Second Circuit Court of Appeals Clarifies Cost Recovery Rights Under CERCLA

In W.R. Grace & Co. v. Zotos International, Inc., ___ F3d___, WL 564048  (2nd Cir., 2009), the Second Circuit Court of Appeals addressed the question of whether and under what specific circumstances a potentially responsible party (PRP) can seek recovery of its response costs against another PRP under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

Three specific CERCLA provisions relating to cost recovery and contribution rights for parties which have incurred response costs cleaning up a contaminated site were the focus of the Second Circuit’s analysis in W.R. Grace:

• CERCLA §107(a)(4)(B), which provides that a party which meets one the four criteria for being deemed a PRP under CERCLA shall be liable for “(B) any other necessary costs of response incurred by any other person consistent with the national contingency plan;”; 
• CERCLA §113(f)(1) which states that “[a]ny person may seek contribution from any other person who is liable or potentially liable under [§107(a)]…during or following any civil action” under CERCLA Sections 106 or 107; and 
• CERCLA §113(f)(3)(B) which provides that a “person who has resolved its liability to the United States or a State for some or all of a response action…in an administrative or judicially approved settlement may seek contribution from any person who is not a party to” such settlement.

In W.R. Grace,  W. R. Grace    acquired  a contaminated site in a 1978 purchase of another company’s assets.  Grace alleged that Zotos International arranged for the disposal of hazardous wastes at this site.  In the l980s, Grace entered into two administrative Consent Orders with the New York DEC under which Grace agreed to investigate and remediate the site and reimburse the DEC for about $20,000 in State response costs.  Grace did not admit liability under these Consent Orders and voluntarily agreed to carry out the Orders’ investigative and remedial obligations.  Grace cleaned up the site and by 2004 had incurred $1.7 million in remedial costs.  

Grace commenced this action in 1998, originally seeking contribution from Zotos under CERCLA §113(f).   After a bench trial the District Court ruled that Grace was not entitled to contribution under that provision because it found that Grace was neither a party to a civil suit under CERCLA or a party to a settlement.   Grace appealed arguing that it was entitled to contribution under CERCLA §113(f)(3)(B) or, alternatively, that it could recover some of its costs under §107(a)(4)(B).

During the pendency of this action and appeal, the Supreme Court decided two cases -- critical to the Second Circuit’s decision in this case -- which resolved open questions regarding these cost recovery and contribution provisions of CERCLA.  In Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004), the Supreme Court held that a party can bring a contribution claim under §113(f)(1) only if that party had been subject to a civil action under CERCLA §106 or §107.  The Second Circuit correctly noted that previous to Cooper Industries most courts had held that only §113(f) provided a PRP with a cause of action for reimbursement from another PRP and that §107(a) was reserved for actions by innocent parties.  In United States v. Atlantic Research Corp, 127 S. Ct. 2331 (2007), however, the Supreme Court again clarified the scope of these provisions ruling that “the plain terms of §107(a)(4)(B) allow a PRP to recover costs [it incurred in cleaning up a site] from other PRPs.” 127 S Ct. at 2339. 

Given these rulings, the Second Circuit first analyzed whether Grace had a cause of action against Zotos for contribution under §113(f).   Grace acknowledged, and the Court agreed, that in light of Cooper Industries, it did not have a right of action under §113(f)(1) because it was not previously subject to a civil suit under either §106 or §107.  In deciding whether Grace had a cause of action under §113(f)(3)(B), the Court had to examine whether or not the Consent Order which Grace entered into with DEC qualified as an administrative settlement resolving Graces’ CERCLA liability.  The Court found that the Consent Order only settled the DEC’s state law claims against Grace and that it did not, in fact, resolve Grace’s liability under CERCLA.  The Court concluded that DEC Consent Order was not an “administrative settlement cognizable under section 113(f)(3)(B)” and, thus, affirmed the District Court’s decision denying Grace’s right to bring a contribution action against Zotos under this provision.

Next, the Court evaluated whether, in light of Atlantic Research, Grace could assert a claim under §107(a)(4)(B).  Zotos argued that because Grace was “compelled” to incur cleanup costs under the DEC Consent Order, that Grace had not incurred response costs within the meaning of §107(a).   Examining the definition of response costs and the scope of Atlantic Research,  the Second Circuit found that that cost recovery rights under §107 are not limited only to an “innocent” party (i.e., a PRP has a cause of action) but also held that this right is not limited only to a party which “voluntarily” cleans up a site.  Thus, the Court found that the fact that Grace, a PRP, entered into a Consent Order with DEC to cleanup the site did not preclude it from bringing an action pursuant to §107(a).  The Court  noted that Zotos’ interpretation of the statute would discourage parties from entering into voluntary agreements with the State which would lead to cleanups with proper regulatory oversight.  Moreover, in the Court’s view, it would be wholly contrary to CERCLA’s purpose to interpret the statute such that a PRP, such as Zotos, would bear no financial responsibility for the cleanup, while a party such as Grace, that agreed to voluntarily remediate the site, would bear the full financial burden of the remediation.

Finally, having decided that Grace could pursue its claim against Zotos under §107(a)(4)(B), the Court noted this subsection only allows for the recovery of “necessary cost of response…consistent with the national contingency plan.”  Since the District Court had decided that Grace had no cause of action at all, it had not made any ruling on the nature of the costs incurred by Grace.  Accordingly, the Second Circuit remanded the matter back to the District Court for further proceedings on this issue.