The Court of Appeals for the Ninth Circuit recently rejected the “third party defense” to CERCLA liability and held that the buyer of real estate in a tax sale could be a “potentially responsible party” liable for investigation and clean-up of hazardous substances released by a predecessor in title in its recycling of spent solvents. California Department of Toxic Substances Control v. Westside Delivery, LLC, No. 16-56558, 2018 WL 1873715 (9th Cir. April 27, 2018). The decision turned on whether a company that buys real property at a tax sale has a “contractual relationship” with a previous owner who caused contamination “in connection with” the contractual relationship. The court reversed the district court’s grant of summary judgment for the buyer.

EPA and a consulting firm had conducted assessments in the 1990s that revealed releases of hazardous substances on the property. In 2009, the local tax collector conveyed title to the site to the buyer, but the buyer did not conduct any operations there. The California Department of Toxic Substances Control (DTSC) had approved a plan for site remediation to be carried out by those who had sent solvents to the site, but the plan was not carried out before the sale by the tax collector.

The buyer did not claim that it was an “innocent landowner” or “bona fide prospective purchaser” (BFPP) entitled to an affirmative defense to CERCLA liability. Instead the buyer sought to demonstrate that it was entitled to the “third party” exception to liability, arguing that the release of hazardous substances on the property was caused solely by the solvent-recycling company with which the buyer had no contractual relationship. CERCLA Section 107(b)(3) creates an affirmative defense for an otherwise responsible party that can prove that the release of hazardous substances and resultant damage resulted solely from an act or omission of a third party. No such defense is available if the release is caused by a person “whose act or omission occurs in connection with a contractual relationship, existing directly or indirectly, with the defendant has a direct or indirect contractual relationship.

The court looked to state law to determine whether the buyer held title, but ruled that the state mechanism for the tax sale did not control whether there was a direct or indirect contractual relationship between the entity that released the hazardous substances and the buyer. The court held that the acquisition of title by the tax collector did not prevent the buyer from having an indirect contractual relationship with the company that had released the hazardous substances. The court viewed the addition to CERCLA of the innocent landowner defense and the BFPP defense, as well as the explicit exception from liability for government entities involuntarily acquiring title as indications that Congress did not intend for an involuntary sale after a default on taxes to erase liability on the part of the buyer. The court reasoned that the stated defenses and exception showed that without those provisions the indirect contractual relationship extending through the chain of title would impose liability on them as well. If the buyer’s arguments were accepted, the court noted, the statute would create an incentive for prospective purchasers to wait until an owner of contaminated property defaulted on its taxes before the buyer acted, so that it would have the benefit of having CERCLA liability removed through the tax sale.

The buyer’s assertion that the statutory language “in connection with” limited liability to the person that acquired the property from the polluter was rejected by the court. The court specifically rejected the ruling in Cont’l Title Co. v. Peoples Gas Light & Coke Co., 1999 WL 1250666 (N.D.Ill. Sept. 15, 1999) and a line of cases in the Second Circuit that have read “in connection with” as precluding liability by purchasers who did not have a direct contract with the seller who caused the release of hazardous substances.[1] Such a limitation, the court stated, would conflict with the broad remedial purposes of CERCLA and would render the innocent-landowner defense largely superfluous.