Court awards damages for stigma of prior toxicity; even after cleanup, property deemed to be blemished.

A recent Los Angeles County Superior court decision could set a legal precedent that could have expensive implications for commercial property owners and tenants who own or lease property that is now or was previously contaminated with hazardous waste.

Lawyers say the case, involving a City of Industry property owned by Long Beach-based developer Bixby Ranch Co., is the first ever in which a property owner has been awarded damages for the "stigma" of owning land that was previously polluted - even though the pollution has since been removed and the property is now in full compliance with existing regulations.

The case, decided in January, involved a 70,000-square-foot industrial building on a 9.3-acre site in the City of Industry. The site is owned by Bixby Ranch and was leased nearly 30 years ago to a company called Spectrol Electronics Corp., a manufacturer of electronic parts. Spectrol was later acquired by Hamilton Standard Controls, a subsidiary of Hartford, Conn.-based United Technologies.

According to the lawsuit filed by Bixby Ranch Co. - which named United Technologies, Hamilton Standard and Spectrol as defendants - Hamilton admitted polluting the groundwater under the property with solvents used in cleaning electronic parts.

Although the lease expired in May 1991 and Hamilton no longer occupies the site, Hamilton and United Technologies have since cleaned up the pollution and received certification from the California Regional Water Quality Control Board that the property meets state and federal regulations.

Following a jury trial in Los Angeles County Superior Court, Bixby Ranch in January was awarded a total of $1.2 million in damages from the defendants. The award included $400,000 for lost rent between the time Hamilton vacated the property and the time the cleanup was completed, plus $865,000 for "permanent post-cleanup stigma."

The $400,000 award was nothing new, legally, speaking, because the courts long ago established that tenants and landlords are responsible for cleaning up whatever pollution they cause. But the "post-cleanup stigma" award was a first.

Lawrence Teplin, a Cox, Castle & Nicholson lawyer who represented Bixby Ranch, argued that the property owner deserved the stigma award because a property that has been polluted suffers the same kind of stigma as any other property or possession that has been damaged.

Explained Teplin: "Suppose two new cars are delivered to a car dealer and one of them falls off a truck. The one that was damaged is fully repaired so that it drives and looks the same as the other. The dealer is required by law to tell the prospective buyer that this car was damaged because the law recognizes that there is a stigma associated with the previously damaged car and that it's obviously not going to sell for the same price as the new one."

United Technologies officials declined to comment on the case, which is on appeal in the California Second District Court of Appeal. But Teplin said the defendant's lawyers argued that, rather than being stigmatized, a property that has been decontaminated is actually more desirable because it has a "clean bill of health" from regulators.

Teplin said the "clean bill of health" argument has merit in the case of a one-time, localized spill that has been completely removed or a building that formerly contained asbestos, if the asbestos has been completely removed. But he said certain types of pollution, especially groundwater contamination, involved future risks because they remain in the soil for years and seep into the water supply.

"The groundwater contamination has been remediated, and the property meets current regulatory standards. But there is no certainty that it will meet standards that may be imposed in the future," he said. Teplin said the uncertainty about what regulators are going to do in the future in one reason for the "stigma" claim.

According to appraiser J. Pearse Cashman of West Los Angeles-based Cashman & Co., who testified as an expert witness for plaintiff Bixby Ranch in the lawsuit, the $5.1 million value assigned to the City of Industry property was 23 percent lower because of the former pollution.

Cashman said he developed his appraisal from a combination of sales data and survey information from other work he's done relating to pollution and contamination. He said he had to search far and wide for comparable sales information because of the combination of a slow real estate market and the fact that polluted or formerly polluted property sells even slower than pristine sites in today's market.

"There are not very many sales of properties that have been stigmatized like this," Cashman said. "We found maybe eight or nine sales in California so far that fit this category. Right now, the market is very emotional about the effects of contamination. So the prevailing attitude is, |Why buy trouble?'"

Cashman added that selling a property is especially difficult if the groundwater has been contaminated, as it was at the site involved in the Bixby Ranch lawsuit. "It's very difficult to sell property that is contaminated or formerly contaminated, especially if there is a threat of future liability relating to groundwater, because the government and the scientists don't really know what they're going to do about groundwater contamination."

Cases like the Bixby Ranch case are relatively rare so far. Cashman said he has found only eight or nine sales in California that fit the category, along with one sale in which the buyer later found groundwater contamination and forced the seller to buy the property back at the same price.

But the number of stigma claims is likely to rise significantly if the Los Angeles court decision is upheld on appeal, Teplin said, because any property owner who is suing someone to recover cleanup costs will add a stigma claim onto the cleanup claim.

According to Cashman, the ultimate results could be costly to anyone involved with contaminated or previously contaminated commercial real estate because those seeking stigma awards will "go after anyone with deep pockets" in the same way regulators now cast a wide net in trying to assign responsibility for contamination.

"When there's contamination discovered, the cleanup authority - whether it be local, state or federal - goes after anyone in the chain of title who can afford to pay for it. So, if you're a property owner and you didn't pollute, you could still be responsible for cleaning it up. Then you, as the property owner, might have to go out and sue somebody else to get them to basically make you whole again," Cashman said.

Teplin estimated that the Court of Appeal will render its decision in about a year in the Bixby Ranch case.

Meanwhile, legal experts said that, if the ruling stands, it will further complicate the already complex world of environmental law.

Jim Otto, managing partner of the downtown Los Angeles law firm Cummins & White, said widespread contamination in the industrial areas of Los Angeles is already the subject of myriad lawsuits. The cases often involve properties where pollution occurred 40 or 50 years ago - on land that has since been converted to other uses.

The issue of stigma awards is the latest in a series of environmental law questions that courts have begun addressing in recent years, as the courts try to sort out who should pay for cleaning up decades of pollution in Southern California.