Groundwater contamination case raises specter of increased litigation

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A decision out of the North Carolina Court of Appeals has garnered the attention of environmental law attorneys in the state because it raises questions about who should have to cover the cost of cleaning up contaminated groundwater when a chemical spill starts to affect surrounding properties.

When a gasoline supplier discovered that storage tanks on a property it owned in Winston-Salem had been leaking its petroleum-based product into the local groundwater, it moved quickly to clean up the mess. But that wasn’t good enough for the owner of a neighboring property whose groundwater was also affected by the leak. He argued that Beroth Oil Co. should have to pick up the cost of a remediation effort on his property, in addition to paying for the diminished value of the land.

In a March 1 decision, the Court of Appeals held that while it was undeniable that Beroth was responsible for the contaminated groundwater, damages should be capped at the cost of the diminished value of the neighboring property, rather than the much more expensive cleanup plan the owner of BSK Enterprises wanted to employ. The three-judge panel upheld the trial court’s finding that by cleaning up the source of the spill, Beroth had ensured the neighboring property would benefit as well. That said, the court acknowledged it will be decades before natural processes dissipate the contaminated groundwater.

Environmental attorneys watching the case said the decision could have a significant impact going forward on similar litigation involving spills and could set the stage for more lawsuits.

“This case raises a number of public policy questions and provides an incentive for property owners with groundwater contamination on their land to sue, knowing that oil companies will have to pay permanent damages for what is a temporary injury,” said Richard Morton of Womble Carlyle Sandridge & Rice’s environmental regulatory compliance practice in Raleigh.

A plan of action

The spill in question occurred on a property Beroth purchased in 1987 and installed underground storage tanks on a year later. The company discovered the leak when it moved to sell the property in 2005. Beroth reported the leak to the N.C. Department of Environmental Quality, then known as the Department of Environment and Natural Resources, which ordered the company to conduct a comprehensive site assessment.

Meanwhile, in 2006, Bradley Kelley purchased a metal-frame building on a neighboring property for $130,000, which he intended to use as a warehouse and distribution facility for a water filter and coffee business. Kelley is the sole owner and proprietor of BSK Enterprises Inc. and B. Kelley Enterprises Inc.

According to court records, Kelley was informed of the leak and its potential impact on his property in a June 28, 2010, letter from DEQ. The letter allegedly stated that a well-water sample taken on his property had detected contaminants and that additional testing was needed.

Terraquest, an environmental engineering firm hired by Beroth, later filed a corrective action plan with DEQ that included a number of remediation strategies for addressing the spill on Beroth’s property. None of those strategies would directly target Kelley’s property, court records said. When Kelley protested the proposed plan, he was allegedly informed by DEQ that by addressing the source of the spill, the groundwater on his property would eventually become free of contamination through the process of natural attenuation—though an expert later testified that process could take up to 25 years to complete. DEQ approved Beroth’s proposed action plan.

Over the next four years, Terraquest employed a number of strategies to remove the concentrated petroleum spills on Beroth’s property. As a result, the “free product” levels on Beroth’s property were allegedly cut from 3.4 feet to 3 inches. Court records said the cleanup effort also had the knock-on effect of reducing the contaminant levels on Kelley’s property. A water supply test found that the water on Kelley’s property did not pose a health risk.

Despite those findings, Kelley hired his own environmental engineer, who proposed a plan to clean the groundwater on Kelley’s property. The cost of that plan was about $1.5 million. Beroth declined to cover the cost of that plan, prompting Kelley to sue. The lawsuit was filed in the name of the two companies owned by Kelley.

Damages disagreement

At trial, a Forsyth County jury found that Kelley’s property had a fair market value of $180,000. But the jury said that value had fallen to $71,500 as a result of the contaminated groundwater—a diminished value of $108,500. The jury also found that the cost of cleaning up Kelley’s property would be $1.492 million and awarded Kelley the full cost of remediation.

On June 5, 2014, the Superior Court judge hearing the case issued a “post-verdict order,” which capped Kelley’s damages at a much lower value. Finding that the total cost of diminution and remediation was disproportionate to the injury Kelley suffered, the judge capped his companies’ claims of trespass and nuisance at $108,500. The trial court chose that figure to reflect the lost value on the property and that the injury was a “temporary and abatable nuisance.”

Both sides appealed the trial court decision.

Kelley’s brief to the Court of Appeals argued the trial court got it wrong by capping damages at the diminished value of the property, rather than allowing for the cost of remediation. Kelley also argued that because the jury did not issue a verdict on the trespass and nuisance claims, the trial court’s decision to award damages on those claims that were capped at the diminished value of the property was improper.

Beroth argued that Kelley’s case should have been dismissed for lack of standing. The company also argued Kelley was not entitled to diminution damages related to the stigma associated with groundwater contamination and that the nuisance and trespass claims should have been dismissed because the contamination did not result in a substantial interference with the use of the property. Beroth’s position had amicus support from the North Carolina Chamber and N.C. Petroleum & Convenience Marketers Inc.

The appeal raised several issues of first impression for the Court of Appeals, including what damages should be assessed in instances where subsurface contaminants have migrated onto neighboring properties.

Who pays?

Writing for the Court of Appeals panel, Judge Wanda Bryant  said the trial court got it right when it capped Kelley’s damages at the diminution cost, despite the fact that North Carolina courts have advised that the lost value standard suffers from excess rigidity and should be applied with caution.

Bryant said that unlike in previous Court of Appeals decisions, the contaminants at issue in BSK Enterprises v. Beroth Oil Co. were underground, approximately 25 feet below the surface. She noted that the contamination on Kelley’s property “cannot be seen, smelled, touched, nor is it otherwise disruptive, intrusive, dangerous or harmful.”

Add to that the fact that Beroth has taken active steps to remediate the migration of the contamination, and Bryant said awarding Kelley’s companies damages for the full cost of remediation was “disproportionate” and “unreasonable.”

Bryant said, “Accordingly, the trial court’s post-verdict order entering a judgment in favor of plaintiffs for damages for nuisance, trespass and violation of the [Oil Pollution and Hazardous Substances Control Act] in the amount of $108,500 was not erroneous.”

She added that Kelley’s claim was not governed by “personal use doctrine” as he argued because the property was owned and being used by two businesses he owned.

The Court of Appeals rejected most of Beroth’s arguments, finding that the award of damages for nuisance and trespass was proper because the contaminants resulted in “substantial annoyance and some interference with comfort and use of the property as well as the need for filtration.”

Guy Crabtree of Crabtree, Carpenter & Connolly in Durham, who represented Kelley’s companies on appeal, said he intends to file for discretionary review by the N.C. Supreme Court because the Court of Appeals decision provides no incentive for oil companies to keep spills from occurring.

“The concern I have is that innocent landowners may not have any control over if and when their property is cleaned up,” Crabtree said. “Without requiring them to pay remediation costs, they could simply calculate that the cost of mitigating the risk of spills is more expensive than simply paying the diminution costs if they do occur.”

Kelley’s companies were also represented by C. Douglas Maynard of Maynard & Harris in Winston-Salem.

Matthew Bryant of Hendrick Bryant Nerhood Sanders & Otis in Winston-Salem declined to comment on the Court of Appeals decision, saying only, “This is an important case that has severe ramifications for DEQ and North Carolina groundwater.”

Trickle-down effect

Regardless of where they stand on the Court of Appeals’ decision in BSK Enterprises v. Beroth, attorneys following the case agree that the Court of Appeals decision is likely to have a significant impact on groundwater contamination lawsuits going forward.

Those who support Kelley’s position say North Carolina law makes it clear that the proper remedy for temporary damage to property is the cost of repair, not the diminution in value.

As the North Carolina Advocates for Justice put it in an amicus brief filed in support of Kelley’s companies, “A hardline, universal damages cap robs trial courts of the flexibility needed to ensure that innocent landowners are fully compensated.”

But Womble Carlyle’s Morton said he opposes the idea of using the diminution value as the damages cap for a different reason. Because the injury allegedly suffered by Kelley was temporary, Morton said Kelley will be made whole through the natural course of time.

“Therefore, granting permanent damages of diminution for a temporary injury essentially amounts to double recovery for the plaintiffs,” Morton said, adding the Court of Appeals decision could increase the number of lawsuits that are filed. “If I am a landowner with groundwater contamination, and I think I can get both damages and the full value of my property if I wait a few years, that sounds like a pretty good deal to me.”

Follow Jeff Jeffrey on Twitter at @NCLWJeffrey.