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USPS v. PHELPS DODGE REF. CORP.

December 23, 1996

UNITED STATES POSTAL SERVICE, Plaintiff, against PHELPS DODGE REFINING CORPORATION and PHELPS DODGE CORPORATION, Defendants.


The opinion of the court was delivered by: GLEESON

 JOHN GLEESON, United States District Judge:

 INTRODUCTION

 The United States Postal Service (the "Postal Service") has sued Phelps Dodge Refining Corporation ("Phelps Dodge") and its parent, the Phelps Dodge Corporation, alleging that defendants have breached an agreement for the sale of real property located in Maspeth, New York. Specifically, the Postal Service claims that Phelps Dodge breached an obligation to excavate lead- and cadmium-containing soil on the property that was the subject of a remedial action plan approved by the New York State Department of Environmental Conservation (the "DEC"). Plaintiff also claims that the agreement was based on a mutual mistake of fact that went to the heart of the bargain. In addition, plaintiff alleges that Phelps Dodge breached an obligation to remove all asbestos-containing materials from the property and to obtain a release of the City of New York's interest in portions of the property. Plaintiff seeks rescission of the contract of sale or, in the alternative, reformation of the contract's indemnification provision and damages for Phelps Dodge's breach.

 A bench trial was held from June 7-20, 1995, and summations were held on July 13, 1995. In accordance with Rule 52(a) of the Federal Rules of Civil Procedure, this Court makes the following Findings of Fact and Conclusions of Law. For the reasons set forth below, the contract of sale is rescinded. Phelps Dodge is ordered to return the $ 14,740,000 that was paid for the property. In addition, interest must be paid on that sum from August 13, 1992, the day the complaint was filed, at the rate of 9 percent per annum.

 FINDINGS OF FACT

 The Agreement

 1. The property that is the subject of this case is known as "Laurel Hill," and is referred to herein as the "site," the "property" or the "Phelps Dodge site." It consists of approximately 37 acres in a heavily industrialized area of Maspeth, Queens. The property is under and slightly east of the Kosciusko Bridge, on the Queens side of the Newtown and Maspeth Creeks, which comprise one body of water that runs east-west under the bridge. The creeks flow into the East River and are subject to its tidal influences.

 2. The site was occupied by industrial users for more than 100 years. As early as 1875, a sulfuric acid plant was in operation there. In 1888, a copper refining plant and "phosphate works" was operated there on landfill placed between the Long Island Railroad tracks, which run east-west through the property, and the bulkhead along Newtown Creek. Ore and copper smelting were conducted there (in coal-fired furnaces until 1920, when the conversion to oil was made), as well as the repackaging of bulk acids that were apparently produced on the site. Phelps Dodge purchased the property in the late 1920s. It expanded and rebuilt the smelting plant and added, by 1939, a tin plant, a silver refinery and a nickel refinery. Phelps Dodge also built a copper sulphate plant, which produced copper sulfate and copper sulfate-based pesticides. Phelps Dodge ceased its operations on the property in 1983. Its activities produced hazardous wastes and introduced various contaminants into the soil and groundwater at the site, including lead and cadmium.

 4. The Postal Service gave Sverdrup-Gilbane's report to Phelps Dodge and suggested that Phelps Dodge conduct further studies and work with the New York State Department of Environmental Conservation ("DEC") to design a plan to remediate the hazardous wastes.

 5. In March 1986, Phelps Dodge's environmental consultant, Fred C. Hart Associates ("Hart"), issued a report that reflected Hart's study of the site. The report set forth several options for the remediation of wastes on the site, including excavation (with off-site removal of the excavated material) and an impermeable cap of concrete or asphalt over the contaminated soil. Hart recommended a cap. The DEC, however, criticized Hart's study and recommendation in May 1986 because of, among other things, insufficiencies in the data upon which it was based. The DEC further suggested that a cap might be inconsistent with future construction on the site. Penetrating the cap in the course of construction would expose the workers to hazardous soil and create airborne particles as well. The DEC recommended more testing, using proper protocols, before a best available solution could be determined.

 6. The 1985 negotiations between Phelps Dodge and the Postal Service regarding the purchase of the site broke down. James T. Coe, Director of the Postal Service's Office of Real Estate, commenced a new round of negotiations with Phelps Dodge during the summer of 1986. On July 30, 1986, the Board of Directors of Phelps Dodge's parent company, the Phelps Dodge Corporation, approved the sale of the Phelps Dodge site to the Postal Service.

 7. On August 13, 1986, Phelps Dodge and the Postal Service executed an Option and Contract for sale of the Phelps Dodge site (the "Option and Contract") for a purchase price of $ 14,640,000. (Plaintiff's Exhibit ("PX") 34). The Postal Service wanted the site available for the construction of a General Mail Facility ("GMF") for Queens, New York. A GMF is a mail processing and distribution center. The Postal Service communicated its planned use for the site to Phelps Dodge and informed Phelps Dodge that it was necessary to remove any contamination from the footprint of the proposed Postal Service building. Phelps Dodge needed and received the details of the Postal Service's planned construction in order to propose a remedial plan that would be approved by the DEC.

 8. The Option and Contract, at § 2.01(a), provided that, of the purchase price:

 
TWO MILLION SIX HUNDRED SIXTY-TWO THOUSAND TWO HUNDRED ( $ 2,662,200.00) DOLLARS [shall be paid] at the time of execution and delivery of this Contract, by check of the United States Treasury, drawn on a Federal Reserve Bank to the order of the Title Company, as Escrow Agent ("Escrow Agent"), who shall hold and disburse the proceeds of said check ("Option Payment"), and interest earned thereon, in accordance with the provisions of an agreement between Seller, Purchaser and said Escrow Agent ("Escrow Agreement")...

 9. The Option and Contract, at § 2.02, provided:

 
In the event Purchaser shall default in the performance of its obligations to (i) purchase the Premises in accordance with the provisions hereof, or (ii) make all payments to Seller required hereunder, Seller, as Seller's sole remedy, shall have the right to receive from Escrow Agent the Option Payment and all interest and other sums earned on the Option Payment as liquidated damages for all loss, damage and expense suffered by Seller, including, without limitation, the loss of its bargain....
 
It is understood and agreed by the parties hereto that Purchaser agrees to purchase the Premises provided that the Board of Governors of Purchaser grants approval of the purchase of the Property at its meeting to be held on September 8th and 9th, 1986.... In the event such approval shall be granted and such notice be served by September 16, 1986, the service of said notice shall be deemed the exercise by Purchaser of the option to purchase the Premises, this Option Agreement shall become a binding agreement for purchase and sale, and in that event (i) the Purchase Price set forth in § 2.01 shall be increased by ONE HUNDRED THOUSAND ( $ 100,000.00) DOLLARS from FOURTEEN MILLION SIX HUNDRED FORTY THOUSAND ( $ 14,640,000.00) DOLLARS TO FOURTEEN MILLION SEVEN HUNDRED FORTY THOUSAND ( $ 14,740,000.00) DOLLARS....

 11. The Option and Contract, at § 14.01, provided:

 
Neither this Contract nor any provisions hereof may be waived, modified, amended, discharged or terminated except by an instrument signed by the party against whom the enforcement of such waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth in such instrument.

 12. The Option and Contract, at § 18.01, provided:

 
Purchaser has been advised that Seller has filed a remedial plan (the "Remedial Plan") with the DEC requesting the approval thereof and that negotiations are now pending between representatives of Seller and of the DEC with references to modifications of the Remedial Plan acceptable to the DEC and to Seller. Seller agrees to proceed with its application with reasonable diligence and continuity so that the final Remedial Plan may be approved without delay. Upon receiving final approval or acceptance of, or equivalent indication of the approval of the Remedial Plan (any one of which being referred to herein as the "approval"), Seller shall forward notice to Purchaser that Seller has received approval of the Remedial Plan ("Notice of Approval") and simultaneously therewith shall forward to Purchaser copies of (i) proof of approval, (ii) the approved Remedial Plan and (iii) a cost estimate ("Cost Estimate") from any one of the following three Contractors as to the cost of performing all work required to comply with such Remedial Plan....

 The three contractors listed in Section 18.01 were reviewed by the Postal Service prior to the execution of the Option and Contract to ensure that they were qualified to excavate and remove contaminated soil in a proper manner.

 13. The "Remedial Plan" referred to in the Option and Contract was the March 1986 report by Hart. It advocated that remediation of the site be accomplished by a cap over the contaminated areas.

 14. The Option and Contract, at § 18.01, further provided:

 
Purchaser shall have the option to require Seller to perform all work to comply with the approved Remedial Plan after the Closing provided Purchaser shall, within seven (7) business days after the service of the Notice of Approval forward notice to Seller to that effect. If Purchaser shall exercise said option, title shall nevertheless close, ... and Seller shall commence such work promptly and perform the same with reasonable diligence and continuity to completion after the Closing.

 Pursuant to this section, $ 750,000 of the purchase price was placed in escrow to secure Phelps Dodge's performance of the remediation. *fn1" This $ 750,000 was to be turned over to Phelps Dodge, with interest, upon its performance of "all work required to comply with the approved Remedial Plan."

 15. The Option and Contract, at § 18.04, provided:

 The purpose of this indemnification provision was to protect the Postal Service from additional hazardous waste issues that might arise during a reasonable period after remediation and the construction of a new facility on the site.

 16. At the time the parties entered into the Option and Contract, the Postal Service believed that excavation would be required, at least in the footprint of its proposed building. There were multiple reasons for this belief. First, excavation was necessary to enable later construction by the Postal Service. In order to construct its proposed building, the Postal Service needed to be able to drive pile caps and install underground storage tanks, utility and sewer lines. Performing these functions through contaminated soil might create a contamination pathway into the groundwater. Second, excavation was necessary in order to satisfy the unions that represent postal workers, which had previously expressed objections to contamination at other Postal Service buildings and had expressed specific concerns regarding the Phelps Dodge site. Third, the DEC's strong criticism of the March 1986 report by Hart, which had recommended a capping remedy, warranted a reasonable belief on the part of the Postal Service that the only form of remediation that would be accepted by the DEC would be excavation.

 17. At the time of the execution of the Option and Contract, both Phelps Dodge and the Postal Service understood that the remediation contemplated by the Option and Contract would, in all likelihood, consist of excavation of the contaminated soil and off-site removal. Bull Durham, who at the time was the Chairman of the Board of the Phelps Dodge Corporation, informed Mr. Coe shortly before the execution of the Option and Contract that updated estimates from Phelps Dodge's environmental consultant showed excavation could be accomplished for approximately $ 750,000. Mr. Durham stated that excavated soil would be disposed of in Ohio. In addition, an internal Phelps Dodge document concerning the proposed sale forecast an expense for the lead and cadmium cleanup of $ 750,000 to $ 1,500,000, an estimate that was consistent with remediation by excavation and off-site removal.

 18. The Option and Contract, as noted, explicitly recognized that negotiations between Phelps Dodge and the DEC regarding remediation were ongoing. If those negotiations had produced an approved plan that did not require excavation of contaminated soil, the Postal Service would not have gone forward with the purchase of the property.

 19. On October 1, 1986, the DEC issued a letter that established removal criteria for the lead and cadmium on the site. The letter required a remedial action plan to be submitted to the DEC for review and approval prior to the initiation of any remedial action.

 20. In response to the DEC's October 1, 1986, letter, on October 23, 1986, Hart submitted to the DEC a Remedial Action Plan ("RAP") (Px 45), which required excavation of lead- and cadmium-contaminated soil. The RAP gave a "rough estimate" that 4,450 cubic yards of soil required removal and acknowledged the difficulty in predicting the scope of the necessary excavation. Phelps Dodge represented to the Postal Service that it had arrived at the 4,450 estimate by using a "surgical" approach for the removal of "hot spots" of contaminated soil.

 21. By letter dated November 26, 1986, the DEC approved the October 23, 1986 RAP requiring excavation of lead and cadmium-contaminated soil, followed by filling with clean soil and capping with asphalt. The approval was conditioned on the incorporation of the RAP into an Order on Consent executed by the DEC and Phelps Dodge.

 22. On December 9, 1986, Phelps Dodge received a bid from Associated Chemical and Environmental Services ("ACES") for excavation, removal and disposal of the lead- and cadmium- contaminated soil at the Phelps Dodge Site, followed by filling with clean soil and asphalt capping of the excavated areas, at a cost of $ 1,968,500. The bid was based on the assumption that 6,440 cubic yards of soil ...


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