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Court rules community property...

Court rules community property law not enough to expose spouse to CERCLA liability

By Bret A. Stone

At least one federal court in California believes that the state’s community property law does not expose the spouse of the owner/operator of a facility to CERCLA liability. Wells Fargo Bank, N.A. v. Renz, Case No. 08-2561 (N.D. Cal. 6/9/11). On summary judgment, the court rejected the plaintiff’s argument that the spouse was a “de facto” owner of the dry cleaning business that allegedly contaminated the property with tetrachloroethylene (“PCE” or “perc”) simply because, under California law, she shared profits with her deceased husband.  The argument, however, may not be entirely without merit under the right set of facts.

Plaintiff, the trustee of the trust that owned the property, filed suit under CERCLA, seeking to recover cleanup costs against several parties, including the estate and spouse that formerly operated the dry cleaning business. Plaintiff argued that the spouse was a “covered person” under CERCLA, pursuant to California community property laws. Specifically, Plaintiff claimed that under California Family Code § 760, “Cal Cleaners is presumed to be a community property business.” Similarly, Plaintiff argued that the spouse became a de facto partner in the business by virtue of sharing in the profits of the dry cleaner. However, court took fault with Plaintiff for its failure to cite any legal authority for the proposition that the spouse’s community property or de facto partnership interest in the dry cleaning business necessarily transmutes her into a PRP within the meaning of Section 107 of CERCLA. Instead, the court said, the relevant question for determining operator liability is whether the defendant played an active role in running the facility.

Finally, citing California Probate Code § 13550, Plaintiff posits that even if the spouse is not a PRP, she nonetheless bears personal liability for her late husband’s liabilities on the theory that his estate did not go through probate. Probate Code section 13550 prescribes the manner and extent to which a surviving spouse remains personally liable for the debts of a deceased spouse. The purpose of this provision is to protect creditors to ensure the payment of preexisting debts. The court found that this provision has no application because Plaintiff was not a creditor attempting to collect on a debt existing when the husband died.

The court rejected the plaintiff’s argument, ruling that legal authority did not support the proposition that defendant’s community property or de facto partnership interest in the facility transformed her into a potentially liable party (“PRP”) under CERCLA. The court also rejected plaintiff’s arguments that defendant played an active role in running the business and that she became liable as an owner or operator because she co-signed the lease.

While the court rejected the plaintiff’s arguments in this particular setting, given the broad liability imposed by CERCLA, the argument is not without merit. California Family Code section 760 provides “all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.” Moreover, “the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.” Fam. Code, § 910 (emphasis added); see also Century Surety Co. v. Polisso (2006) 139 Cal. App. 4th 922, 942.

The Polisso case is particularly instructive in the context of an environmental contamination case where there might be insurance coverage. In Polisso, Mr. Polisso, an owner of a glass company, contracted to install glass panels in an underground viewing chamber being built by the United States Forest Service in Lake Tahoe. Before the project was completed, a heavy rainstorm hit the Tahoe area and caused the creek to overflow and submerge the viewing chamber, triggering a series of events that resulted in damage to the glass. Mr. Polisso was sued for damage to the glass and the chamber. Mrs. Polisso was not involved in the glass installation and was not even named in the lawsuit. The suit was tendered to Mr. Polisso’s insurance company, which also provided coverage for his “spouse . . . with respect to the conduct of a business.” A coverage action between Mr. and Mrs. Polisso and their insurer ensued. In determining whether the insurance carrier had a duty to Mrs. Polisso even though she was not named in the lawsuit, the court analyzed her liability under community property laws. The court found that “[b]ecause the Polissos purchased and operated [the business] during their marriage, it is community property.” Id.; Fam. Code, § 760. As a spouse with a community property interest in the business, Mrs. Polisso would be legally obligated to pay a judgment against Mr. Polisso (Fam. Code, §§ 910, 1000(b)(1)) and therefore the insurer had to cover her even though she was not named in the suit. Id. Indeed, “[a]n individual who owns the assets of a sole proprietorship is personally liable for all debts and responsibilities incurred by the business.” Id. at 943.

Thus, it could be argued that in a case where the couple is married, the dry cleaning business was owned and operated during their marriage, the couple was domiciled in California at the time they owned the dry cleaning business, as a matter of law, both husband and wife owned the dry cleaning business as community property. Furthermore, regardless of whether the wife had any management or control of the dry cleaning business, the community estate is liable for the debt (i.e., the property damage caused by the contamination). Whether it was the husband or wife or both who ran the dry cleaning business is, arguably, of no import. Both share in the liability of the community estate.

This argument is bound to be made again. With the right set of facts, it may prove persuasive.

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