August 20th, 2014
The New York City Office of Environmental Remediation (OER) recently announced the creation of the NYC Affordable Housing Cleanup Fund (AHCF) to help remediate and support affordable housing projects in disadvantaged communities. Unlike the OER Brownfield Incentive Grants (BIG) program which are funded from appropriations, OER will be using $1.8MM in EPA Revolving Loan Fund (RLF) to support the AHCF. Thus, the AHCF should not experienced the funding flucuations that have plagued the BIG program.
The creation of the AHCF was made possible after EPA announced a change in its RLF eligibility earlier this year. The policy change allowed OER to award RLF money to a more spectrum of affordable housing projects that were not previously ineligible because of a financing structure commonly used in New York. We discussed the policy change earlier this year.
The AHCF will award grants of $80K to affordable housing projects that enroll in the OER Voluntary Cleanup Program (VCP) that can be used to cover engineering costs at sites that do not pay prevailing wage. Loans of $150k will also be available for supportive and affordable projects in the VCP that comply with Davis Bacon. The RLF loans can be used at Davis-Bacon sites for asbestos abatement, demolition and any element of an approved remedy. The loan terms will be zero percent interest but repayment can be delayed for 15 years with full repayment by year 30.
In addition to the new funding, OER launched its New York City Clean Soil Bank in December 19, 2013 for sites enrolled in the VCP. The Clean Soil Bank can reduce development costs since VCP applicants can reuse clean native soil excavated at other brownfield properties in the or donate qualified soil to the Clean Soil Bank. OER estimates that brownfield developers could save up to $5 million in soil purchase and disposal costs each year. The clean soil can be used to elevate properties and build protective barriers to protect against storm surges.Affordan
August 13th, 2014
The use of reps and warranties insurance (RWI) is becoming an increasingly popular risk allocation tool in corporate transactions. According to trade press reports, the volume of RWI doubled from 2011 to 2012, with the value of the insurance bound last year exceeding $4 billion.
RWI covers losses related to breaches or inaccuracies in reps and warranties, and can be purchased by either buyers or sellers. An RWI policy can add flexibility to a deal and help parties resolve key transactional issues such as the scope of the reps and warranties, the size of indemnification deductibles and caps, reduce or eliminate the need for escrow as well as extend the survival period. A buyer can use RWI to distinguish its bid in an auction process since the buyer could propose lower or no escrows or indemnification caps. In an odd twist, buyers willing to rely on RWI may actually be able to negotiate longer survival periods and higher indemnification caps since the risk for breaches or inaccuracies would be shifted from the seller to the insurer. RWI is also useful when the buyer has concerns about the seller’s credit such as in distressed asset sales since the RWI can backstop or collateralize the seller’s indemnity
RWI policies are attractive to sellers because they can used as to substitute or supplement a seller indemnity. In this way, an RWI policy can provide certainty to a seller that its exposure will be capped at the amount of a negotiated escrow. The coverage can also help sellers remove contingent liabilities from their balance sheets or avoid establishing new accruals or reserves. The policies can also facilitate a “clean exit” for private equity and “end-of-life” funds to maximize distributions, reduce risk of paybacks and enhance performance metrics.
The form of the policy and the claims handling procedures will vary, depending if the insured is the buyer or the seller. When purchased by a buyer, the RWI policy is written as first-party coverage. When the buyer learns of a breach or inaccurate rep or warranty, the buyer can simply file a claim directly with the insurer using of proof of loss form and does not have to deal with the seller.
When purchased by a seller, RWI operates as a “third-party” liability policy. After the seller receives a notice alleging of a breach or inaccuracy in the reps and warranties, the seller will tender the claim to the insurer. Often times the seller will remain obligated under the RWI policy to defend the claim but a seller policies is often able to obtain advancement of defense costs.
One key difference between a buyer or seller RWI policy is coverage for fraudulent misrepresentations. Seller policies will include an exclusion for fraudulent statements in the reps and warranties while RWI policies issued to a buyer typically would not exclude claims based on seller fraud. Thus, the buyer policy provides broader coverage.
The RWI policies can be structured to cover specific representations and warranties or provide “blanket” coverage for all representations and warranties contained within an agreement that are not otherwise excluded by the insurer. RWI policies generally do not cover known issues, such as issues discovered during due diligence, known to members of the deal teal or described in disclosure schedules. The policies also usually do not cover breaches for covenants or indemnification for specific contingent liabilities. However, a buyer could agree to look to the RWI for breaches of reps and warranties but continue to hold the seller responsible for other indemnification obligations, possibly allowing the parties to reduce any escrow or lower an indemnification cap. Other standard exclusions may include consequential or damages, fines and penalties and claims for injunctive or other equitable (non-monetary) relief.
Parties should be aware that the RWI underwriters will carefully review the transaction documents and discuss the transaction structure with the deal team. Insurers will particularly focus on the thoroughness of the seller’s disclosure process and the risk management policies of the target company. Underwriters may exclude provisions that they believe are easily breached or perhaps too buyer-friendly.
The pricing for RWI coverage depends on a number of factors including the nature of the risk, the extent of the due diligence performed by the parties and the relative size of the deductible. Coverage limits can be as high as $50MM though higher limits are available by aggregating policies. Premiums have been dropping and now commonly range from 2%-3.5% of the coverage limits. Even at those levels, sellers often prefer the cost of the insurance premium rather than having portions of the sales proceeds tied up in escrow or having to reflect indemnities on their balance sheets. Self-insured retention (deductible) also varies from deal to deal but often ranges from 1% to 3% of the transaction value.
It is important to know that not all RWI policies will cover environmental reps and warranties—especially if the environmental liabilities are potentially significant. In such cases, the parties would be better suited obtaining an environmental insurance policy. However, even where a buyer insists on an escrow or indemnity for environmental liability, an RWI policy can still be useful. By covering claims for breaches of other reps and warranties, an RWI policy could enhance the chances that the escrow would not be exhausted by non-environmental claims.
August 11th, 2014
The time period for bringing claims for breaches of representations and warranties in corporate transactions (known as “survival” periods) are usually heavily negotiated. General reps and warranties about the condition of the business often have the shortest survival periods (usually 6 months to two years) and often track the length of an escrow period. However, special reps and warranties such as those relating to environmental liability will typically have a longer “survival” period and are frequently are tied to the underlying statute of limitations (SOLs). If a purchase agreement is silent on survival of reps and warranties, courts tend to default to the state’s contract SOL.
SOLs for claims for breach of contract vary considerably by jurisdiction, usually ranging from 3 to 10 years. The contracting parties will identify the state that will govern the enforcement and interpretation of an agreement. Depending on the state, survival clauses attempting to shorten or extend (or waive) the SOL for breach of contract claims may not be enforceable. States also differ on if a survival clauses tends to operate as a contractual statute of limitation in which a party must file a lawsuit or simply period for an injured party to file a notice of claim.
In states that prohibit extension of the survival period beyond the SOL for breaches of contract, the SOL is essentially also acting as a statute of repose (SOR). Click here for a prior post on the difference between SOLs and SORs as well as delayed discovery rules that can suspend the running of SOLs.
The SOL will start generally begin to run on the date of the closing though often times survival clauses relating to claims filed by third parties may not be triggered for a period of time after the closing. Because of the variation among state contract SOLs, it is important that the contracting parties understand the SOLs of the state law that govern their agreements.
For example, many transactions will be governed by Delaware law when the companies are Delaware entities. Earlier this summer, the Delaware legislature amended the contract SOL to 20 years for contracts involving at least $100K. The extended SOL became effective on August 1st. However, it is unclear if the change applies to contracts executed after the effective date or if it applies to contracts entered into prior to that date that simply reference. the SOL. If the SOL amendment is considered “remedial” and since it extends a plaintiff’s right to bring suit, it is possible the Delaware courts may apply the new SOL to contracts entered into prior to its effective date.
July 31st, 2014
Labor rulings have in the past served as precedent for eroding traditional corporate law doctrines and expanding liability of corporations. For example, the doctrine known as either Continuity of Enterprise or Substantial Continuity was used in the 1990s to impose successor liability for environmental contamination originated with a line of labor law cases dating back to the early 1970s (see, e.g., William J. Burns International Detective Agency, Inc. v. NLRB, 441 F.2d 911 (2nd Cir. 1971) where a security firm outbid the existing firm providing security services and was required to honor the collective bargaining agreement entered into by the prior firm after hiring most of the former firm’s employees).
Indeed, those of us who were practicing environmental law in the 1980s can recall how the larger corporate law firms initially viewed environmental law as a niche area that was primarily the domain of “tree huggers and critter lovers”-as one cynical corporate once told me. The corporate firms were confident that well-entrenched doctrines of corporate law would shield their clients from significant environmental liability. After the Substantial Continuity test was used override state corporate law and impose environmental liability on purchasers of corporate assets, the “white shoe” law firms suddenly realized they needed environmental lawyers to protect their institutional clients and started scrambling to hire environmental lawyers.
We have taken this path down memory land because of labor ruling earlier this week that may profoundly change corporate relationships. This past Tuesday, the National Relations Labor Board (NRLB) Office of General Counsel issued a decision finding that franchisor McDonalds USA could be liable as a “joint employer” of its approximately 13,000 franchised restaurants in the United States for alleged workplace violations. The employees had asserted that McDonald’s was a “joint employer” with the franchise restaurants on the grounds that McDonalds required its franchisees to strictly follow its rules on food, cleanliness and employment practices and that McDonald’s often owned the restaurants that franchisees use.
The ruling will now be heard by the five-member NRLB. If the NRLB upholds decision is affirmed and the ruling survives appellate review, it could impact large swaths of the national economy including manufacturers, real estate management firms, hotels, health care, automotive services, and cleaning companies that use temp agencies or subcontractors. It could also possibly impact the environmental consulting firms that heavily relying on independent contractors (“1099s”) to perform phase 1 reports since those individuals might be deemed to be employees that are entitled to benefits.
It should be noted that in the early 1980s, the NLRB ruled that a company could be considered a “joint employer” where two or more employers exerted “significant control” over the same employees. After that ruling was affirmed by an appeals court, though, the NLRB adopted a narrower standard, holding that a company could only be deemed to be a “joint employer” when it directly controlled, for instance, a franchisee’s or a temp agency’s employment practices. The McDonald’s decision suggests that the NLRB may be returning the earlier “significant control” standard.
What are the implications for environmental law? Well, since the inception of state and federal underground storage tank (UST) programs, purchasers of former gas stations and residents with homes impacted by leaking gas station USTs have sought to impose operator liability on Big Oil franchisors because of the control allegedly exercised over their franchisees. The indicia of control frequently asserted by these plaintiffs included that franchisors required the station operators to maintain the premises in a certain manner, keep specific minimum hours and purchase minimum amounts of their products. Except for a couple of outlier cases where courts found the fuel distributors or “jobbers” essentially acted as agents of the franchisors, these cases have been unsuccessful. The allegations in the McDonald’s case focused on the level of control exerted by the franchisor. It is not a big step from arguing that a company that is liable as a “joint employer” because of the control is exercised over its franchise operations should be liable as an “operator” under state or federal environmental laws.
Likewise, plaintiffs have pursued dry cleaner franchisors and equipment manufacturers under “operator” and arranger” theories. The plaintiffs have asserted that because the manufacturers/franchisors had control over the design of the dry cleaning machines including installing the equipment, chose the locations of the floor drains, physically connecting the discharge piping to the building, inspected the connections to ensure that the waste water was disposed into the sewer system and provided instructions recommending that the dry cleaners be connected to the sewer system, the manufacturers/franchisors amounted to either control or actual involvement in decisions about disposal of waste (for example compare Berg v. Popham, 412 F.3d 1122 (9th Cir. 2005) and Vine Street LLC v. Keeling, 361 F. Supp. 2d 600 (E.D. Tex. 2005) with California Department of Toxic Substances Control v. Payless Cleaners, 368 F. Supp. 2d 1069 (E.D. Cal. 2005), Team Enters., LLC v. W. Inv. Real Estate Trust, 2010 U.S. Dist. LEXIS 79912 (9th Cir. 09/09/2010)). One could envision the reasoning in the McDonald’s case being extended to the dry cleaner franchisor/equipment manufacturer cases at least on the “operator” theory of liability.
The McDonald’s case may not be the first joint employer case to reach the federal appellate courts, though. The NLRB is currently reviewing a request by the Teamsters union to declare Browning-Ferris, Inc (BFI) as a joint employer along with the staffing agency it uses to supply workers at a recycling plant in California because of how closely BFI directs the use of the staffing agency’s workers.
It is true that following the US Supreme Court decision in United States v. Bestfoods, 524 U.S. 51, 141 L. Ed. 2d 43, 118 S. Ct. 1876 (1998) where the Court ruled that CERCLA did not replace settled rules of state corporation law that several federal appellate courts over the past decade have ruled that the Substantial Continuity test was only applicable to labor law and should not be used to extend liability under CERCLA ( see New York v. Nat’l Servs. Indus., 352 F.3d 682 (2nd Cir. 2005) ruling that the fact that the substantial continuity test is well-established in the context of federal labor law does not indicate that it is extendable to other areas of federal common law, it was not a part of general federal common law and should not be used to determine whether a corporation takes on CERCLA liability) . Thus, it is possible that federal courts may decline to apply the reasoning of the “joint employer” cases to CERCLA operator liability. However, the doctrine may be a useful tool for creative lawyers who will likely be presenting their cases before federal judges appointed over the last eight years-at least on the district court level- and therefore be more receptive to these arguments.
July 23rd, 2014
We have previously discussed discussed here and in other forums how the All Appropriate Inquiries (AAI) Rule issued by EPA in 2005 is deeply flawed and has directly contributed to a worsening in the quality of phase 1 reports. This is ironic outcome since the reason EPA was instructed in the 2002 amendments to CERCLA to issue an AAI Rule was to improve the level of due diligence. This is evidenced by the fact that Congress added five criteria to the then existing statutory test that property owners needed to evaluate to satisfy the CERCLA liability protections.
As we have explained. the principal weaknesses of the AAI rule was the watered-down definition of Environmental Professional (EP) and not requiring EPs to actually perform any of the AAI tasks. Instead, the AAI rule allows the work to be done by persons who do not even have to have a high school education so long as they under the “supervision” of an EP (who also does not have to have a high school education). Often times, the so-called EP supervision consists solely of the EP stamping its signature on a template form that has been completed by a field inspector.
When EPA published a proposed rule to add a reference to the new ASTM E1527-13 to the AAI Rule, several lawyers and environmental consultants urged EPA to use the rulemaking as an opportunity to revisit the EP definition or at least require EPs perform some of the more important AAI task. However, the agency declined these requests on the grounds that they were outside the scope of the proposed rulemaking.
Recently, one of the leading CMBS lenders revised its scope of work to require that EPs must actually perform the site inspections for reports prepared for that bank ( Note that I do not represent that lender but have seen its revised scope of work). The SOW requires that all reports must be performed by EPs (as opposed to under supervision or direction of an EP). In addition, the inspector must have at least five years of experience with that particular property type.
It will be interesting to see if other lenders follow the lead of this major CMBS lender and revise their scopes of work as well. It will also be interesting to see what impact this change will have on the business model of firms that heavily rely on independent contractors (1099s) or part-time employees to perform their phase 1 reports and who do not qualify as EPs.
July 18th, 2014
The NYC Office of Environmental Remediation just announced that it has a little over $100K to award for petroleum assessments this summer. The source of the grant money is the brownfield revolving loan fund that was awarded by EPA to OER under section 104(k) of CERCLA. The federally-funded grant may be used for phase 1 or phase 2 investigations. There is no requirement that the applicant enroll in the OER voluntary cleanup program (VCP) to receive the federally funded assessment.
OER hopes the money will be used to fund assessments at former gas station sites or other sites impacted by petroleum USTs that will be redeveloped for affordable housing. However, the funding is no specifically limited to affordable housing projects.
Because the petroleum assessments will be federally-funded, there are fairly stringent eligibility requirements. First, the current owner of the property and immediate prior owner of parcel cannot have caused or be responsible for the petroleum contamination. However, if the immediate prior owner was responsible for the spill, the applicant could be still apply for the grant if the applicant can show that the immediate prior owner is insolvent at the time of the application. In addition, the property could not have been previously owned by the City.
Second, the applicant will also have to have performed an all appropriate inquiry at the eligible site.
Third, the work (phase I or Phase II) must be performed by one of OER’s retainer contractors and not by a site owner’s or a developer’s environmental consultant.
Finally, the work itself must be completed by Sept 30. What this means, given the time required for EPA approval of a Phase II workplan and QAAP, the work needs to be done very fast to have field work and lab analysis completed by Sept 30.
July 3rd, 2014
In June, the NYC Department of Buildings (DOB) completed uploading into its Buildings Information System (BIS) approximately 200 Restrictive Declarations (RD) that can impose certain environmental obligations relating to hazardous materials. This action means that parties seeking building permits and certificates of occupancy for sites subject to RDs will have to demonstrate they have satisfied the conditions set forth in the RD using the same procedures of the (E) Designation Program.
As many readers may be aware, an (E) Designation may be assigned to property lots as part of a zoning action under the City Environmental Quality Review (CEQR) Act. If the CEQR review process indicates that development on a property may be adversely affected by noise, air emissions, or hazardous materials, then the Lead Agency may assign an (E) Designation on the property lot to ensure that the (E) Designation requirements are satisfied prior to or during a new development or new use of the property. An (E) Designation may be assigned for a variety of reasons including that the property:
- Was used as or is in close proximity to a gas station or some other underground fuel oil tank;
- Is located in or contiguous to a manufacturing district;
- Has a history of manufacturing uses;
- Is located next to a building with a history of manufacturing uses;
- Is located on a heavily trafficked street or highway;
- Is located next to a railroad; or
- Has some other environmental condition on the property or nearby that is a cause for concern
DOB began including populating the (E) Designations in its BIS in 2002. If a BIS indicates that a property lot has an (E) Designation, the DOB examiner cannot issue a building permit for new development, changes of use, enlargements or certain other alternations to existing structures until DOB receives either a Notice to Proceed (NTP) or Notice of No Objection (NNO) from the NYC Office of Environmental Remediation (OER). To obtain an NTP from OER, the applicant has to submit an acceptable investigation and remedial plan to OER. OER may issue NNOs for actions that do not raise potential exposure to hazardous materials, or air quality or noise impacts. Indeed, approximately 50% of the (E) Designation projects OER reviews result in NNOs.
When the applicant wants to obtain a Certificate of Occupancy from DOB, it must obtain a Notice of Satisfaction (NOS) from OER demonstrating that the applicant has complied with OER requirements. If an applicant wants to remove the E-designation from the property, it would have to implement a track 1 (unrestricted) cleanup. Parties can also comply or remove the (E) Designation by enrolling the site in the state Brownfield Cleanup Program (BCP) as well as the NYC voluntary cleanup program (f/k/a Local Brownfield Program). It is important to note that when lots with an (E) Designation are merged or subdivided, the (E) Designation will apply to all portions of the merged lot or to each subdivided lot. For more information on the (E) Designation program, click here.
An RD is a form of institutional control that is recorded against a property that is designed to ensure that environmental mitigation or requirements that were imposed as a condition of a land use approval are implemented. The RD which runs with the land so that it binds current and future owners to comply with certain investigate and remedial requirements that may be required be OER.
Historically, RDs were used when private applicants who owned or controlled a property sought a rezoning or other action under section 11-15 of the Zoning Resolution of the City of New York. This proved to be a cumbersome process because all parties with a property interest in property including lenders had to execute an RD. Moreover, the NYC Department of Environmental Protection (DEP) and a city agency approving the discretionary action had to expend resources reviewing the RD. In 2012, the City Council adopted an amendments to the Zoning Resolution authorized lead agencies to assign E-Designations for any actions including those sought by private applicants such as rezoning, special permits or variances. Because of the zoning resolution amendments, RDs will no longer be used to impose environmental conditions on properties. However, owners and developers will have to comply with existing RDs.
DOB has implemented a number of changes to the BIS to reflect RDs. For example, BIS Property Profile label “Little ‘e’ Restricted” will now appear as “Environmental Restrictions.” The field will display the associated Hazmat, Air and/or Noise restriction. On the BIS Web Application Details page, the checkbox in section 9 has been changed from Little “e” Hazmat Site to Environmental Restrictions (Little “e” or RD). The eFiling, Data Entry and Research Unit (DEAR) and Post-Approval Amendments (PAA) screens which formerly asked “Is the site or building a “Little ‘e’ ” Hazmat site?” now inquire “Are there Environmental Restrictions (Little ‘e’ or RD) on this site or building?”. Likewise, on the auto-generated Plan / Work Application (PW1), the “Little ‘e’ Hazmat site” label will be changed to “Little ‘e’” or RD Site.
It should be noted that paper PW1 application will still refer to the little “e” Hazmat site. Changes to the paper PW1 will be implemented along with other PW1 changes later this year, coordinated with implementation of the 2014 Building Code.
The full list of adopted (E) Designations and RDs are searchable by Tax Block and Lot Number.(E) Designation sites are designated with an “E and are listed in Appendix C to the zoning resolution available here. Restrictive Declarations are designated with a “D” on the NYC zoning maps. A list of sites with restrictive declarations is available here:
June 23rd, 2014
[Update: At a bill signing ceremony in Buffalo on June 24th, Governor Cuomo was quoted as saying he would sign the BCP extension]
On June 20th, the NY State Senate approved legislation that would extend the expiration of the Brownfield Cleanup Program (BCP) to March 31, 2017. The same bill had been passed by the Assembly earlier in the week. However, it is unclear if Governor Andrew Cuomo will sign the legislation.
As we have previously discussed, the BCP was slated to sunset on December 31, 2015. Governor Cuomo proposed sweeping reforms to the BCP in his January budget in response to a perception that the program was too expensive and not sufficiently targeted. The key elements of the Governor’s proposal had been to limit the lucrative qualified tangible property (QTP) tax credits to certain categories of sites (informally known as “gates”) and to redefine what constituted site preparation costs (SPC) for purposes of calculating the QTP “soft” cap (i.e., 3x the SPCs).
The legislature and the Governor could not reach agreement on the QTP gates since the proposal essentially pitted upstate against downstate and would have had a detrimental impact on affordable housing and Brownfield Opportunity Areas (BOAs). Thus, the Governor eventually removed BCP reform from the budget that was approved at the end of March. BCP reform appeared stalled until early June when the approaching end of the legislative session spurred last minute negotiations. It appeared that the parties were moving towards a compromise until the Governor agreed– in exchange for the endorsement of the Working Families Party– to campaign against a handful of Senate democrats who had formed a alliance with senate Republicans that allowed the Senate to remain in control of Republicans. This poisoned the well for further negotiations between the Senate and the Governor. As a result, the Legislature opted to pass a simple BCP extension.
It is unclear if the Governor will sign the extension. The Assembly is the legislative chamber that sends bills to the Executive for final action. Under the state Constitution, the Governor has a limited time to sign or veto legislation. However, the Assembly tends to send bills to the Governor in batches over the summer (to achieve maximum media coverage) and it is unclear when the BCP legislation will be forwarded to the Governor. The last time a BCP extender was passed by the Legislature, the Governor did not sign it into law until August.
So what are developers to do? The good news is that the proposed July 1st deadline for changes in the BCP tax credits (BTCs) is no longer a concern. Thus, developers who recently submitted applications but had not received a decision can breathe a sigh of relief.
The combination of a potential July 1st effective date and the 12/31/15 expiration had essentially brought the BCP to a halt for new applications. This was because even if developers were willing to live with the proposed BTC reforms, only the simplest and smaller projects could be assured of completing cleanups and receiving a Certificate of Completion (COC) by the end of 2015. Indeed, even applicants who had been recently accepted into the BCP were under the gun to complete their cleanups by the end of 2015. In reality the cleanup completion is earlier than 12/31/15 because of DEC documentation requirements. Most sites will probably have had to complete physical cleanup (i.e., soil excavation, foundation and installation of any required groundwater treatment system) by September 2015 to obtain DEC approval of all of the required submittals especially given the sheer volume of projects that DEC is going to have to review in 2014 and 2015. Thus, the extension of the BTCs to March 31, 2017 would take the pressure off many existing applicants.
So what are developers with potential new BCP projects to do until the Governor acts? The conventional wisdom (CW) would seem to be that they should proceed with their applications. If the Governor signs the extension bill, they will have until 3/31/17 to complete their projects.Moreover, they will be presumably be grandfathered into the existing BTC structure.
The CW would also seem to weigh in favor of proceeding with a BCP application even if the governor vetoes the legislation (under the political calculus that he will have a democratic senate in 2015). A veto would mean that the 2015 BTC expiration remains in effect so the sooner an applicant gets accepted into the BCP, the faster it can start working towards achieving a 2015 cleanup .
Even if the applicant believes it cannot complete its cleanup by the end of 2015, it still probably makes sense to apply now to the BCP. Assuming the proposes a new BCP reform package in January, the legislation would presumably grandfather projects that have been accepted into the BCP by at least 12/31/14, possibly 12/31/15 (coincidentally the original BTC expiration) or possibly as late as 7/1/15. Of course, it is possible that the Governor may decide to completely reinvent the wheel and allow the BTCs to expire. While Albany often resembles Game of Thrones, this would seem to be an extreme even for Albany. It is hard to believe that NY State would allow its BCP to lapse and become one of only two states without a brownfield program.
June 18th, 2014
Nearly eight years after a New Jersey day care was forced to close down because of mercury contamination, the legal fallout continues. In the latest legal salvo involving the infamous Kiddie Kollege Daycare & Preschool, Inc, (Kiddie Kollege), a New Jersey trial court ordered the current property owner who leased the contaminated building to the daycare center to reimburse the New Jersey Department of Environmental Protection (NJDEP) $2.05MM. Perhaps more significant, the court also awarded treble damages of $6.1MM against the former owner of the thermometer manufacturer.
Following is a summary of the key facts and legal proceedings involving the Kiddie Kollege case. Readers who want a more detailed discussion of the tortured history of this site can click Here.
The property had been owned by Accutherm, Inc. (Accutherm) from 1984 to 1992 and used to manufacturer mercury thermometers. When Accutherm ceased operating, it failed to comply with the Site Industrial Recovery Act (ISRA) which requires certain industrial establishments that are transferred or closed to undergo environmental investigation and remediation if required. After Accutherm ceased paying its property taxes, Franklin Township sold two tax certificates to the bank then held a mortgage on the property. Eventually, the current property owner, a real estate broker, purchased a third tax certificate from the township and acquired the prior two tax lien certificates that had been sold to the bank. The current owner then acquired title by foreclosure judgment, renovated the building and leased it to Kiddie Kollege. The daycare was shut down in July 2006 after it was learned that the building that the building that housed the daycare had previously to manufacturer mercury thermometers and had mercury vapor levels at least 27 times the regulatory limit. Approximately one-third of the children and staff members were found to have elevated levels of mercury.
The controversy spawned the filing of class action lawsuits on behalf of children who attended Kiddie Kollege as well as employees of the daycare center, an insurance declaratory judgment action and several individual personal injury actions. In Baughman v. United States Liab. Ins. Co., 662 F. Supp. 2d 386 (D.N.J., 2009), a federal district court granted summary judgment in favor of the second set of operators of the day care center that their insurer was obligated to defend and indemnity them under the comprehensive general liability (“CGL”) policy. The insurer had argued that claims for medical monitoring were not legal damages as defined under the policy and that the pollution exclusion barred coverage. The court said that since the underlying suits all allege harm due to exposure to mercury contamination inside the Kiddie Kollege building and, the contamination did fall within the scope of “pollution”. The court went on to say the fact that some toxins might have spread beyond Kiddie Kollege did not change that fact that the underlying suits sought damages for bodily injury arising from their exposure to mercury inside Kiddie Kollege. The court subsequently awarded attorney fees as well. Baughman v. United States Liab. Ins. Co., 723 F. Supp. 2d 741 (D.N.J. 2010)
In 2010, the property owner and daycare operators settled a class action lawsuit brought by parents for $1MM. Following a bench trial, a judge ordered that a $1.5MM trust fund be established to pay for long-term medical monitoring with the property owner and Franklin Township each required to contribute $525K, Gloucester County pay $300K and the State of New Jersey $150K. Just before the judge announced his verdict, the County had agreed to settle the lawsuit $950K. Another judge subsequently awarded $1.6MM in attorneys’ fees to plaintiffs’ lawyers. Meanwhile, the building was demolished in 2010 with the debris hauled away to an Indiana hazardous waste site.
2014 Trial Opinion
In New Jersey Department of Environmental Protection v Navillus Group, et al, No. L-1260-12 ((Super. Ct-Law. Div. – Gloucester County May 14, 2014), the court finally got around to addressing the Spill Act liability of the defendants. The court made important rulings on the Spill Act innocent purchaser defense and divisibility of liability under the Spill Act.
Like many other states, New Jersey has enacted its own an innocent purchaser defense that requires a property owner demonstrate that it did not know and had no reason to know of discharges of hazardous substance by performing an “all appropriate inquiry”. However, contrary to most states, New Jersey has not adopted the federal All Appropriate Inquiries rule but instead has its own unique definition for satisfying “all appropriate inquiry.” Under N.J.S.A. 58: I 0-23.11g(d)(2), an “all appropriate inquiry” is defined as “the performance of a preliminary assessment, and site investigations, if the preliminary assessment indicated that a site investigation is necessary.”
A Preliminary Assessment, in turn, is defined at N.S.S.A. § 58:10B-1 as “the first phase in the process of identifying areas of concern and determining whether contaminants are or were present at a site or have migrated or are migrating from a site, and shall include the initial search for and evaluation of, existing site specific operational and environmental information, both current and historic, to determine if further investigation concerning the documented, alleged, suspected or latent discharge of any contaminant is required. The evaluation of historic information shall be conducted from 1932 to the present, except that the department may require the search for and evaluation of additional information relating to ownership and use of the site prior to 1932 if such information is available through diligent inquiry of the public records”
In the Navillus decision, the trial court found that the Sullivan defendants could have learned of the discharge of mercury contamination by researching the historical records or if they followed their attorney’s advice and engaged an environmental professional to perform a preliminary assessment before proceeding to foreclose the tax sale certificates. Instead, the court said the Sullivan relied on the 1996 EPA report. Though the Sullivan defendants misunderstood the report, the court said the EPA report could have been properly interpreted by an environmental lawyer and put into better context by an environmental consultant. Since the EPA report confirmed the presence of mercury at the site, the Sullivan defendants should have known about the mercury contamination and thus did not qualify for the innocent purchaser defense.
The court also found there was a basis to pierce the corporate veil of Jim Sullivan Inc because the Sullivan defendants disregarded corporate formalities and commingled corporate assets. Moreover, the individual sibling Sullivan defendants were liable as general partners of Navillus.
The court also found that the president of Accutherm was personally liable under the state Water Pollution Control Act pursuant to the responsible corporate officer doctrine. In addition, the court found that as the sole shareholder, CEO and corporate officer had sufficient control over the Accutherm operations to be personally liable as a “person in any responsible” under the Spill Act.
We cannot conclude a discussion on the Spill Act innocent purchaser defense without reminding lenders, their borrowers, real estate lawyers and out-of-state environmental lawyers that the Spill Act innocent purchaser’s defense requires performing a pre-acquisition Preliminary Assessment and possibly a Site Investigation. The NJDEP PA technical guidance specifically states that the ASTM Phase I “is NOT an acceptable replacement for a preliminary assessment in New Jersey” Unfortunately, many lenders and borrowers are unaware that there are many differences between a PA and an ASTM E1527 phase 1 ASTM. Thus, purchasers of New Jersey properties who are concerned about potential Spill Act liability should not simply rely on a lender’s ASTM Phase 1 but either supplement the phase 1 with a PA or ordered a combined PA/ASTM Phase 1.
The purpose of the PA is to identify all current and historical potential areas of concern. The NJDEP Preliminary Assessment Technical Guidance contains a Data Gathering Checklist that is intended to serve as a tool to ensure that all the required data gathering/diligent inquiry had been completed. Unlike AAI, for example, a PA specifically REQUIRES review of tax records, deeds, historical chain of title. and business directories (such as McRae’s Industrial Directory, New Jersey Industrial Directory). The consultant is also required to assess protectiveness of prior remedial actions in contrast to the ASTM CREC which does not require EP to determine if controls are actually enforceable and if human exposure is under control. Other differences include that a PA does not have a “Reasonably Ascertainable” limitation that allows a consultant to abandon a search for information based solely on time constraints. Instead, the NJDEP PA technical guidance specifically states that “All efforts to contact a source of information or obtain documents/records should be fully pursued before the inspector completes the data gathering portion of the preliminary assessment.”
Click here for a more detailed list of the significant differences between a PA and AAI/ASTM phase 1 report. We welcome input on this chart from LSRPs and others familiar with PA process.
June 9th, 2014
Since Governor Andrew Cuomo and the Legislature reached an agreement on the 2014 budget, there has been frustrating little progress on extending the Brownfield Cleanup Program (BCP). In the absence of any forward movement, developers have been rushing to submit applications to the BCP so they could obtain a certificate of completion (COC) before the BCP tax credits (BTCs) expire at the end of 2015 or to become grandfathered ahead of any changes to the BTCs.
Now, though, with less than two weeks before the New York State Legislature adjourns, there is growing optimism that a deal may be within reach to extend the BCP. The pace of negotiations among representatives of the Legislative, Executive and key stakeholder groups appeared to heat up after the NPCR brownfield summit last week brought many of key participants together in one room. While it appears that the parties have been narrowing their differences, some significant hurdles remain.
By way of review, the impetus for BCP reform was the looming expiration of the BCP tax credits but the Executive Branch was also concerned about the costs of the BCP. As a result, the Governor’s bill would have limited that the Tangible Property Tax Credit (TPC) to certain categories of brownfield projects and proposed to restrict the kinds of costs that would be eligible for the Site Preparation Tax Credit (SPC) so that so-called “soft costs” could not be included. It was unclear from the Governor’s bill if the definitional changes to the costs eligible for the SPC would apply only to BCP applications accepted after the proposed July 1st effective date or would extend to costs incurred by existing applicants after the effective date. Another significant feature of the Governor’s bill was automatic termination for BCP projects that did not receive Certificates of Completion (COCs) by 12/31/15 if they were accepted into the BCP prior to 6/23/08, or by 12/31/17 for sites accepted after that date but before 7/1/14.
The Senate proposed its own reform legislation that would have retained the current “as of right” tax credit structure. To accommodate the Governor’s concerns about the costs, the Senate proposed to refine the definition of brownfield site to incorporate more precise concepts of under-utilization, functionally obsolescence, affordable housing or qualify as a priority economic development site. The Senate also declined to narrow the scope of the costs eligible for the SPC, contained a broader exemption for applications for Class 2 submitted volunteers and omitted the automatic termination dates.
The Assembly’s bill largely mirrored the approach proposed by the Governor that BCP sites would have to satisfy a second test to qualify for the TPC but largely adopted the test advanced by the Senate. The changes would have taken effect on January 1, 2016. The Assembly did not attempt to change the SPC definition, did not include any automatic termination dates, did not exempt applications for Class 2 sites submitted by volunteers and did not provide for an exemption from the hazardous waste fee for projects enrolled in the NYC VCP or under a federal cleanup order.
Click here for a prior post summarizing the key changes proposed by the Governor’s original bill.
Recognizing the political handwriting on the wall, representatives of the real estate appear to be resigned that a separate test for qualifying for the TPC. The negotiations will center on the nature of the qualifying test.
There has also been progress on some of the ambiguities in the SPC definition. It appears any changes to the SPC definition will only apply to new applications accepted after July 1st. The parties are still negotiating the details of the SPC definition but it appears that the Executive branch has backed away from the more extreme changes that could have conflicted with federal tax law.
It also appears that the negotiators may be moving away from the automatic termination provisions of 12/31/15 for sites accepted into the BCP prior to the 2008 amendments or 12/31/17 for sites accepted into the BCP prior to July 1, 2014. The problem with the automatic termination was that it would have exposed applicants to potential liability since they have owned or controlled the site for an extended period of time. Instead, it is likely that a final bill will have a single date for all sites accepted prior to July 1, 2014. Applicants who fail to obtain a COC by that dated would simply forfeit their right to receive the TPC but could remain in the COC and obtain the liability release upon completion of the cleanup.
The key to any BCP bill may be the Assembly’s insistence on re-authorizing the state superfund program bonding for ten years. The Executive does not want to add $1B to the state’s debt. But it is Albany so anything is possible. So keep the light on and stay close to the phone until the Legislature adjourns on June 19th..