Court Ruling Provides Latest Setback for Developers of BRAC Property

LRAs and developers are no closer to learning whether they can rely on a federal statute to protect them from liability for undiscovered contamination at closed installations, following a recent federal court ruling.

The U.S. Court of Federal Claims’ July ruling that an insurance company could not recover its costs to remove contamination at the former Marine Corps Air Station Tustin in Southern California under Section 330 of the 1993 defense authorization act reinforced the split that already existed on the court over the issue.

Judge Eric Bruggink’s decision directly conflicts with an earlier ruling in a 2007 case with very similar facts. In that case, the court ruled that a claim by five homebuilders at the former Lowry Air Force Base, Colo., is covered under Section 330. In a 2008 decision in a case involving the statute, but with slightly different circumstances, the court ruled against an insurance company trying to recover cleanup costs at the former Naval Air Station Alameda, Calif.

The three decisions are the only judicial interpretations of the statute so far, leaving parties involved in base redevelopment unclear whether the statute will protect them in future cases when unknown contamination is discovered at a military installation closed through BRAC.

“This is an issue that is ripe for appeal,” said Barry Steinberg, a partner in the Washington, D.C., office of law firm Kutak Rock. “Leaving it in a state of uncertainty is the worst possible result,” he said.

Case Starts with Discovery of Petroleum Contamination

The recent case stems from the August 2007 discovery of petroleum contamination in the soil at the former air station on a parcel the city of Tustin conveyed to Tustin Legacy Community Partners (TLCP). The next month, the developer entered into a voluntary cleanup agreement with the California Department of Toxic Substances Control, which called for the agency to oversee removal efforts at the site. The agreement did not release TLCP from any liability arising from the contamination or limit the agency’s future ability to respond to the contamination.

In 2008, the California Regional Water Quality Control Board informed TLCP that “enforcement action can be taken for failure to cleanup and abate waste discharges” and that “contamination at the site must be fully characterized, and appropriate remedial action must be taken.” Because of the agreement already in place with the state, the board said it would defer oversight to the Department of Toxic Substances Control.

The department approved the developer’s cleanup plan in 2009, and over the next year the company finished the majority of the remediation. Indian Harbor Insurance, which had issued a policy to TLCP, reimbursed the developer $5.3 million for the cleanup. Indian Harbor is the company XL Insurance uses to issue its environmental policies.

Indian Harbor filed a suit against the federal government last October after DOD twice denied its request to recover its costs under Section 330. The insurer’s suit also included a separate claim for about $350,000 it paid in response to the discovery of 1, 1 dischloroethene contamination on a parcel the city of Tustin transferred to Vestar/Kimco Tustin LP.

What’s in a Claim? That which We Call a Claim …

The ruling in this case, as well as the two previous ones, hinged on a determination of whether the actions of a state regulatory authority qualify as a covered claim under Section 330.  DOD will indemnify owners of former military bases from “any suit, claim, demand or action, liability, judgment, cost or other fee arising out of any claim for personal injury or property damage,” according to the statute.

Based on a “straightforward reading” of the statute, Bruggink said the language requires a third party to bring an action against the property owner for personal injury or property damages it has suffered. Orders and oversight by state environmental agencies, he argued, cannot be considered third-party claims for personal injury or property damage.

“In short, we do not believe any possible reading of Section 330’s requirement of a ‘claim for personal injury or property damage’ can encompass a state’s exercise of its police power through environmental regulation,” Bruggink’s opinion states.

An attorney with a Denver-based firm disagreed with the judge’s reasoning, and stated that the case was “wrongly decided” and “contrary to the intent of Section 330.”

“The case substantially undermines the assurances developers of former Department of Defense facilities have relied on and is likely to increase the cost of redevelopment and diminish the value of these properties,” said Polly Jessen, a partner with Kaplan Kirsch & Rockwell.

Bruggink was well aware that his interpretation of the statute could have the “unfortunate effect of hindering base closure and transfer.” If so, he wrote, “Congress may amend the law.”

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