Ninth Circuit Finds Tax Sale Purchaser Liable under CERCLA

Manko, Gold, Katcher & Fox LLP
Maria C. Salvemini

May 14, 2018

The Ninth Circuit recently reversed a grant of summary judgment by the United States District Court for the Central District of California in California Department of Toxic Substances Control v. Westside Delivery, LLC, No. 16-56558, 2018 WL 1973715 (9th Cir. Apr. 27, 2018), holding that a defendant who purchased real property at a tax sale had a “contractual relationship” with the previous owner “in connection with” the polluting activities, and therefore was not entitled to a third-party defense under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). In this case, California’s environmental agency, the Department of Toxic Substances Control (DTSC), sought to recover clean up costs from a subsequent owner of the contaminated property and the owner asserted as a defense, recognized under CERCLA, that the contamination was caused by a third party prior to it taking title with whom it had no contractual relationship. The matter before the court was one of first impression in the Ninth Circuit: “Does a defendant who buys real property at a tax sale have a ‘contractual relationship’ with the previous owner of the property within the meaning of CERCLA?” Id. at *1. The court’s affirmative answer will give pause to prospective tax-defaulted property purchasers who may find themselves liable for cleanup costs under CERCLA.

Davis Chemical Company (Davis) recycled spent solvents at its Lost Angeles, California facility (the Site) from 1949 to 1990. In 1990, the DTSC ordered that all hazardous-waste activities stop. Two years later, the United States Environmental Protection Agency (EPA) conducted a preliminary assessment of the Site and found substantial spillage. The EPA referred the Site to DTSC for further investigation and remediation. During the same period, the then-owner, the Davis Family Trust (which the Court considered to be one and the same with the Davis Chemical Company) failed to pay property taxes and the Los Angeles County Tax Collector sold the Site at a tax auction in 2009. Auction materials did not list the Site as potentially contaminated, but they warned bidders that it was their responsibility to investigate the properties. Westside Delivery, LLC (Westside) submitted the highest bid and took title pursuant to a tax deed, but did not conduct any operations on the property. From 2010 through 2015, DTSC remediated the Site and then sued Westside under CERCLA to recover its cleanup costs.

Westside argued at trial that it was not liable because the contamination was caused by Davis with whom it had no contractual relationship. This defense is found in 42 U.S.C. § 9607(b)(3), which exempts current property owners from liability in certain situations, if they have no “contractual relationship” with the actual wrongdoer that is related to that party’s liability. When Congress passed the Superfund Amendments and Reauthorization Act (SARA) in 1986, it added an innocent landowner defense for purchasers of real property and expressly defined, for the first time, a “contractual relationship” to be those which occur by virtue of, among other things, documents which transfer title to property. Westside, which did not qualify for the innocent landowner defense, argued in the trial court that it was nevertheless entitled to the third-party defense because its tax deed, having been executed by the tax collector, did not give rise to a “contractual relationship” with Davis. The District Court agreed, granting summary judgment in favor of Westside.

On appeal, the Ninth Circuit reversed, holding that the tax deed constituted a sufficient “contractual relationship” to overcome the defense, confident that “Congress did not mean to treat tax-sale purchasers differently from typical purchasers.” Westside Delivery, 2018 WL 1973715, at *9. In arriving at its decision, the Ninth Circuit first rejected the notion that state law would apply in determining how to characterize the relationship between the Davis and Westside, which was critical because, under California law, a tax deed is considered a new title from the State, not merely a facilitation of transfer from the prior owner to the new owner. The Court then went on to analyze, as a matter of federal law, whether the tax sale constituted a “contractual relationship,” whether it was considered a transaction involving either one transfer or two.

As a single transaction, the Court concluded that under the statutory definition of “contractual relationship” a tax deed fits “comfortably” within the definition as an “instrument transferring…possession.” Westside Delivery, 2018 WL 1973715, at *6; see also 42 U.S.C. §9601(35)(A). As viewed by Ninth Circuit, prior to the tax deed, the pre-tax-sale owner had the legal right to possess the Site. The tax deed deprived the pre-tax-sale owner of its interest in the Site and vested the right to possession in Defendant. This, the Court explained, is the definition of a “transfer” in property law, and it was irrelevant that the tax collector effectuated the transfer.

As a two-transaction event, “one in which the government acquires an interest from the tax-defaulted owner and a second in which the government gives a new title to the tax-sale purchaser,” Westside Delivery, 2018 WL 1973715, at *6, the key question was whether there was a “contractual relationship” between the tax collector and Davis, because if it not, then the chain between Davis and Westside would have been broken. But relying on legislative history, case law, and the statutory definition that exempted only certain types of involuntary transfers from a “contractual relationship,” the Ninth Circuit found that the acquisition of title by the tax collector was a “contractual relationship” as defined by CERCLA and thus Westside and Davis were in privity with one another.

Having established that a contractual relationship existed in the case of a tax sale, the court then proceeded to determine whether that relationship was the type that would disqualify Westside from asserting the defense, that is, whether Davis’ polluting activities occurred “in connection with” its contractual relationship with Westside. The court rejected Westside’s contention that the relevant contract must relate to hazardous substances or grant control over the third party’s activities. The court found that such a narrow construction would allow defendant-purchasers to assert the third-party defense whenever the relevant contract did not relate to hazardous substances. Such a narrow interpretation would eliminate the need for the innocent landowner defense, as most purchasers would already be covered under the third-party defense. The court noted, however, that it also did not agree with DTSC’s argument that the “in connection with” condition was inapplicable in a case involving a defendant-owner seeking to avoid liability for contamination caused by a previous owner. Rather, “the ‘in connection with’ condition is intended to filter out those situations in which the previous owner’s polluting acts or omissions were unrelated to its status as a landowner.” Id. at *11. Accordingly, the Court found, an owner can assert a third-party defense despite a contractual relationship with a polluting party when the contamination is in no way related to the its status as owner of the land. Here, however, it was Davis’ actions that led to the release of hazardous substances on the Site while it owned the Site. Thus, the Ninth Circuit concluded that Westside was not entitled to the third-party defense and reversed and remanded.

The Ninth Circuit’s decision in Westside Delivery is likely to have a chilling effect on prospective purchasers who may receive more than what they bargained for when purchasing properties at a tax sale. Although engaging in due diligence before purchasing a tax-defaulted property would be the ideal approach, unlike in a private transaction setting, it is usually not a possibility. Prospective purchasers often lack the right to access a property before the tax auction, and a review of publicly available information may not give a full picture of a Site’s potential environmental liability. In contrast, performing parties will certainly benefit from the court’s holding in Westside Delivery. The Ninth Circuit’s broad interpretation of “contractual relationship” will aid in holding owners liable for remediation costs incurred under CERCLA.

This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions of Ms. Salvemini  and may not reflect the opinions of Synergy Environmental, Inc., Manko, Gold, Katcher, Fox, LLP or either of those firms’ clients.

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