Ninth Circuit Rejects CERCLA’s “Third-Party Defense” In Connection with Tax Auction Sale

Ruling on a matter of “first impression,” the Ninth Circuit in California Department of Toxic Substances Control v Westside Delivery LLC, 2018 WL 1973715 (9th Cir. Apr. 27, 2018) held that real-estate purchasers who buy contaminated land through tax-sale default auctions are in “contractual privity” with prior owners and thus, may be subject to CERCLA liability.  Because the site was contaminated by the prior owner who shared a “contractual relationship” with the purchaser, CERCLA’s “third-party” defense did not apply.

From 1949 to 1990, a chemical recycling business (Davis Chemical) operated at the site, located in Los Angeles, California.  One of the company’s owners, Mr. Davis, also owned the property underlying the facility.  Prior to the site owner’s death, he transferred title to the facility into a family trust.  By 1990, the site was under the Department of Toxic Substances Control’s (“DTSC”) supervision.  DTSC quickly issued a cease-and-desist order and initiated site investigation activities.  After concluding the site was contaminated, DTSC required the family trust and customers of the recycling business to prepare a cleanup plan.

In 2009, before remediation activity ensued, the property became tax delinquent and the County of Los Angeles listed it for acquisition through a sale of tax defaulted properties now owned by the County. Under California’s state law, the property was listed at a tax auction by the County and sold to the current defendant, Westside Delivery, LLC.

After completing the cleanup in 2015, DTSC sued under CERCLA to recover cleanup costs from Westside Delivery.  The Ninth Circuit reversed a district court decision in favor of the defendant and remanded the case.  In what it termed the “one-transaction view of the sale,” it held the defendant did, in fact, engage in a contractual relationship with the Davis family trust that had owned the property prior to the tax sale.  The court concluded that a land transfer—even if it occurs through an involuntary proceeding such as a tax auction—nevertheless creates a contractual relationship between a prior owner and purchaser (i.e. the defendant).

The court also reversed based on its so-called “two-transaction view of the sale.”  Under this approach, the family trust and government (Los Angeles County) formed a contractual relationship when the County acquired the tax deed from the trust.  And a second contract was formed between the defendant and County of Los Angeles once he bought the property at the tax auction.  In so holding, the court declined to apply a CERCLA exemption (under 42 U.S.C. 9601 (35)(A)(ii)) which exempts from the definition of “contractual relationship” property obtained by a government entity by escheat or “other involuntary means.”  The Ninth Circuit held that property acquired by tax default was acquired by “other involuntary means”, but that the statutory exemption only applies when the government entity is a defendant, which was not the case.

Upon remand, because the defendant was in contractual privity with either the County of Los Angeles or the family trust, it is precluded from the third-party defense.  The Westside Delivery decision underscores the risk of blind transactions such as auctions and the importance of due diligence before engaging in any property transaction.  Of note, the site in Westside Delivery was not listed in the auction materials as a “Potentially Contaminated Parcel” despite the fact the site had been under DTSC’s control for two decades.  If that site was left off of the contaminated list, virtually any other site would pose the same risk.

 

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