Bick Law LLP Publishes an Article in Law360 – California Contamination Cases: Response Cost Recovery Guide

On June 1, the Court of Appeals for the Fourth Appellate District of the state of California affirmed in part and reversed in part, and remanded with directions, the appeal by the Orange County Water District (OCWD) of the Superior Court of Orange County’s judgment in favor of the defendants in the underlying case. Orange County Water District v. Alcoa Global Fasteners (2017) _ Cal.App.5th _ , 2017. Importantly, the appellate court ruled that the OCWD was entitled to assert a claim under the Carpenter-Presley-Tanner Hazardous Substances Account Act (HSAA), but it is not a “state” and therefore, it is not exempt from the requirements of the national contingency pan (NCP) under the Comprehensive Environmental Response, Compensation and Liability Act.

Further, the appellate court found that the OCWD’s costs were not necessary, nor were they consistent with the NCP because the response actions were not cost-effective and the OCWD failed to provide a meaningful opportunity for public participation. In addition to ruling on legal questions of first impression, the appellate court affirmed the dismissal of all claims as to all defendants, except for certain claims as to the defendant Northrop Grumman Systems Corp. This case is a seminal case in groundwater contamination response cost recovery and will be influential in future cases brought by water districts in California.

Background of the North Basin

The OCWD brought the original action against the defendants to recover costs associated with the North Basin Groundwater Protection Project (NBGPP), a proposed $200 million effort intended to address groundwater contamination in northern Orange County, California caused by volatile organic compounds (VOCs) and other chemicals. At the time of trial, the OCWD had spent approximately $3.7 million. When it originally projected the cost to implement the NBGPP, the OCWD projected $20 million would be sufficient. The proposed costs have escalated ten-fold and incorporated treatment of nitrates and perchlorate contamination.

Since the mid-1980s, private parties and the OCWD have been remediating contamination of the Orange County basin under the Regional Water Quality Control Board’s (RWQCB) supervision. The NBGPP was established to treat VOC contamination in the shallow aquifer, with the goal of preventing contamination of the deeper principal aquifer, which is the source of drinking water. The principal aquifer is over 250 feet below ground level to approximately 1,500 feet below ground level. The contaminated shallow aquifer is approximately 130 feet to within 250 feet below ground level. There is a layer of soil that separates the shallow aquifer and the principal aquifer. VOC contamination primarily affected groundwater in the shallow aquifer, but by the late 1990s, VOC contamination had reached the principal aquifer in certain areas, leading to the decommissioning of several drinking water wells.

OCWD v. Alcoa Trial

The OCWD filed suit against, inter alia, Alcoa Global Fasteners Inc., Arnold Engineering Co., CBS Broadcasting Inc., Crucible Materials Corp., and Northrop Grumman Systems Corp., asserting statutory claims for damages under the HSAA and the Orange County Water District Act (OCWD Act) and for declaratory relief (Code Civ. Proc., § 1060), as well as common law claims for negligence, nuisance and trespass. In that lawsuit, the OCWD sought to recover its past costs in the amount of $3.7 million and obtain a declaration holding defendants liable for future costs for the NBGPP, estimated at $200 million. The OCWD Act allows the OCWD to investigate waters within its district, conduct cleanup work, and seek recovery of its costs.

The trial court determined that the NBGPP costs were not reasonable, necessary to respond to the groundwater contamination, nor consistent with the national contingency plan, necessary to recover under the HSAA. Moreover, the court ruled that OCWD did not prove causation. In particular, the trial court noted that the OCWD’s costs to implement the NBGPP would have been incurred to remediate perchlorate and nitrates, regardless of the operations of the defendants. In doing so, the court applied the “substantial factor” causation standard and found that there was no evidence that the conduct of any one defendant, or all of the defendants together, necessitated the NBGPP.

The trial court entered a judgment in favor of the defendants, dismissing OCWD’s claims, including the remaining common law claims. The OCWD appealed, challenging the trial court’s ruling on the following grounds: (1) the trial court misinterpreted the legal requirements of the OCWD’s claims under the HSAA and the OCWD Act; (2) the court erred under Code of Civil Procedure, section 1048, subdivision (b) by scheduling a bench trial on the OCWD’s statutory (equitable) claims before a jury trial on the OCWD’s common law (legal) claims, thereby depriving the OCWD of its right to trial by jury; (3) the court erred by applying its factual findings on the OCWD’s equitable claims to defeat the OCWD’s common law claims; (4) the court misapplied Evidence Code section 412 and made other erroneous evidentiary rulings; and (5) the court erred by granting declaratory relief in favor of defendants. In response, respondents (defendants) assert that the HSAA is not appropriate because the OCWD is not seeking contribution or indemnity as defined in the statute.

Appellate Court Ruling: Water District May Assert a Claim Under HSAA

The appellate court addressed a threshold issue of first impression whether OCWD is an entity that can bring a suit for cost recovery under the HSAA. The defendants did not raise this question in the underlying trial, but the appellate court exercised its discretion to review this question of law based on undisputed facts. The HSAA provides for a private right of action for contribution or indemnity (Section 25363(d)). The defendants argued that only plaintiffs who are liable for response or corrective action costs under the HSAA enjoy the right to sue for indemnity. The court identified this as a question of statutory interpretation and that the statute is not “clear” as to the interpretation of indemnity. The court looked at the plain meaning of “indemnity” (“statutory indemnity” is an indemnification obligation that arises by statute) and found that the HSAA’s use of the term “indemnity” as “reimbursement” is consistent with CERCLA, the federal analog to HSAA. Under CERCLA, a nonliable or “volunteer” plaintiff may bring a private cost recovery action, and that action is considered an “indemnity.” (42 U.S.C. § 9607(a)). The court ruled that a nonliable plaintiff, such as the OCWD, may bring a claim under the HSAA.

Although the appellate court ruled that OCWD may assert a claim under the HSAA, the OCWD failed to prove HSAA elements as to all defendants. With respect to the OCWD Act, the appellate court reversed the trial court judgment as to Northrop, but affirmed as to the remaining defendants. The appellate court also reversed the trial court’s declaration of no liability in favor of Northrop, but affirmed as to the other defendants.

The Trial Court Used the Wrong Causation Standard

The appellate court ruled that the trial court erroneously required the OCWD to show that each defendant was a substantial factor that caused the OCWD’s response costs, namely the decision to develop the entire NBGPP. Instead, the OCWD is only required to show a release or threatened release from a site, regardless of who caused the release, and a causal connection between that release or threatened release and its response costs. CERCLA and the HSAA require only that the OCWD show that a release or threatened release caused some necessary response costs, not that the release caused all costs incurred by the OCWD in responding to a multitude of releases. A defendant may then assert an affirmative defense that its actions did not cause the release or threatened release that caused the incurrence of response costs.

Despite using the incorrect standard, the appellate court upheld the trial court’s declaration that defendants have no liability for damages, response costs, or other costs claimed by the OCWD, or any future costs. The trial court had the discretion to order equitable apportionment, but it chose not to do so. The trial court’s finding of zero allocation was not based on equitable factors; rather, it was based on the lack of causation.

The trial court identified deficiencies in the causation evidence presented by OCWD including: (1) the OCWD’s failure to conduct a fate and transport analysis of VOC contamination in the North Basin area; (2) the OCWD’s failure to update its 2005 and 2008 contaminant plume maps for trial; (3) the OCWD’s failure to calculate the rate of natural attenuation for VOC contamination; and (4) the OCWD’s failure to conduct an “adequate cost/benefit analysis for the NBGPP. However, the trial court incorrectly relied on Evidence Code Section 412 in its statement of decision to justify viewing the evidence “with distrust.” The appellate court found that the evidence the trial court believed should have been produced did not exist; therefore, there was no justification to view the evidence with distrust. However, the appellate court affirmed the trial court’s discretion to judge the credibility and weight of the evidence, separate and apart from Evidence Code 412. Moreover, the appellate court found that the reliance on Evidence Code 412 did not prejudice the OCWD because the evidence was not credible.

With respect to one defendant, Northrup Grumman, the appellate court held that “there is a reasonable probability the trial court would have found that the district had proved causation as to Northrop’s Kester Solder and Y-12 sites,” if the trial court had used the appropriate standard for causation.

The appellate court found the trial court had similarly misinterpreted the standard for causation under the OCWD Act, reviving the OCWD’s claim against Northrop under the act.

OCWD Is Not a “State” and Doesn’t Enjoy Presumption of Compliance With NCP

The appellate court ruled that the trial court correctly found that the OCWD could not recover on its HSAA claim because it had not shown its response costs were (1) necessary and (2) consistent with the NCP. The OCWD asserted it was not subject to these requirements because it is a “state” under CERCLA. The OCWD was established by an act of the California Legislature. (OCWD Act, § 1, subd. (a).), but it has no statewide authority in subject matter or geography. It is therefore a political subdivision of the state, not a state itself.

Prior to the OCWD case, only one court had considered whether a California water district was a state under CERCLA. (See Santa Clara Valley Water District v. Olin Corp. (N.D.Cal. Sept. 28, 2007, No. C-07-03756) 2007 (SCVWD).) That federal district court held, in an unpublished opinion, that the water district in question was not a state because it did not have statewide authority. (Id. at p. *5.) The OCWD appellate court agreed with this conclusion and the reasoning behind it. Therefore, the OCWD should not be afforded NCP presumption and must prove its costs are necessary and consistent with the NCP.

Response Costs Must Address Actual, Real Threat to Health or Environment

Because it is not a state under CERCLA, the OCWD was required to prove in trial that its response costs were “necessary costs of response” under CERCLA. The appellate court reversed the trial court’s finding that OCWD failed to prove the costs for the NBGPP were necessary. The groundwater in the North Basin area had been impacted by VOC contamination and the presence of VOC contamination was a threat to human health and the environment. Thus, the necessity standard that an “actual and real threat to human health or the environment exist before initiating a response action” was met. (Carson Harbor Village Ltd. v. Unocal Corp. (9th Cir. 2001) 270 F.3d 863, 870 (Carson Harbor I) [en banc].)

Response Actions, Including Investigations, Must Involve Meaningful Public Participation

Although the OCWD met its burden of proving that the costs were necessary, the appellate court ruled that the OCWD’s response costs were not consistent with the NCP because the OCWD failed to provide meaningful public participation in the NBGPP. (42 U.S.C. § 9607(a)(4)(B)). The OCWD asserted that the requirement of NCP consistency should not apply to investigatory costs, but the appellate court did not agree, holding that the plain language of CERCLA require that investigatory costs are not exempt from NCP compliance. Aviall Services Inc. v. Cooper Industries, LLC (N.D.Tex. 2008) 572 F.Supp.2d 676, 697 (Aviall Services).)

Of the OCWD’s $3.7 million in response costs, $876,000 were investigatory costs. The appellate court ruled that the public participation in the NBGPP did not rise to the level of “meaningful participation,” even taking into consideration the California Environmental Quality Act process, thus OCWD’s recovery of such costs was barred as inconsistent with the NCP.

Response Actions Must Be Cost-Effective

The trial court correctly found that the NBGPP was not cost-effective as required under the NCP. A response action is determined to be “cost-effective” based on long-term effectiveness and permanence, reduction of toxicity, mobility or volume through treatment, and short-term effectiveness. “Overall effectiveness is then compared to cost to ensure that the remedy is cost-effective. A remedy shall be cost-effective if its costs are proportional to its overall effectiveness.” (40 C.F.R. § 300.430(f)(1)(ii)(D)). The original project was calculated in 2005 to cost $20 million to treat 5,650 acre-feet per year of groundwater at $576 per acre-foot.

The trial court calculated that the increase to $20 million for the NBGPP would be three times the cost of importing an equivalent amount of clean water (for example from the Metropolitan Water District). The trial court also found that the NBGPP would not significantly clean up the aquifer, based on the optimistic projection that it would remove one-third of the contaminant mass over 30 years. The appellate court found that the OCWD did not conduct a baseline risk to human health and the environment and did not adequately assess the cost-effectiveness and necessity of the NBGPP; therefore, its costs were not necessary and consistent with the NCP, as required.

Bifurcation Was Appropriate

The bifurcation of the trial by the trial court into a bench trial for the statutory claims and a jury trial for common law claims was not in error.

Attorneys’ Fees for Appeal Recoverable

Defendants Alcoa, Arnold, CBS and Crucible were entitled to recover their costs on appeal.

In sum, this case will provide a road map for future California water district cases seeking recovery of response costs and declaratory relief under the HSAA. Water districts in California likely will rely on this opinion to assert that they have the right to bring such claims under the HSAA. However, they will be required to prove that any response costs incurred are necessary and consistent with the NCP.

Toward that end, water districts would be wise to engage public participation early and throughout the process of implementing response actions, including investigations; conduct cost-benefit analysis to prove the response costs are proportional to the overall effectiveness of the response actions; and prove with credible evidence (fate and transport modeling, updated plume maps, assessment of natural attenuation, etc.) that the release or threatened release caused the necessary response costs. Defendants in future cases filed by water districts also will benefit from following the road map of this opinion laying out the challenges that can be brought, including the cost-benefit analysis, credibility of evidence, and the affirmative defense that the defendant’s actions did not cause the response costs to be incurred. In addition, if the response action selected by the water district would be necessary to remediate nitrates or other emerging contaminants that are not related to the defendants’ plumes, causation may be called into question.

This is one of very few opinions in California that applies to water district claims for response costs in groundwater contamination cases, but it is not going to be the last. In fact, in a similar remediation decision was issued the same day involving OCWD’s claims against MAG Aerospace Industries Inc., the same court found MAG was not liable to the OCWD for costs. Given the presence of groundwater contamination in many public drinking water supplies, the OCWD is the beginning of a likely trend towards water districts seeking recovery of remediation.

Kimberly Leue Bick is the founding and co-managing partner of Bick Law LLP in Newport Beach, California. She represents major aerospace, manufacturing, land use, biotech and real estate companies, in environmental litigation, regulatory compliance, enforcement, and corporate transactional work involving environmental issues.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Click here to read the the article on Law360.