Texas High Court Set to Hear Appeal on Viability of Post-Cleanup Stigma Damages in Environmental Contamination Claim


In an issue of first impression in Texas, the state’s highest court will hear arguments in December 2013 in a case involving a party’s claim to recover stigma damages following the cleanup of environmental contamination to standards considered acceptable by the state.  Houston Unlimited, Inc. Metal Processing (HUI) appealed a judgment in favor of Mel Acres Ranch on its negligence claim based on HUI's alleged environmental contamination of real property owned by Mel Acres in Washington County, Texas.  One of the primary issues that the Texas Supreme Court will be asked to decide is whether Mel Acres may recover stigma damages without establishing permanent physical injury to the property.

HUI operates a metal processing facility across Highway 290 from Mel Acres' undeveloped property.  A culvert flows downhill from HUI's facility, under the highway, and into a large pond on Mel Acres' property.  In late 2007, Mel Acres' lessee, a cattle rancher, complained that a number of its calves had died or experienced various defects.  Additionally, someone associated with the lessee had observed an HUI employee "dumping" the contents of a large drum into a culvert and that pipes were discharging materials from HUI's process building into the ground.  Subsequent testing of water samples revealed arsenic, chromium, copper, nickel and zinc exceeding state action levels.

In December 2007, Mel Acres lodged a complaint with the Texas Commission on Environmental Quality (TCEQ), which inspected HUI’s facility shortly thereafter, and found that HUI was in violation of various regulations regarding disposal of hazardous materials.  The TCEQ inspectors took soil and water samples, which suggested that an unauthorized discharge of industrial hazardous waste occurred at the HUI facility and affected Mel Acres' property.  TCEQ formally cited HUI for failure to prevent the discharge of industrial hazardous waste into or adjacent to waters of the state and ordered HUI to cease all discharge activity and initiate cleanup activities.

In January 2008, Mel Acres sued HUI for trespass, nuisance and negligence.  Mel Acres alleged that it suffered permanent damage, measured by loss in market value of the property.  By the time of trial in April 2010, Mel Acres disavowed any claim for temporary damages and sought only permanent damages — measured by diminution in market value as a result of the contamination.  A jury found that HUI did not create a permanent nuisance on the property or commit trespass, but found that HUI's negligence proximately caused the occurrence or injury in question, and assessed $349,312.50 as the difference in market value of the property before and after "the occurrence."  On July 15, 2010, the trial court entered final judgment in favor of Mel Acres based on the jury’s finding, and denied HUI’s motion for judgment notwithstanding the verdict and motion for new trial.  HUI appealed the trial court’s judgment and finding that Mel Acres had the right to recovery of stigma damages under the circumstances.

On November 15, 2012, the Texas Court of Appeals affirmed the trial court’s entry of judgment in favor of Mel Acres.  On appeal, HUI did not challenge the finding of negligence, but rather argued that its negligence caused, at most, temporary injury that was quickly alleviated, and that there was no evidence of permanent injury to Mel Acres’ property caused by HUI’s discharge of hazardous materials.  HUI argued that Texas law provides that a plaintiff in an environmental-contamination case cannot prove permanent injury to its property unless constituents on the property exceed state action levels.  The Texas Court of Appeals rejected this argument and held that Mel Acres proved permanent damage causing lost market value by virtue of permanent stigma created by even a temporary contamination.

The Court of Appeals further found no requirement under Texas law that a claimant must show physical property damage to support a finding of permanent property damage.  In fact, the Court of Appeals recognized that no Texas court has addressed the issue of whether a plaintiff is permitted to recover lost market value resulting from stigma created by former contamination of its property via constituents that exceeded state action levels.  Relying on cases not involving environmental contamination, the Court of Appeals found support for the recovery of stigma damages from a remediated physical injury to real estate.

Courts in other jurisdictions are split on the issue of the existence of a right to recover for lost market value due to negative stigma created by temporary contamination of property from a neighboring property owner without a finding of permanent physical damage.  Some courts recognize such a right.  See e.g., Walker Drug Co., Inc. v. La Sal Oil Co., 972 P.2d 1238, 1245-48 (Utah 1998); In re Paoli R.R. Yard PCB Litigation, 35 F.3d 717. 797-98 (3rd Cir.1994) (interpreting Pennsylvania law); and Terra-Products, Inc. v. Kraft Gen. Foods, Inc., 653 N.E.2d 89, 93 (Ind. Ct. App. 1995).  Other jurisdictions addressing stigma claims have required proof of permanent physical injury before the landowner could recover stigma damages.  See e.g., Bradley v. Armstrong Rubber Co., 130 F.3d, 168, 176 (5th Cir. 1977); Bartleson v. U.S., 96 F.3d 1270, 1275 (9th Cir. 1996); Mehlenbacher v. Akzo Nobel Salt, Inc., 71 F. Supp. 2d 179, 188 (W.D.N.Y. 1999), vacated on other grounds 216 F.3d 291 (2nd Cir. 2000); Rudd v. Electrolux Corp., 982 F. Supp. 355, 372 (M.D.N.C. 1997); Santa Fe P'ship v. ARCO Prods. Co., 54 Cal. Rptr. 2d 214, 214 (Cal. Ct. App. 1996); Stevinson v. Deffenbaugh Indus., Inc., 870 S.W.2d 851, 856 (Mo. Ct. App. 1993); Yadkin Brick Co. v. Materials Recovery Co., 529 S.E.2d 764, 768 (S.C. Ct. App. 2000).

This case presents an issue of first impression in Texas, and has the potential to set precedent for many other states that may view this decision in this case as persuasive, especially in those states that have not yet decided whether such a right to seek stigma damages exists.  The Texas Supreme Court scheduled oral arguments for December 5, 2013, and we can expect a ruling sometime in the spring or summer of 2014.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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