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What's New at Phillips Nizer LLP

SECOND CIRCUIT WRITES NEW LAW ON SUPERFUND LIABILITY FOR LEESSEES,
REVERSES JUDGEMENT AGAINST
BARLO EQUIPMENT CORP. FOR UNIONDALE SITE

NEW YORK, June 13, 2000 --- The lessee of a plot of contaminated land in Uniondale, Long Island, forced into bankruptcy by the strict liability of the federal Superfund statute, won a lifeline from a federal appellate court. In a precedent-setting decision issued yesterday, the U.S. Court of Appeals for the Second Circuit reversed a judgment holding Barlo Equipment Corporation liable as an "owner" merely because it had subleased some of the property to a party chosen by the owner. Commander Oil Corp. v. Barlo Equipment Corp., Dkt. Nos. 98-7975(L), 98-9075 (xap).

"This is a very important decision, not only for Barlo, but for every business involved in a lease or sublease in this Circuit," said Martin B. Wasser, head of the environmental law practice at Phillips Nizer Benjamin Krim & Ballon LLP in New York, which represented Barlo on the appeal.

Who Is a De Facto Owner?

The central issue on the appeal was whether Barlo's status as both a tenant of Commander Oil Corporation and a sublessor to Pasley Solvents & Chemicals, Inc. made it an "owner" of the property and therefore strictly liable for Pasley's contamination under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §9601 et seq. Senior United States District Judge Jacob Mishler of the Eastern District of New York had held Barlo liable for over $800,000 in past clean-up costs and 25% of future costs at the Superfund site.

The Court's scholarly, 27-page opinion by Circuit Judge John M. Walker, Jr., analyzes the nature of property ownership and also draws guidance from the Supreme Court's landmark decision in United States v. Bestfoods, 524 U.S. 1 (1998). Circuit Judges Jose A. Cabranes and Robert Katzmann concurred.

Setting out to "resolve yet another ambiguity within CERCLA's miasmatic provisions," the opinion rejects the concept, adopted by some federal district courts in New York and elsewhere, that mere control of a Superfund site is enough to make a lessee an owner. The Court of Appeals states: "Imposing owner liability on the basis of site control threatens to make owners of all operators and surplusage of most of operator liability."

In the case of a lessee-sublessor, the Court holds, the proper analysis focuses on the relationship with the property owner, not with the sublessee:

The arrangement that led to Pasley's contamination of the site was between Commander Oil and Pasley, not between Pasley and Barlo. The terms of the original lease between Pasley and Commander Oil were set before Barlo was interposed as a sublessor. Commander was a sophisticated lessor and fully capable of including in the price of the lease the risk of Pasley contaminating the site. . . . [O]wner liability might attach to a sophisticated lessee/sublessor who exploits unanticipated risks on the property of an unsophisticated owner. But here, and in the normal course of events, such liability will not attach to lessees/sublessors.

The Court stressed its reluctance "to undermine the security of lessees/sublessors throughout the circuit who have entered into subleases before this decision."

The opinion leaves open the possibility that certain lessees/sublessors could be liable as owners under CERCLA "if they have the requisite indicia of ownership vis-à-vis the record owner to be de facto owners and therefore strictly liable." The opinion goes on to identify five non-exclusive factors which might be important in such a determination: (1) the lease's duration and what rights the owner retains to control use of the property; (2) whether the lease can be terminated early; (3) the extent of the lessee's rights to sublease; (4) the scope of the lessee's responsibility; and (5) the lessee's responsibility for structural and other repairs.

"The Court seemed very interested at oral argument in defining what factors should determine whether a sublessor should be treated as standing in the shoes of an owner," said David Jacoby, who argued the appeal for Barlo. "This opinion should help businesses and their lawyers to anticipate and plan for CERCLA liabilities," he said.

The Court of Appeals also affirms the District Court's dismissal of indemnification and state-law claims by Commander Oil against Barlo.

Barlo was represented by David Jacoby, Martin B. Wasser and Daniel M. Kolko of Phillips Nizer Benjamin Krim & Ballon LLP of New York City and J. David MacCartney, Jr. of MacCartney, MacCartney, Kerrigan & MacCartney of Nyack. Commander Oil was represented by Andrew J. Simons of Farrell Fritz, P.C. of Uniondale.

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For additional information, please contact David Jacoby at (212) 841-0507 or djacoby@phillipsnizer.com.