Lessons Learned: Negotiating Covenants Not to Sue in Environmental Agreements
Parties that settle environmental claims with the government frequently include covenants not to sue in their settlement agreements. But how does a party ensure that a covenant not to sue prevents the government from suing it again? By negotiating a broad covenant not to sue that contemplates all the ways in which the government may hold it liable at a site.
On February 22, 2017, a district court held that a covenant not to sue (Covenant) did not prevent the government from suing to recover its costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The reason? That Covenant was limited by its terms to certain claims brought under the Resource Conservation and Recovery Act (RCRA). The result: two cleanups—over 30 years apart—conducted and paid for by two different parties at the same site, the first one based on RCRA and the second one based on CERCLA.
The case, United States v. Land O’Lakes, Inc ., also teaches two lessons: First, companies should negotiate broad covenants not to sue that anticipate the potential for liability under all environmental statutes, whether or not presently used by the government; and second, companies should conduct careful environmental due diligence, so that prospective buyers of companies or property understand the full extent of risk resulting from a deal.
Over the last 100 years, many companies owned and operated the oil and gas refinery (the Site) at issue in United States v. Land O’Lakes, Inc. Throughout the early 20th century, operators of the Site discharged waste into Skull Creek in Oklahoma. Defendant Land O’Lakes’ predecessor in interest, Midland Cooperative Wholesale, owned and operated the Site from 1943-1977. Midland then sold the Site to the now-bankrupt Hudson Oil Refining Co.
In the 1980s, the United States sued and settled claims against Hudson at the Site for allegedly violating RCRA. Through a judicially approved Consent Decree entered into under RCRA, the United States (the Government) required Hudson to clean up the Site. It did. The Consent Decree contained the following limited Covenant and settled claims against Hudson. The Covenant provided as follows: “United States hereby covenants not to sue Defendants and their successors and assigns of the [refinery] for corrective action claims under Section 3008(h) of RCRA, 42 U.S.C. § 6928(h) . . . .”
After Hudson performed the work, the court entered an Order for Closure in 1994, releasing Hudson from its obligations under the Consent Decree. Hudson ultimately filed for bankruptcy during this time.
But EPA’s investigation wasn’t finished. When it continued to investigate, it determined that the Site was still contaminated. EPA remediated the Site further pursuant to CERCLA. Then the agency sought to recover the costs it incurred in cleaning up substances allegedly released by Land O’Lakes’ predecessor, Midland.
United States v. Land O’Lakes, Inc.
In June 2015, the Government demanded that Land O’Lakes pay more than $28 million. Land O’Lakes refused. The Government then sued the company under CERCLA to recover past and future response costs incurred or to be incurred at the Site. Land O’Lakes argued that the Government’s CERCLA claims were barred by the Covenant in the Consent Decree and the Order for Closure.
The Government moved to strike those affirmative defenses, and on February 22, 2017, the court granted the Government’s motion. The court held, among other things, that the Government’s Covenant was expressly limited to corrective action claims brought under RCRA and that the Order for Closure did not expand the scope of that provision:
The Covenant did not cover CERCLA claims. The Government promised not to sue only for corrective action claims brought under RCRA § 3008(h) and expressly reserved the right to sue under other federal statutes. Because the Consent Decree was a contract, Hudson could have, but did not, bargain for a broader Covenant that included alleged violations of CERCLA or other statutes.
The Order for Closure did not release Land O’Lakes from liability. The Order for Closure incorporated the Consent Decree, but did not expand the scope of the Government’s Covenant.
The Government did not waive its right to sue under CERCLA. The Government was not “required to list every possible federal statute under which it was reserving the right to sue” or “the precise party against whom judgment might one day be sought.”
The case offers two lessons for potentially responsible parties (PRPs) and prospective purchasers of businesses or properties (Purchasers).
First, in negotiating environmental agreements, a PRP should evaluate all the ways in which the government may hold it liable at a site, considering past and current operations on the property and the environmental conditions at issue. The PRP should then bargain for a covenant not to sue that covers all potential laws under which the government may seek to hold that PRP liable, now or in the future. While Hudson ultimately avoided future liability under CERCLA by declaring bankruptcy, the company should have bargained for a broader Covenant that limited its present and future liability exposure—and the exposure of its successors in interest.
Second, Purchasers should carefully review environmental agreements entered into by a target company or related to a target property to discern potential liabilities that the buyer may be assuming in an acquisition. Land O’Lakes’ alleged liability under CERCLA arose solely from its merger with a former owner of the Site, Midland. Companies in Land O’Lakes’ position should review environmental agreements and structure deals in ways that account for liability risks. A PRP can limit its exposure to liability through careful negotiations and review of covenants not to sue and environmental agreements.