Ninth Circuit Interprets Settlement Agreement to Weigh in on Claim Preclusion and CERCLA Cleanup Costs

In the recent CERCLA decision, GP Vincent II v. Est. of Beard, No. 21-16555, 2023 WL 3488113 (9th Cir. May 17, 2023), the Ninth Circuit reversed a motion to dismiss finding that a settlement agreement limited to the cleanup of contamination that had migrated to an adjacent property did not bar claims between parties associated with the property acting as the source of contamination (“Source Site”).

As with most CERCLA cost recovery and contribution actions, Beard features a complicated ownership and procedural history. Beginning in the early 1970’s through at least the early 1980’s, some of the parties in the action operated the Source Site as a manufacturing facility for circuit boards (“Manufacturing Defendants”). In 1992, the Manufacturing Defendants sold the Site to Mayhew Center (“Mayhew”) who used the facility for office space.

In 2007, an adjacent property owner, Walnut Creek Manor, discovered contamination at its property and sued Mayhew for CERCLA cost recovery and common law claims. Having prevailed at trial, Walnut Creek Manor was awarded $350,000 in past damages and $1,597 in future damages. As to the claims arising out of CERCLA and California’s Hazardous Substances Account Act (“HSAA”), the court ruled that Mayhew was 100% liable for any future response costs so long as consistent with the National Contingency Plan.

While post-trial motions were still pending, Mayhew sued the Manufacturing Defendants for contribution based on the theory that their circuit board operations resulted in the release of contamination impacting Walnut Creek Manor’s property.

The parties later entered into a settlement agreement and stipulated order involving both actions. In place of future damages awarded at trial, the parties created an escrow account for remediation. The settlement also required Mayhew to perform all cleanup activities at the Walnut Creek Manor property. Mayhew, however, ultimately failed to conduct the cleanup and subsequently defaulted on its promissory note.

Following Mayhew’s default, GP Vincent purchased Mayhew’s promissory note and foreclosed on and took title to the Source Site. In doing so, GP Vincent entered into an agreement with the Regional Water Quality Control Board (San Francisco) under the California Land Reuse and Revitalization Act (“CLRRA”). Per the CLRRA agreement, GP Vincent was to clean up the property and would be entitled to immunities allowed under CLRRA.

GP Vincent then sued the Manufacturing Defendants, Mayhew and others. The Manufacturing Defendants successfully moved to dismiss the action based on claim preclusion. The district court found that GP Vincent’s claims were the same as those in the prior action because both involved contamination from the Source Property. The district court also found that GP Vincent was in privity with Mayhew such that GP Vincent could be bound by the final judgment in the prior actions. After diving into the claim preclusion doctrine, the Ninth Circuit disagreed with the district court and reversed.

Among the elements to support claim preclusion are (1) Final Judgment on the Merits, (2) Identity of Claims, and (3) Privity. After finding that the final judgment element was satisfied, the Court focused on whether there was sufficient identity of claims between the prior actions and the later G.P. Vincent action. Underlying this analysis was the contrast between CERCLA’s cost recovery provision under Section 107 (42 U.S.C. § 9607) and its contribution provision found at Section 113 (42 U.S.C. § 9613). Relatedly, a second critical factor was the distinction between costs incurred to clean up the Source Site and those incurred to remediate the Walnut Creek Manor property.

In the prior action in which Mayhew sued the Manufacturing Defendants, Mayhew sought to apportion liability as between Mayhew and the Manufacturing Defendants for contamination that had migrated from the Source Site to the Walnut Creek Manor property. The Ninth Circuit viewed this action as a contribution action. By contrast, the Court viewed the more recent GP Vincent action, which involved the recovery of response costs to clean up the Source Site itself, as a cost recovery action.

In declining to find claim preclusion and reversing the district court’s dismissal order, the Court further explained: “[W]e do not hold that the distinctions between §107 and §113 CERCLA claims are dispositive, only that the record and facts of this case lead to the conclusion that the prior litigation concerned different liability than the present litigation.”

Having reversed on the issue of Unity of Interests, the Court did not analyze the Privity element.

As a takeaway, the Court’s analysis creates two potential (and ostensibly related) avenues to avoid issue preclusion in CERCLA actions: the dichotomy of cost recovery vs. contribution as defined by CERCLA (and the HSAA) as well as the physical claims seeking to address onsite vs. offsite contamination. For those drafting settlement agreements, the opinion reinforces the importance of defining the contamination subject to the agreement, the investigation and remediation areas in question, and legal theories embraced by the settlement.