U.S. v. Capital Tax Corp.

• Decision Date: 19 September 2008
• Docket Number: No. 07-3744.,07-3744.
• Citation: 545 F.3d 525
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. CAPITAL TAX CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

545 F.3d 525

UNITED STATES of America, Plaintiff-Appellee, v. CAPITAL TAX CORPORATION, Defendant-Appellant.

No. 07-3744.

United States Court of Appeals, Seventh Circuit.

Argued May 5, 2008.

Decided September 19, 2008.

Elizabeth A. Peterson (argued), Department of Justice, Environment & Natural Resources Div., Washington, DC, for Plaintiff-Appellee.

Norman B. Berger (argued), Varga, Berger, Ledsky, Hayes & Casey, Chicago, IL, for Defendant-Appellant.

Mark J. McAndrew, Barnes & Thornburg, Chicago, IL, for Stephen J. Pedi.

Gary J. Fernandez, Glen Ellyn, IL, for William Lerch.

Before CUDAHY, POSNER and ROVNER, Circuit Judges.

CUDAHY, Circuit Judge.

Capital Tax Corporation (Capital Tax) is an Illinois company that purchases distressed real estate properties and resells them for profit. At a Cook County scavenger sale in October 2001, Capital Tax successfully bid on tax certificates to a derelict paint factory on the south side of Chicago. Capital Tax claims that it then entered into an agreement to sell the property to a man named Mervyn Dukatt. Pursuant to this alleged contract, Capital Tax exercised its option on the tax deed and delivered possession of the property to Dukatt. Capital Tax retained legal title to the property, however, as security for the remainder of the purchase price. Dukatt never made another payment, leaving Capital Tax with title to an unwanted property.

Both the Chicago Department of the Environment (CDOE) and the Environmental Protection Agency (EPA) were called to the old paint factory after receiving complaints that toxic paint products were leaking out of the factory into nearby streets and sewers. The inspections revealed thousands of rusty and leaking barrels containing hazardous waste. The EPA ordered Capital Tax to dispose of the waste but Capital Tax refused; the EPA cleaned up the site itself. The Government then brought this suit under Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) for the response costs it incurred. See 42 U.S.C. § 9607(a). The district court granted summary judgment in favor of the Government on both liability and damages. Capital Tax now appeals, raising two basic arguments. First, it claims that it is not liable under CERCLA because it is not the "owner" of the facility. Second, even if it is liable, Capital Tax claims that it is only responsible for the cleanup of the parcels it owned.

I.

The hazardous waste site facility at issue in the present case is an old paint manufacturing facility located at 7411-7431 South Green Street in Chicago, Illinois. For many years, this facility was operated by the National Lacquer and Paint Company, Inc., which produced paint products and stored the chemicals and materials used to produce them. This facility, which we call the "National Lacquer site," consists of four two-story buildings, two one-story buildings and two yards; it is situated on one acre of land in a mixed industrial, commercial and residential area of Chicago. Although the site is now divided into seven parcels (Parcels 5, 26, 8, 9, 10, 11 and 12), it was historically operated as a single plant.¹ When viewed on a map, the seven rectangular parcels are stacked neatly on top of one another. Each parcel is connected to the others by a fire door or passageway, and several of the parcels share common yards.

In December 1995, William Lerch and Steven Pedi, through their newly created company, National Lacquer Company (National Lacquer), purchased the assets of the old National Lacquer and Paint Company. From 1995 to 2002, National Lacquer reclaimed paint, manufactured paints and coatings, and performed furniture stripping operations at the site. The company used a number of different hazardous materials, which were stored all over the site.² It is undisputed that hazardous materials leaked or were spilled onto the ground throughout this period. In January 1998, for example, the CDOE inspected the site and found "hundreds of rusty, damaged and leaking pails, cans and jars." Not only were these paint products spilling onto the floor, rainwater from a leaky roof mixed with the paint and flowed across the floor into drains and sewers and eventually into the street.

By 2001, National Lacquer had fallen behind on its property taxes, and Cook County made five of the seven parcels available for sale (Pedi retained title to Parcels 8 and 10). At tax scavenger sales, potential buyers bid on the delinquent taxes, and the winning bidder receives a tax certificate for the property. If the original owner fails to redeem the delinquent taxes within a statutory period, the tax sale bidder then has the right to petition for a tax deed to the property. Tax certificates do not pass title; they are similar to an option to later obtain title if the certificate holder chooses to exercise that option. Representatives of Capital Tax visited the National Lacquer site before the scavenger sale and conducted a limited inspection. While they were not able to enter the property, it was apparent to them that the property was a former paint factory. Capital Tax then successfully bid on the tax certificates.

After purchasing the tax certificates but before obtaining the tax deeds, Capital Tax claims that it struck a deal with Dukatt in which Capital Tax agreed to obtain the tax deeds to the property and to convey them to Dukatt in exchange for about $25,000. No written agreement was ever made. Because Capital Tax did not typically obtain the tax deeds until they had a buyer, Dukatt gave Capital Tax a $15,000 check ostensibly as partial payment for the property. On October 30, 2001, Capital Tax obtained tax deeds for four of the parcels. On February 14, 2002, it obtained a tax deed for the fifth parcel. Capital Tax also obtained an order of eviction to secure possession of the site from its previous owner, Lerch.³ After that, Capital Tax had very little to do with the property.

Dukatt, however, was frequently at the site. He had the keys to the property and the office. Capital Tax deferred to him on all matters regarding the site. Dukatt hired workers who, over the course of two or three weeks, cut up and removed the paint machines that had been in the garage. They also prepared and replaced an overhead door and knocked down two walls. This work allegedly cost Dukatt $10,000. In April 2002, the CDOE responded to a call concerning a spill of hazardous materials at the site. It discovered that paint containers had recently been moved from parcel to parcel; trails of spilled product traced the movement of these substances. It is unclear whether it was Dukatt, Lerch or perhaps a third party who moved the containers. The CDOE, however, noted that Capital Tax had made little effort to secure the site and it issued Capital Tax a notice of violation for "allowing a spill of hazardous substances due to container movement at the Site." On July 23, 2003, the CDOE officially requested that Capital Tax clean up the site. Capital Tax refused. It later explained that it "didn't care" about the site because it considered it to be Dukatt's problem.

The CDOE referred the matter to the EPA. On July 31, 2003, the EPA conducted its own inspection of the site. The EPA found more than 10,000 containers of various sizes, including gallon drums, storage tanks, cylindrical mixing tanks, vats, buckets, compressed gas cylinders, laboratory jars and bottles — most of which contained hazardous substances. Many of the containers were unsealed, leaking or otherwise deteriorating. The EPA also found evidence of trespassing on the site. On August 15, 2003, the EPA issued a Unilateral Administrative Order (UAO) demanding that Capital Tax clean its five parcels. Capital Tax did not comply. So, on October 6, 2003, the EPA removed the hazardous materials itself. The EPA also cleaned manholes and pits, excavated the top foot of storage yard soil, backfilled and planted the storage yard with grass. It sealed the tanks and pressure washed interior floors and walls to remove potential contamination.

The Government then filed suit against Capital Tax, Pedi and Lerch under CERCLA to recover the costs of the cleanup. The Government also sought civil penalties, see 42 U.S.C § 9606(b), and punitive damages, see 42 U.S.C. § 9607(c)(3), against Capital Tax for failing to comply with the UAOs. Capital Tax denied that it was liable under CERCLA, raising the "security interest" exemption under 42 U.S.C. § 9601(20)(A) and an "innocent landowner" defense under 42 U.S.C. § 9607(b)(3). On April 11, 2006, the Government moved for partial summary judgment on liability, which the district court granted. On August 24, 2006, the Government moved for summary judgment on damages, which the district court also granted, finding Capital Tax jointly and severally liable to the Government for $2,681,337.79 in response costs. It also assessed civil penalties in the amount of $230,250.00.

II.

The first major issue here is Capital Tax's liability under § 107(a) of CERCLA for the response costs incurred by the Government in the cleanup of the National Lacquer site. Under 42 U.S.C. § 9606(a), the Government may order potentially responsible parties to clean up hazardous waste sites. Further, under 42 U.S.C. § 9604(a), the Government is authorized to conduct its own cleanups of hazardous waste sites using the Hazardous Waste Superfund. The Government can then bring an action under § 107(a) to recover damages from potentially responsible parties. See 42 U.S.C. § 9607(a). In either case, the "polluter pays." Cf. United States v. Burlington Northern, Santa Fe Ry. Co., 520 F.3d 918, 941 (9th Cir.2008).

To establish liability under § 107(a), the Government must show that: (1) "the site in question is a `facility' as defined in § 101(9); the (2) the defendant is a responsible party under § 107(a); (3) a release or a threatened release of a hazardous substance has occurred; and (4) the...