Legal Watch: Volume 18

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

SINCLAIR HAD DUTY TO REMEDIATE PETROLEUM SPILL EVENTHOUGHSERVICE STATION TAKEN BY CONDEMNATION

Case Summary: Sinclair Marketing, Inc. owned a service station at I-35 and Chouteau Trafficway that was condemned by the State of Missouri for development purposes in 1999. Prior to vacating the site, Sinclair removed a used oil tank, but left three underground gasoline tanks. When Chouteau Development entered the property for development purposes, it found the three tanks and also petroleum hydrocarbon contamination in the vicinity of the tanks. Chouteau asked Sinclair to remove the tanks and remediate the contamination. Sinclair replied that it no longer owned the site and had complied with its legal obligations. Chouteau removed the tanks, remediated the site, and then sued Sinclair under the theory of “equitable indemnity” – a legal theory providing that if a landowner neglects to perform a duty and another party performs that duty, the performing party is entitled to reimbursement of its costs. The trial court concluded that, as a matter of law, Sinclair had no duty to remove the tanks or clean the condemned site. Chouteau appealed, and the Court of Appeals of Missouri reversed. The Appeals Court found that under Missouri environmental statutes and regulations, Sinclair had a duty to meet EPA standards for new tanks, or to close the station. Since Sinclair failed to comply with either of these options, Sinclair breached its statutory duty. The Court ruled that Sinclair’s breach of duty was the prime element of an equitable indemnification, thereby permitting Chouteau to recover its costs for removing the tanks and cleaning up the contamination.

LESSON: An oil company is not relieved of its obligation, found in most state environmental laws, to remove tanks and clean up a retail outlet upon closure, even when the property is subject to a condemnation proceeding. When another party then performs these tasks, the prior property owner can be assessed the costs incurred. And remember: the party performing the clean-up may not be as efficient and cost-conscious as the original property owner. Chouteau Development Co., L.L.C. v. Sinclair Marketing, Inc.

BUYER WHO FAILED TO REJECT UNAMBIGUOUSLY DELIVERY OF NO. 6 OIL WITH A 7.5% WATER CONTENT MUST PAY SELLER

Case Summary: Midwest Generation LLC, an independent electricity producer located in Chicago, issued a Request for Proposal to sell 300,000 barrels of No. 6 Fuel Oil it held in storage. Carbon Processing and Generation agreed to purchase the fuel in four liftings. After the fourth lifting, Carbon failed to pay the outstanding $300,413 invoice, and Midwest sued in Federal Court in Illinois. As its defense, Carbon submitted the affidavit of Douglas Smoot stating that the fuel oil failed to satisfy the ASTM standards for No. 6 Fuel Oil. Smoot explained that the water content of the fuel oil was 7.5%, thereby exceeding the 2% max water ASTM standard. The Court rejected Carbon’s defense and granted summary judgment for Midwest. In support of its ruling, the Court first found that the contract specified that the buyer purchase the fuel oil from Midwest “as is.” Secondly, the Court found that Carbon’s actions after receipt of the fuel oil fell short of the obligations imposed by the Uniform Commercial Code (UCC) on buyers who wish to reject delivery of a commodity. Specifically, the Court found that Section 2-606 of the UCC provides that acceptance of goods occurs when the buyer: (1) notifies the seller of acceptance, (2) fails to make an effective rejection, or (3) does any act inconsistent with the seller’s ownership. The Court found that Carbon’s complaints about the water content and the hardship it was causing, submitted via an e-mail, were insufficient. The Court explained that the UCC, “…requires that a buyer give the seller clear and unambiguous notice of his rejection within a reasonable time.”

LESSON: A buyer of a petroleum product who, after testing, finds the product nonconforming must reject the shipment unequivocally. Unless such a rejection is timely received, the buyer is obligated to pay for the fuel oil, even if the water content grossly exceeds applicable ASTM standards. Midwest Generation, L.L.C. v. Carbon Processing and Reclamation, L.C.C.

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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