372 B.R. 446
No. 04-22421-svk.United States Bankruptcy Court, E.D. Wisconsin.
July 19, 2007
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[EDITORS’ NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]West Page 448
Bruce G. Arnold, Daryl L. Diesing, Patrick B. Howell, Milwaukee, WI, Daniel J. McGarry, Whyte Hirschboeck Dudek S.C., Madison, WI, David L. Eaton, Ryan S. Nadick, Tasneem K. Goodman, Kirkland Ellis LLP, Chicago, IL, for Reorganized Debtors.
David W. Asbach, Milwaukee, WI, for U.S. Trustee.
Catherine L. Steege, Jeremy T. Stillings, Ronald R. Peterson, Jeff J. Marwil, Jenner and Block, Chicago, IL, for Creditor Committee.
MEMORANDUM DECISION ON ALLOWANCE OF CLAIM
SUSAN V. KELLEY, Bankruptcy Judge.
Background and Facts
In 1989, the United States Environmental Protection Agency (“EPA”) named various parties, including the Glidden Company and DeSoto, Inc., now known as Sherman Wire Company (the “Debtor”), as potentially responsible parties
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(“PRPs”) liable for the cleanup of the Chemical Recycling, Inc. hazardous waste site located in Wylie, Texas (the “site” or the “CRI Site”). Without admitting liability, the PRPs entered into the Chemical Recycling, Inc. Site Agreement for Participation (the “Agreement”) to jointly manage the cleanup. The Agreement created the CRI Steering Committee (the “CRI Committee”) to organize the initiative and apportion the liability among the parties. The EPA issued an Administrative Consent Order on August 4, 1989,[1] and the PRPs contributed funds to the cleanup.[2] Various drums and tanks were removed in the 1989 to 1990 timeframe, and the site was fenced, but very little else occurred at the site until 2004, when a new EPA On Scene Coordinator was appointed. The EPA issued Action Memoranda which purported to modify the Statement of Work in 2005 and 2006, but no work has been done at the site (except for testing and monitoring) since 1990.
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The Debtor filed a chapter 11 petition on February 26, 2004. The claims bar date for nongovernmental entities was July 1, 2004, and the claims bar date for governmental units was August 24, 2004. The CRI Committee and Glidden filed timely proofs of claim related to the site, but, although it had filed claims related to the cleanup of other sites in which the Debtor was involved, the EPA did not file a proof of claim related to the CRI Site. After the claims bar date expired, the Debtor withdrew from the Agreement. The CRI Committee and Glidden[3] then sought leave to file a late proof of claim on behalf of the EPA, claiming that excusable neglect operated to excuse its failure to file this claim prior to the bar date. Although this Court ruled that the doctrine of excusable neglect as dictated by the 7th Circuit Court of Appeals did not permit the late filing of the claim, this decision was reversed on appeal by the District Court. On remand, this Court disallowed the claims filed by Glidden and the CRI Committee based on Bankruptcy Code § 502(e)(1)(B), which bars contingent claims for contribution and reimbursement.[4] However, the court permitted the CRI Committee to file the claim on behalf of the EPA[5] and proceeded with an estimation hearing under 11 U.S.C. § 502(c)(1). The parties have filed post trial briefs.
Arguments and Evidence Adduced at Estimation Hearing
The CRI Committee’s position is that the Debtor is one of the PRPs responsible for addressing the hazardous condition of the site. Citing the Comprehensive Environmental
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Response, Compensation, and
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Liability Act (“CERCLA”),[6] the CRI Committee contends that the EPA is authorized and empowered to enforce the Consent Order against the Debtor, and alleges that the Debtor, among the other PRPs, was ordered by the EPA to conduct a removal action to address the conditions at the site, that the cleanup is not complete, and that the Debtor is jointly and severally liable for the $1.7 — $1.9 million estimated cost to finish the cleanup.
The Debtor contends that the cleanup is virtually complete, and points out that no activity has taken place at the site for many years. The Debtor argues that even in the unlikely event that further cleanup would be required by the EPA, all that should be necessary is monitoring and/or capping the area where the concentration of contaminated soils is found. Moreover, the Debtor contends that the EPA’s claim should be limited to costs spent by the EPA itself, not by those costs that the EPA will visit upon the CRI Committee.
At the estimation hearing, the CRI Committee presented the expert testimony of Jay Winters, an employee of the environmental consulting firm Golder Associates, Inc.[7] who has been involved with the site since November 1989, and wrote a 2006 Site Investigation Report published in January 2007. Winters testified that even though the CRI Site is located in an industrial area and there is no threat to human life, the EPA will require the PRPs to remove about 1640 cubic yards — about 80 truck loads — of contaminated soil.[8] The trucks loaded with contaminated soil would be sent to a chemical waste management facility in Louisiana at a cost of about $1.5 million. While acknowledging that there is no evidence of any expanding plume of
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contaminated groundwater, he stated the groundwater at the site would require monitoring over 10 years.[9] However, he admitted that the primary waste at the CRI Site is lead and chlorinated solvents in stillbottoms[10] that pose a limited threat to the groundwater.
The CRI Committee acknowledges that “only the EPA has authority to determine that all obligations under the Consent Order have been satisfied.” However, the CRI Committee did not produce a single witness from the EPA to state what further action will be required for the CRI Site or whether EPA will require the soil to be removed or the groundwater monitored. Glidden’s director of environmental claims and remediation testified that to date, the EPA has not required any soils to be removed, although various reports showing the lead contamination as “fairly high,” have been provided to the EPA
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since 1990.[11] Further, even in his role as an environmental consultant for the CRI Committee, Winters admitted that he never had any direct correspondence with the EPA nor any communications concerning whether the Modified Statement of Work would be approved or soil removal required. Currently, there is no EPA order in existence requiring soil removal, and the CRI Committee was at a loss to explain why the EPA has not taken action in the last 17 years. Even assuming that the cleanup of this site fell through some bureaucratic cracks until the appointment of the new On Scene Coordinator in 2004, there is no explanation as to why, if this site is in imminent need of cleanup, the EPA did not file its own proof of claim in Debtor’s case at that time, or seek an extension of the August 24, 2006 bar date to file a claim, especially when the EPA had filed other claims in this case for other contaminated sites.
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The Debtor argued that the 1989 Consent Order was not “open-ended” but rather contained a specific, limited scope of activities that the Debtor and the other PRPs completed more than 17 years ago when the drum and tank removal action at the site was undertaken.[12] The Debtor presented the testimony of Michael Hawthorne, an environmental consultant and remediation expert who designed software used by the Texas Commission of Environmental Quality (TCEQ). Hawthorne reviewed the Golder report and opined that removal of the soil is the least preferred method of addressing any remaining issues at the CRI Site, because digging up and hauling away the soil increases the risk of exposing people to the hazardous materials. The Debtor contends soil removal is inconsistent with the National Contingency Plan because the site in its current state does not pose an imminent threat to human health or the environment. Hawthorne described the CRI Site as a commercial fenced area, bordered by railroad tracks and a highway, and the site is green with vegetation and grown trees. Although a 2004 inspection indicated a problem with the fence at the site,[13] Hawthorne’s 2007 inspection and Golder’s latest report confirms that the fence is stable and secure and in “good condition.”
Based upon his reading of the 2007 expert report, Hawthorne stated that Golder Associates applied the most conservative protective concentration levels to the site which inflated the cleanup estimation.[14] Consequently, the CRI Committee’s claim is based upon a significant overestimation of the amount of soil that should be cleaned up. According to his reading of
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the 2007 report, Hawthorne stated that only one sample had a lead concentration of
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10,300.[15] Hawthorne opined that one acceptable remedy would be leaving the soil in place, and taking no action but keeping the site fenced and protected. He stated that natural attenuation has significantly reduced the problems at the site, and given the state of the site and the nature of the soil, would continue to do so. If more than “no action” is required, Hawthorne testified that based on the hundreds of cleanups similar to the CRI Site with which he is familiar, rather than removing and transporting the soil, the usual approach is to eliminate the risk of exposure by capping the area of contaminated soil.[16] According to Hawthorne, an asphalt cap would serve as an acceptable material costing anywhere from $19,000 to $60,000. Hawthorne based his recommendation on the following two undisputed assertions: first, there is mostly clay at the CRI Site and very little groundwater,[17] and second, significant natural attenuation has reduced the levels of concentration at the CRI Site.
Objections to the Expert Testimony by the CRI Committee
The CRI Committee objected to almost all of Hawthorne’s testimony due to the alleged failure of his expert report to comply with the requirements of Fed.R.Civ.P. 26(a). The report is only a few pages long, and the CRI Committee alleges that it violates Rule 26(a)(2) because the report does not contain all the opinions Hawthorne expressed, and the basis and reasons for his opinions, and failed to list all of the data and other information considered by Hawthorne in forming his opinion. In considering this objection, the court is mindful of the context in which
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this dispute arises: a disputed claim estimation proceeding. The Bankruptcy Code is silent as to the exact procedures governing a claim estimation hearing,[18] but the Federal Rules of Bankruptcy Procedure suggest that this dispute is a “contested matter” rather than an “adversary proceeding.” As such, it is questionable whether the provisions of Rule 26 allegedly violated by the Debtor’s expert even apply. This claim objection proceeding is not an adversary proceeding, since it has not been joined with a demand for any of the relief described in Rule 7001. See Fed.R.Bankr.P. 3007; In re Calisoff, 94 B.R. 1002, 1004 (Bankr. N.D. Ill. 1988) (“An objection to a claim does not give rise to an adversary proceeding (unless the objection
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seeks relief other than disallowance of the claim), but to a contested matter. See, Bankr. R. 3007 and 9014, and Advisory Committee Notes to both rules.”)
Bankruptcy Rule 9014 supplies the procedures in contested matters that are not otherwise governed by the Bankruptcy Rules. In contested matters, unless the court orders otherwise, Fed.R.Civ.P. 26(a)(2) (disclosures regarding expert testimony) “shall not apply.” Fed.R.Bankr.P. 9014(c). Since no court order exists directing that Rule 26(a)(2) shall apply to this contested matter, the alleged failure of the Debtor’s expert to comply with the disclosure requirements of the Rule is of no consequence.
Moreover, courts are given a great deal of judicial discretion in designing the procedures for a claim estimation proceeding, such that a judge can elect to use “whatever method[19] is best suited to the circumstances.” In re Thomson McKinnon Sec., Inc., 191 B.R. 976, 979 (Bankr. S.D.N.Y. 1996), citing Addison v. Langston (In re Brints Cotton Mktg. Inc.), 737 F.2d 1338,
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1341 (5th Cir. 1984). Consistent with the goal of prompt and efficient resolution of bankruptcy cases, “[e]stimation is merely a quick way for a bankruptcy court to liquidate a disputed claim when a full fledged trial would delay administration of the case.” In re Dow Corning, 211 B.R. 545, 560 (Bankr. E.D. Mich. 1997).
The case law suggests that formal claim estimation proceedings are not the norm, and in fact, “it may be sometimes inappropriate to hold time-consuming proceedings which would defeat the very purpose of 11 U.S.C. § 502(c)(1) to avoid undue delay.” In re Windsor Plumbing Supply Co., 170 B.R. 503, 520 (Bankr. E.D.N.Y. 1994). The bottom line is, “to the greatest extent possible, a selected estimation procedure should not run counter to the efficient and expeditious administration of the bankruptcy estate.” In re G-I Holdings, Inc., 323 B.R. 583, 599 (Bankr. D.N.J. 2005). The substance of the claim rather than overly formalized procedural rules should be the paramount consideration. See Bittner v. Borne Chemical Co.,
691 F.2d 134,135 (3d Cir. 1982) (“Where there is sufficient evidence on which to base a reasonable estimate of the claim, the bankruptcy judge shall determine the value . . . the court is bound by the legal rules which may govern the ultimate value of the claim.”)
Given the court’s discretion in determining the best method for claim estimation and the general principles of expediency in bankruptcy law, it is appropriate in this case to opt for a quick and informal method of claim estimation. The Debtor’s Chapter 11 case has been pending for over three years; the plan has been confirmed, and this is the last claim to be decided. The parties have been litigating for about two years, including one appeal to the District Court. The Debtor has consistently denied liability to the CRI Committee and the EPA, taking the position that the site is dormant, the Consent Order cannot be unilaterally amended by the EPA, and that
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the Debtor has no further liability for the cleanup. (See, e.g., Debtor’s Objection filed October 25, 2005 to the CRI Committee’s Motion for Leave to Amend).
Even assuming that Rule 26(a)(2) applies in this contested matter, disallowing
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the Debtor’s expert’s testimony because his report did not list every document he reviewed in this case hinders the estimation proceeding on at least two grounds. First, such trial-like formality runs counter to this Court’s preferred method of a speedy estimation process. Second, engaging in a time-consuming proceeding contradicts the purpose of both claim estimation and bankruptcy law — the efficient administration of the bankruptcy estate. Finally, the ultimate purpose of the disclosure provisions of Rule 26 has been satisfied by the numerous documents and briefs exchanged by the parties, and the Debtor’s unwavering position that the Debtor is not liable to the CRI Committee or the EPA, and has in fact overpaid for the cleanup. Accordingly, the CRI Committee’s objections to the Hawthorne’s report and testimony are overruled.
Claim Estimation Analysis
The Debtor objected that the CRI Committee’s estimate and classification as a removal action is excessive and questioned why the CRI Committee and the EPA did not analyze less expensive remedial options. The CRI Committee’s estimate is $1.9 million,[20]
and the Debtor believes the actual cleanup costs will be no more than $75,000. “To value contingent liability it is necessary to discount it by the probability that the contingency will occur and the liability become real.” In re Xonics Photochemical, Inc., 841 F.2d 198, 200 (7th Cir. 1988). After considering the evidence, and the relevant authorities, the Court concludes that the Debtor’s estimate is closer to the allowable amount of the claim.
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CERCLA provides the EPA with a framework of tools to achieve the efficient and effective cleanup of hazardous waste sites. See 42 U.S.C. § 9601; Frey v. EPA, 403 F.3d 828, 833 (7th Cir. 2005) United States v. Occidental Chem. Corp., 200 F.3d 143 (3d Cir. 1999). CERCLA § 104 authorizes the President (who has delegated most of his authority under CERCLA to the EPA) to use Superfund money to respond to any threatened or actual release of any hazardous substance that may pose an imminent and substantial threat to public health. See 42 U.S.C. § 9604. CERCLA § 107 provides for the recovery of response costs from all persons responsible for the release of a hazardous substance. In re Bell Petroleum Servs., 3 F.3d 889, 894 (5th Cir. 1993).
To establish a prima facie case under § 107(a) of CERCLA, the EPA must prove five elements: (1) the defendant is among the four categories of responsible parties enumerated in § 107(a); (2) the site is a “facility” as defined in § 101(9); (3) there was a “release” or “threatened release” of “hazardous substances” at the facility; (4) the United States incurred costs responding to the release or threatened release; and (5) the costs and response actions conform to the national contingency plan under CERCLA § 107(a)(4)(A) as administered by the EPA. United States v. 175 Inwood Assocs. LLP, 330 F. Supp. 2d 213, 220-221 (E.D.N.Y. 2004), citing B.F. Goodrich v. Betkoski, 99 F.3d 505, 514 (2d Cir. 1996); United States v. Alcan Aluminum Corp., 990 F.2d 711, 719-20 (2d Cir. 1993). In this case, there is little doubt that the Debtor is a person who arranged for the disposal of hazardous substances at the site, and thus is a covered person under the statute.[21] Also, it is not disputable that the
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site is a facility at which a release or threatened release occurred. However, the Debtor disputes that the United States has incurred unreimbursed costs responding to the release, and contends that if such costs are incurred in the
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future, the estimate contained in the Claim filed on behalf of the EPA by the CRI Committee does not conform to the requirements of the national contingency plan.
At first blush, there appears to be merit in the Debtor’s argument that the “surrogate claim” filed by the CRI Committee on behalf of the EPA must be disallowed because the EPA itself is not spending the response costs. The funds to be expended for the remaining cleanup will in all likelihood come from the CRI Committee and the other PRPs who have not filed bankruptcy and not the government itself. However, in disallowing the CRI Committee’s and Glidden’s individual claims under § 502(e)(1)(B) of the Bankruptcy Code, this Court necessarily found that those parties are liable with the Debtor to the EPA. See In re Hemingway Transp., 993 F.2d 915 (1st Cir. 1993). If the Debtor is not liable to the EPA because the EPA has not spent any money, then the provisions of § 502(e)(1)(B) do not apply, and Glidden and the CRI Committee can prove their own contingent claims for the cleanup. The Debtor cannot escape liability to all parties, simply because the amount of the claim is contingent and unliquidated. While there cannot be multiple claims for the same contingent, unliquidated liability, there can be one claim, the claim at issue in this case. See id., 993 F.2d at 923 (sole purpose of Bankruptcy Code § 502(e)(1)(B) is to “preclude redundant recoveries on identical claims against insolvent estates” and “double-dipping” resulting from EPA and PRP claim for the same future CERCLA response costs.) Accordingly, the Debtor’s objection based on the EPA’s failure to have spent any money is denied, and the issue for decision is whether the costs estimated by the CRI Committee would conform to the national contingency plan under CERCLA.
“CERCLA response actions fall into two categories: removal and remedial actions. Removal refers to a short-term action taken to halt risks posed by hazardous wastes immediately. Remedial actions involve permanent solutions, taken instead of or in addition to removal, such as
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the destruction of hazardous materials.” Frey, 403 F.3d at 835 Frey concerned a remedial action, because it dealt with “actions consistent with permanent remedy” including a long-term excavation and destruction of hazardous materials. 42 U.S.C. § 9601(24).
The distinction is important because if the cleanup is a remedial action, regulations require that the site be included on the National Priorities List and that the EPA consider the cost effectiveness of the remediation. United States v. W.R. Grace Co., 429 F.3d 1224, 1226 (9th Cir. 2005), cert. denied, ___ U.S. ___, 166 L.Ed.2d 268 (2006). “In contrast, the regulatory requirements for removal actions, which provide the EPA with substantial flexibility to tailor prompt and effective responses to immediate threats to human health and the environment, are considerably relaxed.” Id. Determining whether the cleanup is a remedial or removal action is complicated by the fact that “(e)lements of either response action may overlap and semantics often obscure the actual nature of the cleanup being performed.”Pub. Serv. of Colo. v. Gates Rubber Co., 175 F.3d 1177, 1182
(10th Cir. 1999).
The CRI Committee alleges that this cleanup is a removal action, and the Debtor disagrees. The standard for
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determining allowed costs of a removal action is two-fold. First, the EPA’s costs must be upheld unless the party challenging the claim proves the method chosen for the cleanup was arbitrary and capricious. Second, the EPA action must be properly characterized as a removal action. See W.R. Grace Co. at 1233. The arbitrary and capricious standard of review instructs a court to make the narrow determination of whether the EPA’s decision is based upon consideration of relevant factors and is not a clear error of judgment. Motor Vehicle Mfg. Ass’n of U.S. Inc. v. State Farm Mut. Auto., 463 U.S. 29, 43
(1983). The agency must present a clear explanation of the relevant data, and the reviewing court will not substitute its judgment for the agency. Id. However, this Court has not heard from the EPA, and is cognizant
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that it should not “supply a reasoned basis for the agency’s action that the agency itself has not given.” Id.
National Contingency Plan regulations require the EPA to consider eight factors before deciding whether to conduct a removal action:
(i) Actual or potential exposure to nearby human populations, animals, or the food chain from hazardous substances or pollutants or contaminants;
(ii) Actual or potential contamination of drinking water supplies or sensitive ecosystems;
(iii) Hazardous substances or pollutants or contaminants in drums, barrels, tanks, or other bulk storage containers, that may pose a threat of release;
(iv) High levels of hazardous substances or pollutants or contaminants in soils largely at or near the surface, that may migrate;
(v) Weather conditions that may cause hazardous substances or pollutants or contaminants to migrate or be released;
(vi) Threat of fire or explosion;
(vii) The availability of other appropriate federal or state response mechanisms to respond to the release; and
(viii) Other situations or factors that may pose threats to public health or welfare of the United States or the environment.
40 C.F.R. § 300.415(b)(2).
In W.R..Grace Co., a removal decision was upheld when the EPA’s consideration of these factors was supported by extensive documentation.[22] The EPA’s findings “detailed specific threats with carefully documented reasoning.” W.R. Grace Co., 429 F.3d at 1233. By contrast, in United States v. Wash. State DOT,
2007 U.S. Dist. LEXIS 8796 (February 7, 2007), the court found the evidence to support the removal decision lacking, for many of the same
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reasons that exist in this case. For example, in discussing a contaminated plume of groundwater that was allegedly migrating toward uncontaminated wells, the court said “[I]t is unclear how this evidence may be used to support a time-sensitive removal. . . . [T]he groundwater path does not evidence the rate of migration. The parties agree that at least some of the contamination is traceable to events that occurred in 1970. The Court therefore concludes that the record of evidence
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of groundwater flow does not demonstrate how this contamination, of which the City and the EPA had been aware since 1993, became an urgent concern in 1997.” Id. at *34 (internal citations omitted). In denying the costs of the removal action, the court concluded: “While much of the EPA’s analysis references scientific evidence in the record, the evidence cited is often of little or no relevance to the overall question of whether the conditions at the Site were such that cleanup, in the form of a time-sensitive removal, was appropriate.” Id. at *44 (emphasis in original).
In this case, it is similarly impossible to conclude that the evidence justifies a “time-sensitive response to public health threats,” when there has been no cleanup for 17 years.[23] In fact, it appears that in the absence of immediate attention the CRI Site has remained stable. For example, there is no evidence that the groundwater has or even could carry hazardous substances off the site,[24] and the CRI Site is fenced in and bordered by railroad tracks and a highway,
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presumably preventing children from entering.[25] The site is lush and green with vegetation, reducing the risk of the contaminated soils becoming airborne, and natural attenuation seems to have mitigated a great deal of the problem. Given the lack of any evidence that public health or safety has been threatened during the long period of inactivity, it is highly doubtful that the site in fact requires “immediate attention,” and extremely speculative that an expensive removal procedure in which 80 trucks full of contaminated soil are driven across several states to a treatment facility is justifiable under the CERCLA standards and national contingency plan regulations.[26]
Further, it is important to reiterate that the CRI Committee did not produce any witnesses from the EPA to discuss how the site poses an imminent public health threat nor to explain how much, if any, soil will need to be excavated. Such testimony could have clarified and supported the CRI Committee’s position that a removal action complies with the NCP and will cost $1.7 to $1.9 million. While some documents exist in the form of findings from Golder Associates, the conclusions and methodology were challenged by the Debtor’s expert, and the EPA’s own report suggests that far less soil may be required to be removed than Golder’s report suggests. It is also important to note that after participating
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in the 1989 removal action, the Debtor withdrew from the CRI Committee and the Participation Agreement after a long period of inactivity.[27] The CRI Committee has presented no evidence to show that the Debtor did anything to the CRI Site in the meantime that contributed to the alleged need to take emergency action in 2007.
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The CRI Committee has not presented any clear evidence that the EPA actually views the CRI Site as an imminent threat to human health or the environment warranting a removal action[28] or that the EPA could support such a decision with appropriate documentation. The CRI Site is a commercial site used only for industrial purposes, is fenced and secure, and no migrating groundwater issues exist. The contaminated soil has existed untreated since at least 1989, and natural attenuation appears to be reducing the contamination. Assuming that some cleanup is required, there is insufficient evidence that the most expensive and least desirable process of removing and trucking the soil across two states would be upheld, especially without considering less expensive, but equally protective options. In a remediation, “Costs that are grossly excessive compared to the overall effectiveness of alternatives may be considered as one of several factors used to eliminate alternatives. Alternatives providing effectiveness and implementability similar to that of another alternative by employing a similar method of treatment or engineering control, but at greater cost, may be eliminated.”[29]
Conclusion
After careful consideration of the evidence presented in the claim estimation hearing, and the extremely well-presented arguments of the parties, the court estimates the Claim filed by the CRI Committee on behalf of the EPA at the high end of the range given by the Debtor’s expert: $75,000. Although it is arguable that the Debtor is not jointly and severally liable for 100% of this amount, the Debtor did not present evidence suggesting apportionment, and no such apportionment will be ordered by this court.[30]
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However, the CRI Committee stipulated that the Debtor is entitled to a $53,100 credit for funds previously paid to the CRI Committee under the 1989 Consent Order. This amount should be offset from the Claim, reducing the Claim to $21,900. The Debtor’s rights to seek contribution and reimbursement from Glidden and the CRI Committee for the amounts to be paid on this Claim are not properly before this Court.
An Order will be entered allowing the Claim in the amount of $75,000, less credit for the overpayment of $53,100, for a total allowed claim of $21,900.
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