Environmental Liability: Equipment Lessor Is Responsible Under CERCLA for Cleanup Costs As the Owner of a 'Facility'

The Facts

Crescent Plating Works was operational from the 1970s to 2003. As its name implies, it was a metal plating facility that used toxic substances in the process of dipping metal parts in a series of chemical baths. In 2003, the facility was found to be highly contaminated, and the EPA spent $1.5 million cleaning the property. As is its habit, the EPA wanted its money back and began searching for individuals or corporations that fell within one of the four groups.

James Saporito was allegedly involved with the plant in several ways, but the court focused on one particular relationship ' it was undisputed that Saporito owned, and leased to the facility, some of the equipment that was used in the plating process. The equipment included 14 rectifiers, a two-ton filter press, boilers, computers, and a semi-truck and trailer. None of the equipment was directly involved in the release of any chemicals, though all of the equipment was necessary to the plating process. Like most other equipment lessors, Saporito was not alleged to have manufactured, installed, operated, maintained, or directed the use of the equipment. Nevertheless, Judge Rebecca Pallmeyer held Saporito liable for all of the cleanup costs, $1.5 million, as an “owner” of the “facility.”

Mere Ownership

The basis for the ruling involved the CERCLA definitions. As noted earlier, a “facility” includes the buildings, structures, installation, equipment, pipe or pipeline, well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle rolling stock, aircraft or contaminated site or area. Since “equipment” is part of the “facility” the owner of the equipment can be liable. That's all it takes ' mere ownership. The landlord who owns the land and the building owner can likewise be liable for contamination found on their land or in their building, though they did nothing other than rent the property or the building to someone who allowed the release of a hazardous substance. It is the ultimate example of guilt by association. It is, also, the law. Is it fair to find the innocent landowner, the innocent building owner, or the innocent equipment lessor liable for the tenant's environmental sins? Of course not, but it is expedient. It is much easier to prove liability if one doesn't have to prove that the property owner, building owner, or equipment owner caused (or even knew about) the contamination. In many cases, the person causing the release can be identified, and it is not necessary to look to the guilt-by-association defendants. In this case, Judge Pallmeyer had to reach further because that's where the solvent defendant could be found. However, Saporito did not go down without a fight.

Not Without a Fight

During the course of the hearing, Saporito tried to argue that it was not fair to hold him responsible since all he was doing was leasing equipment to an independent party that then used the equipment to cause pollution. The court found that the plating line was “no less a facility than the land on which it operated.” Therefore, “an owner of equipment necessary to the operation of the plating line is no less an 'owner' than a part-owner of land.” In fact, according the court, the equipment owner is “arguably more culpable” than a land owner because “a land owner might not inquire into how her land is being used, but an equipment owner is likely to know exactly what her equipment can do.”

Saporito next argued that there was no evidence offered that connected any of his leased equipment to any release or threatened release or to any cleanup costs. The court found that CERCLA requires no such connection to be shown. It was enough that the equipment was a necessary part of a plating process that caused a release of a hazardous substance. The equipment need not be the actual cause of the release.

In what was a fairly creative defense, Saporito argued that he was entitled to the CERCLA exception that owners who are simply protecting a security interest are not liable. This is the exception that protects banks from liability, and Saporito felt he was like a bank in that he owned the equipment simply to secure his interest in a loan that he supposedly made to the company. The problem here was that he was unable to show that he made a loan to the company, which would be necessary to support his theory. According to the court, without that showing, a mere lease of equipment could not support the exception.

Finally, Saporito argued that even if he is liable, he did not own all of the equipment in the process, and some of the equipment was clearly shown not to ever have touched any hazardous substances. Therefore, he argued, the liability should be apportioned, and he should get only a very small (or no) percentage of the total liability. The court was unsympathetic and found:

Defendant's ownership of some of the equipment necessary to the plating process makes him comparable to a joint venturer. And apportionment is not appropriate for joint venturers.

Significant Repercussions

If it is confirmed that the mere owner of leased equipment, the operation of which is part of a line that results in a hazardous waste release, is responsible for the environmental cleanup caused by a sloppy lessee, the repercussions would seem to be significant. Certainly under the court's analysis, all equipment that is associated with the production line where a hazardous waste release is identified would fall within the terms of the ruling. That could include acid baths, printing presses, paint lines, white goods production and any line with a degreaser, among many others. Even if you limit liability to equipment that, in some manner, touches a hazardous substance or is in a production line that uses a hazardous substance, you have already placed at risk a large number of very profitable leasing companies in the United States as well as the many equipment sale/leaseback arrangements that occur on a daily basis.

And what about the court's comment that the “equipment owner is likely to know exactly what her equipment can do”? Does this really have anything to do with environmental liability? If it does, the possible universe of potentially responsible parties has grown significantly. Certainly a lessor of a backhoe knows that the backhoe could be used to break through a gas pipeline or scoop up coal tar tailings. Certainly a lessor of plastic totes knows that a company might use them to store solvents that might be spilled or otherwise released. Certainly a company that leases computers is aware that they could be used to monitor levels of hazardous substances in a production line. If the lessors of such equipment can be responsible for the contamination, there is not much left that can be safely leased.

The Saporito case is very disturbing in how far it goes to find a responsible party. Ownership liability under CERCLA has always been a broad concept, but this case seems to stand the concept on its head. If followed elsewhere, it is hard to believe that equipment leases are not going to be severely impacted. However, since CERCLA was enacted, cases that have liberally construed the provisions of Superfund have resulted in changes that provide limitations of environmental liability for large groups including lenders, trustees, and prospective land purchasers. Protection for equipment lessors should be part of this group. It would certainly help to get us back to the principle that the “polluter pays.”

A Few Suggestions

Until an exemption can be created, what can a lessor do? Though one should always consult legal counsel to obtain state-specific and lease-specific advice, here are a few suggestions if the equipment is to be leased to a company that may use hazardous materials in its process:

• Include a broad indemnification provision. Since the indemnification is only as deep as the pocket giving it, the provision should address how it will be paid if it becomes necessary.
• Include a provision that the use of the equipment is warranted to be in compliance with all federal, state, and local laws and regulations. The court stated that such a provision would not prevent liability to the lessor, but it will encourage the lessee to carefully watch its operations.
• Consider requiring the lessee to obtain environmental liability insurance with the lessor as a named insured.
• Include a provision that states that the lessee will not use any hazardous substances in its process and be sure to discuss this with the lessee prior to execution of the lease. If the lessee cannot make this representation, then you know that a problem could come up, and more investigation is needed prior to completing the lease:

1. Obtain representations as to how long production has been occurring at the site using hazardous substances;

2. Consider visiting the site to determine whether lessee runs a clean operation;

3. Consider requiring that a Phase II Environmental Site Assessment be conducted to determine if the site is already contaminated.

• Include a provision that allows lessor to visit the site at any time to view all operations so that it can determine if releases may be occurring.
• Include a provision that hazardous releases from the lessee's production process will constitute an event of default under the lease.
• Obtain information about the lessee's financial stability. Personal guarantees or the guaranty of a parent corporation may be appropriate.
• Include a provision allowing lessor to immediately terminate the lease and to transfer ownership of the equipment to lessee at the discretion of the lessor with remaining payments to be treated as a loan repayment. Though this would not necessarily eliminate liability for the lessor during the lease period, it might limit future or ongoing liability.
• Include a provision that lessee releases and waives any and all environmental claims against lessor. This will not prevent a regulatory agency from pursuing the lessor, but it will help to prevent the lessee from attempting to include lessor as a third party in an action brought only against lessee.

Conclusion

The court's decision in Saporito should send a clarion call to all lessors. If appealed, there could be a change in the outcome, but Judge Pallmeyer's decision is not obviously wrong. As a result, lessors would be well advised to take care in making equipment leases to companies that use any hazardous substances in their process.

Charles F. Becker is a partner in the Des Moines, IA, law firm of Belin McCormick, P.C., where he has advised businesses regarding Superfund regulation and environmental law for more than 25 years. Becker has done extensive lecturing on environmental issues and regularly blogs at http://www.iowaenvironmentallawupdate.com/.

Equipment lessors need to learn a new acronym: CERCLA. It stands for the Comprehensive Environmental Response, Compensation and Liability Act, and it has the potential to expose lessors to millions of dollars in environmental liability. This according to the recent Illinois federal district court case of United States v. Saporito, 210 WL 489703 (N.D.Ill. Feb. 9, 2010). Before discussing the case, some background is in order.

Cleanup of environmentally contaminated real estate is frequently a very expensive proposition. CERCLA (a/k/a Superfund) is the federal law that deals with the nation's most polluted sites. The cost of cleanup at an average CERCLA site is in excess of $30 million. To establish who must pay these costs, the federal law identifies four groups: 1) The current owner and/or operator of a facility; 2) the owner and operator of the facility at the time of the release; 3) anyone who arranges for the disposal of hazardous waste; and 4) a transporter of hazardous waste.

As with many federal laws, the devil is in the details ' in this case, the definitions. When CERCLA refers to the owner of a “facility,” it is not referring to just a building or even the real estate. Rather, a facility is defined under CERCLA regulations to be:

1. 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;
2. Any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located; but does not include any consumer product in consumer use or any vessel.

In other words, when you think “facility” under CERCLA, think a very broad universe. With these thoughts in mind, let's review the facts of United States
v. Saporito.

The Facts

Crescent Plating Works was operational from the 1970s to 2003. As its name implies, it was a metal plating facility that used toxic substances in the process of dipping metal parts in a series of chemical baths. In 2003, the facility was found to be highly contaminated, and the EPA spent $1.5 million cleaning the property. As is its habit, the EPA wanted its money back and began searching for individuals or corporations that fell within one of the four groups.

James Saporito was allegedly involved with the plant in several ways, but the court focused on one particular relationship ' it was undisputed that Saporito owned, and leased to the facility, some of the equipment that was used in the plating process. The equipment included 14 rectifiers, a two-ton filter press, boilers, computers, and a semi-truck and trailer. None of the equipment was directly involved in the release of any chemicals, though all of the equipment was necessary to the plating process. Like most other equipment lessors, Saporito was not alleged to have manufactured, installed, operated, maintained, or directed the use of the equipment. Nevertheless, Judge Rebecca Pallmeyer held Saporito liable for all of the cleanup costs, $1.5 million, as an “owner” of the “facility.”

Mere Ownership

The basis for the ruling involved the CERCLA definitions. As noted earlier, a “facility” includes the buildings, structures, installation, equipment, pipe or pipeline, well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle rolling stock, aircraft or contaminated site or area. Since “equipment” is part of the “facility” the owner of the equipment can be liable. That's all it takes ' mere ownership. The landlord who owns the land and the building owner can likewise be liable for contamination found on their land or in their building, though they did nothing other than rent the property or the building to someone who allowed the release of a hazardous substance. It is the ultimate example of guilt by association. It is, also, the law. Is it fair to find the innocent landowner, the innocent building owner, or the innocent equipment lessor liable for the tenant's environmental sins? Of course not, but it is expedient. It is much easier to prove liability if one doesn't have to prove that the property owner, building owner, or equipment owner caused (or even knew about) the contamination. In many cases, the person causing the release can be identified, and it is not necessary to look to the guilt-by-association defendants. In this case, Judge Pallmeyer had to reach further because that's where the solvent defendant could be found. However, Saporito did not go down without a fight.

Not Without a Fight

During the course of the hearing, Saporito tried to argue that it was not fair to hold him responsible since all he was doing was leasing equipment to an independent party that then used the equipment to cause pollution. The court found that the plating line was “no less a facility than the land on which it operated.” Therefore, “an owner of equipment necessary to the operation of the plating line is no less an 'owner' than a part-owner of land.” In fact, according the court, the equipment owner is “arguably more culpable” than a land owner because “a land owner might not inquire into how her land is being used, but an equipment owner is likely to know exactly what her equipment can do.”

Saporito next argued that there was no evidence offered that connected any of his leased equipment to any release or threatened release or to any cleanup costs. The court found that CERCLA requires no such connection to be shown. It was enough that the equipment was a necessary part of a plating process that caused a release of a hazardous substance. The equipment need not be the actual cause of the release.

In what was a fairly creative defense, Saporito argued that he was entitled to the CERCLA exception that owners who are simply protecting a security interest are not liable. This is the exception that protects banks from liability, and Saporito felt he was like a bank in that he owned the equipment simply to secure his interest in a loan that he supposedly made to the company. The problem here was that he was unable to show that he made a loan to the company, which would be necessary to support his theory. According to the court, without that showing, a mere lease of equipment could not support the exception.

Finally, Saporito argued that even if he is liable, he did not own all of the equipment in the process, and some of the equipment was clearly shown not to ever have touched any hazardous substances. Therefore, he argued, the liability should be apportioned, and he should get only a very small (or no) percentage of the total liability. The court was unsympathetic and found:

Defendant's ownership of some of the equipment necessary to the plating process makes him comparable to a joint venturer. And apportionment is not appropriate for joint venturers.

Significant Repercussions

If it is confirmed that the mere owner of leased equipment, the operation of which is part of a line that results in a hazardous waste release, is responsible for the environmental cleanup caused by a sloppy lessee, the repercussions would seem to be significant. Certainly under the court's analysis, all equipment that is associated with the production line where a hazardous waste release is identified would fall within the terms of the ruling. That could include acid baths, printing presses, paint lines, white goods production and any line with a degreaser, among many others. Even if you limit liability to equipment that, in some manner, touches a hazardous substance or is in a production line that uses a hazardous substance, you have already placed at risk a large number of very profitable leasing companies in the United States as well as the many equipment sale/leaseback arrangements that occur on a daily basis.

And what about the court's comment that the “equipment owner is likely to know exactly what her equipment can do”? Does this really have anything to do with environmental liability? If it does, the possible universe of potentially responsible parties has grown significantly. Certainly a lessor of a backhoe knows that the backhoe could be used to break through a gas pipeline or scoop up coal tar tailings. Certainly a lessor of plastic totes knows that a company might use them to store solvents that might be spilled or otherwise released. Certainly a company that leases computers is aware that they could be used to monitor levels of hazardous substances in a production line. If the lessors of such equipment can be responsible for the contamination, there is not much left that can be safely leased.

The Saporito case is very disturbing in how far it goes to find a responsible party. Ownership liability under CERCLA has always been a broad concept, but this case seems to stand the concept on its head. If followed elsewhere, it is hard to believe that equipment leases are not going to be severely impacted. However, since CERCLA was enacted, cases that have liberally construed the provisions of Superfund have resulted in changes that provide limitations of environmental liability for large groups including lenders, trustees, and prospective land purchasers. Protection for equipment lessors should be part of this group. It would certainly help to get us back to the principle that the “polluter pays.”

A Few Suggestions

Until an exemption can be created, what can a lessor do? Though one should always consult legal counsel to obtain state-specific and lease-specific advice, here are a few suggestions if the equipment is to be leased to a company that may use hazardous materials in its process:

• Include a broad indemnification provision. Since the indemnification is only as deep as the pocket giving it, the provision should address how it will be paid if it becomes necessary.
• Include a provision that the use of the equipment is warranted to be in compliance with all federal, state, and local laws and regulations. The court stated that such a provision would not prevent liability to the lessor, but it will encourage the lessee to carefully watch its operations.
• Consider requiring the lessee to obtain environmental liability insurance with the lessor as a named insured.
• Include a provision that states that the lessee will not use any hazardous substances in its process and be sure to discuss this with the lessee prior to execution of the lease. If the lessee cannot make this representation, then you know that a problem could come up, and more investigation is needed prior to completing the lease:

1. Obtain representations as to how long production has been occurring at the site using hazardous substances;

2. Consider visiting the site to determine whether lessee runs a clean operation;

3. Consider requiring that a Phase II Environmental Site Assessment be conducted to determine if the site is already contaminated.

• Include a provision that allows lessor to visit the site at any time to view all operations so that it can determine if releases may be occurring.
• Include a provision that hazardous releases from the lessee's production process will constitute an event of default under the lease.
• Obtain information about the lessee's financial stability. Personal guarantees or the guaranty of a parent corporation may be appropriate.
• Include a provision allowing lessor to immediately terminate the lease and to transfer ownership of the equipment to lessee at the discretion of the lessor with remaining payments to be treated as a loan repayment. Though this would not necessarily eliminate liability for the lessor during the lease period, it might limit future or ongoing liability.
• Include a provision that lessee releases and waives any and all environmental claims against lessor. This will not prevent a regulatory agency from pursuing the lessor, but it will help to prevent the lessee from attempting to include lessor as a third party in an action brought only against lessee.

Conclusion

The court's decision in Saporito should send a clarion call to all lessors. If appealed, there could be a change in the outcome, but Judge Pallmeyer's decision is not obviously wrong. As a result, lessors would be well advised to take care in making equipment leases to companies that use any hazardous substances in their process.

Charles F. Becker is a partner in the Des Moines, IA, law firm of Belin McCormick, P.C., where he has advised businesses regarding Superfund regulation and environmental law for more than 25 years. Becker has done extensive lecturing on environmental issues and regularly blogs at http://www.iowaenvironmentallawupdate.com/.