an area that the included the previously described site. The EPA designated the area as a Superfund site under CERCLA. Northern States again tried to persuade the government, this time the EPA, that Wisconsin Central was a PRP. In 2011, the EPA finally sent Wisconsin Central a notice letter, designating it as a PRP. Northern States also filed a lawsuit in 2012 against Wisconsin Central and Soo Line for contribution under CERCLA. EPA noted that it had evidence that the railroads had dumped waste from rail cars at the site and had performed dredging activities around two docks at the site. The EPA maintained that these activities could have contributed to the contamination at the site.

Wisconsin Central and Soo Line eventually settled with the EPA and Northern States for $10.5 million plus interest. Each railroad paid half, while reserving the right to seek indemnification from the other. Wisconsin Central then sued Soo Line for breach of contract, when Soo Line refused to indemnify it, arguing that Soo Line must indemnify it for the entire settlement amount because the “claim” had arisen during the claim period. Alternatively, Wisconsin Central argued that it was only responsible for the “portion of the environmental damages attributable to the exact land and operations that it bought from Soo Line.” Soo Line counterclaimed, seeking indemnification and recovery of the 50% of the settlement amount it had paid and the District Court granted summary judgment in favor of Soo Line on the counterclaim, finding that no “claim” had been made during the ten-year period.

In affirming the District Court’s decision, the Court of Appeal rejected both of Wisconsin Central’s arguments. The pertinent part of the indemnification provision provided that

[Wisconsin Central] shall assume the following liabilities and obligations of Soo [Line]: … all claims for environmental matters relating to the ownership of the Assets or the operation of LST that are asserted after the tenth anniversary of the Closing Date …

Wisconsin Central argued that Northern States had made a claim during the claim period when it urged the WDNR to identify Wisconsin Central as a PRP. The Court disagreed, holding that

[d]uring the [claim] period, Northern States neither threatened litigation nor invoked its right to sue the railroads, and the WDNR did not take any action that imposed any legal duties or impending legal peril on either railroad. Under the Agreement, the responsibility to defend and indemnify against environmental claims thus belonged to Wisconsin Central, not to Soo Line.

The Court also rejected Wisconsin Central’s argument that it should be liable for only a portion of the railroad companies’ negotiated CERCLA settlement. As noted previously, EPA had identified dumping and dredging activity as possibly contributing to the site contamination. Again, after analyzing the specific language of the indemnification provision, the Court found that the dumping and dredging activities were “claims relating to the ownership of the Assets and the operation of LST.” Consequently, the Court found Wisconsin Central had to indemnify Soo Line for the entire settlement amount, notwithstanding that the dredging activity occurred prior to Wisconsin Central’s acquisition of the property from Soo Line.