In contamination case, 7th Circuit cleans up messy preclusion fight

Even though none of the businesses disagreed over who contaminated a manufacturing site, the question of who should pay for the cleanup became a fight over claim preclusion that ended with the 7th Circuit Court of Appeals offering instructions on how the lawsuit should have been defended.

Joslyn Manufacturing Co., a steel manufacturer, owned and operated a site in Fort Wayne for more than 50 years and polluted nearby soil, sludge and groundwater. After Slater Steels Corp. purchased the site in 1981, it began cleaning the property.

Slater tried to get Joslyn to pay for the excavation and capping of the land and for the implementation of a groundwater detection program, but the former owner refused. So Slate sued Joslyn in Indiana state court seeking to recover the costs under the state’s Environmental Legal Action statute.

The lawsuit eventually failed, but while the suit was pending, Valbruna purchased the site at a competitive bankruptcy auction for $6.4 million. Once it discovered the extent of the contamination, Valbruna filed a federal lawsuit against Joslyn, seeking cost recovering under both the ELA and the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

Joslyn moved to dismiss on claim-preclusion grounds. The U.S. District Court for the Northern District of Indiana granted the motion for the ELA claim, concluding that Slater and Valbruna were in privity. However, the lower court denied the motion on the CERCLA claim, ruling that because it is exclusively a federal claim, there could be no claim preclusion based on the failure to raise in the state-court lawsuit.

In response, Joslyn filed another motion for summary judgment, arguing the CERCLA claims was time-barred. After the district court issued a denial, the company filed again for summary judgment and got the same result.

Appealing to the 7th Circuit, the appellate panel began its review by noting how the litigation over Joslyn’s defenses should have played out.

Joslyn should have timely pleaded its preclusion and limitations defenses, according to the 7th Circuit. The parties would have cross-moved at summary judgment on those defenses and the district court would have concluded, as it did, that the defenses did not apply as a matter of law, and granted Valbruna summary judgment on the defenses.

“But things played out differently,” Judge Amy St. Eve wrote for the 7th Circuit. “Joslyn did not plead the defenses before moving for summary judgment on them, and so Valbruna never cross-moved on them (it just opposed Joslyn’s motion). As a result, Joslyn now wants us to review the district court’s denial of its motions for summary judgment on the preclusion and limitations defenses.”

St. Eve noted the circuit court does not typically review summary-judgment denials but concluded this case fits into an exception.

Although the appellate court did review, the outcome was the same. The 7th Circuit affirmed the district court’s rulings on preclusion in Valbruna Slater Steel Corporation, et al. v. Joslyn Manufacturing Company, et al., 18-2633 & 18-2738.

The 7th Circuit held the preclusion question regarding CERCLA claim is whether an Indiana state court has the jurisdictional competency over an exclusively federal claim.

“Indiana courts have not answered the question – nor will they,” St. Eve wrote. “State courts do not hear exclusively federal claims by definition, and so the question will not come before them. … So our task is to answer the question ‘in the same way (as nearly as we can tell) as the state’s highest court would.’”

The 7th Circuit then looked at Marrese v. Am. Acad. Of Orthopaedic Surgeons, 470 U.S. 373 (1985) which carved out an exception. That decision found when a plaintiff brings an action in state court and judgment is rendered for the defendant, the plaintiff is not barred from an action in the federal court.

Next, the 7th Circuit pointed to Green v. Hendrickson Publishers, Inc., 770 N.E.2d 784, 791 (Ind. 2002) which applied the general rule that Marrese describes.

“If, as Green held, a federal counterclaim was not exclusively federal, it could be compulsory in state court and later precluded if not raised,” St. Eve wrote. “It follows, as Green noted, that if the counterclaim was exclusively federal — like the CERCLA claim here — it is not compulsory and not subject to claim preclusion.

“Joslyn also attempts to distinguish Green on procedural grounds, noting that it involved a defendant’s counterclaim and not, as here, a plaintiff’s claim,” St. Eve continued. “That distinction does not undermine Green’s persuasiveness. Green remains Indiana’s only treatment of whether earlier state-court judgments bar exclusively federal claims. It indicates that they cannot be claim precluded.”

Valbruna also appealed the ruling on the ELA claim, arguing there was no privity because when it purchased the site, it had not incurred any cleanup-related costs.

As with Joslyn’s arguments over preclusion, the 7th Circuit was not convinced.

“Privity, however, exists when one ‘acquire(s) an interest in the subject matter affected by the judgment,” St. Eve wrote citing Webb v. Yeager, 52 N.E. 3d 40 (Ind. Ct. App. 2016). “Valbruna acquired an interest in the thing over which the state-court suit was fought. That is enough for privity under Indiana law.”

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