United States v. Dico, Inc.

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
_____________

No. 97-2254
_____________

United States of America, *
*
Appellee, *
* Appeal from the United States
v. * District Court for the
* Southern District of Iowa.
Dico, Incorporated, *
*
Appellant. *
_____________

Submitted: November 20, 1997
Filed: February 12, 1998
_____________

Before BOWMAN and MURPHY, Circuit Judges, and CONMY,1 District Judge.
_____________

BOWMAN, Circuit Judge.

Dico, Inc., appeals from the District Court's decision to grant summary judgment
to the United States on the government's claim to recover from Dico response costs
incurred in association with the environmental cleanup of groundwater determined by
the Environmental Protection Agency (EPA) to be contaminated. Dico also appeals the
order dismissing its counterclaim, in which the company sought reimbursement of

1
The Honorable Patrick A. Conmy, United States District Judge for the District
of North Dakota, sitting by designation.
amounts it expended cleaning up the site. We affirm in part and vacate and remand in
part.

I.

This case arises under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9601-9675, as amended by
the Superfund Amendments and Reauthorization Act of 1986 (SARA), Pub. L. No. 99-
499, 100 Stat. 1613. Under CERCLA, the EPA has broad "authority to direct clean-up
operations prior to a final judicial determination of the rights and liabilities of the
parties affected." Solid State Circuits, Inc.v. United States EPA, 812 F.2d 383, 387
(8th Cir. 1987). The penalties can be harsh for those who refuse to comply with an
administrative cleanup order if they later are determined to be liable for the cleanup and
to have resisted the order without sufficient cause. See id. at 388. In the 1986 SARA
amendments, Congress provided procedures by which a party who pays for cleanup
pursuant to an order from the EPA but does not believe it is liable may petition the
President to recover its response costs from the Hazardous Substance Response Trust
Fund (Superfund) established by CERCLA, and may bring the same claim in federal
court if it receives an adverse ruling from the President.2 See 42 U.S.C. § 9606(b)(2)
(1994). This is the basis for Dico's counterclaim. By the same token, CERCLA
provides that the EPA may bring an action in district court to recover from responsible
parties the removal and remediation costs the government has incurred in association
with the cleanup of a hazardous waste site. See id. § 9607(a) (1994). This is the basis
of the EPA's claim.

2
The President has delegated much of his authority in these matters to the
Administrator of the Environmental Protection Agency (EPA). See Dico, Inc. v.
Diamond, 35 F.3d 348, 349 n.1 (8th Cir. 1994).

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 This is not the first time this litigation has been before our Court. See Dico, Inc.
v. Diamond, 35 F.3d 348 (8th Cir. 1994). The case has its roots in the discovery in the
mid-1970s of contamination in the Des Moines, Iowa, public water supply. EPA tests
determined that the Des Moines Water Works (DMWW) was contaminated by
trichlorethylene (TCE) and other substances designated as hazardous by the EPA. The
EPA identified the land area determined to be the source of the contamination, the Des
Moines TCE Site, and in 1983 this site was placed on the EPA's National Priority List
(NPL). Dico's property was included in the site. Over the years, Dico and its corporate
predecessors had used TCE in industrial degreasing operations and other activities, and
other businesses in the vicinity apparently had used the compound on their properties
as well. In 1986, the EPA ordered Dico, as a potentially responsible party (PRP), to
capture and treat the contaminated groundwater in Operable Unit 1 (OU-1), one of four
operable units that the EPA defined for purposes of cleaning up the site and the only
one at issue here. The remedial system Dico constructed began operating in December
1987.

The following summer, in July 1988, Dico sought from the Superfund
reimbursement for costs the company had incurred, and would continue to incur, with
respect to its remediation efforts at the site. The EPA denied the petition, holding that
the 1986 SARA amendment that permitted such reimbursement did not apply
retroactively to the EPA's cleanup order issued to Dico before the effective date of the
amendment. The Environmental Appeals Board (EAB) sustained the EPA after an
administrative hearing. Dico then brought suit in the district court, but the court
granted summary judgment for the EPA, deferring to the agency's interpretation of the
statute. Dico appealed. We reversed and remanded to the district court with
instructions to remand for further proceedings. Our opinion was filed in September
1994. On April 21, 1995, with Dico's administrative claim for reimbursement pending
before the EAB, the United States filed this action in the District Court seeking
recovery from Dico--and only Dico--of costs that the EPA had incurred in connection
with cleanup of the groundwater at the Des Moines site. Dico filed a counterclaim for

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reimbursement of its costs, and also moved the EAB to stay the administrative
proceedings on the ground that the claim pending before the EAB was the same as
Dico's counterclaim filed in federal court. The EAB granted the motion.

On September 13, 1996, the District Court granted the EPA's motion to dismiss
Dico's counterclaim for failure to exhaust administrative remedies. On April 1, 1997,
the court granted summary judgment to the EPA on its claim for response costs,
including indirect and oversight costs, in the amount of $4,378,110.66. See United
States v. Dico, Inc., 979 F. Supp. 1255 (S.D. Iowa 1997). On April 25, 1997, the EPA
moved the EAB to deny Dico's administrative action for reimbursement without a
hearing, arguing that it was barred by res judicata. Counsel for Dico represented to this
Court at oral argument that the motion has been granted. Dico appeals the orders of the
District Court.

II.

We first address Dico's claim that the court erred in dismissing its counterclaim.
The District Court held that Dico failed to exhaust its administrative remedies. In the
absence of exhaustion, when exhaustion is required, the court does not have subject
matter jurisdiction. We review this question of law de novo.

In its counterclaim, Dico sought recoupment of its remediation costs, arguing that
its operations did not cause TCE contamination of the groundwater at the site. Dico
says it seeks only an offset of the EPA's claim for response costs, which are less than
Dico's costs, and no affirmative recovery--notwithstanding its claim that it is liable for
no cleanup costs whatsoever, a theme that runs throughout its brief. Dico does not
contend that there is no exhaustion requirement, but makes various arguments that the
requirement should be "waived" in these circumstances, that somehow Dico did exhaust
its administrative remedies, or that Dico was "excused" from exhausting. We

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are not persuaded by any of these arguments, as the law is very clear on this issue in
circumstances such as these.

"The doctrine of exhaustion of administrative remedies is one among related
doctrines--including abstention, finality, and ripeness--that govern the timing of federal-
court decisionmaking." McCarthy v. Madigan, 503 U.S. 140, 144 (1992). Such
exhaustion "is required where Congress imposes an exhaustion requirement by statute."
Coit Independence Joint Venture v. FSLIC, 489 U.S. 561, 579 (1989). The government
argues that Congress did so with CERCLA, and we agree.

No later than sixty days after completing the response and remedial action
required by an administrative order, a party may "petition the President for
reimbursement from the Fund for the reasonable costs of such action, plus interest." 42
U.S.C. § 9606(b)(2)(A). Then, "[i]f the President refuses to grant all or part of a
petition made under this paragraph, the petitioner may . . . file an action against the
President in the appropriate United States district court seeking reimbursement from the
Fund." Id. § 9606(b)(2)(B). Using such language, Congress fully intended that
petitioners seeking reimbursement of costs expended complying with an administrative
cleanup order should not have a cause of action in the courts until they have exhausted
the administrative remedies set forth in the statute. See United States v. M/V Santa
Clara I, 819 F. Supp. 507, 512 (D.S.C. 1993); Employers Ins. of Wausau v. Bush, 791
F. Supp. 1314, 1322 (N.D. Ill. 1992). On behalf of the United States, Congress has
consented to suit in federal court, but that consent is not and need not be absolute.
Here, Congress has restricted the right to sue by, among other things, insuring that the
executive branch has the initial opportunity to dispense justice. The court did not have
subject matter jurisdiction over Dico's counterclaim.

Dico's claim that the requirement should be "waived" is without merit. It is true
that "where Congress has not clearly required exhaustion, sound judicial discretion
governs." McCarthy, 503 U.S. at 144. But in CERCLA, Congress "clearly required

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exhaustion," so we need not evaluate the factors a court would consider in exercising
its discretion. But even assuming arguendo that Congress had not spoken clearly, and
that the court did have discretion to waive exhaustion requirements, we would find no
abuse of that discretion.

To the extent an exhaustion requirement is judicially imposed, it can be waived.
The waiver decision should "be guided by the policies underlying" the doctrine of
exhaustion of administrative remedies. Bowen v. City of New York, 476 U.S. 467, 484
(1986). The exhaustion requirement is designed to "[protect] administrative agency
authority and [promote] judicial efficiency," McCarthy, 503 U.S. at 145, and those are
the policies a court must keep in mind in making the waiver decision. The rationale of
the doctrine is that an administrative agency should have the opportunity to apply its
expertise, exercise the discretion delegated to it by Congress, and correct its own
alleged errors in the first instance, with the possibility of avoiding resort to the courts
altogether. The exhaustion requirement also improves the possibility that there will be
produced a fully-developed factual record, facilitating judicial review should it become
necessary and promoting judicial efficiency by aiding the court in its evaluation and
analysis of often technical matters. See McKart v. United States, 395 U.S. 185, 193-95
(1969); Peters v. Union Pac. R.R., 80 F.3d 257, 263 n.3 (8th Cir. 1996); Sharps v.
United States Forest Serv., 28 F.3d 851, 854 (8th Cir. 1994).

This case has little to commend it for waiver. Here, a fully-developed factual
record drawing upon agency expertise likely would be most helpful to the court. Cf.
Bowen, 476 U.S. at 485 (allowing waiver of administrative remedies where, inter alia,
the administrative policy at issue did not depend on facts before the court, but was
illegal on its face). Waiver may be appropriate when "an agency . . . may be unable to
consider whether to grant relief because it lacks institutional competence to resolve the
particular type of issue presented, such as the constitutionality of a statute." McCarthy,
503 U.S. at 147-48. In such a case, it may make sense to bypass the administrative
action. Presumably Dico has raised no constitutional issues in the administrative

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proceeding and there certainly are none in the counterclaim, which Dico has represented
to be identical to its administrative claim. No other issues incapable of resolution by the
agency have been suggested. Thus institutional incompetence is not a ground for
waiver. On the record before us, we conclude that, even if the District Court were
permitted to exercise discretion in determining if Dico was required to exhaust its
administrative remedies before bringing the same claim in court, Dico has demonstrated
insufficient reason that such discretion should be exercised in favor of waiver.

Dico also argues that it exhausted its administrative remedies because it filed its
administrative petition for reimbursement before the EPA filed its lawsuit in the District
Court. The company makes this argument notwithstanding the fact that Dico, and not
the government, sought to stay the administrative proceedings. Although Dico already
had filed its administrative claim when the United States filed suit in federal court, the
proceedings were not completed. The administrative remedies required by statute were
not exhausted absent a final administrative decision.

Dico contends that it should be "excused" from exhausting its administrative
remedies because it otherwise loses all recourse to the courts on its claim for
reimbursement. "To be weighed against the interests in exhaustion is the harsh impact
of the doctrine when it is invoked to bar any judicial review of a [petitioner's] claims."
McGee v. United States, 402 U.S. 479, 484 (1971). The company was excused, Dico
contends, because it would be a violation of public policy if Dico's failure to exhaust
would result in the EPA availing itself of the jurisdiction of the federal court, while Dico
could not resort to the same forum. Dico asserts (and the government appears to agree)
that its counterclaim is compulsory because it "arises out of the transaction or
occurrence that is the subject matter of the opposing party's claim," Fed. R. Civ. P.
13(a), and therefore will be lost if not asserted in its responsive pleading to the EPA's
claim. The cases Dico cites in support of its argument that it should be excused from
the exhaustion requirement, however, analyze claims under the Federal Tort Claims

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Act, which specifically exempts counterclaims from exhaustion requirements. See 28
U.S.C. § 2675(a). It is our conclusion, in any case, that the "excuse" is not necessary,
as Dico's counterclaim is not compulsory and therefore is not lost if it is dismissed for
failure to exhaust administrative remedies.

Under Federal Rule of Civil Procedure 13(a), a compulsory counterclaim must
be asserted in responsive pleadings or it is "thereafter barred." Baker v. Gold Seal
Liquors, Inc., 417 U.S. 467, 469 n.1 (1974). There are exceptions to the rule, one of
which relieves a party from stating the counterclaim if "at the time the action was
commenced the claim was the subject of another pending action." Fed. R. Civ. P.
13(a)(1). That is the case here. Dico filed its administrative claim in 1988. Although
the claim was denied in 1992, it was remanded for further proceedings in 1994. So at
the time Dico's answer was required to be filed, there was "another pending action" the
subject of which was Dico's claim for reimbursement of its cleanup costs. The rule does
not require that the action be pending before another court, to the exclusion of an
administrative tribunal of competent jurisdiction. We conclude that Dico's
administrative claim before the EAB, required by statute to be resolved before filing suit
in court, is "another pending action" within the meaning of Rule 13(a)(1). See
Bethlehem Steel Co. v. Lykes Bros. Steamship Co., 35 F.R.D. 344, 346 (D.D.C. 1964)
(holding that counterclaim was the "subject of another pending action" before the
Maritime Board and therefore was not compulsory). Perhaps Dico miscalculated in
seeking a stay of the administrative proceeding instead of moving to stay the EPA's
court proceeding, but the claim before the EAB was only stayed and not denied, and
therefore was pending at the time the counterclaim was filed.

In sum, the District Court properly dismissed Dico's counterclaim. The court did
not have subject matter jurisdiction because Dico failed to exhaust the administrative
remedies provided by CERCLA before filing its counterclaim. But the counterclaim
was not compulsory and therefore should have been dismissed without prejudice.

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 We now consider the District Court's decision to grant summary judgment to the
United States on the merits of its claim.

III.

Dico presents a series of questions raising the issue whether, and if so to what
extent, Dico was liable for the groundwater contamination for which the administrative
cleanup order was issued. The District Court, in granting summary judgment for the
United States on its claim for reimbursement of costs associated with cleanup of OU-1,
concluded that Dico raised no genuine issues of material fact in response to the EPA's
motion. We review de novo, viewing the evidence in the light most favorable to Dico,
and we will affirm only if we agree there are no genuine issues of material fact and that
the United States is entitled to judgment as a matter of law.

Dico first argues that the EPA has not proved that the company should be held
strictly liable for the EPA's costs of cleaning up OU-1 under 42 U.S.C. § 9607(a). See
Control Data Corp. v. S.C.S.C. Corp., 53 F.3d 930, 934 (8th Cir. 1995) (setting forth
elements that must be shown to prove liability under § 9607(a)). The District Court
held that Dico was (1) an owner or operator (2) at a time when TCE was released, see
42 U.S.C. § 9607(a), propositions with which Dico does not quarrel. But there is a third
requirement before strict liability attaches:3 notwithstanding a release, the "plaintiff
must establish a causal nexus between that release and the incurrence of response
costs," although "the degree of connection" required is open to some debate. Control
Data Corp., 53 F.3d at 935 n.8. The District Court made short work of Dico's argument
that the necessary connection cannot be made. The court held that "Dico does not
dispute the United States incurred some response costs as a result of the TCE

3
There is a fourth element that must be proved as well: "that the costs [sought
to be recovered by the EPA] were necessary and consistent with the national
contingency plan." Control Data Corp. v. S.C.S.C. Corp., 53 F.3d 930, 934 (8th Cir.
1995). This is not an issue that needs to be addressed in this appeal.

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contamination at issue" and therefore concluded that Dico was strictly liable for the
costs at issue. United States v. Dico, Inc., 979 F. Supp. at 1259. The District Court
erred.

Although Dico may have conceded that its operations over the years could have
caused soil contamination at the site, we see nothing in the record to support the
proposition that Dico admitted that any such soil contamination caused the groundwater
contamination at OU-1, which in turn caused the EPA to incur response costs. In fact,
as we read the record, Dico consistently has denied responsibility for groundwater
contamination at OU-1, even while conceding the possibility that it is liable for soil
contamination within the site. As the United States acknowledges,

Operable Unit 1 ("OU-1"), which is the focus of this litigation, was
separately delineated to deal with the groundwater contamination, and
Operable Unit 2 ("OU-2"), also known as the South Area Source Control
Operable Unit, was designated to address releases to the groundwater
from the soil at Dico's property--which comprises a portion of the Site.

Brief of Appellee at 6 (emphasis added). The government freely admits that "[t]he EPA
in this lawsuit is seeking only to recover its expenses regarding OU-1, and not OU-2."
Id. at 6 n.7 (emphasis added). Any response costs the EPA might have incurred in
relation to OU-2 or any other operable unit within the site, and therefore evidence of
Dico's alleged admissions regarding soil contamination within the site, are of no
consequence.

It remains to be determined whether Dico has raised a genuine issue of material
fact on the question of whether the TCE disposal for which Dico is potentially
responsible, soil contamination within the site, is the source of the groundwater
contamination at OU-1. Because the District Court determined that Dico admitted
liability for some of the EPA's OU-1 response costs (which we now hold was error),

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the court did not address the question. After reviewing the record before us, we
conclude that Dico has carried its burden and that summary judgment was inappropriate
in this case.

There is some evidence in the record that the highest concentrations of TCE
groundwater contamination are directly beneath Dico's property. This certainly is
circumstantial evidence that it was Dico's actions that caused the contamination at
OU-1. But Dico submitted evidence that none of the EPA's numerous soil borings from
the area establishes a continuous line of contamination from the soil surface, through fill
and native soils, to the groundwater. Further, Dico asserts and has submitted evidence
in support of the assertion that, to the extent the record may be said to include evidence
of continuous borings that do show a direct line from Dico property to the water table,
the methodology employed in the sampling and the testing of those borings is open to
serious challenge. The EPA answers that there are other ways for the TCE
contamination to have migrated to the groundwater other than straight down through the
soil. But the EPA's hypothesis that this may be what happened at the Des Moines TCE
Site is unsupported by record evidence, and therefore does not resolve the fact question
of whether that is what actually happened at the site in the years before groundwater
contamination was discovered.

Granted, the witnesses whose testimony arguably establishes genuine issues of
material fact have self-serving reasons for testifying as they have. But that also can be
said of the EPA's witnesses. Assessing the credibility of witnesses and evaluating the
weight to assign to their testimony is the job of the fact-finder, and is not a function for
the court on a motion for summary judgment. See Oldham v. West, 47 F.3d 985, 988-
89 (8th Cir. 1995). Therefore, where there are witnesses whose testimony raises
genuine issues of material fact, summary judgment is inappropriate.

We conclude that the United States, as plaintiff seeking a monetary recovery of
considerable magnitude, should be put to its proof on its claim that Dico's disposal of

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hazardous materials caused groundwater contamination that led to the response costs
that the EPA incurred in connection with OU-1. Dico's evidence raises a genuine issue
of material fact for resolution at trial.

Finally, Dico contends that it was entitled to the statutory defense set forth in 42
U.S.C. § 9607(b)(3) (1994) because the release of hazardous substances at issue and
the resultant damages "were caused solely by . . . an act or omission of a third party"
not connected with Dico. The company argues that, with regard to costs related to the
so-called north plume of contamination at the site, located north of and up-gradient from
Dico's property, "Dico is an innocent third party" because that "contamination was
caused solely by sources other than Dico." Brief of Appellant at 29. Dico reiterates
that it is not responsible for the groundwater contamination "at all." Id. But even if it
is, Dico claims, "the North Plume is a separate and distinct plume whose harm is
capable of reasonable divisibility and apportionment," id. at 31, and as a matter of law
Dico should not be responsible for that part of the EPA's response costs that are not
attributable to Dico releases.

Because we have held that the case should be remanded for trial on the question
of Dico's liability, we need not and do not address this fact-dependent argument. It
should be resolved at trial.

IV.

For its final issue on appeal, Dico insists that the indirect and oversight costs that
the EPA supposedly incurred in connection with OU-1 were not recoverable. The
District Court held that they were, although the court did not indicate what part of the
$4.3 million award was attributable to the disputed costs (and counsel for the
government could not definitively break it down for us at oral argument). Dico contends
that such expenses are not "costs of removal or remedial action incurred by the United
States Government," 42 U.S.C. § 9607(a)(4)(A), within the meaning of

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CERCLA. Because we are vacating the judgment entered for the United States and
remanding for trial, the money judgment is necessarily set aside in its entirety.
Resolution of the issue of whether costs that the EPA may recover pursuant to 42
U.S.C. § 9607(a) include indirect and oversight costs is reserved for another day, and
quite possibly another case.

V.

The District Court's decision to dismiss Dico's counterclaim on the ground that
Dico has not exhausted its administrative remedies is affirmed, with instructions that the
court make it clear that the dismissal is without prejudice.4 The judgment entered for
the United States is vacated and the money judgment is set aside. The case is remanded
to the District Court for further proceedings consistent with this opinion.

4
As we mentioned early in the opinion, after the District Court granted summary
judgment to the United States in this case, the EPA moved the EAB for denial without
a hearing of Dico's petition for reimbursement on grounds of res judicata. Dico's
counsel told the Court at oral argument that the motion has been granted. Although we
do not know the grounds on which the EAB's decision was made, and we therefore
express no opinion on the merits thereof, we do point out that it is Dico's counterclaim,
not the government's claim, that is said to be identical to the administrative petition for
reimbursement. It should be remembered that the counterclaim was dismissed on
jurisdictional grounds, and there was no full and fair adjudication on the merits.
Moreover, given our disposition of the present appeal, there is no final judgment from
the District Court on the government's claim. See W.A. Lang Co. v. Anderberg-Lund
Printing Co. (In re Anderberg-Lund Printing Co.), 109 F.3d 1343, 1346 (8th Cir. 1997)
(discussing elements of the rule of res judicata).

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A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

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