Equipment Leasing and CERCLA Liability

Claims Based on Leased Equipment and Containers

The CERCLA statute is extraordinarily broad and intentionally so. Congress wanted to assure that parties that had anything to do with dangers resulting from hazardous substances could be held entirely liable for the entire cleanup of a contamination problem, even if the party had little or no 'fault' for a particular hazardous substance problem. Thus, for example, a party that was a passive owner of property could be held liable for the entire cleanup cost for contamination caused by a party leasing that property. Congress took this broad approach because the alternative was to require the government to conduct the cleanup and in part because those closest to the handling of hazardous substances had the most ability to prevent problems.

Statutory Terms

Section 107(a) of CERCLA has been interpreted to impose retroactive, strict, joint and several liability on, among others, the owner or operator of a 'facility' where there is a 'release or threat of a release' of a 'hazardous substance.'

These terms are quite elastic; they can encompass the owners and operators of leased equipment, not just the owners and operators of land that becomes contaminated. The definition of 'facility' in CERCLA states that:

'facility' means (A) any building, structure, installation, equipment, pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located … CERCLA, '101(9) (emphasis supplied).

This statutory language makes clear that a 'facility' such as an industrial plant may contain a number of 'facilities' consisting of leased equipment, such as leased tanks ('storage container'), industrial machinery ('equipment'), and forklifts or other 'motor vehicles.' If the storage containers, machinery, or vehicles are leased, this raises the possibility that the owner of such 'equipment' may be different from the plant owner and operator. If a contaminated plant site needs cleanup, and the plant owner or operator is bankrupt or otherwise judgment proof, it is legally possible under CERCLA to pursue the owners of the leased equipment, vehicles, or storage containers at the plant for the cleanup costs, certainly to the extent such equipment, tanks, or vehicles played any role in the contamination. At an old industrial plant where contamination is widespread and pervasive, even incidental leaks during the operation of a storage tank for chemicals, or from a vapor degreaser at an appliance assembly plant, or waste oil dripping from plant vehicles could become the basis for CERCLA claims against the owners of such equipment. Because of the nature of joint and several liability, such claims could be for the entire cleanup cost of the underlying plant.

CERCLA Case Law

Such claims against owners of equipment, containers, or vehicles have been rare, but they have been made. Existing case law affirms that shipping containers holding barrels, as well as barrels themselves, are 'facilities' separately giving rise to cleanup liability. U.S. v. Goodner Bros. Aircraft, Inc., 966 F.2d 380 (8th Cir. 1992) (dumping of solvents from barrels); U.S. v. M/V Santa Clara I, 887 F.Supp. 825, 841-42 (D.S.C. 1995) (loss overboard of containers of arsenic trioxide).

In the handful of reported cases involving equipment, containers, and vehicles, the courts seem to require some connection between the particular container, vehicle, or equipment and the release in order to impose CERCLA liability on the owner of such an item. Thus, for example, the court held that in the absence of evidence that some hazardous substances were in the containers, equipment, or vehicles owned by a party at a contaminated site, and were disposed of there, the court will not impose liability on the owner of such equipment or containers. Miami-Dade County, Fla. v. U.S., 345 F.Supp. 1319, 1340 (S.D. Fl. 2004) (aircraft engines); ACC Chemical Co. v. Halliburton Co., 932 F.Supp. 233 (S.D. Ia. 1995) (contractor's vacuum truck; plant provided PCE used by pump truck to flush lines at the plant). The analysis in the ACC case emphasizes that the contractor did not provide the hazardous substance ' PCE ' which the truck pumped through the pipes at the plant to clean out plastic residue. In addition, this was simply a service order, not a lease of the vehicle.

Products Liability Claims

Where equipment failures have resulted in releases of hazardous substances at plant sites, significant claims have been made against the manufacturers of the equipment on the basis of products liability theories. Thus, for example, where a degreaser failure resulted in chlorinated solvent contamination of a site, at least one plant owner has reportedly pursued product liability claims with some success. More recently, dry cleaners have also brought such claims, with mixed success.

Equipment leasing companies presumably address equipment failures ' and potential products liability claims ' in their leasing documents, in indemnification provisions, and in insurance arrangements. CERCLA claims arising from leased equipment, however, may prove to be a more attractive way in the future for a plant owner to pursue recovery than products liability claims. Insurance policies often now exclude environmental damage unless specific environmental coverage is purchased. In addition, the statute of limitations under state tort law is likely to be shorter in practice and more difficult to overcome than the statute of limitations applicable to CERCLA claims. Finally, equipment leasing companies ' as opposed to equipment manufacturers ' are seldom significant targets in the products liability context. Under a CERCLA theory, however, where ownership of the equipment rather than its original manufacturer is critical to the liability theory, the equipment leasing company has much greater potential liability exposure.

Expect an Increase in Claims Against Leasing Companies

Since the early 1990s until Atlantic Research, the case law had made private party CERCLA claims increasingly difficult and less attractive to bring. Courts gradually required private parties with any potential liability of their own to rely on contribution theories. Contribution theories posed two problems ' they only allowed recovery where a party had paid (or was obligated to pay) more than its fair share, and they shifted the burden of proving that fair share to the plaintiff, a difficult practical problem. The cost of such litigation meant that contribution claims were often uneconomic to bring. With the Supreme Court's decision in Cooper Industries v. Aviall, 125 S.Ct. 577, 543 U.S. 157 (2004), requiring that a party first be sued by the federal government or a state before it could bring a contribution claim, the hurdles to such claims became impossible in most circumstances.

With the Atlantic Research decision, however, the number of private party CERCLA claims is likely to dramatically increase as parties seek to much more widely spread the cost of cleaning up contaminated property. Plaintiffs don't need to be sued first by the government in order to bring such a claim. In addition, they may be able to recover some or all of their attorneys' fees.

With that increase in CERCLA litigation, it is reasonable to expect parties ' such as the owners of contaminated plant sites or municipalities addressing abandoned industrial property ' to start bringing claims against equipment leasing companies ' lessors of tanks, chemical processing equipment, shipping containers, and plant vehicles involved in the release of hazardous substances at a specific location.

Such claims would allege that these lessors are owners of 'facilities' ' tanks, shipping containers, chemical processing equipment ' from which releases of hazardous substances have occurred. Particularly where such equipment or containers became fixtures at an industrial plant, it would be reasonable to expect such claims to be made, even if the tank, equipment, or other item were later severed from the land and removed.

Equipment Leasing Company Responses

Because Atlantic Research has materially changed the legal landscape on private party CERCLA claims and has done so in ways likely to encourage many new claims against equipment leasing companies, it seems likely that few equipment leasing documents or practices adequately address such potential claims. Thus, for example, it may be possible for a plant owner to use CERCLA to sue the party who leased equipment to it for use at a contaminated plant site. Similarly, a neighbor affected by contamination may join the equipment leasing company as well as the equipment lessee, particularly if the lessee is a small company with few resources and no insurance.

We recommend several specific steps to address such potential claims.

1) Indemnity provisions. In order to forestall CERCLA claims by those leasing equipment, tanks, and vehicles at a plant site, we recommend that lease documents require lessees to provide an express waiver of CERCLA claims to the lessor. We also recommend that the lessee be required to defend and indemnify the lessor against any such CERCLA claim. The lessee controls the use and contents of the equipment, storage container, or vehicle. The lessee probably controls its maintenance. The equities are such that it is fair to request such waiver and indemnity provisions from those using and maintaining the equipment, containers, or vehicles, as that control can forestall or increase the chance of releasing hazardous substances to the environment.

2) EIL Insurance coverage requirements. Equipment leasing companies should review their insurance coverage to assure that their insurance policies will in fact cover environmental claims arising from the use of their leased equipment. Most comprehensive general liability ('CGL') policies now contain very strong pollution exclusions. Even with an enforceable waiver and indemnity provision in the lease documents, there could be third-party claims against the equipment leasing company, especially if the lessee is bankrupt and cleanup costs are substantial. These claims may not be covered unless the equipment lessor also has environmental impairment liability ('EIL') coverage, which can be very expensive. It may be appropriate to require insurance coverage by the lessee, adding the lessor as an additional insured to the appropriate insurance policy.

3) Due diligence. Where major equipment or large chemical storage containers are being leased for use at existing industrial plants, equipment lessors may want to conduct due diligence on the premises where the equipment may be a fixture. If for example, chemical processing equipment is to be used at a heavily contaminated plant site of a lessee in poor financial condition, the lessor may want to forego such a lease, as there is a higher chance of environmental claims against the lessor whose equipment is used at that plant site. Particularly for leasing involving large pieces of equipment which store or process petroleum or hazardous substances, it may be appropriate to have a Phase I Environmental Assessment performed on the premises where the equipment may become a fixture before finalizing such a lease. Such a report may help an equipment lessor avoid risking the assumption of liability for heavily contaminated premises.

4) Increase equipment maintenance and record equipment condition. While CERCLA is a strict liability statute, courts seem to require some causal connection between the equipment or container and the contamination complained of. One way to help defend against such claims is to assure that leased equipment has been carefully maintained before providing it to the lessee, and to rigorously document its mechanical integrity at the time of the lease. For example, in the case of a leased storage tank, documentation of the tank's mechanical integrity and condition would be helpful information in any defense, whether the claim for contamination is based on CERCLA or on common law.

In general, the greater the chance that the equipment, storage container, or vehicle will be involved in handling hazardous substances or petroleum, the greater the risk of resulting CERCLA claims, and the greater the need to revise practices to account for these risks.

Russell V. Randle ([email protected]) is a partner at Patton Boggs LLP in the Washington, DC, office. For more than 25 years he has litigated and negotiated major environmental cleanups and helped clients review, negotiate, and structure real estate and corporate transactions in order to redevelop and transfer environmentally distressed property. David G. Mayer ([email protected]) is a partner in the firm's Dallas office, where he practices with the Business Group with emphasis on domestic and international asset-based financing/leasing, corporate finance, and project development and finance. His areas of focus include energy, infrastructure, technology, and aviation.

Part Two of a Two-Part Series

Last month, we explained that the Supreme Court's unanimous recent decision in United States v. Atlantic Research Corporation , 127 S.Ct. 2331, 551 U.S. ____ (2007), No. 06-562 (June 11, 2007) potentially affects every commercial real estate transaction in the United States, including those involving fixtures and leased equipment. This decision does so because the Court confirmed that a private party cleaning up contaminated land has an effective judicial remedy under federal law, an issue which had been in serious dispute. Because of the breadth of the law under which it was decided ' the Comprehensive Environmental Response, Compensation and Liability Act ('CERCLA') or Superfund, 42 U.S.C. '9601, et seq. ' this decision affects not only owners and occupiers of land, but also the owners and users of leased equipment ' fixtures ' located on such land.

In this month's installment, we focus on some of the special issues facing equipment leasing as a result of this decision. We recommend some steps in order to address the increased litigation and liability risks facing owners and lessors of equipment, risks that few have addressed. Prudent parties in the equipment leasing business will revisit form contracts, review their insurance coverage, and address due diligence related to the parties and locations where their equipment is to be used.

Claims Based on Leased Equipment and Containers

The CERCLA statute is extraordinarily broad and intentionally so. Congress wanted to assure that parties that had anything to do with dangers resulting from hazardous substances could be held entirely liable for the entire cleanup of a contamination problem, even if the party had little or no 'fault' for a particular hazardous substance problem. Thus, for example, a party that was a passive owner of property could be held liable for the entire cleanup cost for contamination caused by a party leasing that property. Congress took this broad approach because the alternative was to require the government to conduct the cleanup and in part because those closest to the handling of hazardous substances had the most ability to prevent problems.

Statutory Terms

Section 107(a) of CERCLA has been interpreted to impose retroactive, strict, joint and several liability on, among others, the owner or operator of a 'facility' where there is a 'release or threat of a release' of a 'hazardous substance.'

These terms are quite elastic; they can encompass the owners and operators of leased equipment, not just the owners and operators of land that becomes contaminated. The definition of 'facility' in CERCLA states that:

'facility' means (A) any building, structure, installation, equipment, pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located … CERCLA, '101(9) (emphasis supplied).

This statutory language makes clear that a 'facility' such as an industrial plant may contain a number of 'facilities' consisting of leased equipment, such as leased tanks ('storage container'), industrial machinery ('equipment'), and forklifts or other 'motor vehicles.' If the storage containers, machinery, or vehicles are leased, this raises the possibility that the owner of such 'equipment' may be different from the plant owner and operator. If a contaminated plant site needs cleanup, and the plant owner or operator is bankrupt or otherwise judgment proof, it is legally possible under CERCLA to pursue the owners of the leased equipment, vehicles, or storage containers at the plant for the cleanup costs, certainly to the extent such equipment, tanks, or vehicles played any role in the contamination. At an old industrial plant where contamination is widespread and pervasive, even incidental leaks during the operation of a storage tank for chemicals, or from a vapor degreaser at an appliance assembly plant, or waste oil dripping from plant vehicles could become the basis for CERCLA claims against the owners of such equipment. Because of the nature of joint and several liability, such claims could be for the entire cleanup cost of the underlying plant.

CERCLA Case Law

Such claims against owners of equipment, containers, or vehicles have been rare, but they have been made. Existing case law affirms that shipping containers holding barrels, as well as barrels themselves, are 'facilities' separately giving rise to cleanup liability. U.S. v. Goodner Bros. Aircraft, Inc. , 966 F.2d 380 (8th Cir. 1992) (dumping of solvents from barrels); U.S. v. M/V Santa Clara I, 887 F.Supp. 825, 841-42 (D.S.C. 1995) (loss overboard of containers of arsenic trioxide).

In the handful of reported cases involving equipment, containers, and vehicles, the courts seem to require some connection between the particular container, vehicle, or equipment and the release in order to impose CERCLA liability on the owner of such an item. Thus, for example, the court held that in the absence of evidence that some hazardous substances were in the containers, equipment, or vehicles owned by a party at a contaminated site, and were disposed of there, the court will not impose liability on the owner of such equipment or containers. Miami-Dade County, Fla. v. U.S. , 345 F.Supp. 1319, 1340 (S.D. Fl. 2004) (aircraft engines); ACC Chemical Co. v. Halliburton Co ., 932 F.Supp. 233 (S.D. Ia. 1995) (contractor's vacuum truck; plant provided PCE used by pump truck to flush lines at the plant). The analysis in the ACC case emphasizes that the contractor did not provide the hazardous substance ' PCE ' which the truck pumped through the pipes at the plant to clean out plastic residue. In addition, this was simply a service order, not a lease of the vehicle.

Products Liability Claims

Where equipment failures have resulted in releases of hazardous substances at plant sites, significant claims have been made against the manufacturers of the equipment on the basis of products liability theories. Thus, for example, where a degreaser failure resulted in chlorinated solvent contamination of a site, at least one plant owner has reportedly pursued product liability claims with some success. More recently, dry cleaners have also brought such claims, with mixed success.

Equipment leasing companies presumably address equipment failures ' and potential products liability claims ' in their leasing documents, in indemnification provisions, and in insurance arrangements. CERCLA claims arising from leased equipment, however, may prove to be a more attractive way in the future for a plant owner to pursue recovery than products liability claims. Insurance policies often now exclude environmental damage unless specific environmental coverage is purchased. In addition, the statute of limitations under state tort law is likely to be shorter in practice and more difficult to overcome than the statute of limitations applicable to CERCLA claims. Finally, equipment leasing companies ' as opposed to equipment manufacturers ' are seldom significant targets in the products liability context. Under a CERCLA theory, however, where ownership of the equipment rather than its original manufacturer is critical to the liability theory, the equipment leasing company has much greater potential liability exposure.

Expect an Increase in Claims Against Leasing Companies

Since the early 1990s until Atlantic Research, the case law had made private party CERCLA claims increasingly difficult and less attractive to bring. Courts gradually required private parties with any potential liability of their own to rely on contribution theories. Contribution theories posed two problems ' they only allowed recovery where a party had paid (or was obligated to pay) more than its fair share, and they shifted the burden of proving that fair share to the plaintiff, a difficult practical problem. The cost of such litigation meant that contribution claims were often uneconomic to bring. With the Supreme Court's decision in Cooper Industries v. Aviall , 125 S.Ct. 577, 543 U.S. 157 (2004), requiring that a party first be sued by the federal government or a state before it could bring a contribution claim, the hurdles to such claims became impossible in most circumstances.

With the Atlantic Research decision, however, the number of private party CERCLA claims is likely to dramatically increase as parties seek to much more widely spread the cost of cleaning up contaminated property. Plaintiffs don't need to be sued first by the government in order to bring such a claim. In addition, they may be able to recover some or all of their attorneys' fees.

With that increase in CERCLA litigation, it is reasonable to expect parties ' such as the owners of contaminated plant sites or municipalities addressing abandoned industrial property ' to start bringing claims against equipment leasing companies ' lessors of tanks, chemical processing equipment, shipping containers, and plant vehicles involved in the release of hazardous substances at a specific location.

Such claims would allege that these lessors are owners of 'facilities' ' tanks, shipping containers, chemical processing equipment ' from which releases of hazardous substances have occurred. Particularly where such equipment or containers became fixtures at an industrial plant, it would be reasonable to expect such claims to be made, even if the tank, equipment, or other item were later severed from the land and removed.

Equipment Leasing Company Responses

Because Atlantic Research has materially changed the legal landscape on private party CERCLA claims and has done so in ways likely to encourage many new claims against equipment leasing companies, it seems likely that few equipment leasing documents or practices adequately address such potential claims. Thus, for example, it may be possible for a plant owner to use CERCLA to sue the party who leased equipment to it for use at a contaminated plant site. Similarly, a neighbor affected by contamination may join the equipment leasing company as well as the equipment lessee, particularly if the lessee is a small company with few resources and no insurance.

We recommend several specific steps to address such potential claims.

1) Indemnity provisions. In order to forestall CERCLA claims by those leasing equipment, tanks, and vehicles at a plant site, we recommend that lease documents require lessees to provide an express waiver of CERCLA claims to the lessor. We also recommend that the lessee be required to defend and indemnify the lessor against any such CERCLA claim. The lessee controls the use and contents of the equipment, storage container, or vehicle. The lessee probably controls its maintenance. The equities are such that it is fair to request such waiver and indemnity provisions from those using and maintaining the equipment, containers, or vehicles, as that control can forestall or increase the chance of releasing hazardous substances to the environment.

2) EIL Insurance coverage requirements. Equipment leasing companies should review their insurance coverage to assure that their insurance policies will in fact cover environmental claims arising from the use of their leased equipment. Most comprehensive general liability ('CGL') policies now contain very strong pollution exclusions. Even with an enforceable waiver and indemnity provision in the lease documents, there could be third-party claims against the equipment leasing company, especially if the lessee is bankrupt and cleanup costs are substantial. These claims may not be covered unless the equipment lessor also has environmental impairment liability ('EIL') coverage, which can be very expensive. It may be appropriate to require insurance coverage by the lessee, adding the lessor as an additional insured to the appropriate insurance policy.

3) Due diligence. Where major equipment or large chemical storage containers are being leased for use at existing industrial plants, equipment lessors may want to conduct due diligence on the premises where the equipment may be a fixture. If for example, chemical processing equipment is to be used at a heavily contaminated plant site of a lessee in poor financial condition, the lessor may want to forego such a lease, as there is a higher chance of environmental claims against the lessor whose equipment is used at that plant site. Particularly for leasing involving large pieces of equipment which store or process petroleum or hazardous substances, it may be appropriate to have a Phase I Environmental Assessment performed on the premises where the equipment may become a fixture before finalizing such a lease. Such a report may help an equipment lessor avoid risking the assumption of liability for heavily contaminated premises.

4) Increase equipment maintenance and record equipment condition. While CERCLA is a strict liability statute, courts seem to require some causal connection between the equipment or container and the contamination complained of. One way to help defend against such claims is to assure that leased equipment has been carefully maintained before providing it to the lessee, and to rigorously document its mechanical integrity at the time of the lease. For example, in the case of a leased storage tank, documentation of the tank's mechanical integrity and condition would be helpful information in any defense, whether the claim for contamination is based on CERCLA or on common law.

In general, the greater the chance that the equipment, storage container, or vehicle will be involved in handling hazardous substances or petroleum, the greater the risk of resulting CERCLA claims, and the greater the need to revise practices to account for these risks.

Russell V. Randle ([email protected]) is a partner at Patton Boggs LLP in the Washington, DC, office. For more than 25 years he has litigated and negotiated major environmental cleanups and helped clients review, negotiate, and structure real estate and corporate transactions in order to redevelop and transfer environmentally distressed property. David G. Mayer ([email protected]) is a partner in the firm's Dallas office, where he practices with the Business Group with emphasis on domestic and international asset-based financing/leasing, corporate finance, and project development and finance. His areas of focus include energy, infrastructure, technology, and aviation.