Reducing Environmental Risk

The Ninth Circuit’s decision holding a permittee is not an “Owner” for purposes of CERCLA liability rejects the Second Circuit’s test.

In City of Los Angeles v. San Pedro Boat Works, -F.3d- (9th Cir. Mar. 14, 2011), the Ninth Circuit held that the holder of a revocable permit to operate a boat works, which is a facility for repair, maintenance and rebuilding of ships and boats, is not an owner for purpose of determining who is a PRP under CERCLA. 

In 1965, the City of Los Angeles, which owned and thereby controlled activities in the Port of Los Angeles, granted a permit to LA Marine and Harbor to operate a boat works on Berth 44. Three years later, Pacific American purchased the assets of LA Marine and Harbor (including the permit with the City’s necessary and prior approval) and, at the same time, conveyed all of those assets (except the permit) to it’s subsidiary, San Pedro Boat Works. Therefore, San Pedro became the sole owner of the business at Berth 44, and at no time did Pacific American ever own the boat works assets. Later, in 1970, Pacific American assigned the permit to San Pedro, but Pacific remained the named permittee, even after San Pedro sold its business and the permit was assigned to the new owner.

As it would happen, there was contamination arising from shipping activities in the Port of Los Angeles, and in 2002 the City sued, among others, San Pedro, Pacific American and BCI Coca Cola, which purchased the assets of Pacific American (including its liabilities) in 1993, for clean up costs under CERCLA. With respect to BCI Coca-Cola (and Pacific American), the City argued that Pacific American was an owner of the boat works because it held a revocable permit from the City to do business at Berth 44. The district court held that the revocable permits were insufficient to establish owner liability of Pacific American under CERCLA. That decision was appealed to the Ninth Circuit.

The Circuit Court followed its prior decision in the Long Beach case (and, in fact, its only decision concerning the definition of “owner”) in holding that state common law applies to the question of whether a party qualifies as an “owner” of property. See Long Beach Unified Sch. Dist. v. Dorothy B. Godwin Cal. Living Trust, 32 F.3d 1364 (9th Cir. 1994).

The Court examined a South Carolina District Court’s “site control” test and the Second Circuit’s “de facto owner” test.

The District Court for the District of South Carolina has held that a lessee is liable as an owner under CERCLA if it “maintain[s] control over and responsibility for the use of property and, essentially, st[ands] in the shoes of the property owners.” U.S. v. South Carolina Recycling & Disposal, Inc., 653 F. Supp. 984, 1003 (D.S.C. 1986).

Under the Second Circuit test, a lessee could be liable as an owner only in the rare case that the lessee was a de facto owner. See Commander Oil Corp. v. Barlo Equip. Corp., 215 F.3d 321 (2nd. Cir. 2000). The Second Circuit set up a five-part test to determine de facto ownership: (1) whether the lease is for an extensive term and lessee is the sole entity to determine how the property is used; (2) whether the owner cannot terminate the lease before the term ends; (3) whether the lessee can sublet all or part of the property without notifying the owner; (4) whether the lessee is responsible for paying taxes, assessments, insurance and other maintenance costs; and (5) whether the lessee is responsible for making structural and other repairs. Id., at 330-1.

Without further analysis, the Ninth Circuit referred to both these tests as “nebulous and flexible”, and determined that courts should look to the common law of the state where the land is located in determining whether a party is an “owner” for purposes of CERCLA liability. See City of LA, at 12-13. This ruling effectively sets up a split in the Circuits as to how “owner” liability is determined.

Applying California common law, the Ninth Circuit held that Pacific American, as a holder of a revocable permit, is not an “owner” for purposes of CERCLA liability because California state courts consistently distinguish between possessory interests such as a revocable permit and title ownership. Id., at 16. As the Court states, “there is a relevant distinction, for purposes of CERCLA owner liability, between absolute title ownership to real property and less-than fee-title possessory interests in real property, conveyed by the holder of fee title.” Id., at 13.

It is likely that the case would have had the same outcome if the Ninth Circuit applied the “de facto ownership” test, but, again, this ruling is more significant for the fact that it creates a split in the Circuits on this issue.



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