Ninth Circuit Rules CERCLA Liability Does Not Extend to Permit Holder

The Ninth Circuit has held that a permit holder does not hold enough of an interest in property to be considered an “owner” under CERCLA and therefore is not liable under the law. In Los Angeles v. San Pedro Boat Works,[1] the court concluded that a company that held a revocable permit for a shipbuilding berth (but which was not involved in shipbuilding operations) had no liability for cleaning up the contamination that occurred at the property. The case rejected the “de facto” owner approach adopted by the Second Circuit and sets up a split among the circuits.

Factual Background

San Pedro arose from a situation in which there was contamination resulting from ship-repair activities conducted at “Berth 44” in the Port of Los Angeles. The City of Los Angeles (the “City”) owns the Port and issues “revocable permits” for the use of berths through its Harbor Commission. In 1969, Pacific American purchased a revocable permit for Berth 44. Pacific American’s wholly owned subsidiary, San Pedro Boat Works, operated a ship-repair facility at Berth 44. Although Pacific American did not operate facilities at Berth 44, it held the permit for approximately ten months, assigning the permit to San Pedro Boat Works in 1970. Pacific American subsequently sold San Pedro Boat Works, and in 1993, BCI Coca-Cola Bottling Company of Los Angeles (“Coca-Cola”) acquired Pacific American.

In 1995, the City discovered a variety of contaminants, including hydrocarbons and heavy metals, in the soil and groundwater at Berth 44. The City remediated the contamination and filed suit against San Pedro Boat Works and Coca-Cola (as successor to Pacific American) to recover its cleanup costs. San Pedro Boat Works declared bankruptcy shortly after the City filed suit, leaving Coca-Cola as the sole defendant. The City sought to recover its cleanup costs from Coca-Cola, alleging (among other things) that Pacific American was liable as an owner under CERCLA because it had held the revocable permit for Berth 44. The district court concluded that the revocable permit was insufficient to impose owner liability as a matter of law, and the City appealed to the Ninth Circuit.

Ninth Circuit Decision

CERCLA imposes liability on individuals who owned a “facility” at the time that hazardous substances were disposed. The CERCLA definition of “owner” is circular – an owner is defined as “any person owning [a] facility.”[2] Courts have reached different conclusions as to what law to apply to determine ownership for CERCLA liability purposes. When considering an individual with a property interest that is less than full title – as in the case of a lease, easement, or license – courts have adopted two main approaches. In a previous Ninth Circuit decision, Long Beach Unified School District v. Dorothy B. Godwin California Living Trust, the court looked to the common law of the state in which the property was located to determine what constitutes “ownership.”[3] Under this definition, the court concluded that the holder of an easement was not an owner subject to CERCLA liability.[4] The Second Circuit, in Commander Oil Corp. v. Barlo Equipment Corp., adopted a different approach, focusing on the amount of control a lessee has over the property. The court concluded that a lessee could be subject to CERCLA owner liability only if it was a “de facto” owner.[5] The Second Circuit adopted a five-factor test to determine what constitutes a de facto owner: (1) whether the lease is for an extensive term and admits of no rights in the owner/lessor to determine how the property is used; (2) whether the lease cannot be terminated by the owner before it expires by its terms; (3) whether the lessee has the right to sublet all or some of the property without notifying the owner; (4) whether the lessee is responsible for payment of all taxes, assessments, insurance, and operation and maintenance costs; and (5) whether the lessee is responsible for making all structural and other repairs.[6]

In San Pedro the Ninth Circuit rejected what it called the Second Circuit’s “nebulous and flexible analytical framework,” in favor of the common law approach used in Long Beach.[7] Looking to common law, the court noted that California state courts have “consistently distinguished” title ownership from other possessory interests, such as revocable permits.[8] On this basis, the court concluded that the “holder of a permit for a specific use of real property is not the owner of that real property.”[9] The court posited that this definition best served the owner/operator distinction in the statute:

the CERCLA framework holds liable both the passive title owner of real property who acquiesces in another’s discharge of harmful pollutants on his real property or pollutes the land himself (“owner liability”), and the active (or negligent) operator of the facility who holds only a possessory interest in the real property but is in fact responsible for the discharge (“operator liability”). Congress struck this balance between two complementary forms of liability, and this court should uphold that legislative judgment.[10]

The San Pedro court also concluded that this definition best fit within CERCLA’s context of no-fault, joint and several liability – “After all, if Congress intended to impose [such] liability on the holder of a mere possessory interest in real property, the least it could do is speak clearly.”[11] Accordingly, the court held Pacific American (and thus Coca-Cola) was not liable for the Berth 44 contamination as an owner under CERCLA.

Conclusion

State common law governs what constitutes an owner under CERCLA within the Ninth Circuit. The Ninth Circuit has held that an easement holder and now a permit holder are not owners, and are not liable. Left for future litigation is the question of whether anything less than a fee interest gives rise to CERCLA owner liability.

For more information regarding CERCLA or the San Pedro case, please contact Russell Prugh or any other member of Marten Law’s Waste Cleanup practice group.