Court Significantly Curtails Ohio EPA’s Cost Recovery Authority

February 8, 2012 By Thaddeus H. Driscoll and Kevin N. McMurray
Legal Update

On January 18, 2012, the Ohio First District Court of Appeals issued a major decision in an environmental enforcement action, State of Ohio ex rel. DeWine v. Mass Realty, LLC, et al., No. C-110279, 2012-Ohio-146.  The decision clarifies that Ohio EPA cannot recover standard enforcement costs as remediation response costs under Ohio law.  The court also established a highly deferential standard for reviewing a trial court's civil penalty analysis in affirming a very low penalty for violations of Director's Findings and Orders.

In 2001, Mass Realty purchased property that had previously been contaminated with volatile organic compounds.  The former property owner had installed a groundwater remediation system pursuant to Findings and Orders issued by Ohio EPA in 1991.  Upon its purchase of the property, Mass Realty signed Findings and Orders with Ohio EPA, which among other things, required the company to maintain the remediation system and reimburse the State for all response costs associated with the property.  However, Mass Realty stopped maintaining the system and halted payments to Ohio EPA due to financial problems.

Ohio EPA, through the Ohio Attorney General's Office, filed suit and alleged that the company and one of its partners had failed to: 1) operate and maintain the remediation system; 2) conduct groundwater monitoring and submit required reports; and 3) pay remediation response costs.  The trial court found in favor of Mass Realty regarding injunctive relief, but issued a $5,000 civil penalty for its past violations of the Orders and refused to order the payment of response costs to Ohio EPA.  The State appealed the trial court's decision regarding response costs and the amount of civil penalties.

The court of appeals affirmed the trial court's decision that the State was not entitled to recover the response costs that it had sought.  The State had first relied upon R.C. 3734.20(B), which authorizes the Director of Ohio EPA to perform corrective measures necessary to prevent or abate air and water pollution and further provides that "the Director shall keep an itemized record of the cost of the investigation and measures performed, including costs for labor, materials and any contract services required."  However, the court found that Mass Realty, not Ohio EPA, had undertaken the corrective measures and incurred the corresponding costs.  The State had presented "detailed" invoices concerning the cleanup, but the court found that these involved "normal office overhead items" and were not investigations or corrective measures performed by or contracted out by the Agency.  Specifically, the State had sought "payroll costs, travel costs, and enforcement-related costs," which were beyond the types of costs enumerated in R.C. 3734.20(B).

The court also rejected the State's second argument, which relied upon R.C. 3745.01(C) and provides that Ohio EPA may enter into private contracts "in furtherance of the purposes" of Ohio's environmental laws.  The State argued that the 2001 Orders were "a contract negotiated at arm's length" between the parties, and that Mass Realty "voluntarily and knowledgeably consented to pay response costs."  The court rejected this argument as "untenable."  Instead, the court held that Ohio EPA could not circumvent an express statutory limitation on its authority to recover response costs by contract.

As to the second assignment of error, the court affirmed the trial court's issuance of a $5,000 civil penalty for the past violations of the 2001 Orders.  While the State had sought a $417,280 civil penalty, Mass Realty had shown no bad faith, had successfully remediated over 90% of the contamination, had received no economic benefit from its failure to comply, and created minimal environmental harm from its violations.  Despite concluding that the civil penalty was "clearly low," the court of appeals found that the trial court had not abused its discretion in light of the financial difficulties and lack of bad faith on the part of Mass Realty.

This decision is important because it significantly narrows the types of costs that Ohio EPA can recover as response costs in a remediation case action under Ohio law.  Ohio EPA can only recover costs from investigations or corrective measures that the Agency itself has performed or contracted for, and must distinguish between these costs and other response costs, the latter of which are not recoverable under R.C. 3734.20(B).  The court also necessarily determined that unsupported terms in Director's Findings and Orders are unenforceable, even if the parties had expressly agreed to the terms.

The opinion is also notable for its highly deferential approach towards the trial court's civil penalty analysis.  The court of appeals refused to disturb the analysis, which matched each of the proper legal civil penalty factors with the record, despite its own belief that the penalty was "clearly low."