Historic Dry Cleaners At Heart of Two Key NJ Spill Cases-Part 2

November 21st, 2012

In our second post on recent NJ Spill Act decisions involving historic dry cleaners, we examine New Jersey Schools Development Authority v. Marcantuone, 2012 N.J. Super. LEXIS 173 (App. Div. 10/29/12) where the appellate division ruled that a property owner who acquired a site in 1985 without performing environmental due diligence could not qualify for the Spill Act innocent purchaser defense.

In this case, the defendants purchased a property in 1985 that was partly occupied and leased to Carriage Trade Cleaners. A number of dry cleaners had continuously operated on this site since 1930.  After acquiring title, the defendants operated a grocery store on another section of the property while continuing to lease a portion of the property to the dry cleaner.

In June 2003, a phase 1 was performed that concluded that the property did not appear to have been impacted by its past or current uses. However, the report recommended a phase 2. It is unclear if the defendants commissioned the report and if the recommendation was followed.

In 2004, the New Jersey School Construction Corporation retained an environmental consultant to conduct a Preliminary Assessment/Site Investigation Report (PA/SIR). The report noted that PCE had been used in connection with dry cleaning operations on the property but concluded that no further investigation was warranted.

In 2005, the City ofEast Orange(the City) filed a condemnation action against defendants seeking to acquire the property for the purpose of constructing a school.  Despite the findings of the PA/SIR, the City asked the consultant who prepared the PA/SIR to prepare a Property Acquisition Environmental Cost Estimate. Based on this cost estimate, the City offered defendants $365K in compensation, minus an estimated cleanup and remediation cost of $17,489. On December 15, 2005, the City filed a declaration of taking and deposited the estimated compensation amount with the court

In March 2006, the City’s consultant prepared a second PA/SIR but this time the report recommended investigation of the subsurface materials below the slab where hazardous materials had been stored or used. Soil samplings subsequently revealed elevated concentrations of PCE contamination. Remedial activities were implemented from October to December 2006.

In November 2007, the trial court entered final judgment in the condemnation action, ordering the City to pay defendants $629,407 as just compensation. The court ordered that $182,035.20 which represented the estimated remediation costs be held in trust by the Clerk of the Superior Court until the final cost of remediation was ascertained and determination on liability established.

In 2008, plaintiff filed a complaint to recover the $182,345.206 in cleanup and remediation costs under the Spill Act. Plaintiff later moved for partial summary judgment, seeking a ruling that the defendants were liable under the Spill Act. The defendants filed their own cross-motion that they were not liable under the Spill Act because they did not discharge the hazardous materials. Following oral argument, the trial court denied plaintiff’s motion and granted defendants’ cross-motion for summary judgment.  Relying on White Oak Funding, Inc. v. Winning, 341 N.J. Super. 294 (App. Div. 2001), the trial court granted defendants’ motion for summary judgment and dismissed plaintiff’s complaint. The trial court held that defendants were not liable because they purchased the property before September 14, 1993 and were not “in any way responsible” for the contamination.

The plaintiff appealed, arguing that the trial court erred when it relied on White Oak and ignored the 2001 amendments to the Spill Act providing that property owners who acquired title to contaminated property prior to September 1993 had satisfy the requirements of the Spill Act’s Innocent Purchaser defense.  The defendants maintained that 2001 amendments did not expressly state that owners of contaminated sites who acquired title before 1993 were now considered within the class of those “in any way responsible” for pre-acquisition discharges. Thus, the defendants asserted that they could not be “in any way responsible” under the Spill Act even if they failed to perform pre-acquisition due diligence.

The appellate division began its analysis by stating that defendants were not “dischargers” of any hazardous substance because all the contamination had occurred prior to their 1985 acquisition of the property. Thus, the court explained, the defendants could be liable under the Spill Act if they be found to be “in any way responsible” for the hazardous substances found on the property.

Reviewing the legislative history of the Spill Act, the court noted that the statute had been amended in 1993 to add an innocent purchaser defense providing that a person who acquired real property on or after September 14, 1993 would not be liable for cleanup and removal costs or for any other damages for a pre-existing discharge if the person the person did not know and had no reason to know of the discharge after conducting an all appropriate inquiry into the previous ownership and uses of the property. [N.J.S.A. 58:10-23.11g(d)(2)]. The court further explained that an all appropriate inquiry meant a preliminary assessment (PA) (and a site investigation if the PA indicated that a site investigation was necessary) that was performed in accordance with rules and regulations promulgated by the NJDEP.

This court then said the Spill Act was further amended in 1997 to provide that any person who acquired real property on or after September 14, 1993 who knew or should have known of a pre-acquisition discharge at the real property would be strictly liable, jointly and severally, without regard to fault, for all cleanup and removal costs no matter by whom incurred. The Court noted that the amendment further added that it did not alter liability of any person who acquired real property prior to September 14, 1993. [N.J.S.A. 58:10-23.11g(c) (3).]

The 2001 amendment provided that owners who acquired title to real property prior to September 14, 1993 would not be liable if they could show that they did not know or have reason to know of a pre-acquisition discharge by conducting an all appropriate inquiry into the previous ownership and uses of the property based upon generally accepted good and customary standard. [N.J.S.A. 58:10-23.11g(d)(5)].The court noted that the White Oak decision had been released several weeks after the 2001 amendment was passed but before the provision become effective.

The appellate division said White Oak confronted two issues; First, White Oak held that a property owner could not be liable as a “discharger” solely on the basis of passive migration or seepage of a contamination that pre-dated the date of acquisition, reasoning that the definition of discharge required some act or omission of human conduct that caused a hazardous substance to enter the waters or land of the state.

Second, the appellate division said White Oak held that a property owner who was aware of the property’s prior use as a fuel oil distribution business but did not perform any due diligence could not be liable as a  person “in any way responsible” under the Spill Act since the facts of that case pre-dated the 1993 innocent purchaser defense.

The appellate division agreed with the plaintiff that the second part of the White Oak opinion had been superseded by the 2001 Amendments and that that to avoid liability under the Spill Act as a person “in any way responsible” by claiming the innocent purchaser defense, the defendant must prove by a preponderance of the evidence that due diligence had been undertaken when purchasing the property to ascertain prior ownership and use of the property. Accordingly, the appellate court reversed the grant of summary judgment and remanded the matter for the purpose of permitting defendant to develop and present evidence addressing the elements of the “innocent  purchaser” defense established under N.J.S.A. 58:10-23.11g(d)(5).

It will be interesting to see what the trial court decides was the generally accepted good and customary standard for due diligence in 1985. In the mid-1980s, I worked for a NJ  asset-based lender and helped prepare the bank’s environmental due diligence program. As part of this effort, I collected a library of due diligence requirements and suggested scopes of work for phase 1 investigations. The practice in New Jersey was more advanced than other states because of the 1983 passage of what was then known as the Environmental Cleanup Responsibility Act (ECRA). However, the due diligence requirements varied considerably.

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