Inheritance of Contaminated Property: Blessing or Curse?
By Thomas A. Packer and James W. Miller Jr.
British novelist Samuel Butler said that when you tell someone you have left him a legacy, the only decent thing to do is to die at once. If a legacy includes contaminated real property, however, someone may first want to warn the heir. In a perfect world, only assets without liabilities would survive death. The world being far from perfect, however, one must keep in mind the biblical admonition that the sins of the fathers will be visited on the children. especially when it comes to environmental sins, the whole family (and its insurers) should be prepared.
Although the netherworld may provide decedents with a safe haven from environmental liability, their beneficiaries may not be so fortunate as a result of state survival statutes. The owners of contaminated real property formerly owned by a decedent frequently sue the decedent's estate under both state and federal law for the costs of investigation and remediation. As state and federal environmental liability expands, the possibility that a decedent may have only liabilities to leave behind becomes more likely.
Nevertheless, suing a decedent's estate or trust is not a simple matter. Environmental suits against decedents estates and trusts are complicated by the unique way in which these entities own real property.
Ownership interests in decedents' estates and trust assets are divided among the beneficiaries of the estate or trust and the fiduciary who manages the assets. Thus, in sorting out who should bear the liability for contaminated property, judges and juries have several choices.
This article explains how the liability of decedents' estates and trusts is determined under the most common form of pollution liability - that arising under the federal Comprehensive Environmental Response, Compen-sation, and Liability Act of 1980, 42 U.S.C. ¤¤ 9601 et seq. (CERCLA).
Decedents' estates and trusts also may be liable under state environmental statutes and the growing body of state common law imposing liability for nuisance and trespass. This article also analyzes how this expansive liability may be limited and offers some special concerns for liability insurers. Because the scope of pollution liability for decedents' estates and trusts is growing, those who intend to make a testamentary transfer of contaminated property need to consider the environmental liability that may be transferred with it. Those who administer decedents' assets should realize that they also may be exposed to CERCLA liability.
Overview of CERCLA Liability
Any analysis of decedents' estates' and trusts' liability under CERCLA begins, ironically, with the recognition that the statute does not expressly include them within its scope. This does not prevent decedents' estates and trusts from being regularly caught in CERCLA's ever-widening web. The operative section is 42 U.S.C. ¤ 9607(a), which imposes liability on four classes of "responsible persons":
- the current owners or operators of a contaminated property;
- owners or operators of the property at the time of hazardous waste disposal;
- persons who arrange for disposal or treatment of hazardous substances at the prop-erty; and
- persons who accepted hazardous substances for transport to the property.
The reported cases analyzing the CERCLA liability of decedents' estates and trusts focus on the first two classes involving "owners or operators."
CERCLA does not address whether liability may be imposed on the estates or trusts of these "responsible persons." CERCLA defines 'person' but not 'estate' or 'trust.' 42 U.S.C. ¤ 9601(21). CERCLA only addresses estates and trusts expressly in the exception to liability for property acquired by inheritance or bequest. 42 U.S.C. ¤ 9607(b)(3). This section provides the 'innocent landowner' defense when certain conditions are met, as discussed below. This section contains one requirement that the responsible third party's act not occur in connection with a 'contractual relationship' with the innocent landowner. The definition of 'contractual relationship' specifically excludes instruments transferring title by inheritance or bequest. 42 U.S.C. ¤ 9601(35)(A). Because a decedent's estate or trust typically comes into existence after the contamination has occurred, this exception can be very useful.
Decedents Estates Liability: Personhood, Precautions and Preemption
CERCLA liability for a decedent's estate can arise at several points in the CERCLA liability scheme. Initially, liability turns on whether the estate is a ÒpersonÓ under CERCLA. 42 U.S.C. ¤ 9607. If the estate is a 'person,' the next step is to determine whether the estate can invoke the innocent landowner defense provided in 42 U.S.C. ¤ 9607(b)(3). If the estate is not an 'innocent landowner,' the issue is whether state law may prevent the estate from being sued. Finally, if the estate does find protection under state law, the question is whether CERCLA preempts the state law.
Case law reveals that CERCLA liability is no more likely to arise at one of these steps than at the others. Of the eight reported cases that have directly considered estate liability under CERCLA, five have found in favor of liability and three have found against it. Two courts reached opposite results on whether a decedent's estate is a 'person. ' One case found that a decedent's estate is not an Òinnocent landowner. Three decisions held that CERCLA preempts state non-claim statutes. A closer look at these decisions shows that the creativity with which courts find liability indicates that liability is more likely than not.
Decedent's Estate as a 'Person'
The two cases that discuss whether a decedent's estate is a 'person' under CERCLA are prime examples of the trend in implementing CERCLA's mandate to clean up the environment. Even though estates are not listed as 'persons,' courts analogize estates to other allegedly similar entities. In Bowen Engineering v. Estate of Reeve, 799 F. Supp. 467 (D. N.J. 1992), a former owner of contaminated property sued a decedent's estate under CERCLA for cleanup costs. The decedent was the president and principal shareholder of a company that owned the property when the contamination occurred. The estate claimed that it was not a 'person' because it was not a listed entity in the CERCLA definition. The court held that the definition of 'person' is not limited to those entities listed in 42 U.S.C. ¤ 9601(21). It relied on U.S. v. Sharon Steel Corp., 681 F. Supp. 1492 (D. Utah 1987), in which a liquidating trust for a dissolved corporation was liable even though Òliquidating trust was not included in the definition of 'person.'
In Chesapeake and Potomac Telephone Co. v. Peck Iron & Metal, 814 F. Supp. 1285 (E.D. Va. 1993), the court arrived at a different conclusion. It cited a line of cases holding that a corporation whose assets have been distributed (a 'dead and buried' corporation) cannot be a 'person' under CERCLA. This court found that a closed estate was like the 'dead and buried' corporation and, therefore, could not be held liable under CERCLA.
The Chesapeake ruling is encouraging for the defense, but the rationale in both Bowen and Chesapeake gives pause. In both decisions, the courts went beyond the language of the statute to determine whether a decedent's estate was a 'person.' That neither court felt bound by the terms of the statute indicates a general application of CERCLA as a broad form of liability.
Decedents Estates and the Innocent Landowner Defense
All hope is not lost, however, for decedents' estates found to be 'persons.' They may still be Òinnocent landowners. An estate cannot achieve this status automatically. CERCLA excludes property acquired by inheritance or bequest from liability when three conditions exist: (1) the release of contamination was caused solely by a third party; (2) the landowner exercised due care with respect to the hazardous substance; and (3) the landowner took precautions against both the foreseeable acts of the third party and the consequences that could result from those acts. This defense appears to be perfectly suited to a decedent's estate. Of course, the estate must make certain showings before the defense will apply.
One estate learned this lesson the hard way in Soo Line R. Co. v. B. J. Carney Co., 797 F. Supp. 1472 (D. Minn. 1992). In Soo Line, several decedents' estates and testamentary trusts contaminated a parcel of property that they leased. The landlord filed a claim against the estates and other tenants of the property under CERCLA for cleanup costs. The estates responded that they had received their interests in the property by inheritance and were 'innocent landowners.' The court was unimpressed, stating that inheritance alone is insufficient for 'innocent landowner' status. The estates failed to show a sole third party cause and that they had taken the necessary precautions against contamination. Without evidence of these other elements of the defense, 'innocent landowner' status was not available.
Soo Line is particularly instructive when one considers that an estate or testamentary trust may not need much evidence of due care to achieve 'innocent landowner' status. Under CERCLA, persons who receive contaminated property through inheritances and bequests are to be treated with the most leniency. United States v. Pac. Hide & Fur Depot, Inc., 716 F. Supp. 1341 (D. Idaho 1989). The defendants in Pacific Hide were not estates but rather individuals who had received the property through an inter vivos gift from their father while they were teenagers. The court considered the gift to be no different from a bequest, which was "precisely the situation designed to be covered by the innocent landowner defense." 716 F. Supp. at 1348. The court found that the individuals acted reasonably with regard to the contamination by doing nothing, even though they had worked at the salvage yard as teenagers and had holes eaten in their clothes from battery acid.
Even though innocent landowner status is not automatic, an estate may at least meet its due care requirement simply by showing that it had no specialized knowledge of the contamination at the time it received its interest in the contaminated property. Decedents' estates typically exist for the sole purpose of holding the decedent's property pending distribution and may have no knowledge of prior operations on estate property. When properly asserted, 'innocent landowner' status may be one of the decedent's estate's best options.
For decedents' estates that cannot obtain Òinnocent landownerÓ status, the last line of defense is a state law non-claim statute. Non-claim statutes limit the lifespan of a decedent's estate for purposes of claims against it. An estate is, after all, a state law creation and, as such, state law defines the estate's existence. An estate that is otherwise liable under CERCLA may not exist under state law. The problem is that CERCLA often preempts state law non-claim statutes.
The first case to recognize a state non-claim statute as a bar to a CERCLA claim involved two former owners of contaminated property defending a cleanup action. Snediker Developers Ltd. Partnership v. Evans, 773 F. Supp. 984 (E.D. Mich. 1991). One codefendant filed a cross-claim for contribution under 42 U.S.C. ¤ 9613(f). The defendants had inherited the property from the person who owned it when the contamination occurred. The cross-claimant argued that it had claim against the estate under Michigan probate law. The court held that the cross-claimant had no potential CERCLA claim against the estate because it was not timely under the Michigan statute. By recognizing that the Michigan statute would preclude a CERCLA action against the estate, the court impliedly endorsed the state non-claim statute as a bar to a CERCLA action. The court did not squarely address the preemption issue, however.
Nevertheless, a state non-claim statute can withstand a detailed preemption analysis by a sympathetic court. In Witco Corp. v. Beekhuis, 38 F. 3d 682 (D. Del. 1993), a cross-claimant for contribution argued that CERCLA preempted a Delaware non-claim statute. The court held against preemption using a three part analysis:
- CERCLA does not expressly preempt all state environmental law;
- CERCLA is not such a comprehensive scheme of regulation as to provide no room for supplementation by state law; and
- The Delaware statute of limitations does not conflict with CERCLA. 38 F.3d at 687. This third prong is somewhat problematic. State law does not ÒconflictÓ with federal law under the Witco preemption analysis when compliance with both laws is possible and the state law is not an obstacle to congressional intent. The 'compliance' test may be particularly troublesome because one may not even become aware of potential CERCLA liability until after a state non-claim statute has run. The Witco court instead focused on the congressional requirement as more important.
The compliance issue notwithstanding, Witco provides a decedent's estate with perhaps the best overall argument in considering the congressional intent aspect of the 'conflict' analysis-that probate law has historically been the sole province of the individual states. 38 F.3d at 690. If Congress had intended for CERCLA to disturb long settled estates, the court added, Òpandemonium in the descent and distribution of decedents' estates could ensue. The court also pointed to the availability of the innocent landowner defense to those who received contaminated property by inheritance as further evidence that Congress intended to allow state law to control the descent and distribution of property.
The court in Witco also found that a non-claim statute simply governs the capacity of a party to be sued and that Congress intended for state law to govern this issue. This is consistent with Rule 17(b) of the Federal Rules of Civil Procedure, which requires that state law determine the capacity of an individual to be sued. Also, several courts have held that the capacity of a dissolved corporation to be sued under CERCLA is determined by state law. See Levin Metals Corp. v. Parr-Richmond Terminal Co., 817 F.2d 1448 (9th Cir. 1987); United States v. Northeastern Pharmaceutical & Chem. Co., 810 F.2d 726 (8th Cir. 1986), cert. denied, 484 U.S. 848 (1987).
CERCLA Expanded: State Non-Claim Statutes Preempted by CERCLA
The cases in favor of preemption by CERCLA assert that the potential for state non-claim statutes to cut off CERCLA liability thwarts congressional intent regarding environmental cleanups. These cases find that CERCLA should be broadly interpreted to allow the government to respond promptly and effectively to the national problems caused by hazardous waste disposal, and that state laws should not be allowed to limit the scope of liability under CERCLA. E.g., United States v. Reilly Tar and Chem. Corp. 546 F. Supp. 1100, 1112 (D. Minn. 1982). The court in Freudenberg-NOK General Partnership v. Thomopoulos, No. C91-297-L, 1991 WL 325290 (D. N.H. 1991), relied on Reilly Tar to allow a CERCLA contribution action against a decedent's estate brought after the six month non-claim deadline. The court found preemption necessary to preserve the federal scheme of liability for environmental contamination.
These cases also rely on CERCLAÕ' preemption of state corporate dissolution statutes. Steego Corp. v. Ravenal, 830 F. Supp. 42, 47 (D. Mass. 1993) (citing Sharon Steel, 681 F. Supp. 1492). The Steego court even rejected the estate's argument that it was like the dissolved and fully distributed corporations that were previously immune to CERCLA liability. In contrast, this same argument persuaded the court in Chesapeake and Potomac Telephone Co. 814 F. Supp. 1285, to find that a decedents estate was not a 'person' under CERCLA.
The Freudenberg line of cases has also spawned a few decisions that find estates liable under a Òtrust fundÓ theory. See United States v. Martell, 887 F. Supp. 1183, 1189 (N.D. Ind. 1995); State Ex Rel. Howes v. W.R. Peele, Sr. Trust, 876 F. Supp. 733, 743, clarification denied, 889 F. Supp. 849 (E.D. N.C. 1995). These cases find that an estate holds the decedentÕs assets in trust to satisfy environmental liabilities of the decedent. The 'trust fund' theory serves a dual purpose, satisfying the broad congressional mandate for environmental liability and avoiding the resulting windfall from a beneficiary obtaining unencumbered assets otherwise subject to environmental liability. The lesson of Freudenberg and concurring decisions is that courts that consider CERCLA to be a 'liberal liability scheme' are not likely to allow decedents' estates to escape liability.
The defense practitioner should therefore focus on an estate's more positive arguments. The innocent landowner defense is the most effective argument if the due care criteria are met. The next best argument is that state probate law has historically remained free from federal interference. That estates are uniquely governed by state law is a simple way to separate a decedent's estate from other CERCLA defendants.
Don't Take It Personally - Executor and Conservator Liability
Typically, executors and conservators manage estates. Executors and conservators generally are individuals appointed to manage the finances of those who cannot manage their own. An executor manages the property of a decedent and a conservator manages the property of one who is living but incapacitated. An executor does not take legal title to estate assets but a conservator does, albeit for the benefit of the conservatee. See Castlerock Estates, Inc. v. Estate of Markham 871 F. Supp. 360, 366 (N.D. Cal. 1994). Conservators, like executors, are personal representatives and subject to the same potential liability as executors. See Uniform Probate Code ¤ 1-201(30).
If the assets of a decedent's or conservatee's estate include contaminated property, the executor or conservator may be held liable under CERCLA along with the estate. Fortunately, however, executor and conservator liability is typically limited to the assets of the estate. See Uniform Probate Code ¤ 3-808. Nevertheless, if one of these individuals is at fault for the contamination as a result of improper administration of estate property, he or she may be liable beyond estate assets. Castlerock Estates, 871 F. Supp. at 369. As cleanup costs reach into the millions of dollars, plaintiffs are increasingly suing executors and conservators personally when estate assets are exhausted.
Executor and conservator liability under CERCLA turns on control over the disposition of property and the involvement in operations on the property. Castlerock Estates involved a bank that served the estate of a former owner of contaminated property, both as conservator while the owner was alive and as executor after her death. The district court held that the bank would be an 'owner' under CERCLA only if it possessed certain indicia of ownership beyond bare legal title to the property. 871 F. Supp. at 366. The 'indicia of ownership' included the ability to sell or lease the property and management of estate operations.
Not surprisingly, the same 'indicia' also determined whether the bank was liable as an 'operator' under CERCLA and liable beyond estate assets. The court looked to the powers granted to the bank under the California probate code as evidence of the scope of the bank's authority.
The court also reviewed the testi-mony of bank employees about their understanding of the bank's duties. Ultimately, the court held that issues of fact existed about the bank's authority and whether its exercise of that authority warranted CERCLA liability.
Executors and conservators hold estate assets in a trust-like capacity for the benefit of creditors and others interested in the estate. Uniform Probate Code ¤¤ 3-711, 5-419. Consequently, the CERCLA liability of executors and conservators is much like that of trustees. See Castlerock Estates, 871 F. Supp. at 366 (cases involving CERCLA liability of trusts may theoretically be applied to executors and conservators). Thus, the cases considering trustee liability can serve as a guide to executor and conservator liability.
Testamentary Trusts Under CERCLA: Decedents' Estates Revisited
A testamentary trust is, like a decedent's estate, a bundle of a decedent's assets brought together at death. Unlike a decedent's estate, however, a testamentary trust is a creation of the testator's will and not of state law. Nevertheless, for purposes of CERCLA liability, the two are treated the same.
Testamentary trusts may be held liable as owners and operators of contaminated property and can assert the same defenses. Like a decedent's estate, the testamentary trust's best way to avoid CERCLA liability is the innocent landowner defense. A testamentary trust can also assert a state non-claim statute, but it does not enjoy the estate's benefit of being a state law creation, so the state law protection is more easily preempted. As courts hold that Congress intended CERCLA to apply broadly, testamentary trusts will have the same problems avoiding liability as decedents' estates. Some courts do not recognize any difference between testamentary trusts and decedents' estates for purposes of CERCLA liability. Several of the defendants in Soo Line were testamentary trusts. The court held that a testamentary trust, like a decedent's estate, did not automatically fall within the innocent landowner defense but was obligated to offer some proof that it fell within the defense. 797 F. Supp. at 1484. The trusts had to show that the contamination was caused solely by a third party and that they had exercised due care and taken precautions against foreseeable acts related to the contamination. Because the trusts, like the estate, had presented no evidence that they met any of these requirements, the court rejected their defense. The court also rejected the trusts' state non-claim statute argument, citing Freudenberg and its progeny. 797 F. Supp. at 1485.
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