Third Circuit Clarifies Availability of Cost Recovery Claims Under Section 107 of CERCLA

May 19, 2010

In an April 12, 2010, opinion, the U.S. Court of Appeals for the Third Circuit clarified which claims are available to different classes of potentially responsible parties (PRPs) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). In Agere Systems Inc. v. Advanced Environmental Technology Corp., No. 09-1814, 602 F.3d 204, 2010 WL 1427582 (3d Cir. April 12, 2010), the court denied Section 107 cost recovery claims to PRPs who had been granted contribution protection after settling with EPA or a state, while allowing Section 107 claims by PRPs involved in private party settlements.

CERCLA provides PRPs with three potential avenues to recover costs from other PRPs. Under Section 107(a), a party that has incurred costs to clean up a contaminated site may recover those costs from other PRPs. Courts have generally found Section 107 imposes joint and several liability such that the plaintiff could recover 100 percent of its costs from defendants. Defendants in turn could bring contribution claims to defray the potential impact of joint and several liability. Under Section 113(f)(1), a PRP may seek contribution from any other PRP during or following a civil action under Section 106 or 107 of CERCLA. See Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004) (denying PRP a contribution action under 113(f)(1) unless it had been sued in a 106 or 107 action). Under Section 113(f)(3)(B), a PRP who has resolved CERCLA liability to a governmental unit through settlement may seek contribution from any other PRP. Courts applying Section 113 allocate response costs among liable PRPs based on their “fair share” using equitable factors. In Agere, five plaintiffs who incurred costs in the cleanup of the Boarhead Farms Superfund Site in Pennsylvania asserted claims under both Sections 107 and 113.

One significant benefit that CERCLA gives to PRPs who enter into a settlement with the government is contribution protection — such PRPs are shielded from future contribution liability for the matters addressed in the settlement that might have been brought against them by other PRPs. In the Third Circuit, however, this protection now comes with a price. Shielded PRPs do not have recourse to the potentially higher joint and several recovery provided under 107(a), and must instead rely solely on recovery based on equitable (and several) contribution liability under 113(f). 

The court based its holding in part on the desire to balance the allocation of cleanup costs. When a plaintiff PRP brings a 107(a) action for complete recovery against a defendant PRP, the defendant generally can file a contribution counterclaim under 113(f)(1). In this way, as recognized by the Supreme Court in United States v. Atlantic Research, 551 U.S. 128 (2007), the defendant can “fend off” the joint and several claim and thereby effectively convert the action to one in contribution where each PRP, including the plaintiff, can be assigned some share of liability. In cases where a PRP has gained contribution protection, however, the Third Circuit found this strategy becomes impossible; the defendant would be barred from bringing any 113(f) contribution counterclaim in response to the 107(a) claim and thus, a shielded plaintiff could potentially recover 100 percent of its costs — including its own share — from the defendant. The Third Circuit  found this to be “a perverse result, since a primary goal of CERCLA is to make polluters pay.”  Thus, the court denied the 107(a) claims to the PRPs with contribution protection.

While the court closed the door of 107(a) availability to one group of PRPs, it opened it to another. Although most of the plaintiffs in this case entered into two consent decrees with the government, Agere Systems Inc. and TI Group Automotive Systems LLC did not. These two did, however, voluntarily enter into private settlement agreements with the other plaintiffs, wherein all the settling parties contributed to a common fund from which the costs of remediation were paid. Section 107(a) permits recovery of costs a party “incurred” in cleaning a site. In Atlantic Research, the Supreme Court found that that this language does not encompass costs paid as a result of a court judgment or settlement agreement payment where such payments are not incurred directly in cleanup activities, but rather reimburse other parties for costs they incurred. Carpenter argued that, because Agere and TI’s payments were made in connection with a settlement agreement, they did not qualify for 107(a) recovery.

The Court of Appeals disagreed, holding that the Supreme Court’s decision was made in a different context and noting the distinction between a settlement agreement which requires a party to reimburse others for past costs incurred and an agreement which requires the party to conduct on-going work and incur its own response costs. In addition, the ordinary meaning of the word “incurred” should include all payments made for on-going work, regardless of whether payments were made into a group trust or directly incurred in cleanup activities. The court seemed particularly concerned that Agere and TI be given adequate opportunities for contribution recovery. These parties were not eligible for 113(f)(1) contribution claims as they were never subject to a civil action under CERCLA. Nor were they eligible for 113(f)(3)(B) contribution claims as they had not “resolved” their liability to any governmental unit. To also deny them a 107(a) claim would act as a complete bar to recourse under CERCLA. This holding, the court said, also encourages PRPs to voluntarily take responsibility for cleanup costs by ensuring that, regardless of government involvement, they will have some cost recovery claim available to them.

This decision attempts to resolve questions raised by the recent Supreme Court CERCLA decisions as to when Section 107 or 113 are applicable, and will likely have far-reaching impacts, not the least of which will be felt in bankruptcy proceedings. Bankruptcy Code Section 502(e)(1)(B) mandates disallowance of contingent contribution claims of entities co-liable with the debtor to a third-party creditor. Section 113(f) contribution claims against bankrupt PRPs for their share of future cleanup costs are particularly vulnerable to this provision of the Code. In denying 107(a) direct actions to PRPs who have gained contribution protection through settlements with the government, and limiting such PRPs to contribution claims, the Third Circuit has also significantly limited (if not eliminated) the ability of these PRPs to recover any future costs against a PRP debtor’s estate.

Courts across the country, including the Supreme Court, have long wrestled with the interplay between 107(a) and 113(f). Though not clear in the statute, it seems increasingly evident that, at least in the Third Circuit, while PRPs are not barred outright from a 107(a) claim, they may not utilize the more generous joint and several liability aspects of 107(a) if the PRP has obtained contribution protection.

A question remains, however, as to whether costs incurred “outside” the settlement agreement and, thus, not subject to contribution protection, could be recovered as part of the 113 claim based on that settlement or a 107 claim. The line between 107 and 113 recoverable costs continues to be somewhat muddied as a result of the Supreme Court decisions, and the circuit courts continue to try to define these lines.

For more information on this alert, please contact the lawyers listed below:

James Dragna

David Halverson

This article was originally published by Bingham McCutchen LLP.