Buyer Beware: Recent California Decision Limits the Type of Damages You May Recover for Contaminated Property

Wactor & Wick LLP
September, 2009

The California Court of Appeal denied a property owner’s claim for damages resulting from the inability to refinance a first trust deed against his contaminated land.  Gehr v. Baker Hughes Oil Field Operations, Inc. (2008) 165 Cal. App.. 4th 460,81 Cal. Rptr. 3rd 219. The property owner brought a continuing nuisance action against the previous owners, alleging that they had polluted the property with chemical solvents before selling it to the plaintiff.  The Court held that the interest rate differential damages were indistinguishable from diminution in value damages, which are not recoverable for continuing nuisances.

Gehr Case Background

Gehr involved a 13- acre commercial property purchased by the plaintiff from the defendants in 1985.  the purchase agreement contained no representations or warranties regarding the condition of the soil, and stated that the property was being sold in its existing physical condition.  It also imposed upon the buyer/plaintiff the obligation to conduct an independent investigation of the property, including the soil, and contained an addendum that made the close of escrow contingent upon the buyer/plaintiff’s inspection of the property.  The plaintiff encumbered the property with a note secured by a first trust deed.

In 2002, a prospective lender declined tor refinance the first trust deed at a lower interest rate.  A required environmental assessment revealed contamination with chemical solvents used on the site by defendants prior to their sale of the property2.  The defendants refused to comply with the plaintiffs request for either remediation or issuance of an indemnity in favor of the prospective lender.

In 2006, the plaintiff sued the defendants for interest rate differential damages under a continuing nuisance theory, contending these damages were for the  loss of use of his property as collateral.3  Considering the parties’ cross- motions for summary judgment and summary adjudication, the trial court treated the plaintiff’s claim for interest rate differential damages as akin to diminution in value, and his request for ” excessive” interest special damages” as akin to a request for damages for the decline in property value.  According to the trial court, these types of damages are not recoverable under a continuing nuisance theory, but may be recovered only under a permanent nuisance theory. However, a permanent nuisance claim was barred by the statute of limitations.5  The trial court, therefore, entered judgment for the defendants.

Court of Appeal Rules Interest Rate Differential Damages Are Not Recoverable in Continuing Nuisance Action

The Appellate Court agreed with the trial court:  interest rate differential damages are indistinguishable from diminution in value damages, which are not recoverable for continuing nuisance.  The Court stated that the inability to encumber property is not a physical injury to the property.  It disagreed with the plaintiff’s argument that interest rate differential damages should be treated as a claim for loss of use of property, not for diminution in value.   Plaintiff cited cases to show physical loss of use is not required to  prevail under a continuing nuisance theory, but the Court distinguished these cases as not involving or discussing a claim for interest rate differential damages.   The defendants distinguished one case that discussed the availability of interest rate differential damages under a continuing nuisance theory, Carson Harbor Village, Ltd. v. Unocal Corp. ( Carson Harbor).6  Carson Harbor, unlike Gehr, involved a contractual indemnity claim.7

The court relied on Santa Fe Partnership.8  Santa Fe Partnership followed and applied the decisions of California’s highest court that expressly disallowed prospective damages in cases of continuing nuisance to bar recovery of diminution in value damages in a continuing nuisance case.   Like the Gehr plaintiff, the plaintiffs in Santa Fe Partnerships did not seek to abate the nuisance or claim any “physical ” loss of use of their property.  Rather, they claimed “post cleanup stigma damages.9”  The Gehr Court concluded that the plaintiffs claim for interest rate differential damages resulted from the inability to refinance the first trust deed, like the “stigma” damages claim resulting from the inability to sell or secure a loan against the land in Santa Fe Partnership, is ” a component of the diminution in value of the land caused by the contamination, whether or not complete remediation is feasible in the immediate future.”10

Finding the plaintiffs interest rate differentials claim to be indistinguishable from a diminution in value claim, and therefore not recoverable under a continuing nuisance theory, and finding the plaintiffs claim to be barred by the stature of limitations under a permanent nuisance action, 11 the Court affirmed the trial court’s  judgment in favor of the defendants.

Gehr rejects another type of damage under a private continuing nuisance theory- interest rate differential damages.  Recovery under a continuing nuisance cause of action for damages caused by abatable contamination is restricted to actual physical injuries already suffered.  By narrowing the category of contamination -caused damages under the continuing nuisance theory, Gehr underscores the importance of obtaining an environmental assessment prior to purchasing the property.

End Notes

  1. A request for a rehearing was denied ( Gehr V. Baker Hughes Oil Field Operations,2008 Cal App. LEXIS 1499 ( Cal. App. 2nd  Dist., Aug. 21, 2008)) and a petition to the California Supreme Court was denied as well. ( Gehr (Norbert) v. Baker Hughes Oil Field Operations, Inc., 2008 Cal. LEXIS 12304 ( Cal., Oct. 16, 2008)).
  2. The Gehr Court granted the plaintiff’s request for judicial notice of California Regional Water Quality Control Board’s (RWQCB) ordered issued after the trial court’s judgment.  The RWQCB found the defendants responsible for the site’s contamination and directed them to begin remediation.
  3. The Gehr Court pointed out that the plaintiff did not seek to abate the nuisance or claim any physical loss of use of the property.
  4. For private nuisance claims, the available remedies and limitations periods differ according to whether the nuisance is classified as continuing or permanent.  ” If the nuisance has inflicted a permanent injury on the land, the plaintiff generally must bring a single lawsuit for all past, present and future damages within three years of the creation of the nuisance. [ citations.]  But if the nuisance is one ” which may be  discontinued at any time, it is considered continuing in character and persons harmed by it may bring [a suit for injunctive relief or} successive actions for damages [ except for  diminution in value] [as new physic al injuries occur} until the nuisance is abated.  {Citation.}  Recovery is limited, however to actual injury suffered prior to commencement of each action.”  Gehr, citing Santa Fe Partnership v. ARCO Products Co.  (1996) 46 Cal.  App. 4th 967,975-976, citing and quoting Baker v. Burbank- Glendale – Pasadena Airport Authority (1985), 39 Cal. 3d 862,868-869, and citing Spaulding v. Cameron ( 1952) 38 Cal. 2d 265,267.
  5. The trial court concluded the three- year limitations period for a permanent nuisance ( California Code Civ. Proc. 338, subd. (b)) had expired, and the plaintiff did not challenge this determination on appeal.
  6. Carson Harbor Village, Ltd. v. Unocal Corp.,433 F.3d 1260 (9th Cir. 2006).
  7. The indemnity clause in Carson Harbor stated:  ” the partnership Defendants agreed to Indemnify and hold Carson Harbor harmless ” from and against any … damages, cost , expense… liability… suffered by { Carson Harbor} resulting, directly or indirectly, from… any liability or obligation of [ the Partnership Defendants] which [Carson Harbor] is not specifically required to assume here-under.”  Id. at 888
  8. Santa Fe Partnership, supra, note 4
  9. id. at 972.
  10. Gehr, quoting Sante Fe Partnership at 978
  11. Because the plaintiff could not recovery under either a continuing or permanent nuisance theory, the Gehr curt did not have to determine whether or not the contamination was remediable.

Published in  ENVIRONMENTAL LAW NEWS  Volume 18, Number 1,  Summer 2009