Archive for the ‘consultant malpractice’ Category

Bankruptcy Courts Rules Bank May Not Seek Cost Recovery for Contaminated Site Purchased in Auction Sale

Thursday, November 27th, 2014

Pete Seeger’s popular song from the 1960s “Where have all the Flowers Gone?” has the haunting recurring lyrics “When will they ever learn”. This song came to mind when we came across another case of a bank taking title to contaminated property without doing any environmental due diligence.

In this case, Suburban Bank and Trust SBT-BB, LLC (SBT”) extended a $4MM loan Boston Blackies Properties IV, LLC (“Boston Blackies”) in October 2006 that was secured by a mortgage on the property located on East Grand Avenue in the Streeterville section of Chicago. Unfortunately, the gourmet hamburger chain embarked on an aggressive expansion plan that was derailed by the Great Recession and had to file for bankruptcy in 2009. (The owners of the chain apparently also had some ethical issues.

SBT foreclosed on the Property in March 2011. SBT did not perform a new phase 1 before taking title and included the October 2006 phase 1 in the Bidder’s Information Package when the property was put up for auction in April 2011. Standard Bank (Standard), the successful bidder also did not conduct a phase 1 report before submitting its bid.

Standard planned to demolish the existing building and construct a new branch office. However, when Standard applied for a building permit, it learned that the property was within the Lindsay Light Streeterville Thorium Monitoring Area (a/k/a as the Moratorium Area) because of the presence of radioactive fill material associated with the former Lindsay Light Chemical Company (“Lindsay Light). Applicants planning to excavate or disturb soils for properties within the Moratorium Area are required to perform soil testing, conduct certain radioactive monitoring and comply with other work practices. Applications for permits which involve work in the Moratorium Area will be held in the City Permit System until the applicant meets with the Department of Public Health (CDPH) and agrees to implement the health and safety work plan that has been established for the Moratorium Area.   Standard performed the required screening and learned the site was contaminated with thorium contamination.

During the early 1900s, Lindsay Light manufactured gas mantles containing radioactive thorium at three locations in an area in downtown Chicago including a location across the street from the restaurant location that Standard purchased. The process of gas mantle manufacturing involves dipping gauze mantle bags into solutions containing thorium nitrate and small amounts of cerium, beryllium and magnesium nitrates. The mesh bags were then placed inside the glass globe of a light fixture.  When heated by the gas flame, the fabric would burn off and the metal mesh would glow.

The thorium processing refining process produced a sand-like waste known as thorium mill tailings, which were used for fill for development projects in the low-lying areas including in utility installations in City-owned street and sidewalk rights-of-way throughout the  Streeterville AreaIn the 1990’s, EPA excavated approximately 40,000 tons of radioactive thorium-contaminated soils that were discovered during property development and utilities installation and maintenance. In 2000, EPA created the Moratorium Area as a form of institutional control in and around Streeterville to impose restrictions and conditions on excavation to limit exposure to the thorium problems created by Lindsay Light plants. 

Six months after learning of the thorium-contaminated soil, Standard retained a law firm to preparing a claim against Tronox, the successor to Lindsay Light. Tronox had itself filed for bankruptcy and a plan for reorganization had that was confirmed in February 2011. The confirmation order established the Tronox Incorporated Tort Claims Trust Agreement (the “Tort Claims Trust”) that assumed the liabilities for all tort claims of Tronox and was to pay holders of allowed tort claims. Because the bar date for filing proofs of claim in the Tronox bankruptcy had been August 12, 2009, Standard filed a motion for leave to file a late claim of approximately $1.5MM. Standard hoped it could be reimbursed by the Tort Claims Trust.

Standard Bank asserted that its failure to file a timely claim was the result of “excusable neglect” because it had no notice from Tronox and acted within a reasonable time. However, in In re: Tronox Incorporated, 2014 Bankr. LEXIS 4678 (Bankr. S.D.N.Y. 11/7/14), the bankruptcy court found that Standard Bank has not introduced admissible evidence as to the notice provided to Boston Blackies or, equally important, that Boston Blackies was aware of the contamination or Tronox’s chapter 11 case. Moreover, the court said there was nothing in the record that suggested that Tronox knew or should have known that Boston Blackies was a potential creditor based on Tronox’s own records.

In denying the motion to file a late claim, the court said that allowing a purchaser of property after the Bar Date would make finality impossible in any bankruptcy case. Instead, the court said a subsequent purchaser of property can protect itself by obtaining representations and warranties from its predecessor and “may also, of course, obtain an environmental report.”

Standard has also filed a complaint against the firm that prepared the October 2006 phase 1 alleging malpractice and breach of contract. Standard Bank and Trust v The English Company, 2014-L-005825 (Cook Cty Circuit Ct. 6/2/14) . This lawsuit appears to be dead on arrival.

First, the phase 1 contained the following passage discussing the review of the CERCLIS database:

“The Lindsay Light Company, 161 E. Grand Avenue, south adjacent property. This building was one of the former gas mantle manufacturing locations for the Lindsay Light Chemical Company, which refined thorium containing ores and made incandescent gas mantels for home and street lighting. This site is listed as a removal only site with no site assessment work needed, but no further information on the status of this site is provided. Based on the close proximity of this site to the subject property, there is the potential that soils have been impacted.”

Had Standard retain an environmental consultant to perform a phase 1, a transaction screen or even review the October 2006 report prior to submitting its bid, Standard would have learned that the property was likely in the Moratorium Area and that its construction plans might be complicated by the presence of thorium-contaminated soil.

In addition, the report was issued to SBT. By the express terms of the phase 1 report, Standard was not entitled to rely on the report. The complaint does not allege that the consultant knew its report would be included in the Bidder’s Information Package or that the consultant consented to allow bidders rely on its five-year old report. 

Problems Emerge with New CREC Definition

Wednesday, June 4th, 2014

After a little more than six months after ASTM issued its new E1527-13 Phase 1 standard practice, problems are emerging over the new definition Controlled Recognized Environmental Condition (CREC) definition. The difficulties are related to the definition itself and differences among state environmental programs.

Before discussing the CREC problems, a little background might be helpful for readers. Prior to 2000, there were only two types of conditions that had to be evaluated in an ASTM Phase 1 report by an environmental consultant: a Recognized Environmental Condition (REC) or a de minimis condition. The term REC does not appear in CERCLA but was developed by ASTM to help consultants distinguish minor spills from those conditions that would be required to be investigated or remediated. If a consultant identified minor spills or releases that did not pose a risk to human health or the environment, and that would not result in enforcement actions if brought to the attention of regulators could be classified as a de minimis condition.

The 2000 revisions to E1527 added the term Historical Recognized Environmental Conditions (HREC) which was intended to be used for sites where contamination was remediated to applicable standards. Instead of labeling the former contamination as a REC, consultants could now identify the former spill as an HREC, confirming that it has been remediated and no longer poses a risk to human health of the environment. The HREC concept was a useful tool since it prevents property from continuing to be stigmatized by the existence of a former release in state or federal databases.

Unfortunately, consultants did not consistently apply the HREC term so that similar situations were classified as HRECs, RECs or de minimis conditions. Some made HREC determinations without verifying the cleanup standard used in the past was still valid and that the remedy (i.e., engineering or institutional controls) was still protective and functioning as designed.  Other consultants identified the continuing presence of residual contamination a REC notwithstanding regulatory approval. This was a significant concern since most cleanups now employ risk-based approaches where some remnant of contamination is allowed to remain so long as institutional or engineering controls are used to prevent unreasonable exposure to the residual contamination.

To promote more consistency in how these remediated RECs were described and presented in phase 1 reports, the ASTM E1527 task group revised the HREC definition and added the new CREC designation. The HREC term was intended to apply to cleanups that had achieved unrestricted residential cleanup standard while the CREC term for cleanups where residual contamination remained and the site was subject to institutional or engineering controls (known as Activity and Use Limitations or “AULs” in ASTM parlance).  As a result, there are now four types of conditions that may be identified in an ASTM E1527 phase 1 report: REC, HREC, CREC, and de minimis conditions.

The task group hoped that creating the CREC term would help alert purchasers if there were controls on future use of the property as well as develop plans for complying with the controls that are in place so that they can satisfy their post-acquisition “continuing obligations” and maintain their liability protections. A CREC will not require further action so long as the “controlled” conditions remain in effect.

As originally drafted, the CREC term would have been limited to circumstances where ECs/ICs were actually created or recorded against the property and the environmental professional would be required to verify that the EC/ICs were properly maintained/recorded. However, the environmental consultant representatives on the task force pushed back on these requirements, arguing they should not be put in the position to determine if a particular control was “enforceable.”  As a result, the final CREC definition selected by the task force group did not require consultants to actually verify that the controls are in place or are properly working. The final definition adopted by ASTM provides that a CREC is:

 “ a recognized environmental condition resulting from a past release of  hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority (for example, as evidenced by the issuance of a no further action letter or equivalent, or meeting risk-based criteria established by regulatory authority), with hazardous substances or petroleum products allowed to remain in place subject to the implementation of required controls (for example, property use restrictions, activity and use limitations, institutional controls, or engineering controls).”  

Many of the lawyers on the legal subcommittee were opposed to the CREC definition. Several well-known and respected lawyers submitted negative comments during the balloting process, asserting that the CREC term added a needless level of complexity and was unnecessary because conditions that had been addressed to the satisfaction of regulators should be considered a “de minimis condition.”  One particularly prescient negative comment stated that the CREC term was inconsistent with the common understanding of the word “control” or “controlled” and was misleading because it implied that residual contamination was under “control” when it fact consultants were not required confirm that controls were actually in place and effective. The task group was also cautioned that term would be problematic in a number of states because of their approach to cleanups.  Despite these warnings, the ASTM task force found these negative comments “non-persuasive.”  

Because ASTM did not limit CRECs to those conditions where formal AULS have been implemented and did not require the consultant to verify if the “control” has been properly implemented and remains effective, the usefulness of CREC and the extent that an owner, lender or their counsel can rely on the designation will depend on the type of CRECs that exists for the property. At one end of the CREC continuum are those sites where enforceable AULs have been recorded against the property such as a deed restriction and the specific cleanup standards has been memorialized in the NFA letter. In such circumstances, then owner, its lender and counsel will be able to determine if “control” has in fact been implemented, can assess if it remains protective and if it continues to be in compliance with current cleanup standards.

At the other end of the spectrum are cleanups that were done without any oversight by the regulator (commonly known as “self-directed” or “at-risk” cleanups) where the developer or property owner implemented a cleanup on its own to avoid regulatory delays. Because the cleanup would not have been completed “the satisfaction of the applicable Regulatory Authority”, this cleanup would not qualify as a CREC and probably have to be identified as a REC subject to post-remedial confirmatory sampling. An exception would be if the cleanup was supervised by a licensed environmental professional in a state with a licensed environmental professional program such as Massachusetts, Connecticut or New Jersey and the licensed professional opines that the cleanup met “risk-based criteria established by regulatory authority”  

The more challenging CRECs will be those within the murky middle of the continuum where a regulator may have signed off on a cleanup without referencing a formal control. Many state regulators have signed off on risk-based cleanups without referencing any AULs, particularly with petroleum-contaminated sites where many state programs rely on natural degradation of petroleum and only require removal of grossly contaminated soils/source materials. There is still petroleum contamination in the ground but no actual “control” in place.  The contamination has been addressed to the satisfaction of the regulator but often times the records are archived or destroyed so the consultant cannot verify the actual levels that were left in the ground.  In such an instance, the note to the CREC definition advises consultants that they can look to the data and infer an implied a control!

In other words, the consultant can assume that if the site was a gas station or a commercial property with a UST, the cleanup was approved by the state on the condition that the property would continue to be used only for commercial purposes. Indeed, ASTM trainers are emphasizing to consultants that AULs are just one indication of a past of a past or present release but not the only evidence that a property may not be used for unrestricted use.  Consultants are also being instructed that if there are no formal AULs, they should look at the data and ask if the “dirt is eatable and the water drinkable”.  How this assumption is helpful to property owners and their lenders remains unclear.

Then there are the situations where regulatory controls may be implemented but human exposures remain because of the potential for vapor intrusion. Some states allow local governments to adopt groundwater ordinances that prohibit the use of groundwater to facilitate cleanups. The groundwater ordinance serves as a “control” that could qualify as a CREC. However, many states do not take into account potential human exposures from vapor intrusion. In such a situation, while the groundwater “control” is in place but human exposure is not controlled. This is particular so in states with dry cleaner trust funds. Most state programs rank sites for funding based solely on impacts to drinking water. If the groundwater is not used, the site will receive a low priority ranking for cleanup. While the property owner waits years for the dry cleaner fund to get around to funding the cleanup, the groundwater plume could be migrating off-site and posing a risk of vapor intrusion to nearby residences.  

For example, there was recent loan transaction involving a shopping center where a plume from a dry cleaner had migrated off-site and was within proximity to single-family residences.  Because the local government had passed a groundwater ordinance, the state issued an NFA letter. However, the soil gas near the residential community was 20 times the EPA residential screening level. In a different state where vapor intrusion is evaluated as part of a cleanup, closure would not have been granted, the dry cleaner plume would have been identified as a REC and the owner additional investigation would have been required to assess the extent of the REC. However, in this state which allowed for pathway elimination by ordinance, closure was granted and the dry cleaner contamination was identified as a CREC with no further investigation recommended even though there was a strong likelihood that human exposures were not “controlled”. In other words, the same condition in a different state would have a different designation even though in both situations human exposures were not controlled. 

In essence, because of the regulatory program of this state, what might have been a REC in another state was transformed into a Business Environmental Risk in the form of a potential toxic tort claim. Fortunately, counsel for both the lender and property owner recognized the potential liability and a pollution legal liability policy was obtained to protect against potential third party claims for bodily injury or property damage. 

Since the  ASTM Task Group declined to follow the prescient warnings of several seasoned environmental transactional attorneys and approved a flawed CREC definition, what are property owners, lenders or counsel to do? E1527-13 does require that CRECs be listed in the findings and conclusions section of a phase 1 report, and consultants are also required to explain their reasoning related to the impact of the CREC on the property. So users of phase 1 reports, particularly purchasers who will need to take comply with their continuing obligations to maintain liability protections (i.e., take reasonable steps to stop continuing releases and prevent exposure to existing releases), should carefully review the discussion of any CREC and be prepared to ask the consultants the following questions:

  • did they review the NFA letter or decision document by the licensed professional concluding that the cleanup met state standards;
  • identify what the cleanup standard was and if it remains in effect or has been changed since the NFA letter or its equivalent was issued;
  • identify the “controls” that it has identified as the basis for concluding the condition is a CREC;
  • have the consultant verify if the “control” has in fact been properly implemented (e.g., recorded in the land records, sub-slab depressurization is properly working, engineering control is properly maintained, etc) and remains protective of human health;
  • if the consultant is inferring a control, provide justification for concluding the control is applicable to the site; and
  • ask the consultant to determine if human exposures such as vapor intrusion are under “control”

If the environmental consultant cannot verify what cleanup standard was used or that it remains the correct standard, this could be viewed as a significant data gap that would have to be verified to be in compliance with AAI. If the consultant believes in its professional judgment that the condition is continuing to pose a risk of human exposure, the condition should be a REC and not a CREC even if regulatory closure has been granted-especially where the consultant is representing a purchaser. Appropriately identifying the condition as a REC early enough in the transaction will enable the parties to further evaluate the issue or negotiate some risk allocation mechanism for the condition.   

Until ASTM takes another look at the definition, owners and possessors of property should be prepared to ask hard questions of the environmental professionals to make sure that they are not lulled into a false sense of comfort only to inadvertently forfeit their liability protections because they failed to comply with “controls” they did not anticipate after they taking title or possession of the property.  

As we discussed in an article, lenders are positioned differently than property owners from a liability standpoint and therefore may have risk tolerances that are different from those who take title to potentially contaminated property.  Since understanding a CREC will likely be vital to maintaining liability protections, purchasers should not simply rely on consultants retained by their lenders but be prepared to retain their own professionals to independently verify the CRECs and their underlying controls.

Finally, do not forget that a CREC only applies to regulatory “controls” (i.e., institutional and engineering controls) and not human exposures. Purchasers should not assume that a CREC means human exposures are safely controlled. The purchaser who fails to have their consultant verify that if human exposures are under control may later learn that they have bought themselves into a toxic tort lawsuit.   

EPA Recognizes E1527-13 But Preamble Raises Specter of Retroactive LIability For Past Phase 1 Reports that Did Not Assess Vapor Intrusion

Tuesday, December 31st, 2013

On December 30th, the  federal Environmental Protection Agency (EPA) published a final rule in the Federal Register  (78 FR 79319) recognizing the new ASTM E1527-13 phase 1 standard practice as an approved method for complying with the All Appropriate Inquires (AAI) rule. As explained below, while the preamble to the final rule is an improvement to the text that accompanied the August rulemaking since it attempts to address some of the concerns raised in the adverse comments, this action amounts to Band-Aid where surgery was needed to repair the ill-conceived rulemaking exercise.

Despite receiving adverse comments to the botched August rulemaking, EPA declined to delete the reference to the now obsolete E1527-05 from the AAI rule. Instead, agency included language in the explanatory text (the “preamble”) encouraging property owners and consultants to use ASTM E1527-13. In responding to some of the adverse comments it received,  EPA may have opened the door to retroactive liability to consultants and their clients for previously completed phase 1 reports that did not evaluate the vapor intrusion pathway.

In response to concerns that the continuing reference to E1527-05 could cause confusion in the marketplace, EPA first said-unconvincingly to this observer-that because it did not propose to remove the reference to E1527-05 in the August rulemaking, such action was “well beyond the scope of today’s action”. However, to address the concerns that the parties may be confused about the level of due diligence required because of the continuing reference to a historic ASTM standard, EPA said it planned on issuing a future proposal to delete the obsolete ASTM standard from the AAI rule. The agency said it felt that these concerns would be best done through a separate rulemaking process to give the public an opportunity to review and comment on that proposed action. EPA did go on to say that it intends “to monitor the uptake of the new ASTM E1527-13 across the commercial and industrial real estate sector to see if these expectations are borne out.”

In announcing this decision, EPA reminded the regulated community that while E1527 may be used to comply with AAI, “ASTM standards do not comprise a federal regulation or standard, nor are they incorporated by reference into the federal regulation. Parties may use industry standards to comply with Part 312, but the standard for compliance is the AAI rule itself.”  In its specific responses to comments the agency reviewed key due diligence case law that EPA said stood for the proposition that courts look to the “quality of the investigation and reasonableness of the conclusions reached as a result of the investigation” in determining the adequacy of a particular phase 1 report. EPA said it believed “that site-specific circumstances and conditions would continue to inform the courts’ review of the strength and satisfactoriness of parties’ conduct of all appropriate inquiries, under both the ASTM standard and the all appropriate inquiries rule.”

Because of the caselaw and  the fact that parties seeking to asset one of the CERCLA landowner liability protections have the burden of establishing that they qualify for those defenses,  EPA said it believed that parties conducting AAI for this purpose have a strong incentive to ensure that the investigation is done thoroughly and properly. As a result, the agency indicated that it “anticipates that those conducting or relying on the ASTM International standard for the conduct of All Appropriate Inquiries will generally adjust to using the updated standard, particularly in light of the fact that ASTM International will label the ASTM E1527-05 Standard a historical standard and establish that the revised standard, the E1527-13 standard, is the only standard reflecting the current consensus of the responsible ASTM International technical committee.” EPA’s responses to the comments  are set forth in a new document that has been added to the regulatory docket and is available here:

In recognizing the new ASTM standard, EPA said it believed that ASTM E1527-13 “improved upon the previous standard” and “reflected the evolving best practices” that would provide prospective purchasers with the necessary and essential information that is required to satisfy AAI as well as meet their “continuing obligations” under the CERCLA liability protections.  This statement is another indication of how even though phase 1 reports are usually ordered to satisfy AAI, the reports may have implications for satisfying post-acquisition appropriate care/continuing obligations (think Ashley and Voggenthaler).

From a purely legal standpoint, all a consultant needs to do to complete its contractual obligations to its clients under an E1527-13 phase 1 assignment is to determine if there are RECs, CRECs or HRECs at a property. To satisfy AAI and therefore qualify for the bona fide prospective purchaser liability protection, a property owner simply has to identify current and prior releases of hazardous substances at a site using an investigation that complies with AAI. While no further investigation is generally required to comply with AAI and therefore qualify for the BFPP, a property owner/ purchaser may need to do further investigation about the releases (or RECs/CRECs using ASTM parlance) to be able to comply with its appropriate care/continuing obligations. Depending on specific site factors, such an investigation may be more comprehensive than a phase 1 investigation. Users should discuss with their environmental consultants and lawyers if it makes sense to do this more comprehensive all at once prior to acquisition so the user can develop an appropriate care/continuing obligations plan or to do additional investigation soon after acquisition to be able satisfy those obligations.

In touting the virtues of ASTM E1527-13, EPA focused on one of the hottest issues in environmental law-vapor intrusion.  The agency said that one of the important revisions contained in ASTM E1527-13 was clarifying that “all appropriate inquires and phase I environmental site assessments must include, within the scope of the investigation, an assessment of the real or potential occurrence of vapor migration and vapor releases on, at, in or to the subject property.” The more potentially troubling statement for consultants and property owners was the statement that  “In the case of vapor releases, or the potential presence or migration of vapors associated with hazardous substances or petroleum products, EPA notes that both the All Appropriate Inquiries Rule and the ASTM E1527-05 standard already call for the identification of potential vapor releases or vapor migration at a property, to the extent they are indicative of a release or threatened release of hazardous substances.”[Emphasis added]

In the response document that is in the regulatory docket, EPA said that “Some users of the ASTM E1527-05 standard and some who submitted comments in response to EPA’s August 15, 2013, proposed rule raised concerns that potential vapor releases on, at, in or to a property are often not considered or may be overlooked by many practitioners when conducting all appropriate inquiries. EPA wishes to be clear that, in its view, vapor migration has always been a relevant potential source of release or threatened release that, depending on site-specific conditions, may warrant identification when conducting all appropriate inquiries.…” [Emphasis added]

The agency then went on to say “ In the case of the ASTM E1527-05 standard, users and environmental professionals are required to identify recognized environmental conditions that include the presence or likely presence of hazardous substances or petroleum products under conditions that indicate an existing release, a past release, or a material threat of a release. Neither the All Appropriate Inquiries Rule nor the ASTM E 1527-05 standard excludes the identification of vapor releases as a possible type of release.”

These statements seem to reinforce the fears that many lawyers expressed to me as chair of the legal sub-committee that was working on the ASTM revision process. There was consensus that the role of vapor intrusion had to be clarified in the E1527 revisions but not in a way that could call into question the adequacy of phase 1 reports prepared prior to the ASTM revisions. The principal concerns were if such evaluation required sampling and if the evaluation of the vapor pathway would be a prospective obligation so that it only applied to transactions that closed after the publication of E1527.

The ASTM task force satisfactorily addressed the first concern by explaining that vapor intrusion was like any other exposure pathway and that sampling to confirm that the pathway was completed was typically outside the scope of a phase 1 and more properly addressed as part of a phase 2 investigation.

Unfortunately, EPA’s statements that the vapor pathway should have been considered all along raises the very risk that many lawyers and property owners feared-namely that parties who thought they had qualified for the CERCLA landowner liability protections because they had performed an AAI-compliant investigation may now suddenly not qualify as a BFPP because they did not consider the vapor intrusion pathway. Of course, this concern would only be for sites where vapor intrusion is or becomes a problem. However, the uncertainty created by EPA’s statements in the preamble and response document is going to be unsettling to some property owners. It will also provide ammunition to plaintiffs’ counsel who could use these statements as evidence that the defendant property owner breach a duty it owned to plaintiffs and was therefore negligent by failing to comply with a regulatory requirement. In some states, failure to comply with a regulatory standard is considered negligence per se while in others can be used as evidence of a duty.

Moreover, EPA’s statements in the preamble and response document could be used by clients in malpractice or breach of contract against consultants who failed to evaluate the vapor pathway in a prior phase 1. Of course, each situation will be highly fact dependent. Vapor intrusion will have to be a concern at the site and the plaintiff will have to show some nexus between the consultant’s failure to flag the vapor pathway and the damages the client has incurred to be successful. Nevertheless, these statement do potentially expose consultants to the retroactive liability through a backwards looking lens where hindsight is always 20-20 or a classic “Monday Morning Quarterbacking”  scenario (or whatever other aphorism you prefer).  EPA may not have been the Grinch that stole Christmas but this certainly was not a good New Year’s Eve present for property owners and environmental professionals. .

2nd Circuit Affirms Dismissal of Negligence Claim Agst Consultant

Tuesday, December 3rd, 2013

We have previously discussed Ridge Seneca Plaza, LLC v. BP Prods. North America, No. 6:06-cv-06333 (W.D.N.Y. 3/28/11) where the federal district case from the western district of New York ruled that a purchaser could not bring a malpractice claim against a consultant who had been retained by a bank. . We picked this case because it illustrated the importance of purchasers/borrowers doing their own independent due diligence and not simply relying on approval of phase 1 reports by prior lenders. Recently, the Court of Appeals for the Second Circuit affirmed the dismissal of the malpractice case against the consultant.  Ridge Seneca Plaza, LLC v. BP Prods. North America, 2013 U.S. App. LEXIS 21999 (2nd Cir. 10/29/13).

In this case, a 2000 phase 1 report prepared for a potential purchaser concluded that a closed spill on the NYSDEC spills database was not a Recognized Environmental Condition (REC). As I turned out, the phase 1 did not identify a second spill had been reported in 1999 when the underground storage tanks at the gas station were removed. The consultant also failed to identify a former dry cleaner at shopping center because the consultant had used a wrong address.

The purchaser subsequently assigned its rights to the plaintiff who was an affiliated entity. The plaintiff closed on the shopping center in 2001 with a loan from a local bank. In October 2002, plaintiff requested a phase 1 update from the consultant in connection with a loan refinance and obtained another updated phase 1 in January 2003. Both of these updated reports did not mention the former dry cleaner or the active second spill.

In 2004, the plaintiff’s principals decided to refinance so they could take some equity out of the property. However, the new lender was not comfortable with the proximity of the gas station and required a phase 2. The plaintiff’s principal (who also happened to be the principal of the assignor or originally contracting party) discussed the lender’s request 2 with the original consultant who thought a phase 2 could “open a can of worms”.  The plaintiff decided to authorize the phase 2 and the investigation discovered floating petroleum product on a portion of the site near the gas station along with PCE contamination from the former dry cleaner. The bank declined to proceed with the refinancing and the plaintiff brought a lawsuit against the seller and the consultant.

To prevail on a claim for negligent misrepresentation, a plaintiff must show that there was either actual privity of contract between the parties or a relationship so close as to approach that of privity. Since the plaintiff had not been formed when the 2000 phase 1, the Second Circuit said plaintiff had to show it had a relationship with the consultant that approached privity by showing: (1) an awareness by the maker of the statement that it is to be used for a particular purpose; (2) reliance by a known party on the statement in furtherance of that purpose; and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that  reliance. Since the plaintiff was not formed until 2001, the court found the plaintiff was not a “known party.” Therefore, plaintiff’s claims involving the 2000 phase 1 were properly dismissed.

The plaintiff’s amended complaint in 2008 claimed that the consultant had committed malpractice when it prepared the phase 1 update and when it advised plaintiff’s principal in the 2004 telephone conferences. Specifically, plaintiff alleged that the consultant had failed identify the possibility of petroleum or PCE contamination from the former the dry cleaner as RECs and failed to detect contamination or further investigation that would have detected contamination.

Defendant argued the amended complaint had been filed after the three-year statute of limitations (SOL) and should be dismissed. The plaintiff responded that the claims had not expired because they related back to the 2006 original complaint, the SOL had been was tolled or suspended by the NY discovery rule or remained viable under the continuous representation doctrine.

On the “relation back” doctrine, the district court had found that while the original and amended complaints both involved discovery of contamination during the Phase 2 investigation, the amended complaint did more than simply clarify the claims against the consultant. Instead, the court said the amended complaint added new transactions not alleged in the original complaint (e.g., the updated phase 1 reports and the 2004 telephone calls) even though those events had occurred prior to the original complaint. Moreover, the new transactions were alleged to allow plaintiff to achieve privity of contract with the consultant and proceed with its professional malpractice claim. Because the claims in the amended complaint did not arise out of the conduct alleged in the original complaint, the district court ruled the relation back doctrine did not apply.

The plaintiff asserted the discovery rule applied because it had not learned of the contamination until 2004. Therefore, its 2006 complaint had been timely filed. However, the court held that since the “relation back” doctrine did not apply, the plaintiff would have had to amend its complaint to add the new transactions within three years  after it learned of the contamination. Since the amended complaint was filed in 2008, the discovery rule could not preserve plaintiff’s claims.

Finally, the court ruled that the continuous representation theory because plaintiff did not have an actionable relationship with the consultant until 2002 when the Phase I report was updated.  Even assuming that the 2004 telephone conversations between the consultant and the plaintiff’s principal constituted actionable professional advice and was part of a continuing and uninterrupted professional relationship that began with the Phase I update, the SOL would have expired in 2007.

The appeals court found the trial court had properly ruled that the phase 1 updates and the 2004 phone conferences were separate transactions that did not arise out of the conduct alleged in the original complaint. Accordingly, the court affirmed the dismissal of the amended complaint for being filed after the expiration of the SOL.

On the surface, this decision seems to be a straight-forward instance of a different entity having hired the consultant and therefore seems rightly decided. However, the complicating factor is that the original assignor entity was owned by the same principal as the plaintiff in this case. In other words, the person who interacted with the consultant for each of the phase 1 assignments was the same person. From the perspective of the consultant, the “client” was the same person. However, the entity that hired the consultant was different. Some might suggest that the decisions in the case were form over substance that allowed a consultant avoid liability for its error.

In any event, an important lesson from this case for those with multiple LLC entities that are retaining consultants is to make sure you have the correct entity name on the contract with the consultant. Alternatively, the client should have the consultant extend reliance to that entity. And make sure your lawyer reviews the standard terms and conditions that are often attached to the engagement letter from the consultant for the reasons we have discussed in other posts.

Ct Allows Claim Agst Consultant For Missing Contamination at Lowe’s Site To Proceed

Tuesday, October 8th, 2013

Some time ago, we discussed the $14MM lawsuit filed by Lowe’s Home Centers  against a consultant. Lowe’s alleged  that the consultant failed to identify all areas that had been contaminated with PCBs and the store opening was delayed because of complications associated with the previously unknown PCB-contaminated soil was improperly disposed. The matter eventually settled

Another Lowe’s Home Center store development site has led to a lawsuit against a consultant, this time by an insurance company that issued an environmental insurance policy to Lowe’s Companies, Inc (Lowe’s). The complaint alleges that that the consultant failed to identify contamination associated underground storage tanks (USTs) during pre-acquisition due diligence and resulted in the plaintiff paying $1,050,103 under its insurance policy. Recently, the federal district court denied the consultant’s motion for summary judgment in Chartis Specialty Ins. Co. v. Aqua Science Engineers., 2013 U.S. Dist. LEXIS 124090 (N.D.Cal. 8/29/13).

In this case, Lowe’s was considering purchasing a 28-acre property in Concord, California for a proposed Lowe’s Home Center store. The property had a history of light industrial use including contractor equipment yards, diesel generator repair business, drilling company, automotive wrecking, wood truss manufacturer, ornamental iron fabricator and mobile home sales lot.

A phase 1 conducted by Anton Geological (Anton) in 2001 had identified a number of Recognized Environmental Conditions (RECs) including an abandoned oil-water separator, potential soil contamination from automotive wrecking operations, an above-ground storage tank (AST), areas where hazardous materials and wastes had been used by a variety of tenants and former underground storage tanks (USTs). A total of 11 underground storage tanks had been removed from the Site in the 1990s. Several of the USTs were removed without any regulatory oversight. Two USTs that had been operated by Judd Drilling were particularly notable.  The USTs were removed in the early 1990s and the Regional Water Quality Control Board (the Board” ) granted closure in 1998 despite the fact that sampling detected over 1,000 parts per million (ppm) of benzene, toluene, ethylbenzene and xylene (BTEX) in soils and 15,000 ppb of diesel range total petroleum hydrocarbons (TPH-D) in groundwater.

In 2004, Aqua Sciences Engineers, Inc (AES) was retained by the Winton Jones Development Company (WJDC) to obtain regulatory closure on the RECs identified in the Anton  phase 1 report to facilitate redevelopment of the property. AES identified significant petroleum contamination in one well that was located downgradient from the former Judd Drilling UST. However, no elevated levels were detected in the on-site drinking water well. Three test pits detected elevated concentrations of TPH-D, gasoline-range total petroleum hydrocarbons (TPH-G), and motor oil (TPH-MO) in the shallow soil.

In 2006, ASE excavated contaminated soils from the three test pits in the central portion of the Site known as the Winton Jones Development Parcel (WJDP) pursuant to a workplan approved by the Board. Post-excavation sampling confirmed the residual contamination was below environmental screening levels (ESL) used by the Board for commercial property. ASE originally requested that the Board issue a site-wide NFA. However, the Board responded that the sampling performed to date was limited for a size and history of site and that the Board believed additional soil and groundwater contamination was present in areas such as where the USTs had been removed without regulatory supervision. As a result, ASE then modified its request, indicating that ASE was comfortable with the issues elsewhere as the property and was simply seeking confirmation that the 2006 soil remediation was completed in accordance with the approved workplan. In response, the Board advised AES in 2007 that if the owner wanted to receive an NFA letter allowing for unrestricted land use in the future but restricting shallow groundwater use via a deed restriction, it would need to undertake a more robust and complete investigation of the environmental conditions of the entire site that could require additional remediation. However, the Board said the seller could obtain an NFA with restrictions without additional environmental investigations.

In 2008, AES submitted a Revised Workplan for Soil and Groundwater Assessment to obtain a letter from the Board indicating that the property was suitable for redevelopment. ASE investigated two additional former UST areas that ASE had not aware of when it conducted its 2006 remedial work but had learned about from its review of the Board’s files. ASE also collected samples from four areas where stained soil was observed during a site visit or had historically been used to store equipment and vehicles.  ASE detected TPH-D, TPH-G and TPH-MO that did not exceed the ESLs. ASE also issued a Soil and Groundwater Assessment for  an adjacent five-acre parcel where three gasoline USTs had been removed from the site in 1987 and closure had been granted by the Contra Costa County Environmental Health Department and RWQCB in April 1995. ASE did not detect any petroleum hydrocarbons in the soil or groundwater and VOCs in the groundwater were detected below the ESLs. ASE recommended that the RWQCB prepare a no further action (NFA) letter for this parcel. The report contained a section title “Report Limitations”. This section stated that “This report does not fully characterize the site for contamination resulting from unknown sources or for parameters not analyzed by the laboratory.”

Also in 2008, Lowe’s retained ASE to perform a pre-acquisition phase 1 environmental site assessment (ESA) contemporaneous with the sub-surface investigation. Lowe’s selected ASE in part because the firm had performed a number of investigations and implemented remedial measures under the under the supervision of the Board during the preceding decade for the owner/seller of the property.

The ASE report had some curious language and suffered from the use of inconsistent terminology. In the “Findings” section, ASE concluded that the former USTs and surficial staining identified in 2004 were HRECs because of the prior remedial activities. ASE also said that the surface staining from improper handling of hazardous materials and the areas where equipment or vehicle storage each “would be considered a environmental conditions.” (The term “environmental condition” is undefined and not a term recognized by ASTM E1527-05. It is unclear if this was a typo and ASE meant to identify these conditions as RECs).

Then the report went on to say that the areas of heavy surface staining and equipment/vehicle storage were not considered “recognized environmental conditions that would that negatively impact the site” because sampling did not exceed the ESLs. The use of the phrase “that would negatively impact the site” seems to create ambiguity. Was ASE saying there are no RECs or that there are RECs that will not result in material impacts to the site? If the latter, why identify the release as a REC and not a de minimis condition (e.g., one that would not result in enforcement or cleanup obligations if brought to the attention of regulators).

ASE identified the areas where poor management of waste oils and chemicals as de minimis conditions because of the sampling.

The “Findings” section concluded with a box with bold type that seemed to contradict the aforementioned statements. The bold text stated “No recognized environmental conditions, historic environmental conditions or de minimis conditions were discovered in the course of this phase 1Environmental Site Assessment, with regard to the subject property that warrant further assessment activities.

The “Opinion” section went on to state that “Although historical and recognized environmental conditions exist at the subject site, in our opinion, regulatory agency prepared closure letters and recent (2004, 2006 and 2008) assessment and remedial activities performed at the site render a conclusion that these afore-mentioned conditions no longer negatively impact the subject site and do not warrant any further assessment activities.”

The “Conclusions” section stated that “Based on the above-referenced information, there does not appear to be any current or former site conditions that warrant any further assessment.” This section ended with the following statement “ As discussed in Section 8.1 and 8.3, this assessment has identified historic recognized environmental conditions and de minimis conditions, which as detailed in sections 8.0 and 9.0, are not considered to negatively impact the property or warrant any further assessment activities. This assessment has revealed no evidence of evidence of recognized environmental conditions except for those conditions specifically detailed in Section 8.2; however, in our opinion, each of the recognized environmental conditions identified in Section 8.2 have been fully assessed and are not considered to negatively impact the property or warrant any further assessment activities.

Finally, in the “Recommendations” section, ASE recommended that the junk yard area where there was poor management of waste oils and chemicals be re-inspected after the vehicles were gone and that the drums and buckets containing liquid be immediately removed. ASE also recommended that stained soil be scraped and separately managed from non-stained soils.

The Board issued a letter in May 2008 confirming that the property was suitable for redevelopment and that the environmental assessments completed to date were sufficient to allow the Board to issue a No Further Action (NFA) if five identified requirements were met, including additional sampling of the eastern 5-acres, abandonment of the on-site well, recording of a deed restriction and implementation of a “Risk Management Plan to properly deal with unanticipated soil, soil gas, and groundwater issues that may arise during future construction activities. In accordance with the Board’s request, ASE conducted additional soil and groundwater sampling that did not identify any contaminants above the commercial/industrial ESLs and prepared a Soil and Groundwater Plan (SGMP) which was approved in May 2009.

Between June and August 2009, contaminated soils were encountered during grading operations for the building foundation, excavation of a temporary stormwater retention basis and construction of a bio-swale. An estimated 18,500 tons of soil were disposed off-site and moderately-contaminated soils were reused beneath parking and driveway areas on the western half of the property, and beneath the concrete pad of the building

Lowe’s provided a Notice of Loss/Notice of Claim to its carrier, Chartis Specialty Insurance Company (f/k/a American International Specialty Lines Insurance Company). Chartis paid $1,050,103 to or on behalf of Lowe’s for the cleanup costs and then filed its lawsuit.

This case illustrates the challenges of redeveloping brownfield sites or those that have historic light industrial use. Phase 2 investigations are not comprehensive site investigations and it is not unusual for previously unknown contamination to be uncovered during demolition or construction activities. Insurers who write environmental insurance policies are certainly aware that unknown contamination is often encountered when developing industrial sites. Indeed, the frequency and magnitude of unexpected cleanup costs is a reason that insurers largely stopped writing cost cap insurance.

It may be that the plaintiffs will be able to uncover evidence of negligence on the part of ASE during discovery. However, given the numerous investigations and extensive oversight by regulators, it does seem that plaintiffs are embarked on a Quixotic mission. If there was negligence in this case, it seems it was committed by the insurer/plaintiff. The correspondence between ASE and the Board clearly reflect the concerns of the regulator about potential unknown sources of contamination in areas of the property that had not been fully characterized. These materials were readily available for review by the plaintiff’s underwriters. Thus, this lawsuit seems more a case of buyer’s regret on the part of the plaintiff for not having done more thorough due diligence or perhaps ignoring the risks to chase premium dollars during a credit bubble than the negligent performance on the part of the defendant.

Failure to Identify Dry Wells and Review Building Dept File at Heart of Consultant Malpractice Case

Tuesday, July 9th, 2013

Southern Wine & Spirits of New York vs. Impact Environmental Consultants, 2013 N.Y. App. Div. LEXIS 2081(App. Div.-1st Dept 3/28/13) involves a common source of contamination in Long Island and other suburban areas of New York City-dry wells and septic systems. The parties have yet to begin discovery but based on the motion papers filed so far, the lawsuit will include some interesting legal issues such as the application of the economic loss doctrine, the standard of care for non-licensed professionals and if compliance with ASTM satisfies that scope of that duty.

Because discovery has not yet started, our factual recitation is based on the pleadings and motion papers. We will also discuss the findings of the phase 1 report and the plaintiff’s expert certification. Readers can then judge for themselves if they think the plaintiff’s should prevail.

Southern Wine & Spirits of New York (“Southern”) operated a wine and alcoholic beverage storage and distribution facility at 345 Underhill Boulevard in Syosset, Long Island. Southern Wine was considering purchasing the site it was using as well as the adjacent parcels located at 313, 323 and 325 Underhill Boulevard to expand its facility.

In November 2005, Southern retained Impact Environmental Consultants, Inc (“IEC”) to perform a phase 1 on the four parcels. Pursuant to the “proposal for services” letter, Southern acknowledged receipt of the IEC standard terms and conditions. Interestingly, Southern was identified as the “client” while Commerce Bank was identified as the “user”. The bank did not execute the proposal.

The IEC phase 1 identified three 10,000-gallon closed USTs used to store gasoline and diesel for fleet fueling and 4 active USTs. IEC also stated the Property was serviced by 30 dry wells and 9 drainage structures (catch basins) that did not have any visual signs of contaminations. While the property was currently connected to the county sewer system, IEC noted that there were two on-site sanitary systems that had been abandoned in 2001.

According to IEC phase 1, a 1999 phase 1 of 313-323 Underhill Blvd reported that these parcels had been serviced by an on-site sanitary system and fuel oil USTs. The phase 1 recommended sampling of the dry wells, former septic system, the former UST as well as near the transformers and railroad tracks. The 1999 Phase II detected contaminants that were either below the regulatory levels or were determined to not have the potential to impact the groundwater quality of the subject property. Accordingly, the phase 2 concluded no further action was required.

IEC’s historical review also included a 2004 phase 1 of 345 Underhill Blvd. The 2004 phase I revealed four USTs had been used at the property and that two of the USTs had been removed from the property 1996 and 2001. The report noted that the Nassau County Department of Health did not observe the UST removals.

The IEC phase 1 indicated a review of the records of the Nassau County Department of Health (NCHD) that had been performed in connection with the January 2005 phase 1 had inspected the property and had informed IEC that no further work appeared to be required for the abandoned septic systems. However, the NCHD had told IEC in January 2005 that an inventory of the dry wells should be submitted to EPA since the stormwater dry wells were considered Class V Underground Injection Wells (UIW). IEC indicated that this inventory had been completed. It appears that IEC had filed a new request to review the NCHD files but had not received a response when it had prepared the phase 1 report.

IEC also reviewed the building department records and reported the parcels had been used for light manufacturing since 1960 and discussed various permits for the on-site sanitary systems along with installation of USTs.

Because of the historic use of the property, the absence of documentation for the closed USTs and the use of on-site sanitary leaching pools in the past, IEC recommended a phase 2 for 325-345 Underhill Boulevard parcels but not the 313-325 lots. Southern authorized the additional investigation which included a targeted GPR survey that identified the presence of one septic tank, seven parking lot storm water catch basins that discharged to a recharge basin, six storm water drywells and two leaching sanitary cesspools. Impact collected soil samples and elevated levels of contaminants in four dry wells and a former sanitary leaching. The Impact phase 2 dated January 6, 2006 recommended these structures be remediated in accordance with the NCDH requirements.

Based on the IEI reports, an affiliate of Southern acquired the property in September 2006. During construction activities to expand the warehouse, Southern encountered a drywell field under the northeast parking lot of at 345 Underhill Blvd containing 38 dry wells that had not been disclosed in IEC’s phase 1 report. Southern had to submit a drywell closure plan to the NCDOH and the investigation detected concentrations of Semi-Volatile Organic Compounds (SVOCs) and cadmium in soil/sludge exceeding applicable standards. Southern ultimately incurred $1MM to properly abandon 53 dry wells.

Southern then filed a complaint against IEC asserting two causes of action for negligence (including gross negligence) and breach of contract for failing to disclose the existence of 38 drywells and another stormwater conveyance box. Southern alleged that if IEC had identified the undisclosed drywell field, Southern would have negotiated an adjustment in the purchase price of the Property or may have declined to proceed with the transaction.

The Complaint also alleges that Impact failed to properly review public documents pertaining to the Property. Specifically, Southern contended IEC’s phase 1 referenced construction permits in the municipal building department files but to review those documents. Southern alleged that files included letters with hydraulic calculations and describing the need to install the 39 drywells as well as a 1986 survey plan depicting eight (8) manhole covers and an underground storage tank at the site. Southern also contended that the public records contained a building permit that referenced drainage system. Southern argued that these documents were reasonably ascertainable and practically reviewable by Impact. As a result, Southern asserted that IEC failed to conform with the requirements of the ASTM E1527 Phase I standard. Southern also alleged that IEC erroneously identified stormwater drywells as catch basins Southern asserted that the IEC failed to conform to ASTM E1527 when it failed to discuss and identify on the site map physically observable drop inlet grates that lead to the drywells .

The IEC standard terms and conditions (TOC) that applied to both IEC phase 1 and the phase 2 reports. The TOC contained a Limitation of Liability (LOL) clause the capped IEC’s aggregate liability for damages arising out of negligence or breach of contract to the total amount of fees paid to Impact for the project. The TOC also expressly provided that IEC would not be liable for any consequential damages. Southern had paid IEC $3500 for the phase 1 and $22,950 for the phase 2 for a total of $26,450.

Finally, the TOC contained a contractual condition precedent for Southern to bring a claim for professional negligence. This clause provided that Southern could not make a claim for professional negligence unless it first provided IEC with a written certification executed by an independent design professional, which identified each act or omission that the professional contended was a violation of the standard of care identified in the Agreements. The certification had to be provided to Impact no less than thirty days prior to the institution of any judicial proceeding.

Southern filed its Summons and Verified Complaint with the court on December 11, 2008 which was within the three year statute of limitations (SOL) for professional negligence and the six-year SOL for breach of contracts. However, Southern did not serve this complaint on the defendants. Instead, Southern filed and served an amended complaint which contained the certification on March 31, 2009. The trial court dismissed the amended complaint without prejudice in an order dated November 5, 2009 for failing to serve the expert certification prior to filing the original Complaint. Southern filed another complaint that was virtually identical to the original complaint on February 3, 2010 pursuant to the New York rules of civil practice that allows a plaintiff to file a new action within until six months after the date of dismissal. Southern then appealed the dismissal of the amended complaint, arguing that the date for purposes of the SOL should relate back to the filing date of the original complaint.

In January 2011, the appeals court affirmed dismissal of the amended complaint. Southern Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC, 915 N.Y.S.2d 541(App. Div.-1st Dept. 1/20/11). The court ruled that the “relation-back” doctrine could only be used for a valid preexisting action. Because Southern failed to submit the required certification prior to commencing its action, the court ruled that Southern could not use the relation-back doctrine to cure the defective initial complaint.

IEC then filed a motion for summary judgment seeking dismissing of Southern’s claims for negligence and gross negligence on the grounds that the claims were barred by SOL, Southern had failed to allege a duty independent from the contract, had failed to allege an injury to property and that IEC’s alleged negligence did not rise to the level of gross negligence. As part of its argument, IEC claimed the SOL should have started when it completed its site visit and not the date of its report.

In its April 2012 opinion, the trial court denied defendant’s motion to dismiss the negligence claim. Southern Wine & Spirits of Am., Inc. v. Impact Envtl. Eng’g, PLLC, No. 650083/2010 (Sup. Ct.-New York, 4/13/12). The court held that the SOL for the negligence claim began to run on the date of the report since IEC’s obligations included issuing a report. The court also ruled that the savings clause of the New York rules of civil procedure automatically extending the SOL by six months applied since the action was dismissed due to a procedural flaw and from a ruling on the merits of the case.

The court also found that IEC owed a legal duty to Southern independent of its contractual relationship, holding that while New York did not recognize a cause of action for negligent performance of contract, professionals could be independently subject to tort liability for failure to exercise reasonable care. The court also said that the economic loss rule was not applicable to cases involving failure to perform a professional duty.

IEC argued it could not be liable for professional malpractice because its employees were not professionals since that they were not licensed and did not require special training to perform phase 1 reports. The court rejected this notion, relying on a prior decision that held that environmental consultants could be subject to malpractice claims because the nature of the work had a significant public interest and the breach of those duties could have dramatic consequences. As further support, the court pointed out that IEC’s TOC provided its services would be “rendered in accordance with prevailing professional standards…” and “… will be conducted in a manner consistent with the level of care and skill standard to the industry under similar conditions.” Based on the contractual language, the court said IEC implicitly recognized that it was bound to exercise “prevailing professional standards.” The court found that Southern had clearly relied on IEC’s environmental expertise to discover existing problems on the Property. Given such reliance on this expertise as well as the potential dangers and the public interest involved in environmental contamination, the court ruled it was appropriate that IEC be held to the standard of professionals in this matter.

On the application of the LOL, the court said that while a contractual provision absolving a party from its own negligence or limiting its liability was generally enforceable, New York  public policy forbid a party to insulate itself from damages caused by “grossly negligent conduct.” IEC urged the court to find that the failure to report the existence of the drywells did not constitute gross negligence as a matter of law. However, the court said that a jury could reasonably infer that Impact misrepresented to plaintiffs that it had examined the relevant records, when in fact, it had not done so. Accordingly, the court held that was an issue of fact if IEC was grossly negligent in failing to perform its obligations under the Phase I Agreement that prevented granting of summary judgment. Finally, the court did dismiss claims against affiliates of IEC since they were not parties to the agreement with Southern as well as claims asserted by affiliates of Southern that also were not parties to the agreement.

The appellate division unanimously affirmed the 2012 ruling in its entirety. Now that the preliminary rulings are out of the way, the parties will commence discovery.

There appear to be a handful of interesting issues that remain to be resolved. One is if an environmental professional with ordinary skill and training should have discovered the presence of the 38 dry wells particularly given how often these structures are responsible for contamination in Long Island.

A related question is if IEC failed to conform to the professional standard of care for environmental professionals by failing to review the building department files that would have revealed the presence of the 38 dry wells. The duty to perform file reviews was a much debated issue during the recent round of discussions for reauthorization of E1527 standard. The E50 task force chose to clarify the language so that the environmental professional has to provide an explanation when it does not perform a file review. Of course, local custom can influence the standard of care and it may turn out that Southern might be able to introduce evidence showing that an environmental consultant should have reviewed the building records where a property with manufacturing past and was only recently connected to the public sewer. Then again, IEC did obtain a letter from the NCDOH indicating that no further action was required for the abandoned on-site sanitary systems.

Unless new information is developed, the LOL issue seems to be an easier question. Remember that to defeat the LOL, Southern would have to show that IEC was grossly negligent. Reading between the lines, it appears that the court was looking for something more than simply failing to discover the dry wells to support a claim of gross negligence such as a misrepresentation. While IEC’s agreement did state that IEC would review appropriate records, the phase 1 indicated that IEC had reviewed the standard NCDOH files in January 2005 but had not received a response from the NCDOH or building department. Presumably, this statement coupled with the fact that the records still need to be commercial available and practicably reviewable suggests that Southern might have heavy lifting convincing a court to ignore the LOL. Southern might end up with a Pyrrhic victory where the court finds that IEC was negligent but upholds the LOL.

Mass Ct Rules Contractual Limitation Period Unenforceable

Tuesday, June 11th, 2013

When hiring an environmental consultant, clients are often asked to execute an engagement letter that typically addresses the pricing for the Phase 1 and other logistical information. Attached to the engagement letter will be what often looks like a pre-printed form of terms and conditions that govern the performance of the services to be provided by the consulting firm

Clients frequently overlook the standard terms since they tend to focus on the price of the Phase 1 as well as timing for the delivery of the report. However, it is critically important that the terms and conditions provisions be carefully reviewed before executing the engagement letter because the boilerplate language can severely restrict the rights of the client in any dispute with the consultant.

For example, many consultants typically seek to limit liability for negligence or breach of contract claims to the amount of the fee for the Phase 1 ESA though some provide for higher liability caps ranging from $50,000 to $100,000. Many standard terms and contains also impose a limitation on the client’s right to bring a claim that is shorter than the applicable state statute of limitations for bringing a professional negligence or breach of contract claim. Typically, the statute of limitations for a breach of contract claim is six years.

The facts in Shahin v. I.E.S., Inc., 2013 Mass. App. LEXIS 93 (May 31, 2013) are sparse but illustrates this point. In this case, the trustee for the Hersey Street Properties Realty Trust (Trust) retained IES to conduct what the court referred to has “environmental testing and other services” in connection with sale of a property in 2006 The agreement contained an attachment identified as “Attachment B Statement of Terms and Conditions” that provided that “The [trust] agrees that the [trust] shall bring no claim against IES, Inc., and/or its owners, directors, officers, and employees, later than one (1) year after the date of this contract.

The MADEP issued a waste site cleanup notice of non-compliance in July 2009 but the opinion does not state discuss the specific violations. In December 2010, the trust filed a complaint, alleging unfair or deceptive practices, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, breach of contract, and negligence, and it sought a declaratory judgment that the contractual limitations period and a contractual cap on damages did not apply. The Superior Court judge concluded that the complaint was barred by the contractually-shortened limitations period.

The appeals court reversed. The court said that a statutory limitations period can be shortened by contract so long as the shortened period is reasonable. However, because the contractual limitations in this case in this case did not provide that for discovery rule of any alleged breach, the court held the contractual limitation was unreasonable as a matter of law unenforceable.  Query if the court would have upheld the one year limitation period if the contract provided claims must be filed within one year of the date of contract or date of discovery, whichever is later?

Consultant Unable To Escape NJ Contaminated Fill Case

Wednesday, October 31st, 2012

We have previously reported on how disposal of fill material tends not to be well-regulated. During the real estate bubble demand for aggregate was at a premium. Due to the scarcity and cost of aggregate or fill material, contractors often use pulverized construction debris from other construction sites as fill material.

Despite the fact that construction and demolition (C&D) debris can contain asbestos, lead‑based paint, oil and PCBs, most states do not strictly regulate C&D waste streams. Those states have established management practices for C&D have usually adopted qualitative protocols (descriptions of the waste stream) instead of quantitative protocols (sampling) to determine how to manage various types of C&D debris.

One of the more infamous examples of contaminated fill involved the demolition of the Ford Motor automotive assembly plant in Edison,New Jersey. When Ford closed the plant in 2004, it entered into a remediation agreement with the NJDEP to comply with the requirements of the New Jersey Industrial Site Recovery Act (ISRA). Ford entered into a “zero-dollar sales agreement” with Edgewood Properties (Edgewood) where Ford agreed to provide 50,000 cubic yards of Recycled Concrete Aggregate (“RCA”) to Edgewood for use as fill material at seven residential  projects that Edgewood was developing in exchange for Edgewood agreeing to remove the material from the Ford site.

In June 2005, Edgewood discovered that the concrete fill from the Edison plant exceeded the residential limits for PCBs and also the commercial limits in some areas. Beginning in September 2005, Ford began the process of excavating and removing the PCB-contaminated material at the seven Edgewood sites and another half-dozen properties that received PCB-contaminated concrete. In March 2006, NJDEP issued an administrative order to Ford and other parties to remediate the PCB contamination at the impacted sites. In addition, the NJDEP ordered Edgewood to stop development at the impacted sites until the cleanup was satisfactorily completed. Ford filed a complaint asserting claims under the CERCLA and the New Jersey Spill Act for contribution and indemnification. Edgewood, in turn, asserted cross-claims, counterclaims and a third-party complaint against other contractors and consultants involved in the demolition project alleging claims for breach of contract, contribution, negligent misrepresentation, and civil conspiracy.

The parties in this sprawling lawsuit dispute virtually all of the material facts, particularly the allegations involving the specific responsibilities of the parties.  Indeed, in its most recent opinion, the federal district court for the district court of New Jersey declined to grant a motion for summary judgment in favor of Arcadis, Inc. because of material questions of fact over the extent Arcadis was involved in the off-site distribution of contaminated concrete. Ford Motor Co. v. Edgewood Properties, 2012U.S. Dist. LEXIS 125197 (D.N.J. 8/31/12).

The following facts are gleaned from this opinion and the numerous briefs: Ford Motor Land Development Corporation (“Ford Land”) entered into a contract with MIG/Alberici (MA) to demolish the concrete floor slabs and reuse the crushed concrete for on-site fill, road bed, and other similar uses. The contract required MA to dispose crushed concrete containing PCBs pursuant to NJDEP requirements.

Ford Land retained Golder Associates (Golder) to assist in pre-decommissioning support services at the Edison Site, including formal preparation of a decommissioning project manual (the “Manual). Under the Manual, MA was primarily responsible for managing demolition debris through recycling, disposal, or reuse pursuant to the Manual. MA and Ford Land intended to use crushed concrete generated from the demolition of the buildings as backfill if allowed by the Manual and the applicable NJDEP applicable regulations. At the time, the NJDEP PCB regulations provided that concrete containing less than 0.50 ppm could be used at residential sites while concrete material with PCBs between 0. 50 ppm and 2 ppm could be use at commercial sites.

Ford Land also retained Arcadis USA (Arcadis) to identify the ISRA regulatory requirements applicable to the reuse of crushed concrete on-site as backfill. Arcadis advised that a variance from the technical requirements was necessary to use the crushed concrete on-site because, from a regulatory standpoint, the use of crushed concrete as backfill was a gray area. A variance plan containing a sampling plan was developed and submitted to NJDEP for approval. The court found a genuine dispute of fact existed as to whether Arcadis developed the sampling plan since while there was evidence that Arcadis developed the first draft of the sampling plan, other parties were involved in finalizing the plan.

In November 2004, NJDEP approved a variance to reuse crushed concrete at the Edison Plant provided that the crushed material did not contain unlawful detections of PCBs. Accordingly, once the concrete was crushed, MA segregated the concrete material depending upon PCB concentrations. Edgewood contended that Golder issued a memorandum to Edgewood’s environmental consultant that stated that concrete stockpiles that were suitable for residential use were being staged for off-site locations while concrete with PCB concentrations above residential use criteria were being segregated and properly disposed off-site.

Arcadis sought summary judgment on the Edgewood claim that Arcadis was liable as a CERCLA arranger. The court found Edgewood has raised genuine disputes of material fact on Arcadis’ knowledge that Ford was pursuing zero dollar sale agreements for its crushed concrete and on the role Arcadis played arranging those contracts with visitors who viewed sample piles at the Edison Site. The court also said there were genuine disputed facts if Arcadis exercised sufficient dominion and control over the contaminated concrete either directly or through others. These disputed material facts precluded summary judgment in favor of Arcadis, the court ruled. For similar reasons, the court also denied summary judgment on Edgewood’s NJ Spill Act claim against Arcadis.

On its negligence claim, Edgewood had argued Arcadis knew Ford and its agents would be transferring recycled concrete to third parties and therefore owed a duty of care to Edgewood to ensure that the crushing, handling, testing, stockpiling, transfer, and disposal of the concrete be done in  a reasonable and safe manner as well as in accordance with applicable laws. Arcadis denied it owed any duty to Edgewood on the grounds that its role was limited to ISRA compliance and that it was not responsible or involved with the handling, testing and off-site distribution of the concrete generated from demolition. However, the Court said the extensive summary judgment record showed that Arcadis owed a duty of care to Edgewood.

First, the court said a reasonable jury could find that Arcadis knew that other contractors were relying on Arcadis’ determination that the sampling methodology separating concrete to be used on- and off-site was reasonable and conservative, that Arcadis knew about Ford’s plan to distribute contaminated concrete to third parties, and Arcadis knew that Ford was considering Edgewood as a potential recipient of contaminated concrete through a zero dollar sales agreement

Turning to the relationship of the parties, the court also found that Arcadis’ role went beyond mere ISRA compliance, finding that the summary judgment record contained evidence that Arcadis actually participated in those non-ISRA issues crushing, stockpiling, sampling, marking, reviewing, distributing, and compiling concrete for purposes of enabling off-site disposition through zero dollar sales agreement. In so doing, the court said Arcadis increased the risk of harm to potential recipients of contaminated concrete. Therefore, the court said, Arcadis had a specific duty to ensure that the off-site distribution of concrete conformed with the applicable standards. In reaching these conclusions, the court made the following findings:

  • Arcadis played a role in establishing and modifying the sampling methodology included in the variance request that was to be used for determining what concrete would be used on-site or off-site;
  • Arcadis had a role in sampling concrete and advising the assessment of alternatives available in the absence of specific NJDEP regulations or guidance on concrete reuse;
  • Arcadis was involved in inspecting stockpiled concrete scheduled for crushing, analyzing samples and reporting the results, was involved in changing Golder’s sampling method;
  • Arcadis, along with Golder, had a supervisory role in deciding what levels of contaminated concrete would be used as backfill, the corresponding sampling methodology, and how the samples and piles would be labeled

The court cautioned that Edgewood still had to demonstrate that Arcadis breached its duty of care in overseeing concrete processing operations and unlawfully distributed contaminated concrete from the Edison site.

Back in April, we covered a Minnesota lawsuit involving contaminated fill material from a road project.  The recent decision in Woodcliff, Inc. v Jersey Construction, Inc, 2012 U.S. Dist. LEXIS 125214 (D.N.J. 9/4/12) is another case involving contaminated fill from a road project.  In April 2009, the defendant JCI removed approximately 8,000 cubic yards of soil as part of road construction project associated with construction of a new shopping center in Hamilton Township by Stanbery Hamilton LLC (Stanbery). The work was done pursuant to a development agreement between Stanbery and NJDOT that required Stanbery to perform road improvements. The shopping center site had been previously used as an apple orchard.

JCI offered to make the excavated soil available to plaintiff Woodcliff for use as fill material for its residential development known as Woodcliff Estates at Hamilton (“Woodcliff Estates”). One year later, Woodcliff learned the soil was contaminated with arsenic from the former apple orchard.  Woodcliff incurred approximately $ 59K to investigate the extent of the contamination and anticipated incurring significantly more costs to complete remediation. As a result, Woodcliff filed a lawsuit against JCI and NJDOT asserting common law and the Spill Act.

NJDOT said it was not liable under the government redevelopment exemption of the Spill Act. However, the court denied the agency’s summary judgment motion because there were a number of unresolved issues of material fact involving NJDOT’s ownership of the property from which the fill material was excavated.

More interesting was the court decision to grant summary judgment in favor NJDOT on the trespass claim. The court cited prior NJ decisions holding that the use of trespass was an “inappropriate theory of liability” for contamination cases and that courts should not  “endeavor to torture old remedies to fit factual patterns not contemplated when those remedies were fashioned.”

We covered other incidents involving contaminated fill material in the Schnapf Environmental Journal that was published from 1998 to 2008. For example, we reported on a residential project in Kalmath Falls where asbestos-containing building materials had been buried, a proposed residential development site in Providence where auto fluff had been used as fill, and at a construction site in Leominster where pulverized pieces of transite piping was discovered. Past SEJ issues discussing these and other cases are available from the newsletter page of this website.

There have been instances where developers have spent millions of dollars to remediate sites only to have them re-contaminated with fill material. State environmental agencies simply do not have the resources to track the volume of C&D generated by construction sites and contractors looking to increase profit margins have little financial incentive or time to find clean fill. Thus, it is important that developers establish a system to screen the fill materials that are to be imported to their development sites.

Consultant Not Liable to Residents of Housing Complex For Not Identifying Vapor Risks

Thursday, May 17th, 2012

A California state court dismissed a negligence claim brought against an environmental consultant by residents of the infamous Ujima Village low income housing complex for failing to identify health risks associated with a former oil storage facility.

The 300-unit Ujima Village complex had been constructed on a portion of the former 122-acre Athens Tank Farm (ATF)  that had been located in Willowbrook, an unincorporated area within the County of Los Angeles. The ATF was operated by Exxon Mobil and its predecessors from 1924 to 1962. The ATF  contained 22 80,000 barrel aboveground storage tanks along with two crude oil reservoirs/ sumps with a combined capacity of 1.8 million barrels.  After operations ceased  at ATF , Exxon decommissioned the facility. Exxon sold 16 acres of the ATF site to a developer who completed constructed of the Ujima Village Apartments in 1972 with a mortgage provided by federal Department of Housing and Urban Development (HUD). The County Board of Supervisors allegedly acquired title to the balance of the former ATF site in 1987 which was developed into the Ervin Magic Johnson Regional Park (EMJRP).

The Ujima Village complex was not adequately maintained, though, and after the owners defaulted on their loan in 1990, HUD  commenced foreclosure proceedings. Before the foreclosure became final, HUD developed a plan to rehabilitate the property and sell it to a private entity. However, the purchaser withdrew from the sale negotiations after its phase 1 environmental consultant reported that methane gas and hydrocarbons in the subsurface presented “high potential for significant environmental impairment.”

HUD’s property manager retained a consultant in 1992 to perform a phase 2 that concluded that benzene, xylene, toluene and ethylbenzene (BTEX) were present at levels that posed a risk to human health and explosion. The report allegedly recommended further investigation to delineate the extent of the contamination. The plaintiffs allege that the property manager concealed the results of the investigation. The plaintiffs also allege that HUD initially rejected the recommendations and that there were ongoing exposure issues. Instead, the complaint stated, “HUD’s engineers preferred to refer the issue to the HUD Office of Counsel to determine legal responsibility or further action by HUD because the environmental reports had ‘opened Pandora’s Box’ regarding notification to regulatory agencies.

In 1992, the plaintiffs assert that the state Department of Toxic Substances Control (DTSC) advised HUD that a Preliminary Endangerment Assessment (PEA) was required because some of the contaminants exceeded ingestion screening levels.  HUD reportedly advised the DTSC that HUD was trying to sell the property to the County and that the County was reluctant to take over a contaminated site. The plaintiffs allege that HUD never shared the DTSC communications with them.

In 1993, HUD retained Earth Technology, Inc (Earth Tech), a predecessor of defendant Aecom, to perform an assessment of potential health hazards. . The firm conducted three rounds of sampling and testing of soil, soil gas, and indoor air samples. The plaintiffs allege that the Earth Tech detected elevated levels of lead and mercury in the soils and elevated BTEX beneath the buildings but that HUD edited the report so that it concluded that were “no significant threat to the health or safety of residents.

The Community Development Commission of the County of Los Angeles (CDC) hired a consultant to review Earth Technology’s study in December of 1993. The CDC consultant issued a report that was highly critical of Earth Tech Report. The criticisms included that Earth Tech failed to address high levels of petroleum hydrocarbons in the top layers of soil, did not adequately consider that there was a significant risk of explosion, failed to adequately data showing a significant risk of exposure to benzene and that a Preliminary Endangerment Assessment (PEA) should have been performed in accordance with CAL EPA guidelines

In early 1994, HUD issued a memo titled “Ujima Village Apartments: Assessment of Toxic Hazards Compliance with HUD Toxic Policy/Notice 79-33” that expressed HUD’s opinion that contamination at Ujima Village Apartments presented an insignificant risk of exposure to the general public. Later that year, Earth Tech prepared a report that advised HUD that it could be liable to residents or neighbors of Ujima Village Apartments and recommended HUD avoid deep excavation or drilling at the complex or use care when conducting such activities.

According to the complaint, the County initially insisted on additional sampling to determine the full risk to the residents in its negotiations to acquire the complex. However, the complaint alleged, the County dropped the demand when HUD offered to indemnify the County. In 1995, HUD sold the residential complex to the County for $1. The Housing Authority of the County of Los Angeles (Housing Authority) owned and operated Ujima from 1995 until its closure in 2009.

In 2000, the CDC allegedly retained SCS Engineers to perform collect soil gas samples. SCS found elevated concentrations of hydrocarbon vapors in soils. Later that year, the County reportedly retained ATC to conduct a phase 1 at the EMJRP. ATC concluded subsurface soils at the park may have been impacted by previous petroleum refining operations.

Faced with millions of dollars in repair and maintenance costs, the Housing Authority and the CDC sought to find a developer to acquire, rehabilitate and manage the complex.  In 2003, the Housing Authority issued an RFP that sought qualified developers to acquire, rehabilitate, own and manage the Ujima Village complex. The prior environmental reports were disclosed in the RFP.

Two prospective developers were identified but they apparently declined to proceed with the purchase after learning the results of a 2005 investigation performed by Rincon Consultants (Rincon) for the CDC.  Rincon advised the CDC that elevated concentrations of hydrocarbon vapors and the presence of contaminants in groundwater consistent with a gasoline release. Rincon concluded that residents were at “significant risk of exposure and cancer.”

Meanwhile, TRC was retained by a potential developer to perform an environmental investigation phase 1. TRC concluded there was a release of petroleum hydrocarbons associated with the ATF. TRC also reported elevated concentrations of methane and volatile organic compounds in subsurface soil vapor.  TRC also said that in some portions of the property, methane and/or VOCs in the soil gas exceeded the lower explosive limit (LEL).  TRC recommended additional investigation to define the vertical and lateral extent of soil contamination.

In October of 2006, the Housing Authority/CDC retained Rincon to further evaluate environmental conditions at the complex. Rincon concluded that there was a possibility of a chronic health risk concern that warranted additional study and that remediation was warranted  as a preventative measure to reduce possible exposure of VOC to residents as well as to mitigate existing groundwater contamination. The Housing Authority shared the results with HUD and the agencies met with the California Regional Water Quality Control Board (the Water Board). .

The housing authority then met with HUD officials and plaintiffs assert that HUD responded with a letter that stated, in part, that “unhealthy levels of petroleum vapors existed at the project”, “a real health hazard could possibly exist for long-term residents” and that the Housing Authority was concerned about it’s potential liability because it did not have insurance for health related problems.

In May 2007, the Water Board agreed to assume responsibility for the investigation but advised the CDC that it would be responsible for the Water Board’s costs. The Housing Authority then sent a letter advising all Ujima residents that it was considering the possibility of closing the complex due to the age and obsolescence of  the property, the substantial economic cost of rehabilitation, and the significant disruption to the daily lives of residents to remediate environmental concerns. The letter went on to state while displaced residents might be eligible to receive federal relocation assistance payments, residents would forfeit their right relocation assistance if they moved or were evicted before receiving formal notice of eligibility. The letter did not provide any further information about the environmental conditions of the complex

The plaintiffs allege that none of the foregoing reports were provided to the tenants, that communications with Exxon and various consultants between 2007 and 2008 were not disclosed. The plaintiffs also assert that when  community meetings held during 2008 to discuss the environmental conditions at the complex, residents were told that the environmental conditions did not pose adverse health and safety risks to the occupants. Plaintiffs further assert that it was not until a group of former Ujima residents met with an attorney in October 2008 that contamination may pose a serious risk to human health and safety.  and that when public meetings were held, the parties represented that the risks from the contamination were insignificant.

In 2009, the housing authority declared Ujima Village blighted and approved a plan to relocate residents. In 2010, hundreds of former residents filed a toxic tort lawsuit against Exxon, alleging that exposure to chemicals associated with the former storage facility had caused 38 premature deaths, cancer, leukemia, miscarriages, respiratory distress and other health problems. The plaintiffs also sought damages from Aecom as successor to Earth Tech for negligently failing to discover the risks in its 1993 report. A second lawsuit was filed by a group of plaintiffs who had lived at the Ujima complex but had subsequently moved. These cases were consolidated in 2011 and an amended complaint filed.

In Doris Alexander v Exxon Mobil, No. BC 435640, Super. Ct-Los Angeles cty 6/6/12), the court ruled that the plaintiffs did not have any contractual relationship with Aecom and were not the intended beneficiaries of the 1993 environmental. Therefore, Aecom did not have duty that could have been breached. Moreover, to allow the claim against Aecom to proceed, the court said, would expose the firm to millions of dollars in potential liability for a report it was paid approximately $35K.

If allegations in this case are true, the conduct of HUD, the CDC and the housing authority in not timely advising residents that they were being exposed to elevated levels of contaminants and carcinogens is nothing less than disgraceful. This case demonstrates the need to develop clear reporting standards for vapor intrusion sampling results. New York has a strong vapor disclosure law and could serve as a model for other states.


Ct Upholds Limitation of Liability in Consultant Negligence Case

Thursday, December 8th, 2011

When retaining environmental consultants, one of the key issues to review in the consultant’s standard terms and conditions is the limitation of liability (LOL) clause. This clause frequently seeks to cap the consultant’s liability at the amount of its fees. Because consultants are usually expected to carry at least $1MM in liability coverage,  clients often want consultants to be liable for at least the amount of their  insurance  limits.  Depending on the relative bargaining power of the parties, a compromise amount in the form of liquidated damages is usually negotiated that will be between these two extremes (usually $50K-$100K).

The LOL are occasionally challenged as being against public policy. There have been a few cases involving school districts where the courts have not honored the LOL clause but in most private litigation, the clauses are generally upheld. A recent example is Cat Iron, Inc. v. Bodine Environmental Services, Inc. , 2011 U.S. Dist. LEXIS 123057 (C.D.ILL. 10/25/11).

In this case, the plaintiff retained the defendant to perform a complete National Emission Standards for Hazardous Air Pollutants (NESHAPS) asbestos inspection and comprehensive survey report. The standard terms and conditions of the defendant’s agreement contained a limitation of liability of the $6,100 fee for the work. The agreement also provided that ” Bodine warrants that the findings contained herein have been prepared with the level of care and skill exercised by experienced and knowledgeable environmental consultants who are appropriately licensed and trained to perform asbestos building inspections . . . Bodine used due diligence inspecting the structures and sampling for suspect [asbestos containing materials]”.

As it turned out, the defendant failed  to identify approximately 195,000 square feet of asbestos-containing building materials, consisting primari;y of exterior walls and roofing. The plaintiff incurred substantially more asbestos abatement costs than it had anticipated and filed a lawsuit in federal district court, alleging breach   of contract; breach of express warranty; ordinary negligence; willful and wanton negligence; and negligence misrepresentation.

The defendant argued that the LOL applied and because of the liability limit, the district court did not have jurisdiction to hear the case since the damages could not reach the $75K threshold.  Plaintiff asserted that the LOL was an exculpatory clause that violated public policy since both Illinois and federal law expressed interest in asbestos related matters, especially the demolition of asbestos laden buildings.

The court said that exculpatory clauses are valid and enforceable in the absence of fraud or or wanton and willful negligence, if there is substantial disparity in the bargaining position of the two parties; if upholding the exculpatory clause would be violative of the public policy; or if there is something in the social relationship between the two parties that would militate against upholding the clause.

On the public policy issue, the court agreed that the state and federal government had an interest in the health concerns associated with asbestos but that it was not clear that such concerns extended to a contract between two sophisticated corporate entities to remove asbestos from a structure. However, in a June opinion, the court reserved on the wanton and willful negligence claim and ordered further discovery.

Following discovery, the court said the plaintiff had failed to offer any admissible evidence supporting a finding that Defendant was either intentionally or recklessly willfully and wantonly negligent. The court said there clearly was no support that Defendant’s omission of the ACMs from the Report was undertaken with an actual or deliberate intent to harm the Plaintiff.  Likewise, the court said while Illinois allowed claimed of reckless willful and wanton negligence inference, a plaintiff had to show that the defendant either failed to exercise ordinary care to prevent impending danger after acquiring knowledge of the impending danger, or  failed to discover the danger through recklessness or carelessness when it could have been discovered by the exercise of ordinary care. The court said the plaintiff had not offered any evidence to support either circumstance.

As a result, the court found the LOL clause to be enforceable and granted summary judgement to the defendant on the willful and wanton negligence claim. However, the court decided to continue to exercise jurisdiction over the remaining claims, ruling that those claims would be subject to the LOL.