Professor Klass

Helen Cosmo is the sole owner of a metal plating facility in an industrial area in River Forest, Minnesota known as Cosmo Metals. The company was started by her father, George Cosmo, back in the 1940s. The metal plating process involves the use of solvents, paints, and other corrosive materials, all of which are hazardous substances. At its height in the 1950s and 1960s, the company had 10 employees, all of whom received the most current training in the use of hazardous substances. By 2003, business has slowed considerably. Best practices for handling and use of hazardous substances were still implemented.

Back in 1985, Cosmo Metals obtained a mortgage from First Federal Bank that is still in place. In 2003, Helen decided to seek additional financing from another bank, Second Chance Bank, to keep the business afloat for another few years, at which time, she hoped the area (which is in transition) would be attractive to a buyer seeking to develop the property for an office park.

In connection with the financing, Second Chance Bank asked for a Phase I Environmental Site Assessment on the Cosmo Metals property. Second Chance Bank retained ESA, Inc. to conduct the Phase I. ESA observed some stained soil outside the building and some pipes used in connection with the metal plating business during its walkover. ESA also noted some drains in the floor of the main manufacturing building and stained areas of concrete near the drains. As part of the Phase I, ESA also interviewed Helen and the employees who explained how careful they had always been in the use and disposal of hazardous substances. Based on those interviews, ESA did not recommend any additional investigation on the site. The loan officer from Second Chance Bank, Jim Newby, was new to the job and was nervous about holding up the loan, so he put the Phase I in the file and issued the financing, with the Cosmo Metals facility as part of the loan collateral.

However, the financing was not enough to stop the decline of Cosmo Metals. Helen was having trouble keeping up with the bills so Jim Newby began to get involved in the financial aspects of the business, including taking over accounts receivable, inspecting the business on a regular basis, and working very closely with Cosmo Metals’ in-house accountant. In addition, for six months while the operations manager was on medical leave, Mr. Newby also took over the purchase of chemicals for the business and the contracts for disposal of the hazardous substances used in the metal plating process. During this time, First Federal’s involvement was limited to routine, monthly reviews of the financial aspects of the business.

The additional financing and assistance was not enough. In January 2004, First Federal Bank began foreclosure proceedings on the Cosmo Metals facility and Second Chance Bank took steps to seize the company assets that secured Second Chance’s mortgage loan.

In February 2004, Cosmo Metals’ neighbor, Sam Cook, of Sam’s Supply (a kitchen supply company), decided to investigate stains on the wall of his basement that he had started noticing in 1996, when he purchased the business. Sam hired an environmental consultant who determined that the stains were caused by the same solvents and corrosive materials used by Cosmo Metals. Sam reported the contamination to the Minnesota Pollution Control Agency (MPCA), which triggered a further investigation revealing extensive soil and groundwater contamination on both the Cosmo Metals and Sam Supply properties. There is no evidence that Sam Cook has used any hazardous substances on the property since he purchased it in 1996. However, former employees of the previous owner of the property, Handy Hal, have stated that Handy Hal ran a small appliance repair shop in the basement for a few years. The employees have difficulty recalling what types of chemicals were used in the repair shop.

Sam wanted to get the soil contamination taken care of right away so it wouldn’t interfere with his current business operations, and ultimately spent $100,000 investigating and cleaning up the soil on his own property. However, he is daunted by the task of addressing the bigger problem of groundwater contamination on his property and the surrounding area. There is also a “deed notice” now filed with the county recorder on Sam’s property notifying the public of the existence of contamination on his property.

Although Cosmo Metals is now sliding into insolvency, Helen Cosmo owns the real estate itself in her own name, and has a substantial inheritance from her father.

Based on the fact pattern above, answer the following questions. Suggested time to spend on each question is in parenthesis after each question. Minnesota law applies.

1. Sam Cook retains you as his lawyer. Please evaluate: (1) the possible claims available to Sam against all potential defendants; (2) the relief available for each claim; and (3) the arguments each potential defendant (or defendants) may raise to counter each claim or to support a third party claim. Please organize your answer by claim rather than by defendant. (80 Minutes)

2. You proceed to file a lawsuit on behalf of Sam. What type of discovery will you seek from each defendant and/or third parties? For purposes of this question, discovery includes written interrogatories, requests for documents, and depositions. (20 Minutes)

3. Sam asks you to retain as many experts as you need to prosecute the case. What experts will you retain and why? What opinions do you want each of them to express at trial? (20 Minutes)

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Sample Answer to Final Exam

Question 1, Part 1: Possible Claims, Relief and Defenses

CERCLA Claims

Sam should assert CERCLA claims under Sections 107 and 113 against Helen Cosmo, Cosmo Metals and Second Chance Bank. Helen Cosmo and Cosmo Metals are liable as owners and operators of a facility where there has been a release of hazardous substances under 107. Second Change Bank is subject to operator liability under 107 unless it can prove it is eligible for the lender protection provisions of CERCLA. Jim Newby may also be liable in his individual capacity as an operator. Cosmo Metals may be insolvent, but Helen Cosmo is solvent, and owns the real estate, which is a facility under CERCLA. Sam can recover his cleanup costs of $100,000 for investigation and cleanup of the property so long as he met the requirements of the NCP. He cannot recover stigma damages or force Helen Cosmo to remediate the groundwater at the site. Based on the facts, a claim against First Federal Bank is not advisable because the bank clearly meets the standard for protection under the CERCLA lender liability provisions.

Helen Cosmo may bring Handy Hal into the lawsuit under Section 113 and argue that the hazardous substances used in his repair shop contributed to contamination under 113. The history of the Sam’s Supply property would also justify a 113 claim against Sam’s Supply as an owner under 107, unless Sam can show that the Handy Hal contaminants did not contribute to the release, or that Sam meets the innocent owner defense criteria. The facts do not indicate whether reasonable commercial practice in 1996 should have resulted in Sam performing a Phase I evaluation or other due diligence upon purchase of the property. A court will likely use the Gore factors to allocate liability among the parties, with most of the liability going to Helen Cosmo and Cosmo Metals. All defendants can argue that Sam is not eligible for a 107 claim because he is not an innocent owner, based on past contamination on his property, and that he is not eligible for a 113 claim because he has not been sued by the government or a third party.

MERLA Claims

Sam can assert a MERLA claim against Helen Cosmo and Cosmo Metals for recovery of cleanup costs under Sections 115B.04 (recovery of response costs). He can also assert a claim to recover stigma damages under 115B.05 (economic loss) since the operations causing contamination appear to have continued past 1983. Neither of the banks is likely liable under MERLA based on the lender liability protections in MERLA and also because it does not appear either bank contributed to the contamination in any way. However, if it is shown that Second Chance Bank knew about the contamination and made it worse when Jim Newby was running the operations, Second Chance Bank may have some liability.

Sam likely has no liability under MERLA because although he is the current owner, he arguably did not contribute to the contamination. Helen Cosmo may bring a MERLA claim against Handy Hal, to the extent she can prove contaminants from his repair shop contributed to the contamination. The Gore factors apply by statute, with Helen Cosmo likely receiving most of the liability.

MERA

Sam may bring a MERA claim to obtain an injunction forcing Helen Cosmo to remediate the groundwater and do any other cleanup necessary to have the deed restrictions removed from his property. Helen’s defenses to such a claim appear limited.

Common Law

Sam may have a claim for trespass, since contaminants migrated from the Cosmo Metals property to his property. He may also have a good claim for nuisance under the MN statute and a claim for strict liability. A claim for negligence against the Cosmo defendants would be weak, because the facts indicate that the standard of care for the operations may have been met. Second Chance Bank may have a negligence claim against ESA because of its failure to recommend as Phase II evaluation in light of the evidence of contamination discovered during the Phase I. ESA may have protections against such a claim in its contract with Second Chance Bank. Sam can recover his cleanup costs, stigma damages and any lost profits under the common law theories.

All defendants may argue that the statute of limitations for the common law claims expired in 2002, when Sam knew or should have known of the contamination from the stains on the basement wall. The Cosmo defendants may bring in Handy Hal as a third party defendant for nuisance, negligence and strict liability but not trespass because Handy Hal owned the property at the time of contamination. Equitable principles would likely still result in the Cosmo defendants having the vast majority of the liability.

Question 2 – Discovery

Sam should obtain as much information as possible about the Cosmo Metals operations, including chemicals used, the processes themselves, whether any spills were reported to state or local agencies or whether there had been complaints in the past. Sam should obtain any files at the MPCA or the City on the property. Sam should also obtain information about Jim Newby’s activities at the Property to support the CERCLA claim against the Bank. Sam should depose as many current and former Cosmo Metals employees as possible about practices at the shop. Subpoenas can be used to obtain depositions and documents from third parties.

Question 3 – Experts

Sam should retain an environmental consultant to testify about how the contamination happened, why Handy Hal’s operations did not contribute to the contamination, why the cleanup costs were reasonable and the scope of the groundwater cleanup that will be required. The consultant should testify that the contamination migrated from the Como Metal property, that a cleanup was reasonable and necessary (MERLA) and necessary (CERCLA), and that the cleanup conducted complied with the NCP. Sam should retain an appraisal expert to testify regarding the amount to which the value of his property has decreased as a result of “environmental stigma.” The expert should testify about the concept of environmental stigma, the value of the property before and after contamination and why a complete cleanup will not completely remove the stigma to the property.