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MRP Properties Company, LLC v. United States

United States District Court, E.D. Michigan, Northern Division

April 4, 2018

MRP PROPERTIES, LLC, et al., Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.

          ORDER GRANTING MOTION TO DISMISS AND DISMISSING COMPLAINT WITHOUT PREJUDICE

          THOMAS L. LUDINGTON UNITED STATES DISTRICT JUDGE DATED

         Plaintiffs MRP Properties, et al., filed their complaint against Defendant United States of America on April 13, 2017, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). Plaintiffs seek payment of response costs arising from investigation and cleanup of contamination at Plaintiffs' refineries, contending that the United States exercised control over the refineries before and during World War II. Am. Compl., ECF No. 1. Plaintiffs did not initially serve the Complaint on Defendant, but filed an Amended Complaint on July 5, 2017, which was served on Defendant. Am. Compl, ECF No. 4.

         Defendant filed a motion to dismiss all Plaintiffs other than MRP Properties as improperly joined under Rule 20 or, in the alternative, to sever and transfer those Plaintiffs to a proper venue. Mot. Dismiss, ECF No. 13; Fed.R.Civ.P. 20. The answer deadline was stayed pending the Court's decision on the motion to dismiss or sever. ECF No. 22. The motion to dismiss or sever was denied. ECF No. 26. On January 4, 2018, Defendant filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). ECF No. 32. Plaintiffs responded on January 25, 2018. ECF No. 34. Defendant replied on February 8, 2018. ECF No. 35.

         I.

         Plaintiffs are six wholly owned subsidiaries or affiliates of the Valero Energy Corporation. See Discl. Corp. Aff., ECF No. 5. Plaintiffs collectively own twelve refinery sites (the Sites) located in Michigan, Oklahoma, Kansas, Tennessee, Illinois, Texas, and California. With one exception, Plaintiffs did not own the refineries during WWII, but acquired the refineries afterward. Plaintiffs allege that before and during WWII, the Government controlled the operations of the refining industry. Am. Compl. at 5. Pursuant to Executive Order 9276, President Roosevelt established the Petroleum Administration for War (PAW), and vested PAW with broad discretionary authority to carry out the national plans, policies, and objectives for the petroleum industry. Id. at 7. The PAW divided the nation into districts, and implemented the national policy at a regional and refinery level by orders and directives controlling operations and refinery yields. Id. at 7-8. The executive order provides, in part:

There is established a Petroleum Administration for War, at the head of which shall be a Petroleum Administrator who shall be directly responsible to the President . . . The Administrator shall: a. Subject to the provisions of this order, establish basic policies and formulate plans and programs to assure for the prosecution of the war the conservation and most effective development and utilization of petroleum in the United States and its territories and possessions, issue necessary policy and operating directives to parties engaged in the petroleum industry . . . c. (1) Obtain from the Departments of War and the Navy, the Office of Lend-Lease Administration, the Department of State and the Board of Economic Warfare, the several divisions and branches of the War Production Board, and such other Federal departments and agencies as may be appropriate, estimates of the amounts of petroleum which will be required from the United States, its territories and possessions, to meet direct and indirect military, and essential industrial and civilian, requirements; and compile and analyze such estimates and submit them to the War Production Board with recommendations for the allocation of petroleum to meet such requirements. (2) Prepare and recommend to the War Production Board estimates of the quantities and kinds of material needed by the petroleum industry to produce, refine, store, distribute (excluding transportation), or otherwise make available the amount of petroleum recommended by the Administrator for allocation by the War Production Board.

Exec. Order No. 9276, 7 FR 100912 (1942).

         In their common allegations of fact, Plaintiffs allege that PAW proceeded to operate the nation's refineries by directing and controlling, at the refinery level: “(i) the allocation-by time and amount-of crude oil and other feed stocks . . .; (ii) the procurement priorities to obtain services, equipment and parts . . .; (iii) the types and specifications of war-related products to be manufactured; (iv) the levels of production for each of those products; (v) the price of the products and profits made; and (vi) to whom the products would be sold within the Government-controlled supply chain.” Id. at 9. Plaintiffs allege that by serving as the “de facto operator” of the refineries, the Government released hazardous wastes into the environment and disposed, or intentionally arranged for the disposal, of hazardous waste streams into the environment.” Id. at 11. Plaintiffs also allege that the Government specifically exercised control over the hazardous waste management process itself by controlling approval of war-time construction projects, denying approval for some projects “relating to pollution control that were deemed non-essential to the war effort” while approving other projects. Id. at 24.

         With respect to specific refineries, Plaintiffs allege that the Government controlled day-to-day operations at each refinery. Id. ¶¶ 31, 38, 46, 54, 62, 65, 70, 78, 85, 91, 101, 115, 121. Plaintiffs' amended complaint further alleges that the Government's control of all inputs and outputs necessarily impacted the hazardous waste profile of their refineries. For example, at eight of the twelve refineries, Plaintiffs allege that Defendant dictated that the refineries would be allocated “sour” crude, whereas the refineries were only equipped to process “sweet” crude. Id. ¶¶ 32, 39, 47, 55, 63, 71, 79, 86. “Due to its higher sulfur content, sour crude was highly corrosive and caused leaks and other problem in equipment that was designed at the time to process sweet crude oil.” Id. The Government also controlled the outputs, and issued directives prohibiting refineries from manufacturing certain products (such as civilian gasoline), and specifically directing them to manufacture other products such as kerosene, 100-octane aviation gas (avgas), avgas components (i.e. codimer), 80-octane all-purpose gasoline, and 7-0-2 Navy diesel, among others. Id. ¶¶ 32, 40, 48, 56, 64, 72, 80, 87, 93, 102, 116, 122. The Government also “oversaw” or “dictated” the amount and type of wastes generated and released at each refinery and tracked these production loss statistics. Id. ¶¶ 35, 43, 51, 59, 67, 75, 82, 89, 98, 118, 124. Refinery operations and/or facilities had to be converted to accommodate the Government's demands. Id. ¶¶ 33, 41, 49, 57, 65, 73, 80, 88, 96, 107, 117.

         In sum, the Government did everything other than “manually turn the levers and valves.” Id. ¶ 23. Thus, Plaintiffs contend that the level of control exercised by PAW was “well beyond the Government's regulatory role, ” and that the Government is appropriately responsible as an operator and as an arranger under CERCLA. Id. ¶ 26. As such, Plaintiffs contend the Government must pay its share of response costs that Plaintiffs have incurred and continue to incur to dispose of hazardous waste arising from the Government's operation of their refineries during the wartime period.

         Plaintiffs' first claim for relief seeks response cost recovery under CERCLA section 107(a), codified at 42 U.S.C. 9607(a). Plaintiffs assert a second claim for relief arising under CERCLA section 113(g)(2), codified at 42 U.S.C. 9613(g)(2), and the declaratory judgment act, 28 U.S.C. 2201(a), seeking a declaratory determination binding the Defendant in subsequent actions to pay response costs or damages.

         II.

         Defendant argues that Plaintiffs' allegations regarding wartime regulatory authority do not state a claim for operator liability at 11 of the 12 refineries.[1] Mot. at 10-11. Defendant characterizes the Government's control over petroleum inputs, products, prices, and purchasers as “general procurement activities” insufficient to give rise to operator liability under CERCLA. Mot. at 12-14. Defendant contends that Plaintiffs' remaining allegations concerning the Government's control over hazardous waste generation, release, and disposal are conclusory and not entitled to a presumption of truth because they require an unsupported inferential leap. Id. at 14-16. Defendant argues that Plaintiffs have not specifically alleged that the Government “manage[d], direct[ed], or conduct[ed] . . . operations having to do with leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations.” Id. at 11 (citing Bestfoods, 524 U.S. at 61).

         Defendant further contends that Plaintiffs have failed to allege a nexus between the alleged control exercised by the Government and the hazardous waste released at each refinery. Id. Defendant also argues that Plaintiffs have not stated a claim for arranger liability, as Plaintiffs have not alleged that the Government owned or possessed hazardous waste, nor have Plaintiffs alleged that the Government took intentional steps to dispose of hazardous waste. Id. at 18-21. Finally, Defendant contends that Plaintiffs have not pled facts demonstrating that the costs incurred are necessary and consistent with the national contingency plan. Id. at 21-24.

         Plaintiffs argue that the allegations of pervasive Government control over refinery operations including inputs, outputs, prices, and purchasers, are all that is required to state a claim for operator liability. Resp. at 9. Plaintiffs contend those allegations, taken as true, show that the Government managed, directed, and controlled operations having to do with pollution. Id. Plaintiffs argue that they have gone above and beyond their pleading requirement by further alleging: 1) that Government-controlled operations utilized equipment and processes that leaked hazardous waste, 2) that the Government tracked losses and maintained authority over construction projects, 3) that the Government directed immediate changes to refinery yields, altering waste profiles at the refineries, and 4) that the Government allocated corrosive “sour crude” which the refineries were not equipped to process, further contributing to the waste profile of the refineries. Id. at 10. Plaintiffs question Defendant's reliance on the Exxon case from the Southern District of Texas, which Plaintiffs argue imposes a new requirement of “day-to-day” decision making regarding waste disposal. Id. at 17-18. Plaintiffs argue that this is inconsistent with the standard set forth by the Supreme Court in Bestfoods. Id. at 17.

         Plaintiffs argue that the Government is also an arranger based on its “constructive possession” of waste in its control. Id. at 19-20. Plaintiffs contend that the Government's “final review, approval, and authorization of plans submitted by the Refineries for equipment and process designs that necessarily included waste disposal” support an inference that the Government intended and planned for the disposal of wastes. Id. at 21. Finally, with respect to cost necessity and compliance with the national contingency plan, Plaintiffs argue that this is a fact intensive inquiry which, under applicable law, is neither a matter to be considered at the 12(b)(6) stage nor is it an element of Plaintiffs' prima facie case. Id. at 22-24.

         III.

         “To establish a prima facie case for cost recovery under § 107(a), a plaintiff must prove four elements: (1) the site is a “facility”; (2) a release or threatened release of hazardous substance has occurred; (3) the release has caused the plaintiff to incur “necessary costs of response” consistent with the NCP; and (4) the defendant falls within one of the four categories of potentially responsible parties.” Franklin Cty. Convention Facilities Auth. v. Am. Premier Underwriters, Inc., 240 F.3d 534, 541 (6th Cir. 2001). Defendant only challenges the sufficiency of the allegations with respect to the third and fourth elements. The fourth element will be addressed first, followed by the third.

         Under § 107(a)(2)-(3), “Covered persons” (potentially responsible parties) include “any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of, ” (owner and operator liability) and “any person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances” (arranger liability). 42 U.S.C. § 9607(a)(2)-(3). Operators and arrangers are liable for necessary response costs incurred consistent with the national contingency plan.[2] 42 U.S.C. § 9607(a)(4)(B).

         A.

         In the statute, “[t]he phrase ‘owner or operator' is defined only by tautology . . . as ‘any person owning or operating' a facility.” United States v. Bestfoods, 524 U.S. 51, (1998) (quoting § 9601(20)(A)(ii)). Courts have not interpreted the term “operator” uniformly.

         In FMC, the owner of a former textile rayon facility brought an action to recover response costs incurred based on the Government's role in operating the facility during World War II. FMC Corp. v. U.S. Dep't of Commerce. 29 F.3d 833, 843 (1994). The court noted that “the Government can be liable when it engages in regulatory activities extensive enough to make it an operator of a facility or an arranger of the disposal of hazardous wastes.” Id. at 840. In determining whether the Government was an operator, the court considered whether the Government exercised “actual and substantial control over the corporation's day-to-day operations and its policy making decisions.” Id. (emphasis added). The court determined that the Government controlled the “product the facility would produce, the level of production, the price of the product, and to whom the product would be sold, ” and therefore exercised “substantial control” over plaintiff's production facility so as to subject the Government to operator liability.

Id.

         In Bestfoods, the United States brought an action for the costs of cleaning up industrial waste generated by a chemical plant. United States v. Bestfoods, 524 U.S. 51, 55 (1998). The issue before the Supreme Court was whether and when a parent corporation may be held liable as an operator of a polluting facility owned by its subsidiary. A brief overview of the procedural history helps to explain the principles established by Bestfoods. The District Court explained as follows:

a parent corporation is directly liable under section 107(a)(2) as an operator only when it has exerted power or influence over its subsidiary by actively participating in and exercising control over the subsidiary's business during a period of disposal of hazardous waste. A parent's actual participation in and control over a subsidiary's functions and decision-making creates ‘operator' liability under CERCLA; a parent's mere oversight of a subsidiary's business in a manner appropriate and consistent with the investment relationship between a parent and its wholly owned subsidiary does not.

Bestfoods, 524 U.S. at 59 (quoting CPC Int'l, Inc. v. Aerojet-General Corp., 777 F.Supp. 549, 572 (W.D.Mich.1991)) (emphasis added). The District Court applied this “participation and control” test and determined that the parent entity was liable as an operator, as it exercised control over the subsidiary's business by selecting its board of directors, populating its ranks with officials, and playing a significant role in shaping its environmental policy. Id. The District Court observed that, in addition to direct liability as described above, the parent may also be subject to indirect or vicarious liability for the subsidiaries actions when the corporate veil can be pierced under state law. Id. The Sixth Circuit Court of Appeals reversed in part, rejecting the District Court's direct liability analysis (largely without explanation), and found that the corporate veil could not be pierced so as to establish indirect liability. Id. at 59-60 (citing United States v. Cordova Chem. Co. of Michigan, 59 F.3d 584 (6th Cir.)). The Supreme Court reversed, finding that, although the Court of Appeals “correctly rejected the District Court's analysis of direct liability, ” the Court of Appeals “erred in limiting direct liability under the statute to a parent's sole or joint venture operation.” Id.

         The Supreme Court rejected the District Court's application of the “actual control test” (or “participation-and-control test”) for determining direct liability as an operator under CERCLA. Id. at 68. The Court found that the District Court improperly focused on the parent corporation's control over the operation of the subsidiary's business (which is only relevant to indirect liability under veil piercing), whereas the proper focus of the direct liability inquiry under CERCLA is control over the operation of the polluting facilities themselves:

The well-taken objection to the actual control test, however, is its fusion of direct and indirect liability; the test is administered by asking a question about the relationship between the two corporations (an issue going to indirect liability) instead of a question about the parent's interaction with the subsidiary's facility (the source of any direct liability). If, however, direct liability for the parent's operation of the facility is to be kept distinct from derivative liability for the subsidiary's own operation, the focus of the enquiry must necessarily be different under the two tests. The question is not whether the parent operates the subsidiary, but rather whether it operates the facility, and that operation is evidenced by participation in the activities of the facility, not the subsidiary. Control of the subsidiary, if extensive enough, gives rise to indirect liability under piercing doctrine, not direct liability under the statutory language.

Id. at 67-68. The Court offered a more specific description of activities that would or would not give rise to operator liability:

Activities that involve the facility but which are consistent with the parent's investor status, such as monitoring of the subsidiary's performance, supervision of the subsidiary's finance and capital budget decisions, and articulation of general policies and procedures, should not give rise to direct liability. The critical question is whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary's facility.

Id. at 72 (emphasis added) (internal citations and quotations omitted). The Court ultimately defined “operator” under CERLA as follows:

An operator is simply someone who directs the workings of, manages, or conducts the affairs of a facility. To sharpen the definition for purposes of CERCLA's concern with environmental contamination, an operator must manage, direct, or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations.

Id. at 66-67 (emphasis added). Notably, the Court underscored that “[i]n our enquiry into the meaning Congress presumably had in mind when it used the verb ‘to operate, ' we recognized that the statute obviously meant something more than mere mechanical activation of pumps and valves, and must be read to contemplate ‘operation' as including the exercise of direction over the facility's activities.” Id. at 71. (emphasis added).

         Later that same year, in an unrelated case, the Sixth Circuit Court of Appeals (Boggs, Circuit Judge) decided Brighton Township. United States v. Twp. of Brighton, 153 F.3d 307, 314 (6th Cir. 1998). The United States brought an action against a township and property owner to recover response costs incurred in cleaning up a dumpsite on the property. Id. The Township had contracted with the property owner to use his land as a dump site for township residents. Id. at 310. The District Court found that, in addition to the property owner, the Township was also liable as an operator for response costs. Id. The Sixth Circuit vacated and remanded to the District Court.

         Judge Boggs delivered the opinion of the court, with Judge Moore concurring in result, and Judge Dowd dissenting in part and concurring in part. Judge Boggs noted that “authority to control” is insufficient to give rise to operator liability, but that the exercise of “actual control” is required. Id. at 313. In discussing the standard, Judge Boggs noted that the court must apply the plain meaning of the word “operator” as set forth by the Supreme Court in Bestfoods, regardless of whether the case involved Government entities or corporations. Id. at 313. Notwithstanding the fact that the Third Circuit's FMC opinion pre-dated Bestfoods, Judge Boggs found FMC instructive, and determined that “mere regulation does not suffice to render a Government entity liable, but actual operation (or “macromanagement”) does.” Id. at 316. Applying ...


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