Indemnification agreements under CERCLA.

• Author: Miller, Lisl E.

Since CERCLA was enacted, the majority of courts to consider the question have given effect to indemnification and hold harmless agreements allocating responsibility for the cleanup of hazardous substances. Recently, however, several courts have interpreted CERCLA [section] 107(e) and its legislative history to prohibit such agreements. The best reading of the section is that while it prohibits transfer of liability, it allows transfer of responsibility. In other words, any potentially responsible party under CERCLA is legally liable to a CERCLA claimant, but parties may transfer responsibility among themselves to pay for the cleanup. This is the only interpretation of the seemingly ambiguous [section] 107(e) that makes sense if courts are to give full force and credit to each sentence in [section] 107(e) and if the public policy of freedom of contract is to be supported. Because courts disagree in their application of [section] 107(e), Congress should amend the section for clarification.

1. Introduction

   Even after ten years of implementation of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA),(1) new interpretations of its provisions still arise. One controversial provision is [section] 107(e), which states:

   (1) No indemnification, hold harmless, or similar agreement or conveyance shall be effective to transfer from the owner or operator of any vessel or facility or from any person who may be liable for a release or threat of release under this section, to any other person the liability imposed under this section. Nothing in this subsection shall bar any agreement to insure, hold harmless, or indemnify a party to such agreement for any liability under this section.

   (2) Nothing in this subchapter, including the provisions of paragraph (1) of this subsection, shall bar a cause of action that an owner or operator or any other person subject to liability under his section, or a guarantor, has or would have, by reason of subrogation or otherwise against any person.(2)

   On its face, [section] 107(e) is ambiguous because the first sentence of [section] 107(e)(1) seems to contradict the second sentence and also [section] 107(e)(2). Some courts have interpreted the first sentence to prohibit indemnification agreements against the government, and have held that the government can recover damages from any responsible party under CERCLA.(3) These courts have determined, however, that the second sentence of [section] 107(e)(1) means that private parties can contract to indemnify their financial responsibility. Other courts have simply allowed indemnification agreements based upon the general public policy of freedom of contract, without reference to [section] 107(e)(1).(4) The majority of courts, however, have interpreted [section] 107(e) to allow parties to contractually allocate financial responsibility for hazardous materials cleanup.(5)

   The validity and enforceability of indemnification provisions are important issues because private parties find it extremely valuable to be able to allocate the risk of hazardous materials cleanup. If courts decide to disallow indemnification agreements between contracting parties, as some courts have,(6) the bargaining position between these parties will change.

   Section II of this Comment describes the conflict in the case law interpreting [section] 107(e). Section III discusses how the legislative history of [section] 107(e) supports both interpretations. Section IV reviews policy reasons in favor of indemnification agreements. Section V concludes that [section] 107(e) either should be interpreted to allow such agreements, or should be amended to clearly allow parties to utilize indemnification and hold harmless agreements.

2. CASES

   1. Mardan Corp. v. C.G.C. Music, Ltd.

      Until recently most courts have upheld agreements allocating the risk of hazardous materials cleanup. The primary case in this area is Mardan Corp. v. C.G.C. Music, Ltd.(7) In Mardan, Macmillan, Inc. sold certain assets to Mardan Corporation, including a plant, equipment, and related property used in the manufacture of musical instruments.(8) During the ten years prior to sale, Macmillan had deposited wastes generated by the plant's electroplating operations into a settling pond at the site.(9) Mardan continued this practice.(10)

      The parties executed a settlement agreement in which Macmillan paid Mardan $995 thousand for settlement of a variety of claims, and for a general release that included "all actions, causes of action, [and] suits, . . . based upon, arising out of or in any way relating to the Purchase Agreement . . . ."(11) Two years later EPA brought administrative enforcement actions against Mardan for RCRA violations.(12) These actions were resolved by an agreement between Mardan and EPA which required Mardan to clean up and close the settling pond.(13) Mardan then brought suit against Macmillan under CERCLA [section] 107 to recover damages for Mardan's costs of cleanup.(14)

      The Ninth Circuit Court of Appeals affirmed the district court's grant of summary judgment to Macmillan.(15) The Ninth Circuit stated that "section 107(e)(1) expressly preserves agreements to indemnify a party held liable under section 107(a)."(16) The court explained that "[b]y preserving such agreements, Congress seems to have expressed an intent to preserve the associated body of state law under which agreements between private parties would normally be interpreted."(17) The court also discussed how

      [s]uch agreements cannot alter or excuse the underlying liability, but can only change who ultimately pays that liability. Moreover, regardless of how . . . these agreements are interpreted, the result cannot prejudice the right of the government to recover cleanup or closure costs from any responsible party, including either Mardan, Macmillan, or both.(18)

      The court further reasoned that

      nothing in CERCLA suggests that it was intended to offer special protection to unwary purchasers of businesses. Moreover, since CERCLA releases are likely to be entered into by major companies, there is little need for a special federal rule to protect releasors of CERCLA recovery rights from their own ignorance or weak bargaining power. . . . [W]e are convinced that application of a federal rule [that is different than common law] would disrupt commercial relations predicated on state law.(19)

   2. AM International, Inc. v. International Forging Equipment

      In 1990 the United States District Court for the Northern District of Ohio departed from the majority view by holding that the vendor-purchaser indemnification agreement at issue was ineffective.(20)

      In AM International, the plaintiff, AM International, executed a sale and partial lease-back agreement of its plating, heat-treating, and painting operations to D & B Realty.(21) Later a co-owner of D & B Realty, Mr. Robert T. Dziak, doing business as Eucid Industrial Center ("EIC"), assumed the obligations of D & B Realty to AM International.(22) When AM International ceased operations at the end of its lease, another of Dziak's corporate entities, International Forging Equipment ("IFE"), entered into an asset purchase agreement with AM International.(23) The contractual relationship between AM International and the other parties ended when EIC paid AM International $2.3 million as accord and satisfaction for AM International's release of all claims to EIC and Dziak.(24)

      Two years later the Ohio Environmental Protection Agency (Ohio EPA) notified Dziak that remedial action would be required to clean up toxic wastes at the property.(25) Dziak refused, so the Ohio EPA requested AM International to clean up the site.(26) AM International paid over $350 thousand for the cleanup and brought suit against D & B Realty, EIC, IFE, Dziak, and Donald Diemer (D & B's other co-owner) for contribution under CERCLA and for quasi-contractual damages under state law.(27) Defendants counterclaimed for indemnification under the release agreement.(28) A voluntary dismissal was entered as to D & B Realty and Diemer, and the remaining defendants moved for summary judgment.(29) The court granted summary judgment regarding the state law claims but denied summary judgment regarding the CERCLA contribution claims.(30)

      The AM International court described [section] 107(e) as internally inconsistent on its face, but determined that the legislative history explained Congress' intent.(31) The court stated:

      In sum, Congress intended subsection 107(e)(1) to prevent the parties from contractually relieving themselves of liability under the act, whether that liability is enforced by action of the government or in a suit by a person who performed the clean-up and sues others for contribution under the act. In addition, by the second sentence, Congress intended to permit any person to contract with others not already liable under the act to provide additional liability by way of insurance or indemnity.

      This conclusion is supported by subsection 107(e)(2), which specifically directs that subsection 107(e)(1) does not bar causes of action by another person liable under the act or his guarantor against any other person for subrogation or contribution. Since the second sentence of subsection 107(e)(1) authorizes a limited right to contract regarding liability, and since subsection 107(e)(2) expressly directs that such contracts may not limit suits against persons liable under the act, the inescapable conclusion is that such contracts cannot be enforced to prevent suits between tortfeasors under the act.(32)

      Thus, the AM International court decided that the legislative history supported a reading of [section] 107(e) which did not allow potentially responsible parties under CERCLA to utilize indemnification or hold. harmless agreements. The court also reasoned that its interpretation of [section] 107(e) was consistent with the underlying policy of CERCLA: to encourage cleanup initiative on the...