The Enviro-Chem Settlement: Superfund Problem Solving

Norman W. Bernstein

Editors' Summary: The first Ruckelshaus EPA Superfund settlement was concluded recently between the federal government and a group of companies that generated hazardous wastes found at the Environmental Conservation and Chemical Co. (Enviro-Chem) disposal site in Zionsville, Indiana. Mr. Bernstein, cochairman of the generators' steering committee in the negotiations, describes how the parties resolved the critical issues of allocating liability among the generators and establishing a practical mechanism for operating the clean-up trust fund that will pay for cleaning up the site. In addition, he outlines the complaints that the generators have filed against the owners and operators of the site and their insurance carriers, the first suit for reimbursement among Superfund parties.

Norman W. Bernstein is Associate Counsel, Ford Motor Company, and Cochairman of the Enviro-Chem Steering Committee. The views expressed are his personal views and do not necessarily reflect the views of Ford Motor Company.

[13 ELR 10402]

The Enviro-Chem Superfund settlement has attracted interest because it is the first multiparty settlement with the new Ruckelshaus administration; is the largest Superfund settlement in number of generators; and involves apparently the first effort by generators to recover the amounts paid by them for the cleanup from the owners, operators, and their insurance carriers. (That action was filed November 8, 1983.)¹ The terms of the consent decree are the subject of a separate article.² This article will focus on:

the way in which the generators resolved the allocation problem among themselves — this may be of interest in subsequent settlements or judicial proceedings regarding allocation under the recent Chem-Dyne³ decision rationale;

the self-administering nature of the cleanup trust based on employment by the trust of an independent inspection mechanism (in addition to Environmental Protection Agency (EPA) inspection) and payment of the cleanup contractor through a "letter of credit" analog — this combination of independent inspection and payment mechanism eliminated the need for any generator to act as a trustee of the trust; and

the terms of the complaint against the owners, operators, and their insurance carriers.

Solutions to these problems, it should be noted, evolved within the strong 17-member industry steering committee⁴ and were not developed by any one participant.

The Allocation Problem

Major multiparty Superfund cleanups initially involve a series of unknowns, including the cost and scope of the cleanup, the number of companies that will participate, and what sort of allocation will be considered fair. In Enviro-Chem, these issues were resolved in a series of overlapping steps.

[13 ELR 10403]

The first step, determining the cost and scope of the cleanup, involved a combination of EPA's remedial investigation feasibility study (RI/FS) and work by the generators' technical committee.⁵ That committee obtained firm fixed price quotes that were approximately 40 percent lower than EPA's cost estimates for the same work. Limited differences in approach between EPA's technical analysis of the work that needed to be done and the views of the generators' technical committee were resolved. This left only the question of which, if any, of the steps would be EPA's responsibility and which would be paid for by a trust funded by the generators. As may be expected, most were in the end to be paid by the trust. Thus a fixed dollar figure to be raised from the generator group was established.

The second step, determining who should pay what, was difficult because (a) there were sharply conflicting views among the generators as to an appropriate allocation and (b) it was hard to know what any one company's share would be under any number of allocation formulas since the actual figure would vary in each case with, among other things, the number of companies that chose (or chose not) to participate. Moreover, the questions were interrelated — an allocation formula that was perceivedas fundamentally unfair by some segment of generators would reduce participation and increase the costs for each of the remaining companies.

The solution to the first of those two problems involved the identification and resolution, partly by negotiation and partly by an intra-steering committee arbitration, of the conflicting economic positions on allocation. Solving the second problem required a combination of (1) estimating the anticipated make-up of the settling group (based on a number of indicia), (2) establishing a worst case settlement figure for each company, and (3) obtaining consents to the decree from each company based on its worst case figure. All of this went forward while we were negotiating consent decree terms with EPA under the continuing risks that the Agency would break off the talks and proceed with cleanup on its own at substantially higher costs and then sue for reimbursement, and that the generator body would not support the terms negotiated.

Although the exact situation will vary from site to site, allocation negotiations generally start from EPA's "waste-in" list. There will, of course, be the usual contentions such as "my waste wasn't hazardous," "we sent less to the site than EPA claims," and "all of my waste was recycled." In Seymour⁶ the group of 24 settling companies decided that any effort to resolve these and other competing claims, many of which had substantial merit, would involve endless finger pointing and intra-steering committee negotiations. All differences were put to one side and we used EPA's waste-in list with all its unfairness as the allocation basis.

In Enviro-Chem we also recognized that the settlement would have to involve some compromise on allocation fairness, but we started with two basic additional factors not present in Seymour. First, we decided that to avoid the criticism to which the Seymour settlement had been subjected (however unfairly)⁷ and generators large and small would be offered the same opportunity to settle based on an allocation formula uniformly applied. Second, we had available a state on-site drum inventory (in addition to EPA's waste-in list). Such an inventory, even recognizing deficiencies in it, may be of real value in cases where there are large numbers of drums that are readily visible.

The cleanup cost estimates at Enviro-Chem showed that about two-thirds of the costs were attributable to drum removal and disposal and the remaining one-third represented the costs of cleanup of contaminated soil, the settling pond, pond bottom, surface water, etc. The drum inventory indicated that some companies apparently had a far greater proportion of the drums on site than their proportion of waste-in. (Conversely, some companies had a far lower proportion of drums on site than waste-in.) The companies that had a high proportion of the inventory on site argued in effect that they should not be penalized because they dealt with the site toward the end of its period of operation and that the revenue from their material may have been used in part to recycle at least some of the earlier received generator material. The accuracy of the state drum inventory also was questioned. Conversely, the companies with few drums on site argued that they should not pay for cleaning up any other company's drums and whatever the inaccuracy of the inventory, there was no reason to assume the inaccuracies favored any one company.

To resolve the problem, major generators with the most extreme situations argued before a group of the committee whose obligations would change little regardless of which way the formula was weighted.What resulted was a two-part allocation of costs. Actual costs of removing identified drums were allocated to those companies who had those drums on site, less 15 percent (to account for the inaccuracy in the list). All other costs (i.e., unidentified drums, soil removal, contaminated liquids) were allocated on a waste-in basis (based on drums or drum equivalents, less drums already paid for on the inventory basis).

Once the allocation formula was derived, computer-aided estimates were used to develop a worst case basis of $65 per drum (for inventory drums) and $25 per drum or drum-equivalent for all other work. This, it was hoped, would provide enough flexibility in the event that a larger number than anticipated chose not to participate and yet not result in individual company amounts that were so high as to discourage participation. The analysis turned [13 ELR 10404] out to be conservative, and when the consents on the worst case basis were received, we had what was necessary to fund the cleanup. A second computer run was then done based on the actual number of acceptances in hand, using the final inventory drum cleanup costs (less 15 percent) and dividing the remaining costs (less drums already paid for) among the consenting companies on a waste-in basis. Each company was then informed of its actual settlement figure, which in every case turned out to be less than the worst case figure.

In summary, to the extent that specific costs of the cleanup itself (i.e., drum removal costs) could be attributed to specific generators, those generators paid those costs less a small discount — other costs were allocated on a strict waste-in basis. All generators, large and small, were offered participation on the same basis. The problem of not knowing how many companies with what mix of waste-in and drums on site would settle, was resolved by obtaining commitments based on a worst case figure, and then determining the actual cost per company based on the application of the basic formula to the companies in fact agreeing to settle.

Trust Administration and the "Letter of Credit" Analog

Like the Seymour settlement, the Enviro-Chem agreement, as noted above, was premised on the assumption that the generators would fund a trust and that the trust would hire a responsible contractor to do the work in accordance with atechnical appendix approved by EPA's technical personnel. The contractor was required, in turn, to purchase certain insurance, post a performance bond substantially in excess of cleanup costs, sign the consent decree, and agree to stipulated penalties for non-performance.

In Seymour, however, the two largest generators joined with the bank as trustees. There are arguments in favor and against such an arrangement. In Enviro-Chem we took a different approach. The entire trust operation was self-contained. Bankers being loath to exercise engineering (or any other) judgment, the idea evolved to have the trustee, in addition to retaining the cleanup contractor, also hire an independent technical consultant to review the work of the cleanup contractor and approve the contractor's bills. Part of this self-checking mechanism required the technical consultant to consult with EPA's on-site coordinator to assure that he was satisfied with the work and to perform certain other checks. Although this resulted in a marginal increase in transaction costs (about 1 1/2 percent of total cleanup costs) it provided substantial additional assurance that the job would be done right. A checklist of items to be reviewed by the consultant was developed and all cleanup contractor work invoices, when certified to by the inspecting consultant, would then be paid by the bank. This meant that responsibilities had to be clearly defined, but when agreed to, allowed the bank to function much as it would in dealing with letters of credit. If the cleanup contractor's invoice contained the correct information and the work and the document were certified to by the consultant as correctly reflecting work properly done, the bank would pay.

EPA started work on the site using the generators' contractor and cleanup plan while negotiations were being concluded. It was agreed that a portion of the monies would be immediately paid from the trust to reimburse EPA for that work done subsequent to July 6, 1983. Such reimbursement, however, also was subject to a system of internal checks within the trust mechanism.

Action Against the Owners and Operators and the Insurance Carriers

The action against the owners and operators (in the form of cross-claims) and against the two insurance companies that issued environmental impairment insurance at the site (in the form of third party claims) basically seeks reimbursement to the generators of the amounts paid to the trust for the cleanup, other generator expenses related to the consent decree, and a declaration as to future costs.

The cross-claim against the owners and operators, on behalf of 151 defendants that consented to the entry of the consent decree, pleads a number of causes of actions. A summary of some of the allegations follows.

After identifying the parties and the court's jurisdiction, the cross-claim contains a series of factual allegations applicable to all counts. These include: the presence of thousands of waste-containing drums in various stages of decay and of contaminated surface water on the site, causing on- and off-site contamination and threats of fire, explosion, and additional future contamination; the demands for cleanup costs made by Indiana and EPA; the demand of the cross-claimants that the owners and operators pay the costs claimed; the entry of a consent decree among EPA, the state, and settling generators; and the costs of the cleanup (in excess of $2.9 million) — a substantial portion of which has been paid by the cross-claimants.⁸

Counts one and two of the complaint are primarily based on the Superfund statute itself. The first count of the complaint, after further identification of the parties, alleges that the cleanup and the costs thereof have been certified by EPA to be necessary and consistent with the National Contingency Plan, that they are necessary costs of response incurred by any other person within the meaning of "42 U.S.C. at § 9607(a)(4)(B) (Supp V 1981)"⁹ and that, pursuant to "§ 9607(a)(1) and (2),"¹⁰ cross-claim defendants are liable to cross-claimants for the costs described. The second count alleges that EPA's demand that the cross-claimants pay all costs of cleanup is a "claim" within the meaning of the statute, that the payments to the trust to clean up the site (made by cross-claimants) constituted the payment of compensation to a claimant and are costs resulting from a release under "42 U.S.C. § 9612(c)(2) (Supp VI 1981)."¹¹ The complaint further alleges that pursuant to common law and the statute cross-claimants are subrogated to all rights that EPA has under the Comprehensive Environmental Response, Compensation, and Liability Act (including at a [13 ELR 10405] minimum the right to recover from owners and operators the costs of cleanup as alleged).

Counts III through V seek recovery based on common law theories of indemnity, nuisance, and breach of contract. Count III's allegation of a common law right to indemnity is based on cross-claimants' alleged liability to EPA by operation of a special statute creating a non-delegable duty and the owners and operators having directly caused the conditions giving rise to the assertion of that liability against cross-claimants. Count IV alleges in addition that the conditions at the site amounted to a nuisance, that the payments made by cross-claimants were to abate the nuisance created by the cross-defendants, and that the conditions at the site have damaged cross-claimants in the amounts of the payments made and costs incurred. The breach of contract claim (Count V) alleges that cross-claimants contracted with Enviro-Chem to recycle and/or broker the material in accordance with applicable law and that Enviro-Chem breached the contract damaging the cross-claimants.

The relief sought, as noted above, includes the amount paid by the claimants to the trust for the cleanup and other costs, and a declaration that cross-claimants are liable for any additional future costs.

The third-party complaint against the insurance companies, after party identification and jurisdictional allegations, alleges the same basic facts regarding the conditions at the site and the state and federal cleanup demands. The first count of the third-party complaint alleges that third-party plaintiffs are "insureds" as that term is defined in the applicable policy, that the claims made by the state and by EPA were made during the pendency of that policy, were for compensatory damage by reason of impairment or interference with an environmental right protected by law and, under the terms of the policy, the insurer was liable to indemnify third-party plaintiffs. The third-party complaint further alleges the demand and denial of coverage and the negotiation of the consent decree, and it demands reimbursement and declaratory relief as to future costs. The second count against another insurer is similar except that it alleges that during the different period that the second insurer's policy was in effect the state made a demand against the named insured and that the claim subsequently asserted by the state and EPA against the third-party plaintiffs is part of the same claim asserted previously against Enviro-Chem by the state.

Conclusion

The complexity of what needed to be done to accomplish an environmentally and financially sound result in the Enviro-Chem case and the difficulties in assembling and obtaining agreements among large generator groups raise questions about the wisdom of recent EPA policy "guidelines" (in effect a form of rulemaking). These guidelines threaten to make more difficult, or prevent altogether, future settlement of this kind, by imposing rigid criteria that may not be appropriate in many individual cases. To encourage more settlements, greater (not less) flexibility is needed to accommodate reasonable generator requests and greater, not less, willingness is needed on the part of EPA headquarters to allow the regional offices the freedom to adjust to the exigencies of specific cases.

1. Union Carbide Corp. v. Environmental Conservationand Chemical Corp. and Union Carbide Corp. v. International Insurance Co., No. IP-83-1419-C (S.D. Ind.).

2. Bernstein, The Enviro-Chem Site Consent Decree, 6 CHEM. & RADIATION WASTE LITIG. REP. 751 (1983).

3. United States v. Chem-Dyne Corp., 13 ELR 20986 (S.D. Ohio Oct. 11, 1983) (decision denying Defendants' Motion for Summary Judgment).

4. Eugene Berkey, Red Sport Paint & Varnish Co.

Norman W. Bernstein, Cochairman, Ford Motor Co.

Harry Carey, Owens-Illinois, Inc.

Jerome T. Chalwick, United Technologies, Essex Group

Alan R. Chesler, Western Electric

Timothy L. Harker, Peabody, Lambert & Meyers

Barbara A. Hindin, Atlantic Richfield Co.

Jack Kent, General Cable

Edward Kurent, TRW, Inc.

John Kyle, Barnes & Thornburg

Barry L. Malter, Holland & Knight

Thomas Mark, LeBoeuf, Lamb, Leiby & MacRae

Robert Osmundsen, U.S. Gypsum Co.

Michael L. Rodburg, Lowenstein, Sandler, Brochin, Kohl, Fisher & Boylan

Timothy G. Rogers, Cochairman, American Can Co.

Rebecca M. Shanahan, RCA

Cornelius C. Smith Jr., Union Carbide Corp.

Paul Zavala, General Motors Corp.

5. The generator technical committee was chaired by Thomas Mulhern of Western Electric and included John Phelps from Ford Motor Company's Stationary Source Environmental Control Office; Mike Tyro from General Motors; Thomas Ambrose from Penn Central; Peter Lordy from Solvents Recovery Service; and Timothy Kelley from Arvin Industries

6. United States v. Seymour Recycling Corp., 13 ELR 20192 (consent decree); 554 F. Supp. 1334, 13 ELR 20195 (memorandum) (S.D. Ind. Dec. 15, 1982).

7. In Seymour generators accounting for approximately 50 percent of the volume on a waste-in basis paid for the entire surface cleanup costing $7.7 million. This represented substantially more than one-half of total cleanup costs and the settlers obtained in return a complete covenant not to sue. Unfortunately, the government then sent demand letters to the non-settlers for payment of the groundwater portion of the cleanup based on exaggerated groundwater cost estimates, thereby giving the appearance that the settlers had gotten a "sweetheart deal." Judge Steckler, after extensive hearings, wrote a careful 19 page opinion upholding the settlement as reasonable. There were no appeals and the cleanup of the site proceeded.

8. By November 23, 1983, all monies due from industry participants had been received by the trustee. The trust was short more than $10,000, however, because two generators, the United States Navy and the United States Postal Service, had not yet paid the amounts provided for in the consent decree.

9. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) § 107(a)(4)(B), ELR STAT. 41947.

10. CERCLA § 107(a)(1) & (2), ELR STAT. 41947.

11. CERCLA § 112(c)(2), ELR STAT. 41952.