March 22nd, 2012
The New Jersey Industrial Site Recovery Act (“ISRA”, f/k/a Environmental Cleanup Resonsibility Act or “ECRA”) requires industrial establishments to undergo environmental investigation and cleanup when they are to be closed or transferred. I have always felt that if we had a national ISRA law, the country would have a lot fewer brownfield sites.
One of the remedies available to purchasers of industrial establishments when the seller fails to comply with ISRA is to rescind the transaction. Recently, a New Jersey appellate court ruled that the ISRA transaction voiding provision does not apply to sales of tax liens.
Navillus Group v Accutherm Inc., 2011 N.J. Super. LEXIS 157 (App. Div. 8/11/11) involves the infamous Kiddie Kollege day care center inFranklin,New Jersey. For those of you who are not familiar with the case, Accutherm had manufactured laboratory-grade thermometers from 1984 and 1992. Because of increasing environmental requirements, Accutherm ceased operations in 1992 without performing a cleanup of the mercury contamination even though it was required to do so under the New Jersey Industrial Site Recover Act (ISRA).. In 1994, Accutherm filed a bankruptcy petition and stopped paying real estate taxes.FranklinTownshipthen sold two tax sale certificates in separate transactions to a bank who declined to foreclose on the certificates because of potential environmental issues that were flagged by the bank’s counsel. In 1999,Franklin Township sold a third tax sale certificate for the property to plaintiff Navillus, which subsequently also acquired the first two certificates by assignment from the bank. Navillus is a partnership consisting of members of the Sullivan family.
The tax sale certificates contained the following disclaimer: “Purchasers are herewith advised, pursuant to N.J.S.A. 13:1K-6, THAT INDUSTRIAL PROPERTY MAY BE SUBJECT TO THE “Environmental Clean Up Responsibility Act,” the “Spill Compensation and Control Act” or the “Water Pollution Control Act”
Navillus subsequently obtained a final tax foreclosure judgment which vested title to Navillus. After entry of this judgment, Navillus conveyed title to plaintiff James Sullivan, Inc. (JSI), a corporation owned by James Sullivan, Jr., for the nominal sum of one dollar.
In late 2003, JSI leased the property to “Kiddie Kollege” for $2000 per month. On May 4, 2006, the DEP sent a letter to JSI, which stated that “several environment issues exist at the [Accutherm] site,” including the presence of mercury at levels above DEP limits, and asked JSI to provide the DEP “with documentation which outlines what measures, if any, have been undertaken to remediate these environmental concerns.” JSI then hired an environmental consulting firm to conduct tests of air quality on the site, which revealed mercury vapor concentrations far in excess of the DEP’s limits. Immediately thereafter, the daycare center was closed.
In August 2006, JSI signed an administrative consent order agreeing to remediate the site in accordance with the NJ Spill Compensation and Control Act (Spill Act) However, JSI subsequently refused to perform any remediation. Numerous lawsuits followed against Kiddie Kollege, JSI, Navillus, andFranklinTownshipalleging that the children who attended the daycare center and its employees suffered personal injuries as a result of their exposure to mercury within the facility.
Navillus and JSI then sought to void the judgment in the tax foreclosure action so that title would revert back Franklin Township. The township filed a counterclaim that the final judgment in the tax foreclosure action had vested title to the property to Navillus and extinguished the interest of prior title holders. The NJDEP also moved to dismiss the complaint on the ground that plaintiffs’ action was a preemptive attempt to avoid possible liability under the Spill Act.
The trial court ruled that the plaintiffs were entitled to vacate the judgment in the tax foreclosure action based on a provision of ISRA under which the failure of a transferor of an industrial site to remediate environmental contamination before the transfer is grounds for voiding the transaction.
However, the appeals court reversed and vacated the trial court ruling. The appeals court noted that the plaintiff property owners did not seek that relief until more than five years after entry of the tax foreclosure judgment, which was far beyond the three-month limit established by the Tax Sale law.
The court also ruled that ISRA obligations were first triggered when the Accuterm closed its operations and not based solely the sale of the tax sale certificate. Consequently, the court held, there was no basis under ISRA or treating a tax foreclosure judgment as a “transfer or sale” that triggered ISRA for purposes of exercising the transaction voiding remedy. The court held that the Tax Sale Law was the exclusive grounds upon which a tax foreclosure judgment may be vacated. The court also noted that the Tax Sale Law places “the risk of facts discovered after the tax sale which have an impact on the value of the property” on the purchaser of the tax sale certificate.
This continuing litigation in this case reinforces the need for tax lien purchasers to perform thorough due diligence prior to closing on a tax lien sale. Here, the plaintiffs had misunderstood the meaning of an EPA letter that could have been properly interpreted by an environmental lawyer and perhaps put into better context by an environmental consultant.