Regulatory reform is at the centerpiece of the Trump Administration’s plan to stimulate economic growth. During the presidential campaign, candidate Trump vowed to rollback a variety of Obama Administration Climate Change Initiatives but said little about EPA remedial programs such as the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or superfund). Based on his testimony and follow-up written response to Congress, it appears that EPA Administrator Scott Pruitt recognizes the value of brownfield programs and the need to remediate contaminated sites. There also seems to be strong bipartisan support for the brownfield program in the House committee responsible for the EPA budget.
As a result, I have shared the following recommendations to Administrator Pruitt for reforming EPA’s remedial programs. These suggestions could improve the efficiency of the remedial programs without weakening environmental protections. Some of the changes could be achieved through legislative amendments but could be administratively implemented if Congress does not have the time to address environmental issues during the current term. The proposals are not in any order of importance
CERCLA Continuing Obligations Guidance– The 2002 amendments to CERCLA added the Bona Fide Prospective Purchaser (BFPP) and Contiguous Property Owner defenses. These defenses (in particular the BFPP defense) were enacted to help incentivize purchasers to acquire and remediate contaminated properties so they can be put back into productive use. While EPA promulgated an all appropriate inquiries (AAI) rule to help define the pre-acquisition obligations necessary to be able to assert these defenses, there is little guidance from EPA on how property owners or operators may satisfy their “appropriate care” or “continuing obligations” so they can maintain their liability protection after taking title or possession of property. The 2003 “Common Elements Guidance” is inadequate. The lack of guidance and recent caselaw have created uncertainty for developers and undermined the value of these defenses. EPA should issue detailed guidance on what constitutes appropriate care. Developers and property owners should not have to rely on ASTM to provide guidance on how to comply with their legal obligations.
2. Revise “Enforcement Discretion Guidance Regarding the Affiliation Language of CERCLA’s Bona Fide Prospective Purchaser and Contiguous Property Owner Liability Protections” – This memo did not sufficiently address concerns raised by the Ashley decision that purchasers of contaminated property could lose their eligibility for the BFPP by agreeing to indemnify sellers.
3. More Robust Use of PPAs and CPO “Assurance Letters”- With the passage of the 2002 CERCLA amendments, EPA announced in guidance that it would issue PPAs or CPO assurance letters only in rare instances because the landowner liability protections were self-implementing. However, these agreements can be incredibly valuable. EPA should urge its regional offices to issue such documents where they can facilitate redevelopment such as in urban superfund sites (e.g., GowanusCanal, Newtown Creek) and where municipal governments are willing to foreclose on contaminated properties and then convey title to redevelopers.
4. Clarify Scope of Municipal Liability Protections Under CERCLA to Encourage Taking Title of Vacant Properties and Facilitate Reuse- There is considerable uncertainty among local government community if municipalities can invoke the protections of 42 U.S.C. 9601(20)(D) and (9601(35)(A)(ii) where they take title in lieu of formal tax foreclosure proceeding since this may not be “involuntary”. Local governments might be more willing to take title and assemble vacant properties so they would become more attractive to redevelopment if they could obtain clarity on the scope of this protection. Presumably, a purchaser from a municipality would then be able to assert the BFPP or third party defense. A related problem is that the BFPP defense would not apply to local governments who took title prior to January 11, 2002.
5. Reform EPA Remedial Programs Into a Single Unified Cleanup Program- Our nation’s remedial programs were created as we became aware of new concerns. This has resulted in different cleanup standards and procedures. We have separate staffs for CERCLA, RCRA, TSCA (PCBs), USTs, etc. We now have three decades of experience remediating sites. I think we should strongly consider combining these discrete offices into one streamlined remedial office that will provide consistent regulatory approach and reduce unnecessary staff.
6. Clarify Lender Obligations Following Foreclosure- The original EPA lender liability rule contained a “bright-line” test for lenders to follow so they can be deemed to have taken commercially reasonable steps to sell property following foreclosure, thereby staying within the safe harbor created by the secured creditor exemption. Unfortunately, when the rule was vacated and the 1996 lender liability amendments were added to CERCLA, the “bright line” test was omitted. So lenders have no guidance on how to proceed during what is the worst economic downturn since the Great Depression. Can they reject an offer that is equal to artificially depressed price? How long can they hold onto property without losing protection? Some states allow for two years while others allow up to five years to sell the property. Greater clarity will help lenders move these properties.If control of Congress changes, this can be legislative proposal.
7. Encourage States to Adopt Licensed Professional Programs– States are facing severe staffing constraints which are creating backlogs in site remediation. EPA could use its authority under section 128 of CERCLA (approval of state response programs) as well as its RCRA delegation authority to have states adopt licensed site professional programs like MA, NJ and CT so that states could devote their limited resources to the sites that pose the greatest risk to human health and the environment. EPA could establish a national licensing program for consultants that sets forth minimum professional requirements and states could adopt these programs as part of their remedial programs. One way to accomplish this could be by amending the All Appropriate Inquiries (AAI) Rule to revise the definition of Environmental Professional. This could avoid having to promulgate a new regulation.
8. Revise NCP- revising the NCP. It was last revised in 1990. Since then we’ve learned a lot about cleanup and have lots of informal guidance to help streamline the process and make it more cost-effective. Doesn’t make sense to continue to follow the RI/FS lockstep process. Why review five alternatives? The NY brownfield program requires applicants tp propose remedy and an unrestricted cleanup alternative, and this approach has been able to generate robust cleanups. The NCP could be revised to incorporate streamlined provisions for brownfield sites that will produce faster and more cost-effective cleanups while preserving right of contribution. Right now, firms are incentivized to follow the lock-step approach to preserve their ability to pursue cost recovery.
9. Revise CERCLA Disclosure Requirements With Amnesty Program To Incentivize Accelerated Cleanups- Property owners are not currently required to disclose historic contamination. As a result, many sites remain unremediated until the owner is ready to sell the property. To help accelerate cleanups, I think EPA could announce it was going to change its disclosure rules from reportable quantity approach to contaminant concentrations and at the same time provide current property owners a one year amnesty period to voluntarily disclose contamination. Much like the EPA audit policy, owners who disclose the existence of contamination that they are not responsible for would be afforded BFPP status. They would have to exercise “appropriate care” but not full cleanup. The SARA Title III program resulted in substantial reductions in pollution. It seems worth the try to experiment with an amnesty period for contaminated sites.
10. Seek Cost Recovery from Responsible Parties When Brownfield Grants Are Awarded – According to a 2004 EPA study, there may be 300,000 contaminated sites in the nation that may cost over $200 billion (not adjusted for inflation) to remediate. Many brownfield sites were created when corporations closed plants and either relocated elsewhere in the country or exported the jobs overseas yet remains financially viable. EPA has been granting brownfield grants to local governments without considering if there is a responsible party. Before EPA gives away public money, it should make a determination that there are no responsible parties. If responsible parties are available, RPA should give the responsible party an opportunity to conduct an investigation and remediation of the contaminated property is has left behind. If the responsible party declines to participate int he cleanup, EPA could then award the Brownfield grant and seek cost recovery. In this way, the brownfield funding program would not have to rely entirely on Congressional appropriations.
11. Move Away from Brownfield Grants/Loans and To Tax Credits- The brownfield financial incentives are becoming like public works projects. The funding often takes too long for private development. Rather than giving funds to local government to investigate and reuse planning, EPA could incentivize the private market to do this work by expanding and extending brownfield tax credits. The New York Brownfield tax credit program has resulted in an estimated $7.5B in investment in the state at a cost of $750MM. Tax credits put the upfront risk on the developer instead of the taxpayers.
12.Adopt National Environmental “WARN” Obligations Under RCRA- to prevent future brownfields, companies closing operations should be required to notify relevant permitting authority at least 90 days in advance of closing to ensure that appropriate closure occurs so that public money does not have to be used to address cleanup or local government seeks brownfield funds.
13. Require States To Use Parceling To Encourage RCRA Brownfields- EPA RCRA Brownfield Reforms urged states to allow owners or operators of TSDF to sell off clean parcels of their facilities (e.g., portions never used for any waste management) while the HWMUs or SWMUs were undergoing corrective action. EPA should more forcefully use its delegation authority to allow this much needed reform.
14. Clarify RCRA liability for Generator-only sites- There is much confusion if closure obligations for a generator site run with the land. In other words, a site may have been owner or operated by a defunct generator. A prospective purchaser is interested in redevelopment but is concerned it will become subject to closure obligations for the areas where wastes were managed. Presumably, generator sites could be treated as any brownfield site without the need to undergo formal RCRA closure.
15. Add Landowner Liability Protections to TSCA for PCB Cleanups- Purchasers often take steps to qualify for CERCLA BFPP only to learn after taking title that the property has been impacted with PCBs and they are subject to TSCA cleanup. This might require Congressional action but I do not see any reason why TSCA should not have a BFPP defense. Congress added AAI and BFPP to OPA in 2004 with little controversy.
16. TSCA PCB Reform- The PCB cleanup and disposal rules are a bit RCRA-like, a bit CERCLA-like and not well integrated. The cleanup should also not depend on the original spill concentration but on current concentrations and media. I’d like to see the entire Subpart D to 40 CFR 761 repealed, and disposal of PCB-containing material handled entirely within RCRA via the listed-waste and LDR route.
17. Adopt Restatement (Third) of Torts Approach to Joint Liability– When CERCLA was enacted, Congress said that liability should be premised on evolving concepts of common law. At the time of its enactment, the Second Restatement was in effect which favored use of joint liability for indivisible harm. However, this was before states began adopting comparative negligence statutes. The Third Restatement states that the law has shifted dramatically from the use of joint liability and that courts should try to find a basis for apportioning liability where there is a reasonable basis. Despite the publication of the Third Restatement in 2000, federal courts continue to cling to the doctrine espoused by the Second Restatement. Recently an appeals court declined to adopt the suggestion of an amicus brief submitted by The American Tort Reform Association to use the Third Restatement to apportion liability for the Fox River cleanup. My post on this case is at: http://www.environmental-law.net/2012/08/7th-circuit-declines-to-apply-third-restatement-of-torts-in-apportionment-case/ . The Administration might want to have Congress clarify that CERCLA liability should be based on the Third Restatement or EPA could issue interpretative guidance that it now considers the Third Restatement to be the governing law for CERCLA liability. This would reflect the Congressional intent to follow the evolving common law and confirm the direction where the law has moved.
A 20-year old voluntary cleanup agreement (VCA) was the subject of the dispute before the New York Court of Claims in Alaskan Oil, Inc., v. State of New York, Claim No. 116072 Motion No. CM-81863 (Ct. Claims 7/25/16).
In this case, claimant Alaskan Oil Inc. acquired approximately 40 properties owned by Parrish Energy Fuels, Inc., and Webber Oil Company in 1994 and then sought to enroll the sites into the newly-created New York State Department of Environmental Conservation (NYSDEC) Voluntary Cleanup Program (VCP). After over negotiating for more than a year, Alaskan Oil entered into a VCA dated February 5, 1996 that covered all 40 sites. The VCA provided, inter alia, that Alaskan Oil would implement and complete remedial actions at all of the covered sites as well as reimburse NYSDEC for up to $66,000.00 in oversight costs.
Initially, work progressed pursuant to a schedule approved by NYSDEC that contemplated completing cleanup of all 40 sites by December 1998. However, only a handful of sites were remediated by the end of 1998. The pace of cleanups continued to lag and when Alaskan Oil ceased work in 2004, 19 sites remained unremediated. As a result, NYSDEC advised Alaskan Oil in October 2005 that it had failed to comply with the VCA and that the VCA would be terminated within thirty days unless Alaskan Oil came into substantial compliance with the terms of the VCA. After a series of meetings failed to produce any progress, NYSDEC terminated the VCA in September 2007 based on material breach of contract for failure to perform its obligations.
The parties again held several meetings but could not resolve their dispute. Alaskan Oil then filed an article 78 proceeding in January 2008, seeking to determine if DEC had acted within its authority. However, since the proceeding involved contract action against the State, the action had to be discontinued. Alaskan Oil then filed a claim with the Court of Claims in May 2008 alleging that it had suffered $1.3 MM in monetary damages as a result of NYSDEC’s actions. Specifically, the claimant alleged NYSDEC made it more difficult under the VCA to bring its sites into compliance, that the Region 6 technical staff continually interrupted business operations that caused or contributed to claimant’s inability to meet the terms and conditions of the VCA. Alaskan Oil also claimed that the Region 6 staff forced it to comply with more stringent cleanup than required for other sites under the VCA or sites operated by its competitors.
NYSDEC initially claimed that Alaskan Oil had filed its complaint too late because the alleged actions of interference occurred from the 1990s to 2001. However, in a Decision and Order dated September 29;2008, the Court ruled that the claim arose on the date the VCA was terminated and therefore, the claim was timely.
After Alaskan Oil was granted leave to file a late claim, the NYSDEC moved for summary judgement arguing it was immune from liability because it was acting pursuant to its authority under the Navigation Law, citing the savings clause of Navigation Law § 176 (2)(b)., which states:
“Section eight of the court of claims act or any other provision of law to the contrary notwithstanding, the state shall be immune from liability and action with respect to any act or omission done in the discharge of the department’s responsibility pursuant to this article; provided, however, that this subdivision shall not limit any liability which may otherwise exist for unlawful, willful or malicious acts or omissions on the part of the state,· state agencies, or their officers, employees or agents or for a discharge in violation of section one hundred seventy-three of this article.”
In response, Alaskan Oil asserted that NYSDEC was not immune because its employees committed unlawful, willful or malicious acts or omissions. In support of this argument, Alaskan Oil pointed to notices of violations and a proposed administrative Consent Order issued by the NYSDEC Region 6 office for non-compliance with the Petroleum Bulk Storage ACT, that the Region 6 office required more stringent cleanups at two sites than required at other similar facilities and a demand for reimbursement of $261,223.58 incurred for a cleanup conducted by Region 6 related to a 1988 spill which Alaskan Oil alleged breached the indemnity.
However, the Court found these allegations did not fall with the exception to the Navigation Law’s immunity shield because they related to sites or events outside of the VCA. Accordingly, the Court concluded that NYSDEC carried out its responsibilities under the Navigation Law in a lawful, non-willful and non- malicious manner, and dismissed Alaskan Oil’s claim.
The New York State Court of Appeals held that a PRP letter issued by the New York State Department of Environmental Conservation (NYSDEC) was sufficient to trigger an indemnity obligation under a purchase and sale agreement. While lower courts have found PRP letters to constitute “suits” within the meaning of a Comprehensive General Liability policy so as to trigger a duty to defend, this is the first time the a PRP letter has been interpreted within the context of a private indemnity agreement.
In Remet Corp. v. Estate of Pyne, 26 N.Y.3d 58 (N.Y. 2015), James R. Pyne sold all of his stock in Remet Corporation (Remet) and real property to Burmah Castro Holding (BCH) for approximately roughly $28 million. During pre-acquisition due diligence, BCH learned that a leased facility in Utica was located adjacent to the Old Erie Canal site, a parcel that was listed on the New York State List of Inactive Hazardous Waste Sites. BCH became concerned that Remet could become responsible for the remediating the Old Erie Canal site which BCH’s consultant estimated could cost as much as $29MM. After BCH proposed excluding the site from the transaction, Pyne agreed to provide a ten-year indemnity to BCH for losses related to pre-existing environmental conditions provided that the losses resulted from actions that the purchaser was “required to take under or in connection with any Environmental Law.” The indemnity also contained a “muzzle” clause that provided that such required actions could not be a result of communication by BCH with NYSDEC. A $2.7 million environmental escrow account was established.
In October 2002, the NYSDEC sent Remet and four other parties a notice letter identifying them as a generator PRPs for the Old Erie Canal site. The notice letter provided in part that if the PRPs did not enter into a signed Consent Order within 30 days, NYSDEC would terminate discussions and implement a remedy using the state superfund. The letter warned that NYSDEC would seek cost recovery for its costs and that the letter constituted a demand for payment of all monies the NYSDEC might expend for the investigation and remediation of this site, plus any and all interest.
Remet tendered an indemnification claim to Pyne in accordance with the indemnification procedures under the purchase and sale agreement (PSA). Pyne declined to assume control of the defense but cooperated with Remet in implementing the company’s initial response to the PRP letter. Remet, three other PRPs, and Mr. Pyne investigated the Old Erie Canal site and prepared a report with Pyne and Remet splitting 25% of the costs. In discussions with NYSDEC, Remet and Pyne argued that Remet should not be considered a PRP because Remet did not generate any waste stream from its processes and the chemicals it used did not match the contaminants identified at the Old Eric Canal site. The NYSDEC negotiations were unsuccessful. Pyne died in March 2003. Later that year, Remet’s management team acquired all of Remet’s stock and the Pyne estate agreed to assume the Pyne’s indemnification obligations under the PSA.
NYSDEC subsequently issued a letter indicating that since none of the PRPs had agreed to perform any work, the agency would use state funds to complete the investigation and implement the remedy. Eventually, NYSDEC selected a remedy estimated to cost $12.5MM
With its indemnification claim still pending, Remet filed a claim against the Pyne estate in the Surrogate Court seeking to bar distributions from the estate until the indemnification claim was resolved. The Pyne estate objected to any release of funds from the escrow account to cover the approximately $550K demanded by NYSDEC for a portion of the work and instructed Remet that any unilateral contact with the NYSDEC would constitute a waiver of any right to indemnification under the PSA.
Remet then commenced an action against the Pyne estate to enforce the estate’s indemnification obligations of $550K as well as a declaration that it was entitled to reimbursement for all future costs. The trial court granted summary judgment to Remet, holding that Remet would have to expend money since it would either have to respond to the PRP letter or defend a NYSDEC cost recovery action. The court also noted that Pyne’s cooperation following the PRP Letter was inconsistent with the estate’s position that the PRP letter did not “require” action. The estate appealed and the appellate court reversed, ruling that the DEC did not “require” any action but merely informed Remet of its potential liability and sought voluntary action.
Before the Court of Appeals, Remet relied heavily on a line of insurance cases holding involving that PRP letters were “suits” within the meaning of Comprehensive General Liability policies that triggered an insurer’s duty to defend. Remet analogized that if a PRP letter was coercive and adversarial enough to constitute a “suit,” it is coercive and adversarial enough to “require” responsive action. Moreover, Remet argued that if the appellate decision was affirmed, “every business insured under a liability policy that provides coverage for defense of environmental claims will have an incentive to resist cooperating with DEC upon receipt of a PRP letter, until there has been a final determination of liability.”
The estate argued that the NYSDEC letter simply indicated that Remet was a PRP and that it had no indemnification obligation under the PSA until a court actually held that Remet was found to actually be a responsible party. The estate pointed out that the NYSDEC never categorized or ever asserted that Remet was anything other than a PRP. Indeed, the estate emphasized that NYSDEC had not taken any enforcement action against Remet or any other of the PRPs.
The Court of Appeals rejected this creative but strained interpretation, holding that the PRP letter was sufficiently coercive and adversarial as to “require” action ” under Environmental Law as provided under the PSA. The court noted that the PRP letter, which was labeled “Urgent Legal Matter,” demanded either a consent order or payment. It further indicated that a prompt reply was “necessary” and set forth imminent legal and financial consequences that would occur if Remet refused to act. Thus, even though Remet was labeled a “potentially responsible party,” it responses to the letter were coerced and not voluntary. The court also found persuasive the circumstances surrounding the execution of the indemnification clause and the funding of the environmental escrow account as evidence that the parties were aware of the potential for substantial expenses relating to the Erie Canal Site, and that Pyne’s cooperation after receipt of the PRP letter was evidence that Pyne thought action was required action.
Parties to commercial leasing transactions frequently overlook environmental issues because they believe that tenants who do not use large quantities of hazardous chemicals will not be exposed to significant environmental liability. Consequently, the parties may do little to no environmental due diligence and use obsolete or boilerplate lease provision that do not specifically allocate environmental risks. Even when a lessee examines environmental conditions of a site, the investigation is often limited to ensuring that there are no environmental conditions that would impair its ability to operate at the site or that the property is adequate for the intended use.
What these parties do not realize that owners and operators of commercial property can be liable for contamination associated with historic uses. This means that landlords can be liable for contamination caused by their tenants and tenants may be responsible for contamination that preceded its tenancy.
In the second installment of a series that I am publishing in the venerable New York State Bar Journal, I review the key New York State Laws that can impact commercial leasing transactions. The article is available here. The next installment in this series will cover NYC environmental laws. The first article discussing federal environmental laws impacting commercial leasing transactions is available from our publications page here.
We have previously reported on instances where banks have incurred cleanup costs in connection with properties they have sold. For some examples, click here, here, here, here and here
The latest installment of this saga involves Bank of America (BOA) which agreed to pay $1.4MM as part of a settlement involving a dry cleaner property that a BOA predecessor owned decades ago. A federal district court approved the settlement in Whitehurst v. Heinl, 2015 U.S. Dist. LEXIS 49147 (N.D.Ca. 4/14/15).
In this case, Charlotte A. Heinl (“Heinl”) operated a Norge Cleaners in Oakland, California from approximately 1965 to 1987. Bank of America, National Trust & Savings Association (“NTSA”) owned the property from approximately 1969 to 1987 and had leased it to Heinl. Bank of America became the successor to NT&SA when BankAmerica Corp. merged with NationsBank in 1998. As part of that merger, Bank of America, NTSA, was renamed Bank of America, NA (BOA).
NTSA sold the property to Richard and Lorraine Whitehurst (“Plaintiffs”) in 1987 for $265,000 pursuant to an “as is” agreement. The Plaintiffs had also been provided with a opportunity to investigate the property prior to the closing and had obtained a 120-day extension. The Property had been part of a larger parcel of real property that NTSA subdivided shortly before it sold the property to the Plaintiffs. The remainder of the parcel is still owned by Bank of America, NA and is potentially impacted by the former dry cleaner.
Sampling conducted September 2007 revealed elevated levels of PCE and its breakdown products in the groundwater. After the California Regional Water Quality Control Board, San Francisco Bay Region (“RWQCB”) sent an information request to the Plaintiffs, they filed a complaint against the Heinl and BOA asserting the defendants were liable under RCRA 7002, CERCLA and various state common laws claims. The plaintiffs sought an order compelling the defendants to remediate the contamination and sought damages because they had been unable to lease or sell the property due to the presence of the contamination. The bank subsequently filed claims against both Whitehurst and Heinl alleging they were responsible for the contamination.
After several court-sponsored mediations failed to achieve a settlement, the parties reached an agreement on the eve of trial. Under the settlement, the parties agreed to establish a $2MM remediation fund. BOA agreed to contribute $1.4K with $200,000 of that amount representing a contribution from the Plaintiffs Whitehurst in the form of an interest free loan. The plaintiffs will be required to repay the loan within 6 months of receipt of a NFA letter from the RWQCB. The Fireman’s Fund agreed to tender $600K on behalf of Heinl who passed away during the course of the litigation.
The plaintiffs and BOA entered into Fixed Price Remediation Agreement with a consultant to implement remedial actions required by the RWQCB. BOA is required under the agreement to designate a Project Manager to supervise the cleanup and handle various administrative tasks associated with the cleanup.
A copy of the order approving the settlement is available from Google Scholar here
Environmental consultants routinely submit environmental questionnaires to property owners and their clients as part of the phase 1 process. Some consultants tell their clients that they are obligated to complete the questionnaire to be able to comply with EPA’s All Appropriate Inquires (“AAI”) rule. A few go as far as saying they cannot issue a phase 1 report unless the client completes the questionnaire. However, this is flat out wrong.
EPA’s AAI rule does not require users to complete the questionnaire. Indeed, the AAI Rule does not even require purchasers, brownfield grantee or lender (collectively the “user”) to provide the results of their “additional inquiries” to the environmental professional much less complete a questionnaire to satisfy with AAI. All the user needs to do is demonstrate that it performed those “additional inquiries” We will now break down the user obligations.
The AAI rule identified what elements of the investigation were the responsibility of the environmental professional and which criteria were the responsibility of the prospective purchaser or brownfield grantee. The information that has to be obtained by the user are known as “additional inquiries” and set forth in 40 C.F.R. 312.22. The “additional inquiries” include: specialized knowledge or experience of the prospective landowner (or grantee); the relationship of the purchase price to the fair market value of the property, if the property was not contaminated; and commonly known or reasonably ascertainable information.
In the preamble summarizing the changes from the proposed rule to the final rule that was published in the November 1, 2005 federal register, EPA stated at page 66076:
“The final rule does not require the prospective landowner (or grantee) to provide the information collected as part of the “additional inquiries” to the environmental professional. Although we expect that most prospective landowners and grantees will furnish available information or knowledge about a property to an environmental professional he or she hired when such information could assist the environmental professional in ascertaining the environmental conditions at a property, we affirm that compliance with the statutory criteria does not require that such information be disclosed. [emphasis added].
Since it ultimately is up to the owner or operator of a property to defend his or herself against any claims to liability, we agree with commenters that asserted that the regulations should not require that prospective landowners (or grantees) provide information collected to comply with the “additional inquiries” provisions to the environmental professional. Should the required information not be provided to the environmental professional, the environmental professional should assess the impact that the lack of such information may have on his or her ability to render an opinion with regard to conditions indicative of releases or threatened releases of hazardous substances on, at, in or to the property. If the lack of information does impact the ability of the environmental professional to render an opinion with regard to the environmental conditions of the property, the environmental professional should note the missing information as a data gap in the written report.” [Emphasis added]
Beginning on page 66082 of the preamble to the AAI rule in the discussion captioned “H. Who Is Responsible for Conducting the All Appropriate Inquiries?” EPA stated as follows [note we have broken out large block paragraph into smaller paragraphs for ease of reading]:
“Several commenters asserted that the mandatory nature of the proposed provision requiring the prospective landowner to provide information regarding the four criteria listed above to the environmental professional is problematic. Particularly with regard to the requirement to provide “specialized knowledge or experience of the defendant,” commenters pointed out difficulties in a prospective landowner being able to document such knowledge and experience sufficiently. Also, with regard to the information related to the “relationship of the purchase price to the fair market value of the property, if the property was not contaminated,” many commenters pointed out that prospective landowners may not want to divulge information regarding the price paid for a property. Commenters pointed out that the requirement to consider “commonly known or reasonably ascertainable information” about a property is implicit to all aspects of the all appropriate inquiries requirements. In addition, commenters stated that CERCLA liability lies solely with the owners and operators of a vessel or property. A decision on the part of a prospective landowner to not furnish an environmental professional with certain information related to any of the statutory criteria can only affect the property owner’s ability to claim a liability protection provided under the statute. In addition, the statute does not mandate that information deemed to be the responsibility of the prospective landowner and not part of the “inquiry of the environment professional” be provided to the environmental professional or even be part of the inquiry of the environmental professional. Some of the statutory criteria are inherently the responsibility of the prospective landowner.
We agree with the commenters who asserted that the results and information related to the criteria identified as being the responsibility of the prospective landowner should not, as a matter of law, have to be provided to the environmental professional. The statute does not mandate that a prospective landowner provide all information to an environmental professional. Given that the burden of potential CERCLA liability ultimately falls upon the property owner or operator, a prospective landowner’s decision not to provide the results of an inquiry or related information to an environmental professional he or she hired to undertake other aspects of the all appropriate inquiries investigation can only affect the liability of the property owner.
In addition, we believe that the environmental professional may be able to develop an opinion with regard to conditions indicative of releases or threatened releases on, at, in, or to a property based upon the results of the criteria identified to be part of the “inquiry of an environmental professional.” Any information not furnished to the environmental professional by the prospective landowner that may affect the environmental professional’s ability to render such an opinion may be identified by the environmental professional as a “data gap.”
The provisions of the final rule (as did the proposed rule) then require that the environmental professional comment on the significance of the data gap or missing information on his or her ability to render such an opinion, in light of all other information collected and all other data sources consulted.
As a result of our consideration of the issues raised by commenters, today’s final rule modifies the requirements of Sec. 312.22 “additional inquiries” by stating (in paragraph (a)) that “persons * * * may provide the information associated with such inquiries [i.e., the information for which the prospective landowner or brownfields grantee is responsible] to the environmental professional * * *.” The proposed rule provided that such information “must be provided” to the environmental professional.” [Emphasis Added]
AAI is a performance-based regulation. Failure to provide the information in 40 CFR 312.22 does not cause a prospective purchaser or party seeking the landowner liability protection to automatically lose its liability protection. The user may lose its ability to claim the protections IF the absence of that information prevents the EP from reaching a conclusion about the presence or absence of RECs or a release. At the end of the day, the EP has to decide if the failure to respond certain information is a significant data gap that prevents the EP from rendering a conclusion if there is a release (or REC).
The questionnaire is just the starting point for the due diligence since the environmental consultant will perform its own site inspection and historical records review. It will be a rare occasion when a purchaser or lender will have material information about the property that the consultant will not be able to obtain or that will result in a data gap that will prevent the consultant from determining if there is a recognized environmental condition (REC) on the property. The absence of an uncompleted questionnaire will not be significant in the overwhelming number of transactions where the client is a purchaser or lender. If the consultant still feels obligated to identify failure to prepare the questionnaire as data gap in such a situation, the consultant should be required to indicate that the data gap is not significant and does not alter the conclusions of the report.
Purchasers who want to be able to assert the CERCLA Bona Fide Prospective Purchaser (BFPP), Innocent Landowner (ILO) or Continuous Property Owner (CPO) landowner liability protections (LLPs) need to conduct a pre-acquisition investigation that complies with EPA’s All Appropriate Inquires (AAI) rule. A question that is surfacing with surprising frequency is if the phase 1 report needs to be issued or assigned to the person seeking to comply with AAI. The short answer is no.
This issue often arises when a local government or local redevelopment agencies conducts a phase 1 using federal or state brownfield funds on property that will be AAIs for a site will be developed by a private developer. Another example may where a state government agency conducts a phase 1 either for another agency or local government where the local government that does not have access to appropriate staff or capital resources to do the work.
This scenario also occurs in private transactions where an entity that ordered the report is unable to proceed with the transaction. There are many ways this situation can unfold but the more common scenario usually involves the party that originally ordered the phase 1 assigns its rights under a purchase agreement to a related entity (i.e. common principal) who eventually purchases the transaction but failed to ask the consultant to re-issue the report to the purchaser prior to the closing. it failed to obtain a reliance letter from the consultant that prepared the report and is not named in the reliance section of the Phase I report purchaser wants to argue that it satisfied AAI since one of its principals obtained a Phase I pre-purchase, completed the User Questionnaire pre-purchase, and conducted all of the “user” or additional inquires” required by AAI before the purchaser acquired the site. Sometimes the seller ordered the phase 1 to pre-position the property, the deal falls through and the seller provides the phase to a new purchaser. Other times, this situation also occurs because truncated diligence periods or auction sales where purchasers have to rely on materials provided sellers.
Based on the preamble that appeared in the federal register when EPA published the AAI rule, a purchaser may indeed use a report that was not expressly issued to it and does not have a reliance letter from the consultant for purposes of complying with AAI PROVIDED the underlying report satisfies AAI AND the purchaser otherwise complies with the user “additional inquiries”. We will pull apart these various elements.
In the preamble to the AAI rule, EPA said EPA that:
” all appropriate inquiries investigations may be conducted by or for one party and used by another party. In all cases, the all appropriate inquiries investigation must be updated to include commonly known and reasonably ascertainable information and any relevant specialized knowledge held by the prospective landowner and environmental professional. In addition, the evaluation of the relationship between the purchase price and the fair market value of the property must reflect the current sale of the property. In all other aspects of the investigation, the all appropriate inquiries must be in compliance with the provisions of the final regulation. ” [70 FR 66085 (November 1, 2005)]
The underlying report must also have been complete its environmental site assessment within 180 days prior to the date of acquisition of the property. If the report is older than six months, it must be updated to ensure that the report accurately reflects the current environmental conditions at a property:
Interviews with past and present owners, operators, and occupants;
Searches for recorded environmental cleanup liens;
Reviews of federal, tribal, state, and local government records;
Visual inspections of the facility and of adjoining properties; and
The declaration by the environmental professional within one year of taking title to the property.
Finally, EPA cautioned in the preamble that the prospective owner or grantee desiring to use the report prepared for another party cannot wholly adopt the previously conducted AAI but must comply with the following “additional inquiries” that are the responsibility of the user. (70 FR 66084)
commonly known and reasonably ascertainable information,
relevant specialized knowledge held by the prospective landowner and the environmental professional, and
the relationship of the purchase price to the value of the property
To maximize the chances of establish that it complied with AI, the purchaser should document that it complied with the “additional inquiries” in its property file. One way to do this is to complete a questionnaire answering these questions.
Note that the ability to use a report issued for another party for purposes of complying with AAI is a separate and distinct question of whether the party has contractual right to RELY on the report for purposes of breach of contract or malpractice claims.
In general, a contract may be enforced by the parties to the agreement and third parties who are an intended beneficiary of the contract. However, there are often critical non-contracting parties to a transaction such as lenders or landlords who may insist on reviewing the reports. Because most real transactions are financed and the loans are often syndicated or securitized, lenders will often require consultants to extend reliance to broad categories of investors or purchasers of the loans. Those so-called reliance parties would then have standing to bring a breach of contract action subject to the terms and conditions of the underlying agreement. The consultant should identify the parties who may rely on the reports and also place limits on how long those parties may use the information in the reports.
In a professional malpractice action, the question is framed in terms who the consultant owed a duty to and did it breach that duty. This question frequently arises when the consultant is retained by the lender and the borrower/purchaser later wants to file a lawsuit against the consultant for failing to identify contamination. Courts will typically look to contract reliance language in determining who was owed a duty or if it would have been foreseeable to the consultant that such a person who have relied on the phase 1 report.
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 Area. In 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.