ELR Citation: ELR 20113
No(s). 92-95 (AJL) (D.N.J. Jun 28, 1994)

The court holds that the security interest exemption in §101(24) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) applies to a company that formerly held title to a contaminated site under a sale-leaseback arrangement without a repurchase option. The current owner of the site brought suit against several former titleholders, seeking an injunction requiring them to commence removal and remedial action with respect to the contamination. The court first holds that the party seeking to invoke the security interest exemption to §101's definition of "owner" has the burden of establishing its entitlement to the exemption. The court next holds that Congress clearly intended the exemption to apply to defendants who hold title pursuant to a standard sale-leaseback arrangement. CERCLA uses the same language, "security interest," as the Uniform Commercial Code (UCC), and applies the term to similar types of transactions. The court holds that Congress, in drafting CERCLA's security interest exemption, intended that UCC principles governing the existence of security interests would aid in determining whether such an interest exists for CERCLA's purposes. The court holds that under the UCC, the determination as to the nature of the transaction should not be based on the form of the agreement, but rather on the parties' intent as it existed at the outset of the lease.

The court holds that a leaseback need not contain a repurchase option to be deemed a security arrangement rather than a typical lease. The court next holds that the company held title to the site primarily to protect its security interest in the property and not to profit from the investment opportunity normally presented by prolonged ownership. The company's evaluation of the leaseback indicates that it intended to purchase the site to secure the lessee's obligation to repay the company's purchase price. The company never possessed the property; the lessee was required to submit to the company annual profit, loss, and income statements, a certified balance sheet, and all information it sent to stockholders; the rent payments were structured to amortize the amount the company paid over the property's useful life; and the lease placed all the obligations incident to ownership on the lessee. The court holds that the fact that the company retained secondary benefits of ownership, including tax depreciation on the property and entitlement to all the proceeds of an eminent domain proceeding, does not controvert the conclusion that the company took title to the site primarily to protect its security interest. The court next holds that the company did not participate in the operation or management of the site. Thus, the court holds that the company is exempt from liability under CERCLA as an owner or operator.

The court next holds that the New Jersey Spill Compensation and Control Act (Spill Act) security interest exemption may be applied retroactively to bar the current owner's Spill Act claim. The legislative history and language of the exemption make it apparent that New Jersey enacted the provision as a curative measure. Further, the similarity between the Spill Act's and CERCLA's language indicate the legislature's intent to bring the Spill Act into conformity with federal law. The court holds that although the Spill Act contains detailed definitions of the elements of the security interest exemption, the exemption should be interpreted consistent with CERCLA. The court holds, therefore, that because the company held title to the site primarily to protect a security interest and did not participate in the property's management, it is exempt from liability under the Spill Act.

Counsel for Plaintiffs
Bruce D. Nimensky
Berger & Bornstein
237 South St., Morristown NJ 07962
(201) 993-8600

Counsel for Defendants
Samuel P. Moulthrop, Laura M. Massaia
Riker, Danzig, Scherer, Hyland & Perretti
Headquarters Plaza
One Speedwell Ave., Morristown NJ 07962
(201) 538-0800