Cal Appeals Ct Affirms $2MM judgment against foreclosing bank for failure to complete remediation is

September 20th, 2014

The foreclosing lender in Hoang v. California Pacific Bank, 2014 Cal. App. Unpub. LEXIS 5230 (July 23, 2014) made some curious decisions and the result was the bank was ordered to pay damages to the purchaser that exceed the sales price of the property.

In this case, Commercial Pacific Bank (CBP) had financed the purchase of a commercial real property that had been contaminated with PCE from a dry cleaning solvent packaging and supply business that had formerly operated at the site. At the time of the loan, the known maximum PCE contamination had been 3,200 parts per million (ppm) in the soil and 82,000 parts per billion (ppb) in the groundwater. The highest PCE concentrations were located in areas where product had been offloaded from railcars and trucks to an aboveground storage tank.

A consultant retained by the borrower concluded the remediation could be completed within three years at a maximum cost of $250K. The consultant prepared a workplan that called for excavation of the three-hot spots. Despite the high PCE concentrations, the bank made its first judgment error when it accepted what proved to be a woefully inadequate estimate without retaining its own consultant to independently vet the estimate. The bank then committed its second error when it approved an escrow equal to the estimated cleanup costs. Most lenders will require escrows to be at least 125% and often 150% of the estimated costs to obtain closure.  

After excavating 130 cubic yards of contaminated soil and pumping 5,000 gallons of groundwater, the borrower’s consultant sought regulatory closure form the State Regional Water Quality Control Board (Water Board). In October 2001, though, the Water Board required further groundwater and soil remediation.  Shortly thereafter, the borrower filed for bankruptcy and defaulted on the loan.

In another curious decision, CPB retained an environmental consultant two months AFTER the bank acquired title through a non-judicial foreclosure. CPB retained the borrower’s consultant to complete the cleanup. The consultant reportedly told the bank that he could he could obtain Water Board closure for $45K of additional remediation. However, at trial he testified he had informed the CPB that other environmental consultants probably would have estimated that it would cost over $1 million to obtain Water Board closure. Another lender might have wondered if it was provided with a low-ball bid but CPB appears to have elected to proceed with the environmental equivalent of a “Hail Mary” pass. The Water Board approved the workplan for quarterly monitoring but required submission of a remedial investigation and proposed remedial action by the end of 2003.

CPB then agreed to sell the property to the plaintiff for $1.14MM. Paragraph 29 of the amended agreement provided that CPB agreed to fund the remedial work up to $45K consisting of additional source removal and installation of additional groundwater wells. If additional remediation was required to obtain an NFA letter, the Bank had the discretion to authorize additional remediation work up to a maximum cost of $100K, with plaintiff paying half of the additional costs. Any costs in excess of $100K were to be the sole responsibility of CPB. The bank covenanted to obtain the NFA letter within three years of the August 6, 2003 closing.

After the closing, the bank’s consultant conducted groundwater monitoring and requested regulatory closure in 2004 and 2005 based on natural degradation of the PCE concentrations but each time the Water Board denied the request. In August 2010, the Water Board issued another directive requiring additional investigation and requiring submission of remedial alternatives.  The remedial investigation revealed maximum PCE soil samples at 8800 ppm in the soil and 28,000 ppb in groundwater. Maximum TCE concentrations in groundwater were 41,000 ppb, DCE at 61,000 ppb and vinyl chloride at 21,000 ppb. The report also revealed concentrations of PCE and TCE in the soil has of 8,529,800 ug/m3 and 5,591,070 ug/m3, respectively. As a result, the Water Board also became concerned about vapor intrusion.

In July 2010, plaintiff filed a breach of contract action asserting CPB had failed to remediate the property within three years from the date of purchase. As a direct result of CPB’s failure to perform, plaintiff claims it has suffered the loss of use of the property, was unable to enter into advantageous loan agreements, and the loss of the ability to sell the property.

A trial was conducted in two phases. First, a bench trial was held to interpret the contract. In April 2012, the trial court found that the agreement did not require the Bank to obtain a NFA letter by any specific date. Instead, the court ruled that the bank had simply promised to complete the tasks set forth in the agreed upon scope of work but did not include a guarantee that the scope of services would result in regulatory closure before the third anniversary after the close of escrow. The plaintiff then filed an amended complaint alleging that CPB’s failure to obtain an NFA letter within a reasonable time constituted a breach of contract for which Plaintiff sought damages of $4.5MM.

In the second phase of trial, a jury awarded plaintiff approximately $2.3MM for the bank’s failure to complete the cleanup in a reasonable time period. The jury based its damage award on expert testimony proffered by the environmental consultants who had conducted the original investigation. These experts had testified based on contaminant levels, it could cost from $1,332,990 to $3,235,770 to achieve the environmental screening levels (ESL) of 0.69 ppm in soils and 5 ppb in groundwater.

On appeal. CPB argued that paragraph 28 of the agreement stating that the bank “shall have no liability to buyer for any known or unknown hazardous contamination on the property” limited plaintiff’s remedy to an indemnity. Since the plaintiff had yet to incur any cleanup costs, CPB asserted that the jury erred when it awarded damages. However, the appeals court noted that CPB had not raise this issue with the trial court prior to or during the trial, did not assert this ground as an affirmative defense and had not objected to the jury instruction on damages until after the jury had returned its verdict. Thus, the court concluded CPB had waived the indemnity issue.

Even if the bank had not waived the indemnity issue, the appeals court went on to say the two contractual provisions do not operate to limit plaintiff’s contractual remedies to indemnity. The court held that Paragraph 28 was an “as is” clause that simply limited the bank’s liability in connection with any representations. This provision, the court continued, could not be reasonably understood to limit plaintiff’s remedies for failing to complete the remediation in a in a reasonable time period as required in Paragraph 29.

Turning to the damage award, CPB contended the evidence was insufficient to support the $2.3MM damage award. The damage claim was based, in part, on plaintiff’s testimony that 1600 tons of contaminated soil would have to be excavated. The bank said the plaintiff’s experts did not explain how they reached the 1600 ton figure. CPB noted that only two of the 15 soil borings relied upon by plaintiff’s experts had PCE concentrations over the ESL, suggesting plaintiff’s expert opinions on the quantity of soil that needed to be removed was unfounded. However, in yet another questionable trial tactic, the court noted that the bank’s counsel did not ask plaintiff’s expert on cross-examination to explain why he would recommend the removal of soil in areas where the borings showed contamination levels below the ESL. Moreover, the court observed, CPB did not offer any expert witness testimony to contradict plaintiff’s expert testimony.

The court found that it was uncontroverted that at least a portion of property contained very high levels of PCE contamination and that while plaintiff’s expert testified that the precise extent of the contamination could not be determined without more testing, his remediation scenarios contemplated excavating soil from the three known hot-spots to resolve the contamination. Moreover, the court said that while it did appear only one or two of the samples were above the ESL, plaintiff’s expert relied on other evidence in forming his opinions. Again, the court highlighted more questionable trial strategy by the bank, noting that CPB did not raise any evidentiary objections to plaintiff’s expert testimony and did not challenge the proffered jury instructions on how to evaluate expert testimony.

The appeals court said while there was uncertainty on the disposal costs of the excavated soil, the evidence was sufficient to support the plaintiff’s estimates on the cost of each element of remediation that would be needed to obtain an NFA letter. Once again, the court noted that the bank did not object before or during the plaintiff’s expert testimony that estimates were based on speculation, either. Since the jury’s award fell within his estimates, the court ruled that the award was not is unduly speculative.

CPB also objected to the amount of the award because it exceeded the purchase price of the property. However, the court noted that the Bank did not argue in advance of the jury’s verdict that there was a ceiling on damages based on the purchase price. The court said the evidence supported the conclusion that plaintiff purchased the property with the understanding that the Bank would remediate the property and obtain an NFA letter would be obtained within a reasonable time. The court said the remediation costs were not awarded based on injury to the property, but to enable plaintiff to be in as good a position as if the bank had remediated his property according to its promise in the contract. Additionally, the court noted that because the state had a firm policy in favor of environmental remediation, it could say an award of remediation costs was unreasonable just because it exceeds the amount that the present owner paid for the property. In sum, we find no error

The plaintiff had asserted at trial that he was unable to refinance his property in 2005 at a lower interest rate of 6.75 percent, and instead elected to take a loan at 8.25 percent, allegedly due to the Bank’s breach of the contract in failing to obtain a NFA letter prior to 2005. CPB asserted there was no evidence showing that it breached the contract in 2005 because it had until August 2006 (three years from close of escrow in August 2003) to complete the work. Even if there had been a breach, the Bank argued, any claim for breach would have been barred by the statute of limitations. However, the court ruled that the action involved an executory contract where the plaintiff had fully performed and was waiting for the bank to complete its performance. In such situations, the court said an injured party can wait until the time for complete performance by the other party to bring an action for damages. The court said the party waiting for performance was not required to treat the contract as abandoned on the first breach but could elect to wait for performance, and the statute of limitations will not begin to run until the injured party has made its election. Since the trial court found that the time for the Bank’s performance was not three years, but was instead “reasonable time, there was no error.

CMBS Environmental Due Diligence Needs to Consider B-Piece Buyers

September 12th, 2014

Commercial Mortgage-Backed Securities (CMBS) loans have been playing an increasingly important role in commercial real estate financing and account for around 30% of commercial loan originations. Because of the increasing use of CMBS loans, it is important for consultants to understand the different risk tolerances of the players in a CMBS transaction and how environmental due diligence may differ for CMBS transactions.

When retained to perform a phase 1 for a CMBS loan, consultants tailor their recommendations to the lender’s scope of work since the lender is the consultant’s client. However, in CMBS transactions, there is another big elephant in the  room that Both the originating lender and the consultant need to satisfy– the so-called B piece buyers Recommendations that might make sense if a client was a sophisticated property owner or a portfolio lender might not be acceptable to a B-piece investor.  

CMBS loans are securities created from the cash flows of pooled commercial mortgage that are usually secured by hotels, office buildings, shopping malls, and warehouses. In CMBS transactions, individual loans are originated by a lender (the consultant’s client). After closing on the loan, the originating lender will hold the loan on its books for a short period of time until it has accumulated a sufficient volume of loans and then sell the loans to a CMBS trust which is known as a real estate mortgage investment conduit (REMIC). The loans are sold pursuant to a pooling and servicing agreement (PSA) where the originating lender makes certain representations and warranties about the due diligence it performed for each loan including environmental due diligence.

The CMBS trust pools or bundles the loans and then issues bonds that are secured by the cash flow from the mortgages. Rating agencies assign credit ratings to the various classes of bonds (which are known as tranches) ranging from investment grade (e.g., AAA/Aaa to BBB+) to below investment grade (BB+/ Ba1 through B-/B3). Sometimes the CMBS trust will also have unrated bonds.  Loan payments are distributed to the holders of the lower-risk, lower-interest securities first, and then to the holders of the higher-risk securities. Here is illustration of the CMBS tranches.

CMBS

After the loans are sold, the trust is administered by Master Servicer will is responsible for servicing all of the loans in the trust, including collecting monthly payments, verifying compliance, and waiving or modifying any mortgage conditions. If an individual loan goes into default, it will be assigned to a Special Servicer.

The critical player in any CMBS transaction are the investors who buy the below investment grade tranches who are called the B-piece buyers. Since holders of class A notes are paid interest and principal payments before the holders of the lower-grade notes, B-note investors will suffer losses before the investment-grade tranches.

Traditionally, B-piece buyers were specialist investors/funds but new players chasing yield have entered this and may now include private equity and public companies. B-piece buyers or a related entity also often serve as special servicer so that they can control the disposition of non-performing assets.

During the credit bubble, B-piece buyers often piggybacked on the environmental diligence performed by the CMBS issuer. Now, though, the due diligence performed by B-piece investors has dramatically increased. B-piece buyers are carefully reviewing properties proposed to be included in new CMBS pools and often force issuers to “kick-out” or drop troublesome properties from the pools.  As a result, the B-piece buyers often drive underwriting standards and serve as a market watchdog. Indeed, it is not unusual for the B-piece buyers to perform desktop reviews or their own Phase I ESA reports. Moreover, environmental consultants and environmental attorneys retained by B-piece buyers are questioning conclusions in Phase I ESA reports and carefully vetting assumptions used to develop environmental loan reserves.

B-piece buyers tend to like cleanups or mitigation to be approved by regulatory agencies. For example, if a consultant identified a former UST that was removed in the past as an HREC but no closure documentation is available, the B-piece buyer might want further sampling investigation. Likewise, if the soil gas at a former shopping center is impacted by a former dry cleaner, a consultant might recommend that the property owner install a sub-slab depressurization system (SSDS) without involving the regulator since this could expand the scope of the investigation and increase the cost of the project. However, the B-piece buyer may insist that the SSDS to be approved by and installed under the supervision of a regulatory agency to keep the property in the CMBS pool.

An indemnity from a credit-worthy entity or environmental insurance can assuage the concerns of B-piece buyers. Fortunately, the environmental insurance market has become very competitive and coverage is not only widely available for unknown conditions but also at attractive pricing. Often times, it may be preferable to obtain a lender policy rather than collect samples from a former dry cleaner space. Borrowers with significant real estate holdings may have their own environmental pollution legal liability (PLL) policies and may want to have the lender added to the existing policy.  However, there are often challenges fitting PLL policies into the particular needs of CMBS transactions so this option may be available.  

OER Launches NYC Affordable Housing Cleanup Fund

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

Rep and Warranty Insurance Becoming More Common in M&A Deals

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.

Delaware Extends Statute of Limitations For Contract Claims to 20 Years

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.

McDonald’s Labor Case May Have Environmental Law Implications

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.

Major CMBS Lender Requiring EPs to Perform Site Inspections

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.  

OER Grants Available for Petroleum Assessments But Need to Move Quickly

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.

 

Environmental Restrictions Now Fully Enforceable by NYC DOB

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 hereRestrictive Declarations are designated with a “D” on the NYC zoning maps. A list of sites with restrictive declarations is available here:

NY Legislature Passes Brownfield Extender Bill But Will It Matter?

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.