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Parties Involved:
Chemical Waste Management, Inc.
Appellee
John S. Hoover
Appellant
Gene Miles
Appellant
Paul B. Nunn
Appellant
United States of America
Amicus Curiae
Waste Management, Inc.
Appellee

Document Text:

.,.. ,.,F·ILED 

United StatesiOourt of Appeals 

Tenth Circuit • • .!., ' UNITED' S-TATES COURT OF A?PEALS 

'TENTH ~CIRCUIT 

PAUL B. NUNN, .6-ENE MILES 

and JOHN S. HOOVER, 

Plaintiff~~Appellants, 

v. 

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1) 

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) 

) 

. J 

CHEMICAL WASTE., ?Iil:l'N.AGEMENT' .i) 

INC., a Delaw~tiab6rporation, ) 

and WASTE MANAGEMENT, INC., } 

a Delaware cor~oration,- ) 

" ) Defendants-Appellees. ) 

UNITED STATES OF AMERICA, 

Amicus Curiae. 

PAUL B. NUNN, GENE MILES 

and JOHN s. HOOVER, 

Plaintiffs-Appellees, 

v. 

) 

) 

} 

) 

) 

) 

) 

) 

) 

) 

) 

CHEMICAL WASTE MANAGEMENT, ) 

INC., a Delaware corporation, ) 

and WASTE MANAGEMENT, INC., ) 

a Delaware corporation, ) 

DefendantsCounterclaimantsAppellants. 

UNITED STATES OF AMERICA, 

Amicus Curiae. 

) 

) 

) 

) 

) 

) 

) 

) 

SI? 0?, 19BS 

~-··· ~.E;' ROBERT L. HOECKER 

Clerk 

No·. 85-1509 

( D . C . Ci vi 1 'No,. 8 2 -18 4 5 ) J •• '" • ~ . • . ···' .. , " ( K ) D • · an .. 

No. 85-1570 

(D.C. Civil No. 82-1845) 

( D. Kan. ) 

Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 1 
Thomas A. Wood, Wichita, Kansas (H. E. Jones, William R. Smith and 

David J. Morgan of Hershberger, Patterson, Jones & Roth, Wichita, 

Kansas, with him on the briefs), for Plaintiffs/Appellants/CrossAppellees. 

Roberf L; Driscoll of Stinson, Mag & Fizzell, Kansas City, 

Missouri-(Catherine M. Hauber and Mary Ann Tyrrell of Stinson, Mag 

& Fizzell, Kansas City, Missouri, Steve A. Leben of Stinson, Mag & 

Fizzell, Overland Park, Kansas, and William Tinker of McDonald, 

Tinker, Skaer, Quinn & Herrington, Wichita, Kansas, with him on 

the briefs), for Defendants/Appellees/Cross-Appellants. 

F. Henry Habicht II, Assistant Attorney General, Martin w. Matzen 

and Blake A. Watson, Attorneys, Department of Justice, Washington, 

D.C., Francis S. Blake, General Counsel, and Gail Cooper, 

Attorney, Environmental Protection Agency, Washington, D.C., of 

counsel, filed a brief on behalf of Arnicus Curiae. 

Before LOGAN, SETH and BARRETT, Circuit Judges. 

SETH, Circuit Judge. 

This action for breach of contract was brought by Paul B. 

Nunn, Gene Miles and John S. Hoover, the former owners of a 

corporation named National Industrial Environmental Services, Inc. 

(NIES), against Chemical Waste Management, Inc. (Chemical Waste), 

the purchaser of the shares of the corporation, and Waste 

Management, Inc. (Waste Management), Chemical Waste's parent and 

sole shareholder. In their suit, the former owners alleged that 

Chemical Waste had breached its contractual duty of payment on a 

promissory note of $2,400,000.00 that it had executed in their 

favor in exchange (with some cash) for all the outstanding stock 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 2 
of NIES. The former owners also sought to hold Waste Management 

liable as guarantor for an accelerated payment of the note. 

Chemical Waste and Waste Management counterclaimed against 

the former owners, stating causes of action for negligence, breach 

of warranty, and violations of the Comprehensive Environmental 

Response, Compensation and Liability Act (CERCLA), 42 u.s.c. 

§ 9601 et ~· 

After a bench trial, the trial court denied recovery on all 

of plaintiffs' causes of action and entered judgment on 

defendants' counterclaim for breach of warranty. As damages, the 

trial court awarded Chemical Waste and Waste Management 

$1,710,400.00 in lost profits and $6,964,942.17 for costs to 

remedy contamination through August 30, 1984. The trial court 

also conditionally awarded $2,000,000.00 in damages for future 

remediation costs. Both sides have appealed. 

We considered the appeals previously and remanded the cases 

to the trial court because the issues could not be fully decided 

by consideration of either claim. We there held that the CERCLA 

issue was an essential element of the appeal, and it had not been 

decided by the trial court. 

The facts are not in dispute. Chemical Waste owns and 

operated a nationwide network of industrial waste facilities. In 

1979, officers of Chemical Waste initiated negotiations for the 

acquisition of NIES. NIES was an attractive takeover target 

because it owned a permitted industrial waste disposal facility 

near Wichita, Kansas. During negotiations on the terms of the 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 3 
corporate acquisition the attorneys for Chemical Waste and NIES 

exchanged three drafts of an acquisition agreement. In each 

draft, counsel for NIES requested and received changes in the 

contractual language, including amendments to the warranties being 

made by the former owners of NIES. The final acquisition 

agreement was executed between the former owners and Chemical 

Waste on May 14, 1980. As consideration for all the outstanding 

stock in NIES, Chemical Waste made a $500,000.00 cash payment to 

the former owners and gave its promissory note for $2,400,000.00 

which was guaranteed by waste Management. 

The former owners of NIES made numerous warranties regarding 

NIES's industrial waste facility to Chemical Waste in the final 

acquisition agreement. The trial court found that the former 

owners warranted, inter alia: 

"a. That the operations of NIES were in 

compliance with all applicable laws, 

regulations and its permits; 

"b. That from the inception of its operations 

NIES had been in compliance with all 

applicable laws, regulations and its 

permit; 

"c. That the NIES financial statements were 

complete; 

"d. That there were no undisclosed, fixed or 

contingent liabilities." 

The trial court further found that "[u)nder the [acquisition] 

Agreement, the warranties were deemed effective as of December 15, 

1980, 11 and that Chemical Waste "would not have bought NIES without 

the warranties that its site complied with all applicable laws." 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 4 
Thirteen months after Chemical Waste acquired NIES, and had 

been operating the plant, the facility was closed by the Kansas 

Department of Health and Environment (KDHE) because toxic wastes 

were leaking from the facility's ponds and polluting nearby 

groundwaters. The trial court found that 

"[t]he groundwater pollution which caused the 

NIES site to be shut down in 1982, began 

during the early phase of [the former owners'] 

operation of the NIES facility, continued 

thereafter during [the former owners'] 

operation, up to and including the time of 

sale to Chem[ ical] Waste . . . . 11 

To ameliorate the polluting of the leakage Chemical Waste and 

Waste Management undertook various remediation efforts all of 

which were either required or approved by the State of Kansas. As 

of the time of trial Kansas authorities had not permitted the 

Wichita facility to recommence operations. However, no direct 

request to reopen may have been made. Shortly after the Wichita 

facility was closed by KDHE, Chemical Waste notified the former 

owners that it was suspending payments on the promissory note. 

The former owners contend on appeal that the trial court 

erred in granting judgment for the defendants on the breach of 

warranty counterclaim. The former owners urge that the trial 

court misconstrued the warranties contained in the acquisition 

agreement. Specifically, the former owners maintain that they did 

not warrant that the Wichita facility did not leak, that the 

facility's noncompliance with pertinent federal laws and 

regulations is irrelevant given the wording of the warranties, 

that they did not warrant facts about which they had no knowledge, 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 5 
and that the warranties contained in the acquisition agreement 

should be construed against the defendants since their attorney 

was primarily responsible for drafting the agreement. 

At the outset it must be observed that "[t]he intention of 

the parties and the meaning of the contract are to be deduced from 

the instrument where its terms are plain and unambiguous." First 

National Bank & Trust Co. v. Lygrisse, 647 P.2d 1268, 1273 (Kan.) 

(quoting Martin v. Edwards, 548 P.2d 779, 785-86 (Kan.)). In the 

absence of contractual ambiguity, a trial court's interpretation 

of the contract presents an issue of law which is reviewed de novo 

on appeal. See CMI Corp. v. Gurries, 674 F.2d 821, 825 (10th 

Cir.); Duffin v. Patrick, 512 P.2d 442, 447-48 (Kan.). In Teton 

Exploration Drilling v. Bokum Resources Corp., 818 F.2d 1521, 1526 

(10th Cir.), we held that "[t]he determination whether a contract 

provision is ambiguous is a matter of law • . • . Once a 

provision is found to be ambiguous, the resolution of its proper 

meaning is a question of fact, subject to review on a clearly 

erroneous standard." 

Our review of the relevant contractual language leads us to 

conclude as a matter of law that the warranties made by the former 

owners are ambiguous insofar as the leakage issue and the 

applicability of federal laws and regulations are concerned. 

Accordingly, we review the trial court's resolution of these 

ambiguities by a clearly erroneous standard. 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 6 
In Section 2.12 of the acquisition agreement, the former 

owners warranted that: 

"[NIES] is not in default under any law or 

ordinance, or under any order of any court or 

federal, state, municipal or other 

governmental department, commission, board, 

bureau, agency, or instrumentality wherever 

located; its operations are in compliance with 

all applicable laws, permits and ordinances 

and there are no claims, actions, suits or 

proceedings pending, or threatened, against or 

affecting the Company or any Shareholder, at 

law or in equity, or before or by any federal, 

state, municipal, or other governmental 

department, commission, board, bureau, agency 

or instrumentality, wherever located, which 

might result in any material adverse change in 

the financial condition or business of the 

Company or which would question the validity 

or propriety of this agreement or of any 

action taken or to be taken in accordance with 

or in connection with this agreement." 

In Section 2.30 of the acquisition agreement, the former owners 

warranted that: 

"[NIES], from the inception of operation at 

the [Wichita] Site, has been and is in 

compliance with the terms, conditions and 

requirements of all licenses, permits and 

authorizations it holds and the laws, 

ordinances and regulations pursuant to which 

such licenses, permits and authorizations were 

granted." 

We are not persuaded by the former owners' contention that 

the foregoing warranties do not include within their scope a 

warranty against leakage at the Wichita waste facility. Although 

the warranties do not expressly mention leakage, we conclude that 

the trial court did not clearly err in interpreting these 

ambiguous contractual warranties to warrant against the leakage of 

toxic wastes from the site. Both Sections 2.21 and 2.30 warrant 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 7 
that the Wichita facility is in compliance with all applicable 

laws. One such law is surely K.S.A. § 65-164 which proscribes the 

placing, discharging, or permitting the flow of any chemical waste 

into the waters of the state of Kansas. Contrary to the former 

owners' argument, we find that K.S.A. § 65-164 is not in conflict 

with later Kansas enactments dealing with toxic wastes and, 

accordingly, we conclude that the statute has not been repealed by 

implication. See State v. Keeley, 694 P.2d 422, 426-27 (Kan.) (to 

the extent possible, older statute must be harmonized with newer 

statutes), Pederson v. Russell State Bank, 481 P.2d 986, 990 

(Kan.) (repeals by implication are disfavored and such a repeal 

should not be found if two statutes may operate independently 

without conflict). When we look at the warranties in the light of 

the laws of the state of Kansas, as well as in the context of 

applicable federal law, we are confident that the trial court 

correctly interpreted the contract to contain a warranty against 

leakage at the site. 

Likewise, we conclude that the trial court did not clearly 

err in resolving the contractual ambiguity regarding the relevance 

of pertinent federal laws and regulations. Section 2.17 of the 

acquisition agreement provides, in pertinent part, that 

"the business of [NIES] is subject to certain 

environmental regulations and that revision of 

such regulations may occur from time to time 

and is currently contemplated by the Kansas 

State Legislature and the Kansas Department of 

Health and Environment." 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 8 
Section 2.21 of the acquisition agreement provides: 

"If the exchange provided for in this 

agreement is consummated at the Time of 

Closing, all of the representations and 

warranties hereinabove contained in this 

article will be true and correct at and as of 

the Time of Closing, with the same force and 

effect as though made at and as of the Time of 

Closing, except for changes contemplated or 

permitted by this agreement." 

The former owners argue that the foregoing sections, read in 

conjunction with each other, render any violations of the federal 

Resource, Conservation and Recovery Act of 1976 (RCRA) and CERCLA 

irrelevant insofar as the contractual warranties are concerned. 

The former owners premise this contention on the fact that RCRA 

and CERCLA, both of which became effective during the period of 

time between the execution of the acquisition agreement and the 

time of closing, were regulatory "changes contemplated'' by the 

agreement. Accordingly, argue the former owners, RCRA and CERCLA 

violations were not within the warranties. 

As noted above, the trial court found that "the warranties 

were deemed effective as of December 15, 1980," the date upon 

which the acquisition of NIES was consummated. Although the trial 

judge did not so expressly hold, a reading of the findings of fact 

reveals that the trial court found that RCRA and CERCLA violations 

were warranted against. We agree and we hold that this 

interpretation is not clearly erroneous. 

Indeed, the very argument advanced by the former owners leads 

to the conclusion that the parties intended.RCRA and CERCLA 

violations to be within the scope of the warranties. Section 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 9 
2.21, in effect, provides that the warranties made at the time the 

acquisition agreement was executed are not static; rather, the 

parties intended that the warranties would expand or contract 

along with the "contemplated changes" in the law which transpired 

prior to the time of closing. While the enactment of RCRA and of 

CERCLA may have expanded the scope of the warranties beyond that 

which was warranted at the time the agreement was executed, an 

expansion was expressly provided for by the terms of the 

agreement. 

We conclude, as mentioned, that the trial court's 

interpretation that RCRA and CERCLA violations were within the 

warranties was not clearly erroneous. It is noteworthy that the 

former owners have not argued that the Wichita facility was in 

compliance with RCRA and CERCLA at the time the acquisition was 

consummated. 

The former owners also argue that they did not warrant 

conditions or events about which they had no knowledge. The 

contractual warranties are not ambiguous in this regard. Many of 

the warranties made by the former owners were expressly made "to 

the best of [their] knowledge." The face of the agreement leaves 

no doubt but that the former owners well knew how to limit 

contractual warranties to the best of their knowledge when they so 

desired. It is significant, then, that the warranties contained 

in Sections 2.12 and 2.30 are not limited by the former owners' 

knowledge. In the absence of such a limitation, we conclude that 

the trial court did not err when it found that the parties 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 10 
intended that such warranties would not be limited by the former 

owners' knowledge. This is not at all an unusual result. Parties 

to a contract frequently allocate the risks which may arise from · 

uncontemplated or unknown events and conditions through 

warranties. "[I]f a material state of facts is warranted to exist 

which turns out not to be the case, the warrantor is liable for 

the loss or damage caused; and it is no defense that he acted upon 

misinformation and in good faith." Hoffa v. Fitzsimmons, 673 F.2d 

1345, 1358 (D.C. Cir.) (quoting Pittsburgh Coke & Chemical Co. v. 

Bollo, 421 F. Supp. 908, 928 (E.D.N.Y.)). 

Neither are we persuaded by the former owners' argument that 

the acquisition agreement, including the warranties contained 

therein, should be construed against the defendants since the 

defendants' counsel drafted the agreement. The rule that 

contracts are to be construed against the draftsperson is simply 

inapplicable in this case in which the parties brought equal 

bargaining power to the negotiation table. Moreover, both the 

former owners and the defendants were represented by counsel 

during the negotiations and both parties to the agreement had 

input into the final contractual language. See Dorchester 

Exploration, Inc. v. Sunflower Electric Coop., Inc., 504 F. Supp. 

926, 936 (D. Kan.). 

Having concluded that the trial court's interpretation of the 

contractual warranties was not attended by any error, we further 

affirm the trial court's conclusion that the warranties were 

breached. Our review of the record indicates that the trial court 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 11 
did not clearly err in finding that the warranties against leakage 

and violation of applicable laws and regulations were breached. 

This finding is supported by the evidentiary facts regarding the 

shutdown of the Wichita facility and the causes of the groundwater 

pollution which led to the shutdown. Accordingly, that portion of 

the damage award which reflects the cost to the defendants of 

bringing the Wichita facility up to the warranted condition is 

hereby affirmed. 

We cannot affirm, however, that portion of the damage award 

which was intended to compensate the defendants for their lost 

profits. The contractual warranties contained in the acquisition 

agreement were made by the former owners to Chemical Waste. 

Therefore, Chemical Waste was directly injured by the breach of 

those warranties. The lost profit injury, on the other hand, was 

not suffered by Chemical Waste. Rather, the profits were lost by 

a separate corporate entity, the subsidiary corporation NIES. As 

a matter of law, it was erroneous for the trial court to disregard 

the separate entity status of the defendant corporations and the 

injured corporation. See McDaniel v. Painter, 418 F.2d 545, 547 

(10th Cir.) (a stockholder who is damaged indirectly may not sue 

individually to vindicate an injury to the corporation). 

Accordingly, we reverse the award of damages insofar as that award 

reflects profits lost by NIES, a corporate entity which was not 

made a party to this lawsuit. 

The final point on appeal raised by the former owners is that 

the trial court erred in failing to enforce the defendants' 

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Appellate Case: 85-1509 Document: 01019610072 Date Filed: 09/02/1988 Page: 12 
contractual obligations because of a "failure of consideration.'' 

We agree that the defendants should not have been discharged from 

their contractual duties and, accordingly, we hold ·that the 

defendants remain obligated to pay the balance due on the 

promissory note to the former owners. The cases cited by the 

defendants on failure of consideration are inapposite here. By 

performing on the warranties and paying remediation costs as 

ordered by the trial court, the former owners will deliver the 

consideration for which the defendants bargained. Thus, there has 

been no "failure" of consideration. "The general measure of 

damages for breach of warranty of quality is the difference 

between the value of the article actually furnished the buyer and 

the value the article would have had if it possessed the warranted 

qualities." Williston, Contracts§ 1391 (3d ed. 1968). In the 

instant case, the award of remediation costs to the defendants 

puts them into as good a position as they would have been had the 

Wichita facility been in the condition warranted by the former 

owners. To discharge the defendants from their contractual duties 

while holding the former owners liable on the contractual 

warranties bestows a windfall on the defendants. "Kansas has 

recognized that '[t]he basic principle of damages is to make a 

party whole by putting it back in the same position, not to grant 

a windfall.'" State of Kansas v. Wolfenbarger and McCulley, P.A., 

690 P.2d 380, 385 (Kan.) (quoting Service Iron Foundry, Inc. v. 

M. A. Bell Co., 588 P.2d 463, 476 (Kan. App.)). Accordingly, we 

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reverse the trial court's decision to discharge the defendants 

from their contractual obligations. 

Finally, we note that the defendants have appealed from the 

trial court's adverse judgment on their CERCLA counterclaim. When 

the original appeal was considered by this court, we noted that 

the record did not provide a sufficient basis for review of the 

trial court's proceedings on the CERCLA counterclaim. 

Accordingly, we remanded the case for further proceedings on the 

CERCLA issues. Unfortunately, the trial court did not develop the 

CERCLA issues upon remand. Instead, the trial court found that 

state law provided the parties with all the relief which they 

requested and again declined to pass upon the merits of the CERCLA 

claim. Although it is true that state law remedies were available 

in the instant case, the trial court's calculation of damages 

could have been significantly affected by a full development of 

the issues surrounding the CERCLA liability of both parties to the 

acquisition agreement. As noted, NIES under the direction and 

under the ownership of Chemical Waste operated the facility for 

over a year. The Third Circuit in Smith Land & Improvement 

Corp. v. Celotex Corp., 851 F.2d 86 (3d Cir.), considered the 

obligations of entities which were or had operated the facilities. 

Unless and until the CERCLA issues are fully developed in the 

district court, however, we are unable to rule upon the CERCLA 

counterclaim. 

WHEREFORE, the trial court's judgment in favor of Chemical 

Waste and Waste Management on the breach of warranty counterclaim 

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( 

•

1 is AFFIRMED insofar as the award of damages for remediation costs 

is concerned. The trial court's award of lost profits damages is 

REVERSED, as is the trial court's decision to discharge Chemical 

Waste and Waste Management from their contractual obligations. 

This cause is REMANDED to the trial court for modification of the 

judgment in a manner consistent with this opinion and for further 

proceedings on the CERCLA issues. 

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