Last week, the Second Circuit issued an unpublished decision affirming an earlier decision of the Eastern District of New York that stands for the principle that a passive lessee that subleases a property to an unaffiliated tenant is neither an “Owner” nor an “Operator” under CERCLA. Next Millenium Realty, LLC v. Adchem Corp., No. 16-1260-cv, 2017 U.S. App. LEXIS 8476 (2d Cir. May 11, 2017). 

The facts of this case were unique in that the release that allegedly gives rise to CERCLA liability can be pinpointed to a single month. In July 1976, an arsonist employee of a dry cleaning business in Westbury, New York burned the business’s building to the ground, releasing a high quantity of PCE into the environment.

At the time, the property was owned by an individual, Jerry Spiegel. Spiegel had leased the property to Northern State Realty Co., one of five affiliated Defendants in the present action.  Northern State Realty Co. had subleased the property to an unaffiliated company, 89 Frost Leasing Corp., which in turn had installed its own affiliate, Marvex Processing and Finishing Corp., as the operator at the time of the release.

Though Northern State Realty Co. was the only one of the five affiliated Defendants in the case that held any property interest in the site at the time of the release, the Plaintiffs – two subsequent purchasers of the site who likewise held no property interest in the site at the time of the release – sought to hold all five affiliated corporate Defendants liable as “Owners” or “Operators” under CERCLA. The Plaintiffs, Next Millennium Realty, LLC, and 101 Frost Street Associates purchased the site in the late 1990s and entered a consent decree with the New York State Department of Environmental Conservation for its remediation, allegedly accruing $10 million in response costs by the time of their suit.

The Second Circuit affirmed the district court’s ruling that the affiliated Defendants, which – at best – were passive lessees at the time of the release were not “Owners” or “Operators.” First, though only one of the affiliated Defendants held a property interest in the site at the time of the release, two other affiliates had leased or subleased the property prior to the release. The Plaintiffs argued that each of the Defendants that at one time held a leasehold interest in the property should be deemed “Owners” under CERCLA.  Relying on the test that it previously announced in Commander Oil, the circuit court concluded that the lessee Defendants could not be considered “Owners” for CERCLA purposes because they did not exhibit sufficient attributes of ownership over the property. Id. at *7-8 (relying on Commander Oil Corp. v. Barlo Equip. Corp., 215 F.3d 321, 329 (2d Cir. 2000)).  Instead, the court agreed with the district court that the affiliated Defendants were merely “typical” lessees in a commercial lease and should not be held as “Owners” such that this definition be conflated with the definition of “Operator.” Id.

Next, the Plaintiffs argued that the five affiliated Defendants were a “single enterprise” that should be collectively deemed an “Operator” at the site, derivate from the unquestioned status of one Defendant as an operator at the site from 1966-1973. Plaintiffs asserted that the owners of all five affiliated Defendants, three brothers, exerted control over the entire corporate family such that all of the affiliates operated as a single entity.  In order to pierce the corporate veil, however, the Plaintiffs were required to show that the parent’s domination of its affiliates also “caused the contamination at the site.” Id. at *9.  Because the release in this case could be pinpointed to an exact month and year, July 1976, Plaintiffs could not establish that the brothers’ domination somehow caused the release three years after any affiliate Defendant operated the site.

 It is rare in a CERCLA case that the parties can trace the release at a site to a single instance, and thus the facts of this case are somewhat unique.  This case nevertheless provides affirmation that a passive lessee, like Northern State Realty Co., cannot be held liable as an owner merely because of its relationship to an active sublessee operator, nor can affiliated companies be held liable as Operators without that affiliation having some connection to the release giving rise to liability.   

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