Defense Digest

New Jersey - Environmental & Toxic Tort
Third Circuit Expands Availability Of Damages In Environmental Contamination Cases

The Third Circuit in Jaasma v. Shell Oil Co., 412 F.3d 501 (3d Cir. 2005), expanded the availability of damages in an environmental contamination case. In Jaasma, the Third Circuit held that under New Jersey law, a landowner may assert a claim for lost use or impaired marketability of property during the time that a regulatory agency is reviewing clean-up results and issuing a No-Further-Action determination. In Jaasma, the plaintiffs appealed from an Order of the District Court granting judgment as a matter of law against Jaasma pursuant to Fed. R. Civ. P. 50(a) because Jaasma had not established that the defendants, Shell Oil Company and its assignee, Motiva Enterprises, L.L.C., had breached their obligations under a lease agreement to operate a gasoline station or that she had suffered cognizable damages as a result.

Motiva ceased operating the gasoline station on Jaasma's property, terminating the lease on October 31, 2001. However, when Motiva removed the gasoline station's underground storage tanks one week before the termination of the lease, fuel residue was discovered on the adjacent soil, which lead to a two-and-one-half year investigation by the New Jersey Department of Environmental Protection (NJDEP). It was not until February 18, 2004, that NJDEP issued a final No Further Action (NFA) letter concluding the investigation. While soil samples taken between October 2001 and February 2004 had indicated that the levels of hazardous compounds were, in fact, below regulatory standards, it took over two years of sampling to prove the safety of the property to the satisfaction of NJDEP.

Jaasma's lawsuit, which alleged that Shell and Motiva breached the lease, sought damages for loss of use during the pendency of the NJDEP investigation. The appeal presented two principal questions. First, was there a legally sufficient basis for a jury to find that Shell/Motiva breached the lease agreement? The court concluded that there was. Secondly, does New Jersey law recognize loss of use as a measure of damages for temporary harm to property interests as a result of the uncertainty surrounding the property's environmental status which impairs its marketability?

The District Court found that New Jersey law limits the measures of damages to only permanent diminution in value and cost of repair or cost of remediation and, therefore, does not recognize damages for such temporary harm. However, the Third Circuit held that the loss of use described is a cognizable measure of damages under New Jersey law and that judgment as a matter of law was, therefore, inappropriate because there was sufficient evidence of loss use for the case to proceed.

The Third Circuit found that New Jersey recognizes lost rental income as a standard measure of damages for breach of a lease. See, McGuire v. City of Jersey City, 125 N.J. 310, 593 A.2d 309, 315 (N.J. 1991); River Road Associates v. Chesapeake Display & Packaging Co., 104 F.Supp. 2d 418, 425 (D.N.J. 2000) ("under New Jersey law, a commercial landlord may recover for lost rental income resulting from a tenant's breach of lease").

Moreover, in both T&E Industries, Inc. v. Safety Light Corp., 123 N.J. 371, 587 A.2d 1249, 1263 (N.J. 1991), and Siligato v. State, 268 N.J. Super 21, 632 A.2d 837, 842 (App. Div. 1993), New Jersey courts recognized that loss of use is one of several possible measures of damages for tortious harm to real property. This comports with the common law of property, which includes loss of use or lost rental value as a proper measure of damages when land is temporarily unusable but then returned to its original state. Citing Thompson on Real Property, the Third Circuit stated:

The more difficult question the Third Circuit was presented with in Jaasma was whether damages for loss of use are available during the period of uncertainty which may occur after the clean-up is physically completed but before the property has been certified as compliant with all environmental regulations. Jaasma argued that, even if the property did not require any further environmental remediation after the termination of the lease, she suffered damages so long as the cloud of uncertainty from the prior contamination lingered.

The Third Circuit was satisfied that New Jersey law does recognize damages for the uncertainty that follows in the wake of environmental contamination. The court cited to Bahrle v. Exxon Corp., 279 N.J. Super. 5, 652 A.2d 178 (App. Div. 1994), for the proposition that New Jersey law recognizes an injury due to the temporary uncertainty surrounding the environmental status of property created by a NJDEP investigation. In Bahrle, adjoining landowners sued the proprietors of a gasoline service station under a nuisance theory for groundwater contamination due to alleged spills from the station's underground storage tanks. The trial court had dismissed the claims of 17 plaintiffs whose water never registered as contaminated but who resided within the "redlined" area where NJDEP prohibited new wells. The Appellate Division reversed, finding that, even though these landowners' wells were not contaminated in fact, there was foreseeable damage caused by the redlining itself, including the plaintiffs' hesitancy to use the water for drinking or showering during the pendency of the investigation.

Therefore, the Third Circuit in Jaasma concluded that the District Court erred by limiting its assessment of damages to diminution of value or cost of remediation and thereby ignoring damages for temporary loss of use. Moreover, in light of Bahrle, the court found that, even in the absence of actual pollution, a claim is cognizable under New Jersey law for the period of uncertainty following a pollution incident, particularly where that uncertainty is due to an ongoing investigation by the state environmental agency.

*Lila is a shareholder in our Cherry Hill, NJ office. She can be reached at (856) 414-6026 or ltwynne@mdwcg.com.