Temporary Contamination and Permanent Damages

13 December 2013 Publication

Texas Supreme Court to Decide Case on Environmental Stigma Damages

Can an owner recover for loss in market value of his Texas real property, as a permanent damage, resulting from contamination that is only "temporary?" In November 2012, the 14th Court of Appeals affirmed damages awarded on such a theory in a negligence claim. The Texas Supreme Court heard oral arguments on the issue on Dec. 5, 2013 in the case Houston Unlimited Inc. Metal Processing v. Mel Acres Ranch, 389 S.W.3d 583 (Tex. App.-Houston [14th Dist.] 2012, pet. granted).

Process waste discharges from a metals finishing facility (defendant\appellant Houston Unlimited Inc.) led to contamination of a stock pond on a neighboring farm property (plaintiff\appellee Mel Acres Ranch). After the farm tenant complained its cattle had become ill, the Texas Commission on Environmental Quality tested the stock pond and documented that concentrations of hazardous metals in the plaintiff's stock pond exceeded state action levels (TCEQ's protective concentration levels) and required Houston Unlimited to investigate the contamination of its property and the stock pond and to prepare an environmental risk assessment. Houston Unlimited took measures to stop further process waste discharges from its facility and undertook the required investigation work. The investigation demonstrated that metals TCEQ previously detected in the stock pond no longer exceeded state action levels. The environmental risk assessment, approved by TCEQ, concluded that there was no unacceptable risk to ecological receptors in the stock pond.

Mel Acres Ranch filed a lawsuit in Texas state court alleging theories of nuisance, trespass and negligence to recover loss of market value of its property caused by the contamination. At trial, the jury held that Houston Unlimited did not cause a permanent nuisance and did not cause a trespass on the Mel Acres Ranch farm property. However, it did find that Houston Unlimited was negligent in discharging pollutants, which proximately caused permanent damage by a loss of $350,000 in market value of the farm property. The trial court awarded these damages.

In its appeal, Houston Unlimited argued that Mel Acres Ranch could not establish permanent damage to the property, which is a prerequisite to recovering for loss of market value, because the contaminants detected in the stock pond no longer exceeded state action levels. Mel Acres Ranch argued that it could recover these damages for a permanent environmental stigma even if the contamination was only temporary. Although the Houston Court of Appeals agreed that proving permanent damage is a prerequisite for the recovery of loss of market value, it held that the type of permanent damage does not need to be physical damage to the land such as contamination above state action levels. Rather a stigma resulting from even temporary contamination of a property (which would include contamination that has been remediated) may be a permanent damage for which loss of market value could be recovered.

Houston Court of Appeals distinguished two Texas cases, Taco Cabana Inc. v. Exxon Corp., 5 S.W.3d 773 (Tex.App.-San Antonio 1999, pet. denied) and Z.A.O. Inc. v. Yarbrough Drive Center Joint Venture, 50 S.W.3d 531, 543-44 (Tex.App.-El Paso 2001, no. pet.), which held that TCEQ-established action levels determine whether levels of contamination on a property are "unreasonable" to warrant recovery of cleanup costs and other damages under nuisance or trespass theories. Although those cases held that the Texas Water Code and implementing regulations (including state action levels) displaced any common law duties regarding removal of contamination, the Houston Court of Appeals limited their reach, noting that they did not address contamination that temporarily exceeded state action levels. Citing the fact that the Mel Acres Ranch stock pond had, in fact, been contaminated by metals above state action levels at one time, it also distinguished Texas cases holding that economic damages are not recoverable absent an accompanying physical harm to person or property.

The Houston Court of Appeals held that the plaintiff offered sufficient evidence to support the stigma-based loss of market value award. Evidence of stigma included testimony by a real estate appraiser that: (1) TCEQ records of the contamination issue were publicly available; (2) the plaintiff would be required to disclose the contamination issue to avoid potential liability if it sold the property; and (3) there is a market perception of increased "environmental risk" associated with a contaminated property.

The Houston Court of Appeals' ruling is in line with courts applying laws of Utah (Walker Drug Co. Inc. v. La Sal Oil Co., 972 P.2d 1238, 1245-48 (Utah 1998)), Indiana (Terra-Products Inc. v. Kraft Gen. Foods Inc., 653 N.E.2d 89, 93 (Ind.Ct.App.1995)) and Pennsylvania (In re Paoli R.R. Yard PCB Litigation, 35 F.3d 717. 797-98 (3rd Cir.1994)), which allowed recovery of loss of market value based on stigma without establishing permanent physical injury to the property. A majority of courts, including the Fifth Circuit, the Ninth Circuit, and courts in North Carolina, South Carolina, California, Missouri and New York, have come out on the other side, requiring permanent physical injury to the property.

The resolution of this case in the Texas Supreme Court will affect how private parties treat cleanups that reduce contaminant levels to meet state cleanup standards. If upheld, the possibility of a stigma claim could attach to any remediated site, even sites issued a Certificate of Completion from the TCEQ's Voluntary Cleanup Program releasing subsequent owners from state cleanup liability. Parties on both sides of transactions will need to keep stigma-based damages in mind when addressing environmental issues.

If you have any questions regarding this alert, please contact Gardere's Environmental Attorneys Frances E. Phillips (fphillips@gardere.com or 214.999.4803), Scott D. Deatherage (sdeatherage@gardere.com or 214.999.4979) or Jonathan Bull (jbull@gardere.com or 214.999.4050).

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