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What the New Jersey Appellate Division Really Said About the Spill Act Limitations Period – the Expanded Landowner Duty to Inspect

May 28, 2014

Much has been said about the April 2013 New Jersey Appellate Division’s decision regarding what statute of limitations is applicable to contribution claims under the New Jersey Spill Compensation and Control Act (“Spill Act”), N.J.S.A. 58:10-23.11 to -23.24. But the more surprising part of the case is what the Court said about the obligations property owners have to proactively inspect tank systems, and when that obligation arises and starts the ticking of the limitations clock.

In Morristown Associates v. Grant Oil Company, Docket No. A-0313-11T3, the Appellate Division held that New Jersey’s general six year statute of limitations for property damage claims also applies to private contribution claims under the Spill Act. This part of the decision was not surprising, primarily because the only alternative would have been to hold that no statute of limitations applies at all. A lack of any statute of limitations would eliminate pressure on claimants to undertake timely cleanup and cost recovery, and is inconsistent with countless other applications of New Jersey’s general statute of limitations. Moreover, it would be contrary to how the federal Superfund law is implemented, which New Jersey courts often turn to for guidance on implementing the Spill Act. Because the Spill Act’s limitations period has been litigated over and over in the lower New Jersey courts for many years, any environmental practitioner familiar with Spill Act cases would be aware of the arguments supporting the decision in Morristown Associates, and would therefore not be surprised with the Court’s decision. Although over the years litigants have cited to several prior, unreported New Jersey decisions to argue against the imposition of any limitations period under the Spill Act, the facts and issues in those cases were distinguishable from Morristown Associates, and those decisions lacked the sound reasoning of previous federal cases reaching the same holding as the Court in Morristown Associates.

The surprising part about the Morristown Associates decision is actually what the Court said about when the limitations period begins to run. To understand the significance, a look at the facts of the case is necessary. The plaintiff in Morristown Associates owned a shopping center at which the subject underground storage tank (“UST”) existed. The court accepted evidence that the UST first began to leak in around 1988, nine years after plaintiff had purchased the property and ten to eleven years after the UST was installed to hold heating oil for use at a tenant’s dry cleaning business. The question, then, was whether, and how, to apply New Jersey’s discovery rule. The discovery rule tolls a limitations period for as long as the claimant discovered, or by exercising reasonable due diligence should have discovered, that he may have a basis for an actionable claim.

The Appellate Division had a number of options for determining how long to toll the limitations period in the Morristown Associates case. The Court rejected plaintiff’s argument that the period should have been tolled until 2003 when plaintiff claimed it had learned of oil contamination in the soil and ground water on an adjacent property. Instead, the Court held that plaintiff should have made reasonable inquiry of the condition of the UST at least by 1999, when plaintiff’s property management company learned that another UST at the property was leaking. On this basis, because six years had passed between 1999 and plaintiff’s lawsuit filed in July 2006, the Court dismissed plaintiff’s contribution claim. This holding alone constitutes a significant advancement in the duty to conduct due diligence, because there was nothing linking the two USTs other than that they had both been missed in an environmental audit – there was no indication they were installed at the same time or near each other, used by the same tenant, or constructed similarly. If this were as far as the decision went in Morristown Associates, one would be asking whether the Court would have reached the same conclusion if the prior leaking UST known to plaintiff had existed on someone else’s property nearby, or even on some distant property. It would appear that, to the Court, being directly aware that USTs can leak would be enough information to place on property owners the burden of inspecting their USTs in order to determine whether the property owner may have an actionable claim.

But the Court went much further than simply holding that having direct knowledge of other UST leaks triggers an obligation to conduct due diligence. The Court applied a New Jersey Supreme Court decision holding that “a landowner has a fundamental duty historically and settled in our law to make reasonable observations of the condition on its property and to take a reasonable care to ensure that dangers do not exist on that property.” Based on this principle, the Court held that plaintiff “should have made inquiry, even before 1999, about the use of the fill pipes and their condition.” To be clear, the record lacked any suggestion whatsoever that before 1999 (in fact, before 2003) plaintiff had any indication that the dry cleaner UST, or any other UST anywhere, was leaking. The only evidence in the record was that before 1999 plaintiff knew or should have known of the existence of the dry cleaner UST, due to the presence of a vent and fill pipe, and repeated fuel deliveries. To the Court, then, the condition triggering due diligence was simply the presence of the UST. This constitutes a broader interpretation of the discovery rule than has been applied previously.

Another important point about the Morristown Associates decision is that the Appellate Division ignored plaintiff’s claims that plaintiff itself was unaware of the dry cleaner UST until 2003, because plaintiff itself had never seen the dry cleaner UST’s fill and vent pipes, and was not aware of fuel deliveries to the UST. The evidence of record only indicated that plaintiff’s property management company had learned of the other leaking UST in 1999. And the Appellate Division also was not troubled that plaintiff claimed reliance on a 1993 environmental audit which failed to identify the dry cleaner UST. Instead, the Court focused on the obviousness of the UST, as well as the fact that plaintiff’s own management company was aware of the UST in 1999 and should have been aware of it sooner. The Court apparently either found plaintiff’s purported lack of knowledge incredible, or determined that the failure to acquire knowledge was in violation of a landowner’s duty to make reasonable observations of the condition on its property and take reasonable care to ensure that dangers do not exist.

The significance of the Morristown Associates case cannot be overstated. First, in order to avoid the running of the limitations period on a Spill Act contribution claim, the decision obligates property owners to inspect their heating oil USTs, even absent any suggestion that the UST is leaking. Property owners can no longer assume that a contribution claim limitations period is tolled until they have a clear indication, or in fact any indication, that a problem exists. Instead, the limitations period is apparently tolled only until the property owner first has an opportunity to inspect its tank systems. And nothing about the decision limits its application only to heating oil tank systems. Countless other systems and materials which historically can pose a threat to the environment are equally fair game under the Court’s decision. For example, dry cleaners, machine shops, and automobile maintenance garages arguably have an obligation to conduct testing of containers they maintain, and of the surrounding environment. And for insurance carriers, by the time they receive a claim for cleanup, the window of opportunity to bring a subrogation claim may have closed long ago.

Second, the Morristown Associates decision is significant because it indicates that the Court will not allow property owners to avoid the duty to inspect by passing it onto property management companies. This leaves property owners with the choice of either diligently watching over the shoulder of their management companies to learn of any systems or operations which could fail and cause environmental contamination, or constructing a contractual arrangement whereby the property owner can recover from the management company any damages suffered by virtue of having missed a limitations period.

Finally, the Court’s decision is significant because the Court applied it to the entirety of the property owner’s contribution claim, despite the fact that plaintiff had filed its suit within six years of incurring cleanup costs. Accordingly, property owners have no hope that if they fail to file their lawsuit within six years of the date on which they should have discovered a problem they might at least be able to recover those costs expended within six years prior to filing their lawsuit. Instead, all damages recoverable under a Spill Act contribution claim will be barred if not sought within six years of when a property owner should have identified the release.

For further information on New Jersey Spill Act claims, risk management, or any other environmental matter, please contact Paul M. Schmidt, Esq at pmschmidt@zarwin.com or at (267) 765-9636. Mr. Schmidt is the Co-chair of the Environmental Practice Group.


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