Buyer Beware: No-Fault Owner Responsible for 25% of Past and Future Cleanup Costs

Valbruna Slater Steel Corp. (Valbruna) knew about the extensive contamination from a former owner’s industrial operations when it bought the Indiana steel mill out of bankruptcy in 2004.  As many do when buying contaminated property, Valbruna negotiated a Prospective Purchaser Agreement (PPA) with the Indiana Department of Environmental Management (IDEM) and escrowed $500,000 for the remaining cleanup work.

That $500,000 was soon depleted and Valbruna picked up the tab for the additional cleanup work later ordered by IDEM. Valbruna filed, among other things, a CERCLA contribution suit against the former owner to recover past and future cleanup costs.

In Valbruna Slater Steel Corp. v. Joslyn Mfg. Co., No. 18-2633, 2019 WL 3729272 (7th Cir. Aug. 8, 2019), the Seventh Circuit upheld the district court’s equitable allocation of past and future cleanup costs: 75% for the former owner, whose operations caused the contamination, and 25% to Valbruna, who bought the property decades after the contamination occurred and pursuant to a PPA with IDEM.

Recognizing the lower court’s discretion in allocating cleanup costs among responsible parties, the Seventh Circuit found that the 25% allocation to a no-fault owner, while striking, was rational.  One key factor in upholding this allocation is classic caveat emptor – Valbruna knew there were serious pollution problems at the site at the time of acquisition.  Another key factor is the potential for windfall given the steep discount on the purchase price – Valbruna paid less than half the asking price, $6.4 million as compared to $20 million, and ultimately insured the property for $80 million.

This case emphasizes the importance of smart, careful, and thorough pre-purchase due diligence.  If environmental issues are suspected, purchasers should employ contractual protections such as indemnities and escrows, as well as the use of the various insurance products available in today’s market to protect against unknown liabilities.  Purchasers should also undertake adequate due diligence to take advance of statutory defenses, such as CERCLA’s innocent purchaser defense.