The opinion of the court was delivered by: RONALD M. WHYTE
The motions of defendants to dismiss all or portions of plaintiff's complaint came on regularly for hearing on March 19, 1993. The court has read the moving and responding papers and heard the oral argument of all counsel. Good cause appearing therefor, the court denies defendant Unisys's motion to dismiss count two as to injunctive relief; grants the remainder of defendants' motions to dismiss; and grants plaintiff leave to amend its complaint as to the Kundes and as to count seven.
Plaintiff Kaufman and Broad-South Bay ("K&B") commenced this action on October 22, 1992. K&B named as defendants Unisys Corporation ("Unisys"); Armand Kunde, Joan Kunde, and Armand Kunde as trustee of the John Doudell Trust created December 30, 1971 (collectively, "the Kundes"); Doudell Trucking Company ("Doudell"), Diamond Tank and Transportation Lines, Inc. ("Diamond"); and Does 1 through 100. The complaint alleges that significant amounts of toxic waste had been dumped on a piece of property K&B had purchased from the Kundes. K&B filed suit to recoup its clean-up costs from the Kundes, from Doudell and Diamond (two trucking companies that allegedly delivered the waste), and from Unisys as successor in interest to Memorex Corporation (the alleged originator of the waste).
K&B is a real estate development company. In December 1987, K&B acquired an option to purchase approximately one hundred acres of real property in Milpitas, California from the Kundes. The property was to be developed into housing sites. K&B alleges that the purchase price reflected the property's fair market value if it were free from environmental contaminants. K&B further alleges that the sellers made no disclosures at that time about possible toxic waste buried on the property.
In October and November 1988, during the option period, K&B alleges that it discovered hundreds of barrels containing significant quantities of methyl ethyl ketone, cyclohexanone and ethylbenzene, all toxic substances. Some of the barrels had broken and the contaminants had leaked into the soil. K&B alleges that this toxic dump posed a significant threat to the environment and to the health of persons in the area. As K&B investigated further and began cleanup operations in 1988 and 1989, it discovered more waste and soil contamination.
K&B learned that the Doudell and Diamond trucking firms had buried toxic waste on the property from 1969 to 1974, and that some or all of the Kundes had owned the property during that time. The alleged source of the toxics was a manufacturing plant run by Memorex Corporation. The property was apparently not designated for disposal of the type of waste that the firms deposited there.
In 1976, the California Regional Water Quality Control Board, San Francisco Bay Region ("the Regional Board") issued Abatement Order No. 76-010, ordering the trucking firms to clean up 500 to 600 drums of toxic waste. On June 26, 1978, the Regional Board rescinded its 1976 order, allegedly because the two firms represented that they had complied with all provisions of the order and that the property was clean. K&B alleges that the firms had actually removed only some of the waste, if any. K&B's own cleanup efforts had allegedly resulted in the removal of approximately 625 drums of waste by early 1990, along with approximately 113,500 cubic yards of contaminated soil.
While K&B was investigating the contamination, the City of Milpitas delayed its approval of K&B's development plans. K&B therefore sought an extension of the option period from the Kundes. This was granted, allegedly for consideration of two million dollars. The Kundes and K&B signed a second addendum to their option agreement on February 13, 1989. This document included a broad release of all claims K&B might have against the Kundes, including claims for environmental cleanup of discovered and undiscovered contaminants. The release contained a recital to the effect that, just before the scheduled closing date, K&B had accused the Kundes of intentionally concealing the nature and extent of the contamination at the site. In the same vein, K&B's complaint alleges that, at the time the extension was negotiated and the release was signed, the Kundes had fraudulently failed to disclose the full extent of the contamination.
K&B exercised its options and purchased portions of the property in December 1988 and January 1990. K&B asserts that it closed escrow in 1988 and signed the release in 1989 in order to protect the expenditures it had already made to investigate and clean up the contamination. At the time K&B filed its complaint, its expenditures for the cleanup allegedly exceeded twenty-six million dollars.
In 1989, the Regional Board issued Abatement Order No. 89-163 to K&B and Armand Kunde, requiring investigation and cleanup of the property, and protection of water under and around the property. The order specifically found that K&B was not responsible for the disposal of chemicals on the property. K&B continues to perform quarterly monitoring and testing of the property, pursuant to the 1989 order.
In evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court must accept the facts alleged in plaintiff's complaint as true, and must construe those facts in the light most favorable to the plaintiff. Neitzke v. Williams, 490 U.S. 319, 326-27, 104 L. Ed. 2d 338, 109 S. Ct. 1827 (1989); U.S. v. City of Redwood City, 963 F.2d 963, 966 (9th Cir. 1981). The court may dismiss a claim only on a dispositive issue of law, and only if the plaintiff cannot prove any set of facts to support its claim. Neitzke, 490 U.S. at 326-27; Conley v. Gibson, 355 U.S. 41, 45-45, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Generally, a motion to dismiss for failure to state a claim is regarded with disfavor and is rarely granted without leave to amend. Hall v. City of Santa Barbara, 833 F.2d 1270, 1274 (9th Cir. 1987), cert. denied, 485 U.S. 940, 99 L. Ed. 2d 281, 108 S. Ct. 1120 (1988).
A. KUNDES' MOTION TO DISMISS PLAINTIFF'S COMPLAINT IN ITS ENTIRETY
The Kundes assert that K&B is legally unable to state any cause of action against them because of a release that both parties executed on February 13, 1989. They have attached to their moving papers a copy of a document entitled Second Addendum to Option Agreement, which contains the release agreement.
1. Incorporation of Release into K&B's Complaint
Under Fed. R. Civ. P. 12(b), if material outside the complaint is presented to the court and is not excluded from consideration, the court must normally convert a 12(b)(6) motion to dismiss into a motion for summary judgment. Clipper Exxpress v. Rocky Mountain Motor Tariff, 690 F.2d 1240, 1250 n.14 (9th Cir. 1982), cert. denied, 459 U.S. 1227, 75 L. Ed. 2d 468, 103 S. Ct. 1234 (1983); Townsend v. Columbia Operations, 667 F.2d 844, 849 (9th Cir. 1982). K&B's complaint briefly discusses the release. Complaint at P 36. In their reply memorandum, the Kundes argue that, under Fed. R. Civ. P. 10(c), the complaint has incorporated the release by reference. If the plaintiff fails to attach a pertinent document to its complaint, the defendant may introduce the document as part of a motion attacking the complaint. Romani v. Shearson Lehman Hutton, 929 F.2d 875, 879 n.3 (1st Cir. 1991); 5 Wright & Miller § 1327 at 761-62. A document incorporated by reference is not external to the complaint, even if it is actually introduced by the defendant. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991) (plaintiff had actual knowledge of documents and relied on them in framing complaint), cert. denied sub nom. Cortec Indus., Inc. v. Westinghouse Credit Corp., 118 L. Ed. 2d 208, 112 S. Ct. 1561 (1992); Townsend v. Columbia Operations, 667 F.2d 844, 848-49 (9th Cir. 1982) (complaint fully described documents and referred to them extensively as a basis for claims; documents' authenticity not questioned); Merrell v. All Seasons Resorts, Inc., 720 F. Supp. 815, 817 (C.D. Cal. 1989).
Since K&B's complaint incorporates the release by reference, the court may consider the release without converting the motion to dismiss into one for summary judgment. See Cortec, 949 F.2d at 48; Romani, 929 F.2d at 879 n.3; 5 Wright & Miller § 1327 at 761-63.
2. California Law Controls Interpretation of Release2
In Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454, 1458-59 (9th Cir. 1986), the Ninth Circuit held that a contract releasing CERCLA
liability should be construed under state law. The fact pattern of Mardan is similar to the case at bar. In Mardan, the parties entered into a release and settlement agreement pursuant to the sale of property, under which each party released the other from all causes of action related to the purchase agreement and sale. The release apparently did not mention the environmental contamination that was present on the property. Prior to the sale, however, defendant seller filed a Notification of Hazardous Waste Activity with the Environmental Protection Agency ("EPA"). Plaintiff buyer subsequently remediated the contamination, pursuant to an action brought by the EPA. Plaintiff then sued defendant under CERCLA sections 9607 and 9613 to recover part of its response costs.
Defendant argued on a motion for summary judgment that the release, as construed under state law, indemnified it from plaintiff's suit.
The court found no Congressional mandate to develop uniform federal law regarding private parties' ability to settle CERCLA liability disputes between themselves, and so deferred to state law to construe the release. Id. at 1458-59 (citing amicus curiae brief filed by the U.S. government). Specifically, "the application of state law to interpret such releases will not frustrate the objectives of CERCLA." Id. at 1459. Such releases "are essentially tangential to the enforcement of CERCLA's liability provisions. . . . [They] cannot alter or excuse the underlying liability, but can only change who ultimately pays that liability." Id.
Courts have repeatedly held that, despite the restrictive language of subsections 9607(b) regarding limited defenses to suits under subsection (a), equitable defenses may be asserted in CERCLA actions, especially defenses such as release or indemnification. See, e.g., Niecko, 973 F.2d at 1296; Jones-Hamilton, 973 F.2d at 692; Mardan, 804 F.2d 1454 at 1459 ; Village of Fox River, 806 F. Supp. at 790-92; Purolator, 772 F. Supp. at 129-30. Indeed, subsection (e) allows agreements to insure, to hold harmless, and to indemnify a party liable under subsection (a). See Jones-Hamilton, 973 F.2d at 692. The ...