APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY. (D.C. Civ. No. 89-cv-01031).
Before: Mansmann, Hutchinson, and Weis, Circuit Judges.
In this case, the buyer of a chemical plant has sued the seller under state law and the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), 42 U.S.C. §§ 9601-9675, for costs incurred in abating contamination at the site. The district court, applying federal common law, held that the sale agreement between the parties did not clearly relieve the seller from a duty to contribute and, after a trial, entered judgment for the buyer. We conclude that state law governs the interpretation of the contract and requires consideration of extrinsic evidence to resolve ambiguities. We agree with the district court that the parties are not entitled to a jury trial under CERCLA. Accordingly, we will vacate the judgment in favor of the buyer and remand for a hearing on the contractual issues.
In 1959, W.R. Grace & Co.--Conn. acquired a chemical manufacturing business in Fords, New Jersey. Grace owned and operated the plant until 1978 when it sold the operation to the straw-parties that, in turn, transferred the business to Hatco Corporation, whose sole shareholder was and is Alex Kaufman.*fn1
Kaufman had worked at the Fords site for over twenty years and served as the president of Grace's chemical division there from 1962 until the sale in 1978. At the time of the sale, the site was polluted by the manufacturing operations that had been carried on over the years. Additional contamination occurred during the subsequent years when Hatco owned the facility.
Under pressure from state authorities, Hatco undertook cleanup operations at the site and then sued for reimbursement of sums expended, alleging liability against Grace under CERCLA and the New Jersey Spill Compensation and Control Act ("Spill Act"), N.J. Stat. Ann. §§ 58:10-23.11 to -23.24. Contending that Hatco had assumed responsibility for cleanup in the 1978 agreement of sale, Grace moved for summary judgment. Hatco filed a cross-motion on the same issue. The district court denied Grace's motion on that issue and granted Hatco's, concluding that the agreement, as a matter of law, did not unambiguously shield Grace from Hatco's claim for reimbursement.
In a nonjury trial, the district court found both Grace and Hatco responsible under the New Jersey Spill Act and CERCLA. The court apportioned the cleanup costs between the two companies based on a number of factors and entered judgment in favor of Hatco and against Grace in the amount of $9,269,892.41, plus prejudgment interest of $2,919,885.75, for a total of $12,189,778.16. The proceedings before the district court have been chronicled in a series of published opinions.*fn2
Although unresolved claims between the parties remain (including potential insurance coverage), the court entered final judgment pursuant to Fed. R. Civ. P. 54(b). Grace has appealed, raising a number of issues, one of which we find is dispositive of this appeal.
Under CERCLA, 42 U.S.C. § 9607(e), "agreements to indemnify or hold harmless are enforceable between [private] parties but not against the government." Smith Land & Improvement Corp. v. Celotex Corp., 851 F.2d 86, 89 (3d Cir. 1988); accord Beazer East, Inc. v. Mead Corp., 34 F.3d 206, 211 (3d Cir. 1994), cert. denied, 131 L. Ed. 2d 559, 115 S. Ct. 1696 (1995). Although these private agreements cannot nullify a party's underlying CERCLA liability, they are effective to shift the ultimate financial loss. Beazer, 34 F.3d at 211; Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454, 1459 (9th Cir. 1986).
Grace contends that it is not required to reimburse Hatco for cleaning up the Fords site because in the agreement of sale between the parties, Hatco assumed the obligation of satisfying any environmental obligations. Following its earlier opinion in Mobay Corp. v. Allied-Signal, Inc., 761 F. Supp. 345 (D.N.J. 1991), the district court held that in order to create a duty to indemnify under federal common law, "an unmistakable intent to do so must be expressed in unambiguous terms or be clearly implied." Hatco Corp. v. W.R. Grace & Co.--Conn., 801 F. Supp. 1309, 1318 (D.N.J. 1992).
However, some months after this appeal was taken, we held that agreements among private parties inter se addressing the allocation of responsibility for CERCLA claims are to be interpreted by incorporating state, not federal, law. Fisher Dev. Co. v. Boise Cascade Corp., 37 F.3d 104, 109 (3d Cir. 1994); Tippins, Inc. v. USX Corp., 37 F.3d 87, 91 n.4 (3d Cir. 1994); Beazer, 34 F.3d at 215. We have also decided that, given appropriate language, a pre-CERCLA agreement can be effective for claims arising after the statute became effective. Fisher, 37 F.3d at 110; Beazer, 34 F.3d at 211.
The sale agreement before us provides that its terms are to be interpreted by the laws of New York. Under that state's law, the assignment of the burden of proof depends upon whether the agreement in question is characterized as a "release" or as an "indemnity" contract. Compare, e.g., Structural Painting Corp. v. Travelers Indemnity Co., 88 A.D.2d 743, 451 N.Y.S.2d 875, 876 (N.Y. App. Div. 1982) (burden of establishing intent of parties is assigned to releasor) with Walsh v. Morse Diesel, Inc., 143 A.D.2d 653, 533 N.Y.S.2d 80, 83 (N.Y. App. Div. 1988) (burden of establishing intent of parties is assigned to indemnitee).
In the case before us, the district court and the parties on appeal have used the terms "release" and "indemnity" interchangeably. Under the Mobay standard, perhaps that made no difference, but it is otherwise under Beazer. As we remarked in a CERCLA context, the effect of a release is to shield the beneficiary of that agreement from liability rather than to shift its responsibility to another as is the case of a contract to indemnify. Fisher, 37 F.3d at 112.
New York law specifies that an indemnity agreement be strictly construed and that a clear and unmistakable intent to indemnify be manifested in the contract. Heimbach v. Metropolitan Transp. Auth., 75 N.Y.2d 387, 553 N.E.2d 242, 246, 553 N.Y.S.2d 653 (N.Y. 1990). If the parties' intent is not clear from the writing, the court must consider extrinsic evidence. Commander Oil v. Advance Food Serv. Equip., 991 F.2d 49, 51 (2d Cir. 1993) (applying New York law); Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 430 (2d Cir. 1992) (applying New York law); General Mills, Inc. v. Filmtel Int'l Corp., 195 A.D.2d 251, 599 N.Y.S.2d 820, 822 (N.Y. App. Div. 1993). However, under state law, the agreement here may be more accurately characterized as a release. "To constitute a release, a writing must contain an expression of a present intention to renounce a claim." Carpenter v. Machold, 86 A.D.2d 727, 447 N.Y.S.2d 46, 46-47 (N.Y. App. Div. 1982) (citation omitted).
"No particular form need be used in drafting a release . . . ." Pratt Plumbing & Heating, Inc. v. Mastropole, 68 A.D.2d 973, 414 N.Y.S.2d 783, 784 (N.Y. App. Div. 1979). Indeed, "any words may be used, as long as they manifest the releasor's intent to discharge. The parties' intent will determine the scope of a release." Bank of Am. Nat'l Trust & Sav. Ass'n v. Gillaizeau, 766 F.2d 709, 713 (2d Cir. 1985) (applying New York law) (citations omitted).
Releases are governed by principles of contract law. Mangini v. McClurg, 24 N.Y.2d 556, 249 N.E.2d 386, 389, 301 N.Y.S.2d 508 (N.Y. 1969). Whether an agreement is ambiguous is a question of law for the court, W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 566 N.E.2d 639, 642, 565 N.Y.S.2d 440 (N.Y. 1990), to be determined by looking to the document as a whole rather than to sentences or clauses in isolation. Williams Press, Inc. v. State, 37 N.Y.2d 434, 335 N.E.2d 299, 302, 373 N.Y.S.2d 72 (N.Y. 1975). If an ambiguity in the document prevents a firm Conclusion that an agreement is a release, extrinsic evidence may be introduced to resolve that question of fact. Gillaizeau, 766 F.2d at 713-15; see also Green v. Lake Placid 1980 Olympic Games, Inc., 538 N.Y.S.2d 82, 84 (N.Y. App. Div. 1989) (circumstances sufficient to raise issue of fact as to parties' intent permit extrinsic evidence as aid to interpretation of a release).
A factor to be considered in determining whether an agreement is a "release" or an "indemnity" is the type of claim asserted in the litigation. "An action for the breach of an indemnity agreement does not arise until [a party] has suffered damage by reason of the breach." Eliseo v. Stan Margolin Assocs., Inc, 175 A.D.2d 682, 572 N.Y.S.2d 831, 831-32 (N.Y. App. Div. 1991) (citation omitted).*fn3
In Bouton v. Litton Indus., Inc., 423 F.2d 643 (3d Cir. 1970), we interpreted New York law in construing a contract for the sale of a business and distinguished between agreements of indemnity and those of assumption. We held that the language of the contract was "that of assumption not of indemnification" and that "one who assumes a liability, as distinguished from one who agrees to indemnify against it, takes the obligation of the transferor unto himself . . . ." Id. at 651.
Although various canons may dictate that an ambiguous agreement is to be construed against one of the parties,*fn4 such rules are of little consequence when the agreement in question has been "negotiated at arm's length between the representatives of two sophisticated business entities." Hogeland v. Sibley, Lindsay & Curr Co., 42 N.Y.2d 153, 366 N.E.2d 263, 266, 397 N.Y.S.2d 602 (N.Y. 1977).
The burden of proof rests on the releasor to establish that general language in the document was meant to be limited "or otherwise does not represent the intent of the parties." Mangini, 249 N.E.2d at 390; see also Olin Corp. v. Consolidated Aluminum Corp., 5 F.3d 10, 16 n.4 (2d Cir. 1993) (applying New York law); Mardan, 804 F.2d at 1462 (applying New York law). "The burden of proof is not a necessary concomitant of the burden of pleading" an affirmative defense. Hill v. St. Clare's Hosp., 67 N.Y.2d 72, 490 N.E.2d 823, 830, 499 N.Y.S.2d 904 (N.Y. 1986) (citations omitted). "Thus the burden of proof as to the validity of a release is on the defendant who pleads it, but a releasor who seeks to limit the effect of a release because of a claimed mutual mistake has the burden of proof on that issue." Id. (citations omitted).
With this survey of New York law, we now turn our attention to the dispute at hand. The relevant language in the agreement is: "[Hatco] hereby assumes and agrees to . . . discharge" certain obligations of Grace. The agreement has been invoked by Grace, which has not expended any sums for cleanup and makes no claim for them. Hence, Grace has no basis for indemnity at this point, but in reality is seeking to shield itself from Hatco's claim for reimbursement.
Hatco is attempting to recover sums it spent to meet Grace's asserted liability. However, if the agreement is enforceable, it acts to relieve Grace from payment for matters that Hatco had taken over itself when the parties executed the assumption agreement in 1978. Indeed, as the district court pointed out, to the extent a document of that nature "prevents a purchaser from asserting a CERCLA claim against the seller, the agreement can be viewed as a 'release.'" Hatco, 801 F. Supp. at 1317. We are in accord with this comment of the district court, and we shall treat the agreement as a release.
In diversity cases, the burden of proof is a matter of substantive law, Blair v. Manhattan Life Ins. Co., 692 F.2d 296, 299 (3d Cir. 1982), and is not controlled by Fed. R. Civ. P. 8(c), which governs releases pled as affirmative defenses. See Palmer v. Hoffman, 318 U.S. 109, 117, 87 L. Ed. 645, 63 S. Ct. 477 (1943). We recognize that the present dispute is not a diversity case, but because the parties here have chosen to have their agreement interpreted in accordance with New York law, we will apply that state's substantive law on the burden of proof. See Olin, 5 F.3d at 16 n.4; Mardan, 804 F.2d at 1462. Because it contends that the terms of the agreement are unclear, we conclude that the proper course is to require Grace to bear the burden of producing evidence bearing on ambiguity. Hatco, though, as the releasor seeking to limit the effect of the release, bears the burden of persuasion on the effect of that agreement.
In reviewing the agreement, the district court used a very strict criterion articulated as simply, "No clear expression, no indemnity." Hatco, 801 F. Supp. at 1321. In other words, the district court opined that matters extrinsic to the agreement are irrelevant to the indemnity inquiry. However, when a writing is ambiguous, New York cases require the admission of extrinsic evidence to establish or disprove the intent of the parties.
The assumption agreement that Hatco executed specifically incorporated the sale agreement and read in pertinent part:
"1. [Hatco] hereby assumes and agrees to pay and discharge in due course all liabilities of [Grace] attributable to the Chemical Business listed in Exhibit A to this instrument, and [Hatco] hereby assumes and agrees to perform and fulfill all obligations of [Grace] attributable to the Chemical Business . . . .
2. [Hatco also] agrees to indemnify [Grace] and to save and hold [Grace] harmless from and against any and all damage, liability, [or] loss . . . arising out of or resulting from any failure by [Hatco] duly to perform or fulfill any agreement set forth in this instrument."
Liabilities and obligations of Grace attributable to the chemical business and assumed by Hatco were defined in relevant part as follows:
"(b) [Hatco assumes] the following obligations and liabilities existing on the date of the Closing, or in the case of those described in clause (iv), arising thereafter . . . :
(i) obligations with respect to sales orders accepted by the Chemical Business, other than Excluded Liabilities;
(ii) obligations for goods and services ordered by the Chemical Business, other than Excluded Liabilities;
(iii) liabilities and obligations with respect to capital expenditures described in any Request for Capital Appropriation approved in accordance with [Grace's] customary procedures by the management of the Chemical ...