California Court of Appeal Uphold Polanco Act in First Appellate Challenge to Broad Brownfields Liability

Richard G. Opper

California’s brownfields statute, the Polanco Redevelopment Act (California Health & Safety Code §§ 33459 et seq., has survived its first appellate challenge intact. In Redevelopment Agency of the City of San Diego v. Salvation Army (2002) 127 Cal.Rptr.2d 30, the court illuminated a path for other redevelopment agencies in California to follow.” California cities may have been reluctant to use the Polanco Redevelopment Act (Polanco Act), given little case support interpreting the statute. In deciding for the city of San Diego’s redevelopment agency against the Salvation Army, however, the Fourth District Court of Appeals gave the Polanco Act its seal of approval. This decision may prove to be a significant turning point, spurring redevelopment agencies to use the Polanco Act.

The Setting for the Salvation Army’s Brownfield Battle

In the 1950s, San Diego was a sleepy Navy town with light manufacturing and warehousing activities. San Diego’s popular “Gaslamp Quarter” did not attract throngs of conventioneers and young professionals out for an evening’s entertainment, as occurs today. This warehouse district attracted the homeless and destitute resident of 1950’s-era San Diego, so the Salvation Army bought facilities south of downtown to support its programs. Its property had an underground storage tank that could be used for bulk fuel purchases. Acquisition of the building cost the Salvation Army around $55,000. In forty years, the value escalated to over $500,000.

The Redevelopment Agency began the acquisition/condemnation process with a notice informing the Salvation Army that would use the Polanco Redevelopment Act. The appellate court’s opinion in Redevelopment Agency describes each step utilized by the City in its process. Any city considering use of the Polanco Act can apply that process to a project area elsewhere.

To begin with, the opinion in Redevelopment Agency points out that the city proceeded with a Phase I investigation before contacting landowners. The Phase I investigation went so far as to provide the landowners a proposal for an “Initial Scope of Work” that they were requested to supply. The city provided the statutory 60-day notice, and the court noted that at one point the city extended the notice 30 days while voters considered approval of the measure for the redevelopment project.

The opinion details steps taken by the city to craft a Master Work Plan and link that plan to its condemnation effort. For example, in the Phase I study, the city identified the leaking underground storage tank in its investigation. The city appraisers had determined that the building, if it were “clean” and free of environmental issues, would have a fair market value of more than $500,000. However, because of the suspected environmental condition, the agency’s environmental consultants concluded that the cost of remediation could exceed that amount. Therefore, the city deposited only $100 for the property value in its condemnation action, and sought an Order For Prejudgment Possession based on that deposit.

The Unhappy Surprise: A Browner Shade of Brownfield

Unfortunately, after obtaining pre-judgment possession and demolishing the structure, the city determined that there was a layer of burn ash residue spread across the property that had gone undetected. This residue remained from decades of trash incineration that probably occurred offsite, by persons not affiliated with the Salvation Army. For many years, citizens had hauled trash to the edge of San Diego Bay where it was incinerated and left for the tides to resolve. This unhappy practice left large areas of downtown San Diego pock-marked with burn ash pits. Worse yet, decades after the formation of this problem, San Diegans frequently returned to the bayside for fill to use in building downtown. They had no way of anticipating a future where CERCLA would mandate remediation of heavy metals in burn ash residue.

Discovery of the burn ash residue and a small burn ash pit under the Salvation Army’s building led to more than $100,000 of additional clean up costs (over 70 percent of the remediation would be “orphan share” liability with no responsible party available to hold directly liable for it). The Salvation Army balked at paying this orphan share and litigated the city’s claims for reimbursement to test the Polanco Redevelopment Act in the courts.

The Trial

The court rejected three rather technical arguments with minimal discussion. First, the court held that the Salvation Army argued that it was not an “owner” because the City took prejudgment possession. The court easily rejected this contention, given the broad scope of liability incorporated into the Polanco Act from the federal CERCLA statute. The appellate opinion found the Salvation Army to be an “owner” as the term is defined in CERCLA caselaw, and “owner” status was not changed when the city took possession of the site during the time the remediation was implemented.

Second, the Salvation Army argued that its cooperation with the agency merited a discharge of all liability. Third, the Salvation Army argued a technicality, saying it was entitled to a second 60-day notice of agency action under the Polanco Act after the discovery of the burn ash. These arguments were both rejected, with some discussion in the opinion in Redevelopment Agency.

The opinion in Redevelopment Agency also addressed some serious challenges to the Polanco Act. First, the court affirmed the Polanco Act’s power to use CERCLA’s broad liability scope without necessarily having to prove compliance with all of CERCLA’s procedural protections. At trial, the Salvation Army argued the city should be denied reimbursement if it failed to follow the complicated federal scheme (the “National Contingency Plan,” or “NCP”) that CERCLA imposes upon the EPA and PRP-plaintiffs seeking cost recovery. The city argued that the Polanco Act did not require compliance with this federal scheme. The city argued that the NCP was an expensive and unnecessary regulatory hurdle for Brownfield redevelopment. The trial judge was not persuaded that the NCP should apply in a Polanco Act case, but found that the city had apparently acted consistently with the NCP.

After the city prevailed on this critical issue, it recovered clean up costs ($171,119.42), attorneys’ fees ($58,014.00), and interest ($2,341.90). The Salvation Army also had to agree to pay certain future costs of remediation for a total judgement of $231,475.32. In condemnation, the Salvation Army received “net” value in excess of $300,000 after clean up costs. The Salvation Army nevertheless chose to appeal.

The Appeal

As is noted above, the trial court found that the city had apparently acted consistently with the NCP. The appellate hearing went into some detail about the NCP and its purpose. This state appellate panel presumably had never heard a single CERCLA case before, yet they were being asked to determine the proper “scope” of CERCLA liability when it is grafted onto a state brownfields statute. Interesting questions arise about whether and to what extent a state court must accept and be guided by federal court decisions on CERCLA.

The opinion in Redevelopment Agency is striking for the depth and variety of federal case citations cited in interpreting the Polanco Redevelopment Act, which is wholly a product of a state legislature. While the Polanco Act incorporates broad CERCLA liability, it also hedged its bets with language stating that “any actions” would have to be “consistent with other state and federal laws to remedy or remove a release of hazardous substances . . . from . . . within a project area . . . .” Health and Safety Code §33459.1(a)(1).

The court rejected the Salvation Army’s effort to escape responsibility for the historic use of the property (i.e., the mysterious burn ash found during inspection). Since the Salvation Army had itself contributed to pollution through the use of its own underground storage tank, the CERLCA standard of ‘joint and several liability” applied without need for discussion. Applying “joint and several liability” to the Salvation Army – the lone defendant – the court essentially determined that as a result of liability for part of the problem at a site, that lone defendant became liable for all of it.

The opinion in Redevelopment Agency did not address the fairness of holding the Salvation Army liable for the “orphan share” it paid for, in the remediation of historic burn ash deposits. This opinion affirms the right of redevelopment agencies to place the entire burden of all historic contamination on the owner of the property being condemned and any other responsible parties that can be found.

The Future

The opinion in Redevelopment Agency underscores the willingness of California courts to support cities that use explicit statutory authority to redevelop contaminated property. Thousands of potential brownfields redevelopment sites dot the California landscape. While cities have historically showed lagging enthusiasm for redevelopment using the Polanco Act, the publication of this striking and clear decision supporting Polanco should renew that enthusiasm. The Salvation Army case shines a light through the maze of eminent domain and contamination, so that cities should be willing to take on brownfields sites. The Redevelopment Agency case will likely be the first in a long series of municipal successes at solving these vexing community problems.

Richard G. Opper is a partner of the law firm of Foley & Lardner where he advised the City of San Diego on the design and architecture of its Polanco Act program for the downtown ballpark project, and served as trial counsel and appellate counsel for the litigation described in this article. This article was adapted from a longer article published in California Redevelopment Journal.