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Third Circuit Vacates and Remands District Court’s “Speculative” Equitable Allocation

Reminding all Superfund practitioners that while the application of allocation principles and factors may be flexible it is not without boundaries, on September 11, 2018, the Third Circuit filed an opinion vacating and remanding a District Court’s equitable allocation of cleanup costs because the lower court’s methodology resulted in an allocation that was too “speculative.” Trinity Indus., Inc. v. Greenlease Holding Co., No. 16-1994, 2018 WL 4324261, at *12 (3d Cir. Sept. 11, 2018).  The Court pointed to two "mathematical" errors in the District Court’s analysis, and noted that although courts do not have to be perfectly precise in their calculations, they must be able to demonstrate a solid mathematical foundation for arriving at their final number. The ruling also offered guidance for the lower court on an appropriate methodology and application of certain equitable factors. This guidance could prove helpful for other practitioners in this area of the law regarding what the Third Circuit would deem non-speculative, and therefore acceptable.

Factual Background

From 1910 to 1986, Greenlease Holding Co. (“Greenlease”) owned and operated a facility that manufactured and painted railroad cars. In 1986, Greenlease sold the facility and surrounding property to Trinity Industries, Inc. (“Trinity”). Trinity used the property in the same fashion until 2000. The activities conducted at the North Plant portion of the property, the subject site, included painting railcars with lead paint and using other toxic chemicals without procedures in place to collect or treat the runoff. Additionally, Trinity asserted that a subsequent purchaser of the property dumped additional hazardous chemicals onto the North Plant land, further contaminating the property.

In 2006, the Commonwealth of Pennsylvania brought criminal charges against Trinity for the improper handling and disposal of hazardous waste. Although Trinity had sold the property to an unrelated entity by this time, it entered into an agreement to remediate the property pursuant to a consent decree with the Pennsylvania Department of Environmental Protection (“PADEP”). The remedial investigation identified several “areas of concern” at the North Plant site, and within each area of concern, “impact areas” with different primary contaminants of concern and in differing amounts, such that each impact area within an area of concern required a unique plan for proper remediation.  The total cost of remediation was nearly $9,000,000.  Trinity filed suit against Greenlease pleading several counts, and the Court allowed a contribution claims pursuant to CERCLA, 42 U.S.C. 9613(f)(3)(B), and Pennsylvania's Hazardous Sites Cleanup Act, 35 Pa. Stat. 6020.705(c)(2), to proceed to a bench trial to allocate responsibility for remediation costs between Trinity and Greenlease.

The District Court Decision Under Review

District Court Judge Joy Flowers Conti conducted a bench trial regarding the equitable allocation of remediation costs at the North Plant. Trinity Industries, Inc. v. Greenlease Holding Co. 173 F.Supp.3d 108 (2016). Judge Conti heard  divergent arguments from both sides’ experts regarding the proper allocation of costs to remediate the North Plant, with Trinity’s expert allocating 99% of the costs to Greenlease, and Greenlease’s expert allocating approximately 88% of the costs to Trinity. After conducting its own analysis, the Court held that Greenlease was responsible for 62% of all cleanup costs. 

The Third Circuit opinion summarized the District Court’s analysis as follows:

…the Court multiplied the percentage of responsibility it attributed to Greenlease by the square footage or cubic yardage involved in each remediation activity. The District Court then added the results and divided by the total square footage and cubic yardage for all remediation activities at the North Plant to arrive at the overall cost allocation percentage.

Trinity v. Greenlease, 2018 WL 4324261, at *6. This analysis determined that Greenlease should be held responsible for 83% of the cleanup costs. The court then applied three equitable factors that further reduced Greenlease’s liability. First, it found that Trinity did not properly attribute any of the waste to its subsequent buyer’s actions. Second, it found that language in the contract for the sale of the North Plant between Trinity and Greenlease had intended to shift some of the liability. Third, it found that the remediation had increased the property value of the North Plant. When taken together, the three equitable factors combined to reduce Greenlease’s liability, and the court ultimately held that Greenlease should be held responsible for 62% of the total cost or remediation.

The Third Circuit Decision

Greanlease's Appeal

Greenlease appealed several aspects of the District Court's decision, and the Third Circuit upheld the lower court's rulings that an indemnification agreement between the parties did not preclude Trinity's action and that the costs being sought were "necessary and reasonable" as required by CERCLA.  However, the lower court's allocation did not survive the Third Circuit's review.  While the Court of Appeals praised the District Court’s effort to make a thorough examination of the record, it ultimately held that its analysis was flawed.  Although the Court noted that CERCLA does not “command mathematical preciseness,” it does require that allocation estimates be more than mere speculation. Id. at *13

First, the Third Circuit focused on what it considered two "mathematical errors" by the lower court, although they are better viewed as errors in methodology.  Specifically, the Third Circuit held that “a volumetric-centered approach is only appropriate where the evidence supports a finding that one standardized volumetric unit correlates with a standardized per unit measure of cost” because an “approach that fails to account for cost differences will very likely lead to an allocation that is inequitable because it is divorced from the record evidence and analytically unsound.” Id. at *15.  Thus, the first error identified was the District Court's failure to account for the fact that the different remedial activities had different costs depending on how difficult or time consuming they are to complete. For example, the Third Circuit noted that the District Court improperly considered “placing asphalt caps and placing topsoil as functionally the same for its cost allocation analysis despite the fact that those two activities’ costs vary significantly.” Id. at *14.  The second "mathematical error" that “compounded” the first, the Third Circuit identified, was that the District Court “treated conceptually distinct units of measurement as equal.” Id. Specifically, the District Court added square feet and cubic yards together, and treated them equally when calculating the amount of substance remediated. Greenlease argued in its appeal that this technique was like comparing “apples to oranges,” an assertion with which the Third Circuit agreed. Id.

Next, the court provided guidance for the District Court on how to allocate costs properly when there are several different impact areas and remediation methods used. The Court noted that each side had accepted the principles of Trinity’s expert Joseph Gormley's six-step methodology (which had been incorporated by Greenlease's expert in its report), and suggested that it could be used on remand:  

To apply Gormley’s methodology properly, the District Court must use volumetric and cost data specific to the remediation activities. For every major remediation activity, then, the Court should calculate how much of that activity each party was responsible for. It can then apply that percentage breakdown to the total cost of that specific activity at the North Plant. Once it assigns each party a cost allocation for every major remediation activity, the Court will be able to add the parties’ respective shares of costs together. From those totals, the Court can calculate the overall percentages to use in determining an equitable allocation of costs between Greenlease and Trinity. The District Court remains free to exercise its discretion to adjust those percentages, subject to the guidance provided herein. It is also free to reopen the record, should it determine that it is necessary to do so to carry out the kind of analysis we have described.

Id. at *15.

Trinity's Cross-Appeal

Trinity filed a cross-appeal that also challenged the District Court’s ruling. The Third Circuit rejected Trinity's arguments that the allocation for lead, in particular, was an abuse of discretion and that Greenlease's parent company should be held liable for Greenlease's allocated share of liability, but agreed  that one element of the cross-appeal was worth further consideration on remand, namely, that the lower court erred in its application of two equitable deductions.   The Court of Appeal wrote that “the District Court is free on remand to apply equitable deductions” in general, but again emphasized the importance of grounding equitable principles in mathematics and legal analysis. Id. at *16.

First, the Third Circuit found that the District Court erred when it granted an equitable deduction of 5% in favor of Greenlease for language contained in the parties’ indemnification agreement. It noted that the lower court had improperly interpreted precedent set in BeazerEast, Inc. v. Mead Corp., which stated that courts should include the “parties’ mutual intent when entering a contract as part of its equitable allocation.” BeazerEast, Inc. v. Mead Corp. 412 F.3d 429 (3d Cir. 2005)(emphasis added). Here it was error to apply that standard because the District Court only found that it was Greenlease's subjective intent to shift liability in the indemnification agreement between Trinity and Greenlease. The Third Circuit noted that the District Court was free to take another look at the indemnification agreement, apply the Beazer standard if appropriate, and accordingly issue an equitable deduction based in legal analysis.  Id. at *17.

Second, the Third Circuit rejected the District Court’s assertion that Greenlease was due a 10% equitable deduction based on the fact that the cleanup had increased the property value of the North Plant. Again, the Third Circuit did not take issue with the fact that the District Court had applied that specific equitable deduction, rather, the concern was that the lower court did not demonstrate its basis for arriving at the 10% figure. The Court wrote that there was no “evidence concerning the fair market value of the North Plant, either before or after the remediation,” and that because there was no such evidence entered into the record, it was inappropriate to consider the appreciation in value of the North Plant when making equitable deductions. Id. at *18. The Third Circuit noted that because the District Court is permitted to reopen the record on remand, it could obtain additional evidence regarding the North Plant’s appreciation in value, and apply an evidence-based equitable deduction if appropriate.

Impact of the Third Circuit’s Decision

In Trinity, the Third Circuit limited its support for the volumetric approach, holding that it was only appropriate when determining allocations involving only one standard unit and one measure of cost. The court also expressed support for Trinity’s expert’s methodology. It does not appear that the Third Circuit intends for that methodology to become the standard by which all equitable cost allocation calculations must be made, but it does provide helpful guidance for practitioners regarding the types of calculations that take equitable allocations out of the realm of disallowed “speculation.” The opinion also stressed the importance of evidence-based equitable deductions. Going forward, practitioners should be wary of applying a strictly-volumetric approach, should ensure that allocation methodologies consider the varying costs of different kinds of remediation in their calculations, and provide ample record evidence supporting their claims in order to comply with the Third Circuit’s guidance in Trinity.