Tenth Circuit Bars Recovery of Cleanup Costs Under Collateral Source Rule

The Tenth Circuit is the first appellate court to endorse the growing number of district court decisions holding that the collateral source rule does not apply in contribution actions under section 113(f)(1) of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Affirming the district court[1], the Tenth Circuit agreed in Friedland v. TIC-Industrial Co. (“TIC”) that a potentially responsible party (“PRP”) that has recovered all of its cleanup costs from its insurers cannot recover additional funds it alleges are defense costs from other PRPs.[2] The Tenth Circuit concluded that a CERCLA contribution action is equivalent to “a claim between two or more culpable tortfeasors, and the policy underlying the collateral source rule—to provide the innocent party with the benefit of any windfall [due to double recovery]—is simply not advanced in such cases.”[3]

Factual Background

The case arises out of the cleanup of the Summitville Mine Superfund Site in Rio Grande County, Colorado (the “Site”), where gold and silver mining began in the late nineteenth century. The Summitville Consolidated Mining Company (“Summitville Mining”) operated large-scale, open-pit mining at the Site, using cyanide heap leaching to extract metals from ore, from 1984 to 1992, when it abandoned the operation and filed for bankruptcy. Shortly thereafter, EPA began response actions and ultimately placed the 1,400-acre Site on the National Priorities List under CERCLA.

In 1996 the United States filed a CERCLA cost recovery action for cleanup costs incurred at the Site against Robert M. Friedland, former director and officer of Summitville Mining. The parties resolved the cost recovery action with a consent decree under which Friedland agreed to pay the United States approximately $21 million. Friedland spent approximately $28 million in legal fees defending the cost-recovery action.[4]

While the government’s suit was pending, Friedland filed suit in Montana state court against Industrial Constructors Corp. (“ICC”) and its insurer, United States Guaranty and Fidelity Corp. (“USF&G”), among others, seeking indemnification pursuant to a contract for work performed by ICC at the Site. In the resulting settlement, ICC assigned its claims against its insurers, including USF&G, to Friedland.[5] Friedland then settled the assigned claims against USF&G., and initiated another action under his employer’s liability insurance policy against The Travelers Indemnity Company and related entities (“Travelers”) in Colorado state court. That case was also settled. In total, Friedland recovered more from the two settlements than he agreed to pay the United States.[6] Neither agreement made an express or implied allocation between indemnification for amounts paid in the government’s cost recovery action and legal defense costs.

Friedland then sought contribution under CERCLA from TIC and Geosyntec Consultants, Inc. (“Geosyntec”), who Friedland alleged were also PRPs at the Site. Friedland argued that, because his pleadings in the USF&G and Travelers lawsuits made separate claims for indemnification of response costs and recovery of defense costs, any recovery that he might obtain from TIC and Geosyntec should not be offset by the amounts of the prior settlements.[7]

The Collateral Source Rule and CERCLA’s Equitable Allocation Mandate

Under the collateral source rule, “[p]ayments made to or benefits conferred on the injured party from other sources are not credited against the tortfeasor's liability, although they cover all or a part of the harm for which the tortfeasor is liable.”[8] The rule permits an injured plaintiff to recover more than the damages he has suffered as the result of an injury, exactly what Friedland attempted to do in his CERCLA contribution suit against TIC and Geosyntec.

CERCLA section 113(f)(2) provides that “[a] person who has resolved its liability to the United States or a State in an administrative or judicially approved settlement shall not be liable for claims for contribution for matters addressed in the settlement. Such settlement does not discharge any of the other [PRPs] unless its terms so provide, but it reduces the potential liability of the others by the amount of the settlement.”[9]  In Friedland v. TIC, the Tenth Circuit explained that a claim for contribution is a claim “by and between jointly and severally liable parties for an appropriate division of the payment one of them has been compelled to make” and therefore the collateral source rule, designed to protect innocent plaintiffs and punish tortfeasors, does not apply.[10] Noting that it was “unaware of any court that has applied the collateral source rule to a claim for contribution, even outside the CERCLA context,”[11] the court endorsed the reasoning of district courts which have distinguished CERCLA PRPs from injury actions where the plaintiff is seeking to be made whole again.[12] Moreover, the Tenth Circuit reasoned, permitting a PRP to recover more than the response costs it paid out of pocket “flies in the face of CERCLA’s mandate to apportion those costs equitably among liable parties.”[13] The court rejected Friedland’s argument that the source of the payment is relevant as to whether the collateral source rule applies for the same reason, finding that the source of the payment is irrelevant in light of section 113(f)(1)’s “instruction to allocate response costs equitably.”[14]

Settlement Allocation and Common Damages

Relying on Hess Oil Virgin Islands Corp. v. UOP, Inc.[15] and United States v. Burlington Northern Railroad[16], Friedland also argued that the district court erred in reducing his damages by the full amount of the USF & G and Travelers settlements because those settlements did not represent damages in common with the ones at issue in his CERCLA contribution case. The Tenth Circuit rejected this argument and upheld the district court, which had found: (1) no indication that the USF&G and Travelers settlements were attributable to divisible harms and (2) that Friedland’s claim for defense costs arose directly from his liability for response costs. Because the insurance settlement agreements lacked an express allocation between response costs and defense costs, the district court credited the defendants with the full amount of Friedland’s prior settlements.[17] The Tenth Circuit agreed that the insurance settlements dealt with the same injury and damages being sought by Friedland in his contribution action, and rejected what it described as Friedland’s “apparent attempt to create divisible harm where it otherwise does not exist.”[18]

Conclusion

Federal district courts in Kansas and Texas have also considered the question of whether the collateral source rule applies in CERCLA cases to preclude the offset of cost recovery awards with the amounts of prior settlements with PRPs or insurers.[19] Both courts reached the same conclusion that the district court and now the Tenth Circuit did in Friedland v. TIC– the rule does not apply. The Tenth Circuit is the first federal appellate court to directly address the issue.

At this point it is well settled in the Tenth Circuit that, unless the harm to which a CERCLA settlement relates is divisible or the relevant agreement contains specific allocation language, a judgment against a non-settling defendant in a subsequent CERCLA suit is subject to an offset by the amount of a plaintiff’s prior settlement recovery. Therefore, if a harm is not divisible and a party seeks to allocate settlement amounts between cleanup, defense, and other costs, it should clearly spell out its intent to vary from the terms of CERCLA in its settlement agreement, regardless of the source of payments. Whether those terms will withstand challenge in court is another matter, but absent divisibility, it appears that explicit language may be a precondition to avoiding a subsequent offset in the Tenth Circuit. Any practitioner structuring CERCLA settlements that do not result in an allocation between all PRPs at a site should carefully assess federal and state precedent for the jurisdiction where a subsequent cost recovery action might be brought.

For more information, contact Linda Larson or any member of Marten Law Group’s Litigation practice group.