Loss of Peak Market Real Estate Sales as Damages in Contamination Cases

September 21, 2009

Companies alleged to have caused contamination often face claims from third-party property owners alleging under common law nuisance or trespass that the contamination has caused a decrease in market value, often referred to as “stigma damage,” to plaintiffs’ nearby property.  Such claims can be defended on multiple grounds, two of the more notable being that government supervised remediation has mitigated the contamination such that it does not interfere with plaintiffs’ property rights or that plaintiffs’ decrease in value had some independent cause, such as the general real estate market decline.

Recently in West Coast Home Builders, Inc. v. Aventis Cropscience, USA Inc., Case No. C 04-2225, 2009 U.S. Dist. LEXIS 74460 (N.D. Cal. Aug. 21, 2009) (“Aventis”), a district court in Northern California permitted a damage theory that could bypass both of those defenses to survive summary judgment.  The theory was not the typical stigma damage claim that the existence of contamination had caused a market decrease, but instead was that because of the contamination and related remediation, plaintiff had lost the opportunity to sell at the peak of the real estate market.  The case involved a landfill that had since 1993 been under a Department of Toxic Substances Control remedial action plan and a consent order issued in 2001.  Plaintiff homebuilder owned a former oil tank property to the northwest, part of which it had developed and part of which it intended to develop.  Plaintiff alleged in nuisance and trespass against the landfill owner and its environmental consultant that because “they ha[d] failed to abate the groundwater plume underlying plaintiff’s property,” it was unable to develop the property and was thus damaged the $13,000,000 it would have made had the development been complete near the peak of the real estate market in mid-2004.  The Court permitted the theory, holding that “ongoing remediation raises triable issues of fact as to whether defendants have interfered with plaintiff’s use of the property and the reasonableness of defendants’ conduct” and that the plaintiff’s experts supporting opinion was not overly speculative.

Given property value declines approaching 50% to date in some markets, a theory allowing property owners near environmental sites to recover that decline from the parties carrying out the remediation is a serious concern.  However, for reasons not considered in Aventis, that theory should be a difficult one for plaintiffs.  First, outside the context of fiduciary relationships, the “lost opportunity to sell in a high market” is generally not compensable because the conduct causing the delay is “merely the condition or occasion for the market decline to affect” plaintiff, not the proximate cause of the damages.  Second and more fundamental, actions to influence an agency consent order or decree, or actions done pursuant to it, can be immune from tort liability under the “right to petition” clause of the First Amendment.  Thus, where a remediation is being carried out under a negotiated consent order, as was the case in Aventis, it should be difficult to hold a remediating party, or its consultant, liable in tort for doing what the consent order requires.

Because the principal theories that would prohibit the lost opportunity claim Aventis allowed were not considered, it is difficult to gauge what impact the case will have.  However, the fact that a district court has allowed a claim that shifts the damages from a general market decline onto a remediating party abiding by a consent order, is cause for concern.

Gibson, Dunn & Crutcher’s Environmental Litigation and Mass Tort Practice Group has particular expertise with claims alleging property damage from contamination. We also handle a range of other environmental litigation and counseling matters nationwide.  To learn more about the firm’s environmental litigation, please contact the Gibson Dunn attorney with whom you work or the following practice group co-chairs:

Patrick W. Dennis – Los Angeles (213-229-7567, [email protected])
Jeffrey D. Dintzer – Los Angeles (213-229-7860, [email protected])
Alan N. Bick – Orange County (949-451-4211, [email protected])
Peter E. Seley – Washington, D.C. (202-887-3689, [email protected])

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