7th Circuit Court of Appeals Rules that State Property Law Must be Used to Determine Whether a Tax Sale Purchaser is an “Owner” Under CERCLA

     In United States v. Capital Tax Corporation, the United States Court of Appeals for the Seventh Circuit reversed a district court decision which held a tax sale property purchaser responsible as an “owner” of a Superfund clean-up site (No. 07-3744, Sept. 19, 2008).  The district court had ruled that the tax sale purchaser was liable because it had accepted a tax deed to the property.  The Circuit Court ruled that the issue was more complicated and remanded the issue to the district court for evaluation using State property law. 

     The tax sale purchaser claimed that its normal and customary practice was to take a deed to a delinquent property only after it had arranged to sell the property to a buyer.  It claimed in this case that it had taken the deed only as part of an agreement to sell the property to a third party, although the agreement had not been reduced to a written contract.  As a result, the tax sale purchaser claimed that it held indicia title solely to secure payment from the third party purchaser, and thereby qualified for the secured creditor exemption from the definition of “ownership” in CERCLA.  That provision provides that “owners” liable under CERCLA do not include people who hold indicia of ownership primarily to protect a security interest in a facility.  The district court ruled that the tax sale purchaser was not a secured lender because it had not made a formal loan.

     The Circuit Court reversed, finding that the defense rested on the concept of “equitable conversion.”  Under that doctrine, in the vast majority of jurisdictions, upon entering into a contract for the sale of land, the seller merely holds legal title as security for payment of the purchase price.  In this case, that would make the tax sale purchaser merely a secured party in its attempt to sell the property to a third party.  The Circuit ruled that the district court needed to re-examine whether the tax sale purchaser was an “owner” under CERCLA, after applying principles of Illinois state law, rather than attempting to create federal common law.

     This article was authored by Robert G. McLusky, Jackson Kelly PLLC. For more information on the author see here.