Jones-Hamilton Co. v. Kop-Coat, Inc., C-90-0169 EFL.

• Decision Date: 20 November 1990
• Docket Number: No. C-90-0169 EFL.,C-90-0169 EFL.
• Citation: 750 F. Supp. 1022
• Parties: JONES-HAMILTON COMPANY, Plaintiff, v. KOP-COAT, INC., Beazer Materials and Services, Inc., and Koppers Company, Inc., Defendants.
• Court: U.S. District Court — Northern District of California

750 F. Supp. 1022

JONES-HAMILTON COMPANY, Plaintiff, v. KOP-COAT, INC., Beazer Materials and Services, Inc., and Koppers Company, Inc., Defendants.

No. C-90-0169 EFL.

United States District Court, N.D. California.

November 20, 1990.

James R. Arnold, Pettit & Martin, San Francisco, Cal., for plaintiff.

James L. Meeder, Brobeck, Phleger & Harrison, San Francisco, Cal., for defendants.

MEMORANDUM OPINION AND ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

LYNCH, District Judge.

Plaintiff, Jones-Hamilton Company, has brought this action pursuant to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq. Plaintiff alleges that defendants, Kop-Coat, Inc., Beazer Materials and Services, Inc., and Koppers Company, Inc., should contribute to the cost of responding to the illegal disposal of certain hazardous substances from plaintiff's chemical formulation facility. Plaintiff and defendants have filed cross-motions for summary judgment. For the reasons set forth below, the Court grants defendants' motion for summary judgment and denies plaintiff's motion for summary judgment.

I. BACKGROUND

The following facts are not in dispute. On August 31, 1970, plaintiff and defendants entered into a written agreement ("the agreement") under which plaintiff was to formulate raw materials to be provided by defendants into wood preservation compounds.¹ Under the agreement, defendants retained title to the raw materials and title to the finished products at all times. The agreement contained a provision ("the indemnity clause") which provided as follows:

Plaintiff agrees to comply with all applicable Federal, State and local laws, ordinances, codes, rules and regulations and to indemnify defendants against all losses, damages and costs resulting from any failure of plaintiff or any of its employes sic, agents or contractors to do so.

Plaintiff formulated defendants' raw materials into wood preservation compounds under the agreement from 1970 until some time in 1984. An agent of defendants was present at plaintiff's facility during the formulation process. Although the agent's full role in the formulation process is disputed, it is clear that his duties included, at a minimum, insuring that plaintiff maintained quality control standards that were acceptable to defendants.

On August 27, 1970, four days before the formulation agreement was signed, the California Regional Water Quality Control Board ("the Water Quality Board") issued a waste discharge permit ("the permit") to plaintiff. The permit prohibited plaintiff from discharging chemicals other than "chlorides, sulfates, phosphates and carbonates" into plaintiff's waste water containment ponds. Notwithstanding the permit, plaintiff released prohibited chemicals into its ponds during the process of formulating defendants' compounds. On March 14, 1985, the Water Quality Board found that plaintiff had violated its permit. The Water Quality Board ordered plaintiff to conduct an investigation to determine the extent of contamination and to remediate the site of illegal disposal. Plaintiff alleges that it has spent in excess of $2 million in complying with this order.

II. ISSUES

The Court, at a status conference held on April 20, 1990, requested that the parties submit cross-motions for summary judgment on two issues. First, the Court requested that the parties brief the issue of whether the indemnity clause bars plaintiff's action. If defendants are entitled to indemnification from plaintiff for any liability under CERCLA, plaintiff's suit against defendants for contribution is meaningless. Second, the Court requested that the parties brief the issue of whether defendants fall within the ambit of the statute—that is, whether defendants "arranged for the disposal of hazardous substances." 42 U.S.C. § 9607(a)(3). Because the Court holds that the indemnity clause bars plaintiff's action, the Court need not address the issue of whether defendants "arranged for the disposal of hazardous substances."

III. DISCUSSION

Plaintiff contends that the indemnity clause does not bar plaintiff's action for three reasons. First, plaintiff argues that defendants may not be indemnified for liability under CERCLA because indemnification for strict liability is contrary to the public policy of California. Second, plaintiff argues that the indemnity clause does not apply to CERCLA liability because the clause's language does not expressly anticipate "CERCLA-type liability" and because the parties drafted the clause ten years before CERCLA's enactment. Third, plaintiff argues that defendants' "active negligence" bars indemnification. After briefly discussing the source of applicable law, the Court addresses each of these issues in turn.

A. Applicable Law

California contract law governs the Court's interpretation of the indemnity clause. The Ninth Circuit has held that state law should provide the general content of federal law with respect to interpreting a contract that releases a party from CERCLA liability. Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454, 1458-59 (9th Cir.1986). A court should apply uniform federal law to the interpretation of such a contract only when the outcome under state law would be hostile to federal interests. Id. at 1460. The indemnity clause at issue is part of an agreement that was executed in California. The parties were to perform their obligations under the agreement in California. As set forth below, interpretation of the indemnity clause under California law does not lead to an outcome which is hostile to federal interests. Accordingly, the law of contracts in California governs the interpretation of the indemnity clause.

However, plaintiff's argument that one may never be contractually indemnified for CERCLA liability is a threshold public policy issue. Congress has specifically addressed this issue. See 42 U.S.C. § 9607(e)(1). The Court must therefore look to the provisions of CERCLA to determine whether Congress intended to absolutely bar such agreements. See Mardan, 804 F.2d at 1458 ("In a case ... which implicates a federal statute, the predominant consideration must be Congressional intent....").²

B. Liability Under CERCLA and Contractual Indemnification

Contractual indemnification among private parties is not contrary to public policy. Plaintiff argues that defendants are barred from indemnification because CERCLA is a strict liability scheme and one cannot be indemnified by agreement for strict liability under California law. Plaintiff cites Widson v. International Harvester Co., 153 Cal.App.3d 45, 60, 200 Cal.Rptr. 136, 147 (1984), for the proposition that "it would thwart basic public policy behind strict liability to permit indemnification of a strictly liable defendant under a general indemnity clause." Widson, however, considered the application of an indemnity agreement to the law of products liability in California. Id. at 49, 200 Cal.Rptr. at 139. Although CERCLA, like California products liability law, is a strict liability regime, see, e.g., New York v. Shore Realty Corp., 759 F.2d 1032, 1044 (2d Cir.1985), CERCLA and California products liability law do not necessarily embrace identical public policies. The California legislature has specifically provided that agreements which seek to indemnify a party for strict products liability are "void and unenforceable" because they are "against public policy." Widson, 153 Cal. App.3d at 60-61, 200 Cal.Rptr. at 147 (quoting Cal.Civ.Code § 2782). To determine the public policies which underlie CERCLA, however, the Court need not and should not examine the pronouncements of the California legislature with respect to products liability, but rather must determine the intent of Congress as expressed in the language of CERCLA itself.

Section 107(e)(1) of CERCLA provides:

No indemnification, hold harmless, or similar agreement or conveyance shall be effective to transfer from the owner or operator of any vessel or facility or from any person who may be liable for a release or threat of release under this section, to any other person the liability imposed under this section. Nothing in this subsection shall bar any agreement to insure, hold harmless, or indemnify a party to such agreement for any liability under this section.

42 U.S.C. § 9607(e)(1). This inartfully drafted provision seems internally inconsistent. The first sentence of section 107(e)(1) appears to prohibit indemnification agreements under all circumstances while the second sentence of section 107(e)(1) appears to permit indemnification under all circumstances. Plaintiff, in its briefs and at oral argument, has never argued that the first sentence of section 107(e)(1) prohibits indemnification agreements. Rather, plaintiff has relied on California products liability law in arguing that CERCLA indemnification agreements are contrary to public policy. While the Court rejects plaintiff's argument that California's public policy of disallowing contractual indemnification for strict products liability prohibits contractual indemnification for CERCLA liability, the Court finds it necessary to consider sua sponte the issue of whether the language of CERCLA itself bars contractual indemnification.

A majority of federal courts that have considered the issue have held with minimal discussion that the second sentence of section 107(e)(1) completely negates the first sentence, thereby permitting parties to bargain over indemnification for CERCLA liability under all circumstances. See, e.g., American Nat'l Can Co. v. Kerr Glass Mfg. Corp., 1990 WL 125368, 1990 U.S. Dist. Lexis 10999, p. 32 (N.D.Ill.1990); Versatile Metals, Inc. v. Union Corp., 693 F.Supp. 1563, 1573 (E.D.Pa.1988) Chemical Waste Management v. Armstrong World Indus., Inc., 669 F.Supp. 1285, 1293 (E.D. Pa.1987); FMC Corp. v. Northern Pump Co., 668 F.Supp. 1285, 1289 (...