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PARACO GAS CORPORATION v. AGA GAS

March 14, 2003

PARACO GAS CORPORATION, PATRICK ARMENTANO AND JOSEPH ARMENTANO, PLAINTIFFS-COUNTERCLAIM-DEFENDANTS,
v.
AGA GAS, INC., DEFENDANT-COUNTERCLAIMANT. JMR ENTERPRISES, LTD., ADDITIONAL DEFENDANT ON THE COUNTERCLAIM.



The opinion of the court was delivered by: Michael B. Mukasey, United States District Judge.

OPINION AND ORDER

Paraco Gas Corporation ("Paraco Gas") and Patrick and Joseph Armentano ("the Armentanos") sued AGA Gas, Inc. ("AGA") in the Supreme Court of the State of New York alleging breach of contract. AGA removed the case to this court based on diversity of citizenship.*fn1 AGA asserts counterclaims against Paraco, JMR Enterprises, LTD ("JMR"), and the Armentanos for breach of contract and indemnification, and against Paraco and JMR for strict liability under Section 181 of the New York Navigation Law. AGA moves for summary judgment pursuant to Fed.R.Civ.P. 56. For the reasons stated below, AGA's motion is granted with respect to the breach of contract and indemnification claims as to liability.

I.

The following facts are based primarily on the documents submitted by the parties and AGA's Rule 56.1 Statement. Paraco, JMR, and the Armentanos ("counterclaim defendants") add several additional facts and give a blanket denial of many of AGA's factual assertions. (See Counterclaim Def.'s 56.1 ¶ 11 (stating that they "disagree with and controvert" paragraphs 11 through 35 of AGA's 56.1 Statement)). To the extent that they dispute particular assertions, these disputes are noted.

This action arises out of AGA's purchase from Paraco and JMR of a business and a parcel of real property (the "Property") located at 25 Warren Place in Mount Vernon, New York. The half-acre lot has a separate address at 24 Roslyn Place, as the lot has frontage on both streets. (AGA's 56.1 ¶¶ 6-7; Muller-Thym Aff. ¶ 8).

Prior to December 1996, JMR was the owner of the Property and Paraco used the Property for its industrial gas and welding supply business. (AGA's 56.1 ¶ 6) In 1994, the New York State Department of Environmental Conservation ("NYSDEC") notified Paraco that a 2000-gallon diesel underground storage tank ("UST") located at the southern portion of the Property had failed a tank tightness test. (Muller-Thym Aff. ¶ 10). Paraco hired National Environmental Specialists, Inc. ("NES") to remove the UST. (AGA's 56.1 ¶ 8) NES removed the UST along with 25 tons of contaminated soil from the Property, backfilled the hole with sand, and topped the excavation with asphalt. (AGA's 56.1 ¶ 9; Muller-Thym Aff., Ex. D).

On or about November 3, 1996, AGA entered into an agreement (the "Agreement") with Paraco and JMR (the "Sellers") to buy the Property along with Paraco's industrial gas and welding supply business and other personal property. Patrick and Joseph Armentano, shareholders of Paraco and JMR, were also parties to the Agreement. (Compl. ¶ 4; Ans. ¶ 4; AGA's 56.1 ¶ 10, Muller-Thym Aff., Ex. E) Paragraph 14 of the Agreement listed the "Sellers' Representations and Warranties." Paragraph 14(p) of the Agreement provided in pertinent part:

Paraco's Industrial Gas and Welding Supply Business has been conducted, and currently is conducted, in a manner, to generate, refine, transport, treat, store, handle, dispose, transfer, produce or process all Contaminants, in any manner that complies with all applicable Environmental laws, except as disclosed in Schedule 18. Except as disclosed in Schedule 18, Sellers have not been engaged, at any time, and currently is not engaging in any activity (nor is failing to act) in a manner that has resulted or may result in a Release, or threat of a Release, into the Environment of a Contaminant in any quantity regulated by law.
Except as disclosed in Schedule 18 and with respect to the Locations of Paraco's Industrial Gas and Welding Supply Business:*fn2
(1) no Contaminant has been disposed of, generated on, treated on, buried beneath, or percolated beneath, and no disposal, generation, treatment, burial or percolation has been threatened in or near any real property previously or currently owned, leased, or used by Sellers;
(2) no real property previously or currently so owned, leased or used by Sellers, contains or has contained any underground storage tank; and
(3) Sellers have not received any Notice pertaining to any asserted violation of any Environmental law.
Any underground storage tank removed from the Mt. Vernon Location, was removed in accordance with Environmental law.
(Muller-Thym Aff., Ex. E, ¶ 14(p)) Schedule 18 to the Agreement disclosed the presence of an underground storage tank only at the Brooklyn location and not at the Property in Mount Vernon. (Muller-Thym Aff., Ex. F)*fn3 The Agreement defined "Contaminant" as follows:
"Contaminant" — means (i) any substance defined as hazardous under CERCLA § 101 (14), (ii) any other substance deemed hazardous by the United States Environmental Protection Agency pursuant to CERCLA § 102(a), (iii) petroleum (including crude oil or any fraction thereof), (iv) any substance deemed hazardous pursuant to RCRA § 1004(5), or (v) any other hazardous or toxic substance, material, compound, mixture, solution, element, pollutant, or waste regulated under any Environmental law.
(Muller-Thym Aff., Ex. E, ¶ 14(p)).

Paragraph 20 of the Agreement contained the following indemnification provision:

INDEMNIFICATION: Sellers, Patrick Armentano, and Joseph Armentano shall indemnify and defend AGA against any claim, loss, damage, cost or expense (including those resulting from any legal proceeding) that is incurred by AGA and that results from (i) the failure of Sellers to timely pay any liability of Sellers that are not expressly assumed by AGA under this Agreement; (ii) any breach of warranty, misrepresentation or nonfulfillment of any obligation on the part of Sellers or Shareholders contained in this Agreement, or in any document or list delivered or to be delivered in connection with this Agreement; (iii) any claim described in attached Schedule 20 and those matters of indemnification set forth in Sections 5 and 22.
The duty of Patrick Armentano and Joseph Armentano to indemnify and defend AGA (i) shall apply only to collection of any unpaid final judgment or balance thereof obtained by AGA against Sellers and only after exhausting all recourse and recovery against Sellers and all of their assets, and (ii) is conditioned upon AGA commencing a legal proceeding for indemnification against Sellers (or either of them) within four years of the date of the Closing. As to those claims for indemnification against Sellers where AGA makes a written demand after the fourth anniversary of the Closing, the guarantee of payment of Patrick Armentano and Joseph Armentano shall expire and is unenforceable. AGA may set off the amount of any claim for indemnification under this paragraph against any payments that AGA owes to Sellers, including any lease payments, payments that are due under Exhibit "I", and any noncompetition agreement payments due Sellers.
(Muller-Thym Aff., Ex. E, ¶ 20).

As part of the Agreement, AGA agreed to pay Paraco $1,270,200 over a period of seven years for a covenant not to compete. (Compl. ¶ 5; Muller-Thym Aff., Ex. E, ¶ 6) AGA agreed to pay $98,000 to each of the Armentanos over a period of seven years for covenants not to compete. (Compl. ¶ 5 & Ex. B; Ans. ¶ 5).

In connection with AGA's purchase of the Property from JMR, AGA hired URS Corporation ("URS") to perform a Phase I and Phase II Environmental Site Assessment ("ESA") of the Property.*fn4 The Phase I Report stated that the Mount Vernon Fire Department indicated that a 550-gallon UST was located on the Property. (Muller-Thym Aff. ¶ 17 & Ex. G, at 19). The Phase II Report said that URS took three soil samples from the Property. The first soil boring, MB-1, was from the site of the former 2000-gallon UST on the southern end of the Property near Warren Place; MB-2 was taken from the middle of the Property to the east of a concrete loading platform; and MB-3 was from the northern end of the Property near Roslyn Place. (Muller-Thym Aff., Ex. G, tbl.3). URS detected low concentrations of Volatile Organic Compounds ("VOCs") in MB-1, but these levels were well below NYSDEC Recommended Soil Cleanup Objectives. URS detected Diesel Range Organic Compounds ("DROs") and Gasoline Range Organic Compounds ("GROs") in MB-1 and MB-3, but at low concentrations. The only area of concern was MB-2, where URS detected relatively high levels of DROs.*fn5 (Muller-Thym Aff. ¶ 18 & Ex. G, at 20-21).

On or about December 2, 1996, AGA, Paraco, JMR, and the Armentanos executed a Second Amendment to the Agreement ("Second Amendment"). The Second Amendment provided: "AGA will not purchase the Mt. Vernon Location on the Closing," but if the investigation and remediation of the MB-2 Site "is confirmed before 36 months following the Closing, then AGA shall purchase, and JMR shall sell and convey to AGA, the Mt. Vernon Location." (Muller-Thym Aff., Ex. H, ¶¶ 3-4) The Second Amendment provided that the Sellers would engage an environmental consulting and engineering firm "for the purpose of continuing the investigation of the MB-2 Site as recommended" by URS. "If federal or state law requires remedial action at the MB-2 Site, then Sellers shall cause such remedial action to occur as soon as practicable, at Sellers' sole cost and expense." (Muller-Thym Aff., Ex. H, ¶ 1) Finally, the Second Amendment provided:

In addition to any other indemnity provisions in the Agreement, Sellers, Patrick Armentano, and Joseph Armentano shall indemnify and defend AGA against any claim, loss, damages, cost or expense (including those that result from any legal proceeding) that is incurred by AGA and that results from (i) any underground storage tanks that are located upon the [Property] as of the Closing, or that were located upon the [Property] prior to the Closing, and any contaminated soil surrounding the underground storage tanks on or prior to the Closing, and (ii) any Contaminant located at or near, or originating from, the MB-2 Site, on or prior to the Closing.
(Id., ¶ 5)*fn6 The "Closing" — the sale of the business and other assets — occurred on December 2, 1996. The sale of the Property was delayed pending the environmental investigation. (AGA's 56.1 ¶ 16 n. 1).

Paraco hired Trade-Winds Environmental Restoration, Inc. ("Trade-Winds") in or about January 1997 to conduct further investigation of the MB-2 site. Trade-Winds, in a letter dated May 27, 1997, reported that it did not detect DROs and concluded that the concentration of this compound detected by URS was "an anomaly that may have been the result of cross contamination from surface asphalt or some other source." (J. Armentano Aff., Ex. J; Muller-Thym Aff. ¶ 22) Trade-Winds did detect "total petroleum hydrocarbons" ("TPHs"), but concluded that because the NYSDEC did not have "any guidelines governing the acceptable levels of TPH in soil or groundwater," no further work was warranted. (J. Armentano Aff. ¶ 9 & Ex. J; Counterclaim Def.'s 56.1 ¶ 3).

In January 1997, AGA hired URS to look for the 550-gallon UST. URS did not detect the UST with metal detectors and excavation of test pits. (Muller-Thym Aff. ¶ 23 & Ex. I) Counterclaim defendants assert that AGA requested that Paraco submit the URS report regarding the failure to locate the UST to the Mount Vernon Fire Department and obtain a letter indicating that there was no UST on the Property. (Counterclaim Def.'s 56.1 ¶ 2).

AGA acquired title to the Property on September 26, 1997. (AGA's 56.1 ¶ 16 n. 1) AGA operated an industrial gas and welding supply business at the Property until early 2001 when it closed the business and began to look for a buyer for the Property. During its ownership of the Property, AGA says that it did not install or operate any UST or above-ground petroleum storage tank at the Property. (Id. ¶ 18).

On June 3, 2001, AGA entered into an agreement to sell the Property to Town Holding Company ("Town Holding"). The agreement was subject to termination by Town Holding if the environmental conditions at the Property were not satisfactory. (Id. ¶ 19).

Town Holding hired ATC Associates Inc. ("ATC") to perform a Phase I and Phase II ESA of the Property. ATC took soil samples and found that five borings indicated contamination above the NYSDEC Recommended Soil Cleanup Objectives. ((Muller-Thym Aff., Ex. J, at 28). Three of these samples showed petroleum contamination in the vicinity of the former 2000-gallon UST at the southern end of the Property. The other two samples were located to the north of the concrete loading platform, ...


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