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 Athens Tank Farm that had contained 22 80,000 barrel aboveground storage tanks along with two crude oil reservoirs/ sumps with a combined capacity of 1.8 million barrels. The tank farm operated from 1924 until 1962 when Exxon began dismantling the structures. After Exxon sold the property, it was subdivided. The Ujima Village Apartments complex was constructed in 1973 on a portion of the old tank farm.

The complex was not adequately maintained, though, and after the owners defaulted on their loan, the federal Department of Housing and Urban Development (HUD) commenced foreclosure proceedings in 1990. According to the complaint, HUD planned to sell the complex to Drew Economic Development Corporation (Drew) in 1990 who had committed to invest $6MM to renovate the complex. However, a June 1990 environment report allegedly indicated that the property had “high potential for significant environmental impairment” including exposure to methane gas and hydrocarbons. As a result, Drew withdrew its offer to acquire the property.

The plaintiffs allege that HUD then retained a property manager who performed its own environmental investigation in 1991 that revealed benzene, xylene, toluene and ethylbenzene (BTEX) 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 disagreed with the recommendations. Specifically, the complaint stated 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 property manager reportedly retained its own consultant, Hunter and Associates (Hunter) in December 1993 that was highly critical of the Earth Tech Report. Hunter’s 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 for HUD titled “Ujima Village Apartment Complex: A Survey of Potential Liability and Reporting for a Subsequent Owner or Operator” 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 (gee-engineers providing legal advice?).

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 plaintiffs also allege that in 2000, the County retained ATC to perform a phase 1 that concluded that the previous petroleum refining operations might have impacted the subsurface soils. The County then retained SCS Engineers who reported elevated concentrations of hydrocarbon vapors in soils. Plaintiffs allege that none of these reports were disclosed to the residents.

Faced with millions of dollars in repair and maintenance costs, the Los Angeles County Housing Authority and the CDC sought to find a developer to acquire, rehabilitate and manage the complex. 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). The Rincon report warned that residents were at a significant risk of exposure and cancer from elevated levels of hydrocarbon vapors in the buildings and BTEX groundwater contamination.

One of the developers retained TRC to perform a phase 1 and the firm reported elevated concentrations of methane and VOCs 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. Plaintiffs also claim that Rincon later prepared a report for the housing authority titled “Risk Based Corrective Action Evaluation Ujima Village Residential Development” where the firm stated “we believe that the possibility of a chronic health risk concern at this site warrants additional study…[F]inally, we believe that remediation is likely warranted at this site as a preventative measure to reduce possible exposure of VOC to residents, and also to mitigate existing soil and groundwater contamination underlying this property.”

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.

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 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. The complex is currently scheduled to be demolished. 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.

In Doris Alexander v Exxon Mobil, No. BC436640, Super. Ct-Los Angeles cty). However, 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.

We have reviewed several cases where sellers have been held liable for failing to adequately disclose environmental conditions in mandated property condition reports even where the property is sold “as is”. Another example is Wise v. Hays, 943 N.E.2d 835 (Ind. Ct. App. 2011), a state appeals court reversed a grant of summary judgment  in favor of a seller of residential property where the seller had failed to disclose correspondence with the Army Corps of Engineers (Corps) discussing the presence of wetlands on the property.

In 2007, the plaintiffs were interested in purchasing a 16.5 acre parcel that contained a residence. After inspecting the property, plaintiffs sent defendant written questions about the property. One of the questions asked if there were any wetlands that could impact development of the property. The defendant allegedly responded that the property could be developed for additional residential housing.

In connection with the purchase agreement, defendants completed a Residential Real Estate Sales Disclosure Form. The “no” box was marked next to question 7 (“Have you received any notices by any governmental or quasi-governmental agencies affecting this property?) and question 14 ( “Is the property in a flood plain?”).

Sometime after the purchase, plaintiffs began to have concerns about the certain structural issues about home and the presence of wetlands. Plaintiff obtained copies of correspondences from the Corps to the defendant. A June 2003 letter informed defendant that he had engaged in improper “sidecasting” of dredged material from an excavated channel, that he would have to obtain a wetlands permit for the portion of the property he proposed to develop and that any such a permit would likely compensatory mitigation. The November 2003 letter acknowledged receipt of the defendant’s permit application to leave the dredged material in place until it could be removed during the winter freeze and advised the defendant that a site visit would be conducted in March 2004 to verify that the spoil material had been removed and the area restored to its original grade.

Plaintiffs filed a complaint, alleging that defendant knowingly misrepresented certain items on the sales disclosure form. The trial court granted defendant’s motion to dismiss, ruling that plaintiffs had no right to rely on their representations when they had a reasonable opportunity to inspect the property. On appeal, the court reversed.

The appeals court began its analysis by stating that the common law recognized that a seller had a duty to disclose material facts about the property when asked by the buyer. The court said that this common law obligation was amended in 1993 when the legislature required  sellers of certain residential real estate must complete and sign a disclosure form and submit the form to a prospective buyer before an offer is accepted. However, the court said that a seller is not liable under the statute for any error, inaccuracy, or omission on the sales disclosure form that was not within the seller’s actual knowledge.

Turning to the disclosure statement, the court said the evidence established that seller had failed to disclose that the Corps had informed him that the property could not be developed with a wetlands permits, had failed to disclose that he had been informed that the dredging activities had violated the Clean Water Act, and that he was under obligation to remove the dredged materials. However, there were genuine issue of material fact as to whether the defendants had actual knowledge of the structural problems with the residence if the property lies in a flood plain. Accordingly, the court remanded the matter to the trial court for further proceedings.

The New York Property Condition Disclosure Law provides for a statutory penalty of $500 for non-compliance. Many real estate lawyers advise their clients to give the buyer the $500 credit rather than completing the form and risking greater damages for misrepresentation.

In Stalvey v. NVR, Inc., 2012 U.S. Dist. LEXIS 2506 (N.D. Ohio 1/09/12), the plaintiffs entered into an Ohio Purchase Agreement with defendant for the construction and purchase of a house. As part of the Agreement, defendant provided plaintiff with a Topographic Survey & Improvement Plan that did not depict the presence of wetlands on the property.

After taking possession of the house, plaintiffs learned that their home had been built on or near wetlands in violation of federal regulations and the local zoning regulations. Plaintiffs then began to notice odors in their home that they associated with the wetlands. After notifying the defendant, the parties agreed that they would each pay one-half of the cost to install a radon pump beneath the garage floor to eliminate the odor. After the installation, the garage floor coating began to bubble from the wet concrete floor. When the defendants declined to pay their half of the costs of the work, the plaintiffs filed their action.

Plaintiff alleged the defendant had breached the Ohio Consumer Sales Practices Act (“OCSPA”) prohibiting unfair or deceptive act or practice in connection with a consumer transaction. The trial court initially granted the defendant’s motion to dismiss on grounds OCSPA claim pertains only to real property and the law did not provide a remedy for real estate transactions.

Plaintiff filed a motion for reconsideration, arguing that its allegations went beyond the presence or failure to inform of the existence of wetlands but concerned the construction of the home itself.  The plaintiff said the defendant was required to build a home that was in compliance with local zoning ordinances and federal law but had built a home that was too large for the lot since a portion of the house encroached upon wetlands. The court reversed its ruling and held that the OCSPA claim would survive but only to the extent that it is based on allegations that the construction of the house was in violation of applicable zoning laws because the construction encroaches upon wetlands.

The plaintiffs alleged the defendant materially breached the Purchase Agreement because it represented that no wetlands existed on the property. The defendant did not check the “wetlands addendum.” Plaintiffs allege that the addendum created a duty on the part of Defendant to disclose the existence of wetlands. In response, the defendant maintained that the failure to check the wetlands addendum meant that the parties did not contract in any manner in regard to wetlands. The court concluded that the contract was ambiguous since the failure to check the wetlands addendum might be read to suggest that since there are no wetlands. Accordingly, the court denied the defendant’s Motion to dismiss the breach of contract claim.

In Ferris v. Location 3 Corp., 804 N.W.2d 822 (Wisc. Ct. App.  2011), the plaintiff Ferris purchased real property located from defendant Location 3 Corporation.3 Sometime after closing, Ferris discovered that the landfill adjacent to his property was also a Superfund4 site.

Ferris then filed a complaint against Location 3 and certain employees of firm alleging that they knew about the Superfund site but failed to disclose it in the real estate condition report. The report, which was signed by defendant Lechner, had a “no” circled next to the question “[a]re you aware of any other conditions or occurrences which would significantly increase the cost of development or reduce the value of the Property to a reasonable person with knowledge of the nature and scope of the condition or occurrence?” Ferris alleged that the real estate condition report constituted a knowing false representation of fact regarding the condition of the property. Although the real estate condition report was only signed by defendant Lechner, Ferris alleged that Lechner signed the condition report after consulting and discussing the issues regarding disclosure with the other individual defendants, and acted in concert with the three of them in signing the condition report.

The trial court found that because Ferris had not alleged facts that showed the individual defendants acted outside the scope of their authority as corporate agents, they could not be held personally liable. However, the appeals court reversed, holding that the state Supreme Court has ruled that individual defendants could be held personally liable if a fact finder finds that they engaged in tortious conduct, regardless of whether they acted on behalf of Location 3.

New York has a property condition disclosure law for residential properties that provides for a $500 penalty if a seller does not complete the form. Many lawyers advise their clients to simply give the buyers the statutory credit rather than complete the form and risk exposing themselves to claims for misrepresentation.

Historical environmental compliance is critically important in corporate transactions especially when a business or facility may be subject to a regulatory programs that is evolving or subject to re-interpretation such as the New Source Review program. In such cases, the parties will try to contractually allocate the risks. Despite the fact that these agreements are heavily negotiated, regulatory issues may subsequently arise that the parties may have no contemplated or that the parties simply disagree on how the agreement addressed the issue.

An interesting example is the unreported decision in Lucite International, Inc. v E. I. Du Pont De Nemours and Co., No. 2:09-cv-02279 (W.D. Tenn. 5/17/11) involved a 1993 sale of aMemphis acrylics plant by DuPont to ICI Acrylics, Inc. (now known as Lucite International, Inc). Unreported decision tend to be overlooked by the legal trade press because they have no precedential value. However, the vast bulk of law is made in unreported cases and these opinions can provide insights on how judges may view similar situations or provide roadmaps on what arguments  may present the best chance of success. These informal decisions can also often provide practical insights and lessons learned about contract drafting and interpretation.

In this case, theMemphisplant manufactured methyl methacrylate.  The manufacturing process used a sulfuric acid recovery unit (“SAR Unit”) to convert spent acid sludge into sulfuric acid. In 1973, the Tennessee Division of Air Pollution Control (the “TDAPC”) classified the SAR Unit as a “process” instead of a “sulfuric acid plant. If the SAR unit had been classified as a sulfuric acid plant, it would have been potentially subject to the New Source Performance Standards (NSPS) of the Clean Air Act (CAA). The TDAPC subsequently delegated permitting authority to theMemphisand Shelby County Health Department (“MSCHD”). This agency initially informed Dupont that the SAR was considered to be a ‘pollution prevention device’ and not a NSPS-regulated unit because it recycled the spent acid to the process eliminating the discharge of spent acid to the process server.

In 1975, Dupont applied for a permit from the MSCHD to construct a second furnace train. In 1982, the MSCHD issued a permit that allowed the plant to emit 11.9 tons per day of sulfur dioxide (SO2) which exceeded of the amount permissible under the NSPS. EPA subsequently approved the facility’s Title V operating permit with the SO2 emission rate.

In November 1985, the MSCHD advised Dupont that it had re-classified the SAR Unit as a sulfuric acid plant. However, the MSCHD informed Dupont that it would not enforce the NSPS or retroactively penalize Dupont for modifications made between 1975 and 1978 since the facility had relied in good faith on the prior determination that the SAR unit was not subject to NSPS. However, the agency cautioned that any future modification would trigger the NSPS. The MSCHD indicated in its letter that while it believed the SAR classification was correct, DuPont could request a determination by the EPA.

In December 2002, the EPA conducted a multimedia compliance investigation and subsequently concluded that the plant was operating in violation of the NSPS emission limits for SAR units since at least 1978, when the second furnace train came online. Following two years of negotiations, EPA and Lucite entered into a consent decree in February 2006 where Lucite agreed to install dual absorption technology to bring the SAR unit air emissions within NSPS and paid almost $25 million in civil penalties. The consent decree was terminated in 2008 after the court determined that Lucite had complied with its terms.

In May 2009, Lucite filed a breach of contract action against Dupont for failing to honor it’s indemnification obligations under the 1993 the Asset Purchase Agreement (APA). Specifically, Lucite alleged that Dupont had breached APA Clause 12.2.1 that provided that the seller indemnify the buyer for “Environmental Liabilities” attributable to conditions existing at the Closing Date.

Dupont argued that it was not required to indemnify Lucite because the environmental liabilities resulted from Lucite’s failure to install dual absorption technology. Dupont claimed that Lucite had failed to mitigate or avoid exacerbating environmental liabilities. Dupont specifically pointed to APA clause 12.2.2 providing that its indemnity obligation did not extend to environmental liabilities that “have arisen, been increased, exacerbated, enhanced, or caused as a result of an act or omission (whether direct or indirect) of the buyer . . .”.  Dupont also argued that it was not required to indemnify Lucite the NSPS determination by EPA was a change in legislation after the closing of the APA agreement.

On Dupont’s claim that Lucite caused its damages by failing to install the dual absorption technology, the court said that for an act or omission to constitute a complete bar to indemnity, the court said that Dupont would have to show that Lucite was the sole cause of the environmental liabilities but had failed to do so since the EPA Investigation Report had concluded that the SAR had been exceeding the NSPS emission limits years before Lucite purchased the site.

On the related issue that Lucite failure to mitigate its damages relieved Dupont of its indemnity obligation, the court said the duty to mitigate only attaches once a material breach of contract occurs and then all that is required of the non-breaching party is to act reasonably so as to not unduly enhance the damages. The court said the APA did not alter the traditional mitigation duty. The court pointed to APA Clause 12.4.1 which suggested a narrow range of activities that Lucite had to perform to mitigate against environmental liabilities, such as “carrying out (where reasonably practicable) soil tests” (APA Clause 12.4.1.1) and “settling a claim of any party . ..with respect to loss, harm or other damage” (APA Clause 12.4.1.3).

Under these clauses, the court continued, Lucite only had to take reasonable and practical steps to mitigate damages. Requiring Plaintiff to install a multi-million dual absorption technology prior to an allegation or determination by a government regulator that the NSPS apply to the SAR Unit would not be reasonable or practicable. Thus, the court found that the earliest point at which a “potential environmental liability” may have arisen to trigger APA Clause 12.4.1 was when the EPA first informed Lucite that it intended to assert claims for violations of the NSPS. Prior to this event, the court reasoned, Lucite was not aware of any “potential environmental liabilities” and thus could not be found to have failed to mitigate such liabilities under APA Clause 12.4.1. The court also rejected Dupont’s interpretation that Lucite had a duty to “monitor the status of the law” and to “proactively request” an NSPS applicability determination from the EPA.

In response to the Lucite’s claim that Dupont had breached its environmental compliance warranty, Dupont asserted that its disclosures in the Schedules of the APA relieved it of any duty to indemnify. Dupont specifically pointed to APA Clause 9.7 providing that “[t]he Buyer shall not be entitled to make any claim with respect to any breach or alleged breach of the Warranties to the extent that: the facts, matters or circumstances giving rise thereto (with respect to which any such claim or alleged claim arises) have been disclosed in this Agreement or the Schedules hereto.” Dupont also relied on APA Clause 1.2.2 that stated that the schedules forms part of the APA and Clause 9.2.1 that provided that the warranties are given subject to the information disclosed in the Schedules. Dupont pointed out that ICI had requested information identifying all environmental capital expenditures during the last ten years that were greater than $100,000 and that the schedules referred to a Site Assessment Report and Environmental Baseline Study that included an entry of “SO2 Stack Dual Absorption” at a cost of “8 million dollars. Dupont also cited a document disclosed in the schedules titled “Environmental Topics and Path Forward,” that summarized a meeting between ICI and MSCHD representatives concerning emissions permits in October 1992

However, the court ruled that the disclosures in the APA Schedules did not viscitate its indemnity obligation. The court said the disclosure about the SO2 Stack Dual Absorption reflected a potential but unauthorized capital project that did not come to fruition. The mere fact that Lucite subsequently had such a project on its capital forecast, the court said,  did not obligate Lucite to install the equipment. The court also found that pre-closing communications did not relieve Dupont of its potential indemnification obligation since the APA constituted the final, integrated agreement among the parties.

The court said that Dupont agreed to indemnify Lucite for environmental liabilities attributable to pre-closing conditions and failed to cited any cases supporting its arguments that pre-closing disclosures can nullify express representations in a contract. The court pointed out that Delaware law provided that a party to a contract can rely on express warranties and representations in that contract regardless what they learned or should have learned during due diligence. The court said contracting parties do not have to prove that they were justified in relying on the representations and warranties set forth in the contract. Accordingly, the court held that Lucite’s failure to install dual absorption technology prior to being informed by the EPA that the agency intended to assert claims against Plaintiff for violations of the NSPS did not constitute an omission or a failure to mitigate under APA Clause 12.4.1. However, the court did find there was an issue of material fact as to when the EPA informed Plaintiff of its intent to bring these claims.

Dupont also argued that EPA’s determination that the NSPS applied to the SAR Unit fell within the change of law exclusion to its indemnity obligation since the EPA interpretation ran counter to prior rulings of the state and MSCDH. The court rejected this claim, holding no change in legislation occurred when the EPA issued its 2003 Investigation Report. The court said neither the governing law enforced by the EPA or the NSPS regulations had changed since the 1993 closing date. The court said that the MSCDH had informed Dupont in 1985 that the SAR Unit was incorrectly classified as a sulfuric acid process but had decided to exercise its discretion not to enforce the NSPS. The fact that EPA decided to enforce the long-existing NSPS regulations did not constitute legislation not in effect at closing.

Moreover, the court rejected the assertion that the MSCDH had “grandfathered” and exempted the SAR from the NSPS regulation. The court said EPA’s delegation to the state expressly reserved EPA’s right to enforce any applicable standard and EPA was not bound by any decision of the state or local authority. In addition, the court said, neither Congress nor the EPA delegated to local authorities the power to make local plants “exempt” from federal laws and regulations. Indeed, the court noted that MSCHD acknowledge in its letter to Dupont that the EPA could make a subsequent enforcement determination and informed Dupont that it could request a determination by the EPA if they so desired. Regardless of what the parties believed, the court ruled, EPA retained the authority to decide that the parties’ understanding of the compliance status of the SAR Unit was in error, regardless of whether it was operating under emissions permits issued by the MSCHD.

The court docket had lots of sealed documents presumably to prevent disclosure of confidential information or trade secrets. Recently, the parties reacged a confidential settlement of this case.

In Carolyn Vickers Inc. v. Unocal Corp., 2011 Cal. App. Unpub. LEXIS 9642 (Ct. App-2^nd Dist. 12/19/11), Alan Little Ventures (ALV) purchased a 4.1 acre tract of land in San Luis Obispo in 2005. The land had been subdivided into 17 lots by the sellers, Phyllis and Alex Madonna (the “Madonnas”), and was zoned for single family residences.

Four oil pipelines ran across portions of the tract. Back in 1981, an employee of the Madonnas had struck one of the pipelines while operating a backhoe, causing an unknown release of oil.  The oil spill was not properly remediated. The Madonnas did not disclose the presence of the pipelines or the oil spill when they sold the land to ALV.

In 2006, ALV sold lots, ALV sold lots 5 and 9 to Carolyn Vickers Inc. (CVI). One year later, ALV and CVI discovered that soil and groundwater beneath several lots was contaminated, including lot 5. ALV subsequently assigned any rights it had regarding contamination of lots 2 and 4 to CVI who then filed a 69-page complaint containing 16 causes of action for the contamination of the four lots against the companies alleged to have owned or operated the pipelines, namely Unocal Corporation, Union Oil Company of California, Unocal Pipeline Company and Chevron Corporation, Conoco Phillips Company and Conoco Phillips Pipeline Company.  The damages sought by CVI included accrued interest on the purchase mortgages, lost business opportunities and profits, cleanup costs and legal fees.

The defendants moved to dismiss the complaint, asserting the claims stemmed from 1981 and were therefore barred by the three-year statute of limitations. CVI responded that statute of limitations did not begin to run until May 2007 when it learned of the contamination. CVI also argued that even if the discovery rule was inapplicable, the contamination constituted ongoing nuisance and trespass so the statute of limitations had not run for those two causes of action.

The trial court agreed with the defendants that statute of limitations for injury to real property had expired but allowed CVI to amend its continuing nuisance and trespass claims. To expedite an appeal, CVI opted to dismiss its nuisance and trespass claims. This highly risky maneuver proved to be fatal when the appeals court affirmed the ruling of the trial court. The appeals court said that the three-year statute of limitation began to run when the Madonnas first became aware of the oil spill in 1981 and expired in 1984. The court said that statute of limitation was not revived and that ALV or CVI were not entitled to the benefit of the discovery rule because the Madonnas had immediately aware of the oil spill.

This case is yet another example of why environmental due diligence should consider potential impacts from pipelines. Many pipelines were constructed on property that was formally rural but it now prime land for development. Much of the pipeline network is aging, has not been well-maintained and is not well marked. As development encroaches upon pipeline easements, accidents like what happened in this case in 1981 are becoming more frequent.

Unfortunately, due diligence practice has not kept up with this growing concern and phase 1 reports frequently tend to ignore or downplay potential risks about contamination from pipelines. However, in the wake of a number of high profile pipeline leaks during the past few years, pipelines are coming under increasing regulatory scrutiny. Indeed, the GAO issued a report just last week about the potential risks and regulatory gaps for the 250,000 miles of gathering pipelines dispersed across the rural parts of our country.  See http://www.gao.gov/assets/590/589514.pdf?goback=%2Egmp_3607181%2Eanp_3607181_1332819145827_1%2Egmp_3607181%2Egde_3607181_member_103597960 . We are only beginning to understand the potential risks from pipelines and I suspect that pipelines will become the USTs of the 21^st century.

The title of this post sounds like a teaser to a bad joke but unfortunately it refers to the latest round of motions in two sprawling lawsuits involving a defunct planned community that was to be developed on what proved to be a part of a world war 2 bombing practice range. The defendants include the project developer, the bond underwriter, bond counsel, the district established to issue the bonds, the appraiser, the title company and the seller of the property.

Several motions for summary judgment were recently decided by the federal district court for the eastern district of Louisiana. Coves of the Highland Community Development District v McGlinchey Stafford, 2011 U.S. Dist. LEXIS 109187 (E.D.LA. 9/26/11); SCB Diversified Municipal Portfolio v Crews & Associates, 2011 U.S. Dist. LEXIS 136177 (E.D.LA 11/28/11) and SCB Diversified Municipal Portfolio v Crews & Associates, 2011 U.S. Dist. LEXIS 141987 (E.D.La. 12/9/11). A third related case, MGD Partners v First American Title Insurance Company, 2011 U.S. Dist. LEXIS 18699 (E.D.La 09/08/11), was recently dismissed and will not be discussed in this post. The Cove of the Highland Community Development District is scheduled to go to trial in January while the SCB trial is scheduled for February.

Common Facts

In March of 2006, MGD Partners (“MGD”) purchased 324 acres of real property (the “Property”) inTangipahoa Parish,Louisianato build a planned residential community known as The Coves of theHighland(the Project”). MGD did not perform a phase 1 environmental site assessment (Phase 1 ESA). A MGD partner testified in a deposition that he did not order a phase 1 ESA because he had lived in the area and the property had timber or farmland for all his life. He did say that he was aware that there had been a World War 2 practice bombing and gunnery range in the area but believed it was about a mile to the east of the Project. Moreover, the title abstract indicated that the practice range was on a different parcel. In addition, the bank that financed the acquisition of the property, First Guaranty Bank, did not require a Phase 1 ESA.

In June 2006, MGD retained Defendant McGlinchey Stafford (McGlinchey) to a special municipal district known as the Coves of the Highland Community Development District (the “District). The purpose of the District was to finance and manage the Project infrastructure. MGD transferred title to the District who then issued tax-exempt bonds to finance certain infrastructure improvements such as roads, utilities and sewers. The District had five board of supervisors. Three of the board supervisors were partners of MGD. The other two board members were the attorney who served as the District’s general counsel and the consulting engineer for the Project.

On November 1, 2006, the District entered into a Development Agreement with MGD to facilitate development approvals and infrastructure financing. MGD represented there were no violations of any Environmental Laws or any material environmental claims affecting the property. MGD also agreed in section 3.10(b) that it would take all remedial actions necessary to clean up or remove of any hazardous materials discovered on the Property.

The District also entered into a Master Trust Indenture with Regions Bank, as trustee, for the issuance of up to $30MM in tax exempt bonds. Defendant Crews and Associates (“Crews”) was the underwriter of the bonds to be issued by the District. Crews worked with MGD to assemble a 480-page “Due Diligence Binder” to support the bond offering. To develop this binder, Crews gave MGD a “Due Diligence Checklist”.

The District issued $7.695MM in bonds that were sold through a prospectus called a ‘Preliminary Limited Offering Memorandum (“PLOM”) and a “Limited Offering Memorandum” (“LOM”). Bond investors typically use the PLOM to make purchase decisions with the bond pricing left blank. After the bond purchases are confirmed, the LOM is then issued with the only changes typically being the pricing information.

Defendant Breazeale, Sachse & Wilson (“BSW”) prepared both the PLOM and the LOM. The PLOM contained a paragraph titled “Development” that stated the developer had provided a number of documents including a Phase 1 ESA. This paragraph also stated that although the information furnished was believed to be reliable, “the neither District, the Underwriter nor their counsel have independently verified the information provided by such parties.” The PLOM also had a section title “Phase 1 Environmental Site Assessment” that stated a phase 1 with the date left blank had been performed and no RECs had been identified. When the LOM was issued, the phase 1 section had been deleted but the “Development” section still stated that a phase 1 had been one of the documents furnished by the developers. BSW issued an opinion letter to Crews stating that the firm was not aware of any information that caused it to believe that the LOM contained any untrue statement of material fact or omits to state any material fact.  The LOM also contained the standard bold boilerplate that investors should not rely on any investigations by any party to the transaction

Greystone Valuation Services (“Greystone”) was retained by MGD to prepare a feasibility study known as a marketing study which was attached as an appendix to the LOM. McGlinchey issued Bond Counsel Opinion, Supplemental Opinion and opinion to the District. The opinions were delivered on November 16, 2006, the date of the closing of the issuance, sale and delivery of the Bonds.

Crews purchased the bonds pursuant to bond purchase agreement drafted by McGlinchey. Crews then sold the bonds to several series of the Sanford C. Bernstein Fund Diversified Municipal Portfolio (“SCB”), a municipal mutual fund for the face amount of the Bonds. In connection with the SCB closing, BSW issued an opinion letter to Crews stating that the LOM did not contain any misrepresentations or omissions of facts.

Discovery of the Former Bombing Range

As it turns out, the property was part of the Former Hammond Bombing andGunneryRange(“HBGR”) that the federal government had leased from 1942 to 1945. The 1943 deed expressly stated that the property was being leased to the United States Army Air Corp for “a practice bombing and gunnery range.” The HBGR was subsequently designated as a “Formerly Used Defense Site” (“FUDS”) and in 1995 the Army Corps of Engineers (“Corps”) conducted an assessment to determine if the site was eligible for funding under the Defense Environmental Restoration Program for Formerly Used Defense Sites (DERP-FUDS). The inspection revealed physical evidence of ordnance and explosive waste consisting of old bomb craters and pieces of shrapnel. The Corps also concluded the existence of bomb craters suggested a high probability of buried unexploded ordnance (“UXO”) as well as munitions and explosives of concern (“MEC”) on the HBGR. In August 1996, the Corps determined the site was eligible for DERP-FUDS inclusion, based on the likely presence of UXO and MEC. In 1996, a local historian wrote a book “Hammond Army Air Field and Early Aviation in the Hammond Area” which contained extensive detail about the HBGR and interviews with former military personnel who had used the HBGR. Indeed, the Corps used this book to locate some of the target areas.

After Sept. 11, 2001, Congress took a particular interest in the approximately 10,000 FUDs across the country because their potential for terrorist activity. In connection with this initiative, the Corps returned to the HBGR in 2002 and performed an extensive physical, historical and risk assessment analysis. The results were published in the March 2003 Archives Search Report for the formerHammondBombingRange(“2003 ASR”).

In 2005, the Corps issued a contract to Parsons Infrastructures and Technology Group, Inc. (“Parsons”) to conduct a Site Inspection at the HBGR to further define the scope and extent of munitions, including any UXO and MEC, remaining on or at the HBGR, and to determine what, if any, further action would be required to remove this material from the HBGR. Parsons issued a draft report in December 2008 which showed that the Project was located within the HBGR.

By the spring of 2009, the District had completed the 120-acre phase 1 of the Project consisting of 264 home lots, installed streets, street lights, sewer and water lines, eight acres of ponds, and a one acre sewage plant that was capable of serving 2500 homes. MGD was preparing to close on $2.5MM in lot sales when the Corps published a public notice in the local newspaper advising of the results of the site inspection. The study contained maps showing that a portion of the Project was located within the outer boundary of the former strafing target area, rifle range, multiple use target area, and three of the five munitions response sites located within the HBGR. The Corps said that the munitions used at the HBGR included 100-pound general purpose bombs, 100-pound practice bombs, 100-pound concrete practice bombs, 2.25” practice rockets, spotting charges, .50-caliber machine gun ammunition, 3-pound practice bombs, 4.5-pound practice bombs and general arms ammunition. The Corps indicated that it would probably not begin remediation work until 2030 depending on Congressional funding.

Following publication of the notice, the Tangipahoa Parish Engineer issued a building moratorium until the risk of UXO and MEC contamination had been fully investigated and remediated. As a result, development of the Project ceased, the lots could not be sold and the District defaulted since the bond payments were to be funded from assessments. There were also allegations in the briefing for the various motions that the Project had been encountering financial difficulties. Reportedly, MGD as well as its principals had to borrower an additional $1.3MM in late 2008 money to fund the work. In 2009, MGD allegedly was behind on its assessment payments, interest payment for the bonds and an installment payment on a promissory note for land that was to be used for the other phases of the Project.

The District Litigation

After the District defaulted on the Bonds, the District filed a lawsuit against McGlinchey and BSW alleging violations of federal securities law and state claims for professional malpractice The District said that under the bond offering documents and CERCLA, the District and MGD were obligated to remediate the property at an estimated cost of $1,3MM

Specifically the District argued that as its bond counsel, McGlinchey had strict “due diligence” duties to conduct a reasonable investigation into the facts supporting its opinion letters, including performing basic environmental due diligence. The District also claimed McGlinchey had failed to alert its client’s attention that the LOM inferred that the Developer had obtained a Phase I ESA when in fact no such environmental site assessment had been performed. As a result, the District said the LOM was misleading and subjected it to securities litigation with the bond purchasers. The District also asserted that McGlinchey had a duty to review the abstract of title obtained by its general counsel or should have ordered its own abstract of title.

McGlinchey filed a motion to dismiss and in 2010 arguing as bond counsel it had no obligation to investigate environmental issues and that its engagement letter expressly stated that the firm would be relying on information provided by the District and MGD. In an October 2010 opinion, the court noted that documents such as the engagement letter outlining the scope of the firm’s services seemed to contradict or undermine the District’s allegations. While concluding that the allegations raised sufficient questions to defeat a motion to dismiss, the court said it was skeptical of the alleged expanded scope of the law firm’s representation. Therefore, the court said it would welcome an appropriately-supported motion for summary judgment after sufficient discovery had been completed.

The law firm also argued that the complaint that had been filed on November 10, 2009 was barred by the three-year statute of limitations. The court agreed that any claims relating to any alleged misrepresentations, errors, omissions, or misstatements of fact upon by McGlinchey that the District relied on to its detriment that occurred prior to November 10, 2006 were barred.

The District then sought permission from the court to file an amended complaint to clarify the misstatements, misrepresentations or omissions committed by McGlinchey that had been learned during discovery. However, the court denied this motion. Coves of the Highland Community Development District v McGlinchey Stafford, 2011 U.S. Dist. LEXIS 109187 (E.D.LA. 9/26/11)

The District also alleged that BSW committed legal malpractice when it (1) failed to advise the District that its bond offering memorandum referenced the Environmental Phase 1 study; (2) did not advise the District that this reference to an Environmental Phase 1 study amounted to a representation that an Environmental Phase 1 study had been performed; (3) failed to disclose to the District that an Environmental Phase 1 study had not been completed; (4) did not remove reference to the Environmental Phase 1 study in the LOM; and (5) did not advise the Plaintiff that an Environmental Phase 1 study should have been performed to protect against unknown conditions associated with the property that may delay the development or affect the Plaintiff’s ability to meet its debt obligations. The District also stated that the firm had a “duty” to evaluate the Plaintiff’s bond offering memorandum, disclose the terms of the memorandum, and advise the Plaintiff about the possible consequences of the memorandum.

SCB Litigation

SCB filed a complaint against the District, Crews and Greystone, alleging the LOM was also misleading because it failed to disclose the UXO and MEC contamination risks affecting the Property. SCB asserted the defendants had strict due diligence obligations in connection with the bonds that included environmental due diligence.

SCB Claims Against BSW

Specifically, SCB charged BSW with negligent misrepresentation for (1) failing to reveal relevant facts relating to the proximity of the HBGR to the Project; (2) failing to reveal that a Phase I Environmental Site Assessment had not been conducted on the property; (3) drafting the PLOM and LOM which allegedly contained misleading statements regarding a Phase I Environmental Site Assessment;” and (4) issuing an opinion letter to Crews which states that the PLOM and LOM did not contain misrepresentations or omissions of facts.

BSW filed a motion for summary judgment. The court said that even if it assumed BSW had a duty of disclosure and breached that duty, SCB have failed to establish justifiable reliance on any alleged misrepresentation. The court said SCB was essentially claiming that its financial analyst interpreted the reference to the section captioned “Phase I Environmental Site Assessment” meant a Phase I ESA had been performed on the Property and relied upon that statement in making the decision to purchase the Bonds. However, the court noted that SCB’s financial analyst who read the PLOM had testified that he had failed to notice that the caption “Phase I Site Assessment” was missing from the LOM. Since he was the only SCB representative who read the PLOM, the court ruled that SCB could not claim reliance on this alleged misrepresentation by BSW.

SCB also argued that BSW made misrepresentations in its opinion letter that the PLOM did not contain any misrepresentation or omission of material fact. However, the court said even assuming BSW had a duty of disclosure and breached this duty by making misrepresentations or omitting material facts in its opinion letter, SCB had not presented any evidence of justifiable reliance. In particular, the court noted that SCB’s financial analyst testified in his deposition that SCB did not rely on the opinion letter in purchasing the Coves Bonds. Accordingly, summary judgment was granted to BSW. SCB Diversified Municipal Portfolio v Crews & Associates, 2011 U.S. Dist. LEXIS 141987 (E.D.La. 12/9/11)

SCB Claims Against Greystone

SCB asserted claims against Greystone for negligent misrepresentation for failing to conduct an environmental investigation. SCB also argued that as a certified and licensed real estate appraiser, Greystone had a duty to obtain and review a title search to determine any historical issues regarding environmental contamination

The Marketability Study stated that was “a comprehensive analysis and review” of forces affecting the Project including “environmental (physical) and governmental features of the defined market area. SCB alleged that Greystone had a duty to discover and disclose the lack of a Phase I Environmental Site Assessment; had breached that duty; and that SCB had relied on such statements when it decided to purchase the Bonds.

In Greystone’s motion for summary judgment, the court said that SCB had failed to identify any source of law that could impose upon Greystone a duty to obtain an environmental assessment or to disclose is absence. Even assuming that Greystone had a legal duty, the Court said, Greystone did not breach that duty. The court said there was no mention of any environmental assessment in Greystone’s report. Moreover, the court said the Marketability Study contained several “Underlying Assumptions and Conditions” that make clear that the analysis was based on the Property being in full compliance with all applicable environmental and laws unless stated otherwise. Moreover, SCB’s financial analyst testified that he did not rely on the Greystone’s study. The court said it was undisputed that the SCB financial analyst understood from the PLOM that any Phase 1 ESA was supplied by the developers and not from any other source. Because SCB could not demonstrate justifiable reliance on the Greystone study regarding the existence of a Phase I Environmental Site Assessment, the court granted Greystone’s motion for summary judgment. SCB Diversified Municipal Portfolio v Crews & Associates, 2011 U.S. Dist. LEXIS 136177 (E.D.LA 11/28/11)

SCB Claims Against Crews

SCB asserts the LOM was misleading because it failed to disclose the Project was located on the HBGR and may contain UXO and MEC. Crews failed to disclose the above alleged material facts. SCB alleges that as the underwriter, Crews had a duty to inquire into the accuracy, truthfulness and completeness of the key representations of the District and had a duty to exercise reasonable care by conducting due diligence to investigate and disclose all material facts surrounding the issuance of the bonds. In particular, SCB claims that Crews had a duty to conduct basic environmental due diligence as to potential environmental contamination of the Project. SCB claims Crews knowingly and recklessly failed to verify or inquire into whether there was any basis for this representation even though a Phase I Environmental Study is a basic component of due diligence on a real estate transaction of this size. Crews has filed a summary judgment motion but the court has not yet decided the motion.

This case is just one of a number of high cases involving residential developments that were unknowingly constructed on former bombing practice ranges. In some instances, the parties were aware that a former bombing range had been located in the vicinity of the development but the developments were not close enough to the target areas to represent a significant risk. The underlying assumption in those decisions was that all of the bombs fell on the intended target. Given that these were PRACTICE ranges for new pilots, one has to wonder why the developers and their engineers assumed all of the bombs fell on the “x”! Discussions of the other cases are available from our Archived Posts.

It is also interesting that the District was dominated by the developer who made the decision not to conduct environmental due diligence. Call my cynical but it does seem somewhat repugnant that the District is trying to blame professional service providers who do not normally deal with environmental issues for the negligence of its own members.

Update on McGlinchey Lawsuit

In January, the court granted summary judgment to McGlinchey. The court said that the terms of the engagement letter provided that McGlinchey’s role in the venture was limited to assisting Plaintiff in its formation under Louisiana law and in issuing bonds. The court said the firm’s review of the PLOM did notinclude the section regarding the development, which is where the mention of a Phase I Environmental Site Assessment is located.

The court also rejected the District’s claim that McGlinchey had violated the rules of professional conduct for attorneys by limiting its representation without obtaining informed consent to such limited representation. The District had introduced expert testimony that any attorney representing, in any capacity, a client who is engaged in developing real estate must advise a client about the need for environmental reviews. However, the court said this  standard of practice was too broad, finding that environmental issues are outside the scope of bond counsel’s traditional role in municipal finance transactions. Since environmental due diligence was not in the scope of McGlinchey’s duty to Plaintiff, McGlinchey did not commit legal malpractice by reviewing the PLOM and failing to notice the mention of a Phase I Environmental Site Assessment-especially in this case where McGlinchey was retained after the client had acquired the property.

Of some concern to real estate lawyers, though, was the court suggestion that attorneys working on real property acquisitions would most likely have a duty to advise a client regarding environmental issues but this duty didnot extend to every attorney who comes into contact with a client developing real estate. SCB Diversified Mun. Portfolio v. Crews & Assocs 2012 U.S. Dist. LEXIS 754  (E.D.La. 1/4/12)

Shareholder Representative Services (SRS) recently issued the results of its M&A Deal Terms Study covering 196 private-target acquisition agreements. The deals closed between July 2010 and September 2011. The 2011 study compares results against an earlier study that encompassed deals from July 2007 to July 2010. Some of the interesting findings are:

• use of escrows for post-closing purchase price adjustments has doubled since 2010
• average escrow periods increased from 15.9 months to 18.3 months
• The definition of “material adverse effect” (MAE) had carve-outs in 92% of the deals. Common carve outs included changes in law (71%), changes in economic conditions (87%), changes in accounting standards (73%) and changes effecting the particular industry (79%)
• For knowledge qualifiers, 11% of deals required actual knowledge. For those deals using constructive knowledge, 82% required reasonable or due inquiry, 35% required such reasonable or due inquiry of certain employees. 87% of the deals.
• For the compliance with law representation, 80% of deals included present and past compliance. For the Notice of Investigation rep, 8% included this rep without a qualifier and 20% included a knowledge qualifier. For notice of violation rep, 70% included this rep while 12% contained a knowledge qualifier. For 7% of deals, the complete rep was subject to a knowledge qualifier.
• 90% of all deals in the study required seller to update reps and warranties.
• At the signing of an agreement, 10% of deals required the reps to be accurate “in all respects”, 72% require reps to be accurate “in all materials respects” and 18% are subject to MAE. However, for closing reps, 66% of deals use the “in all material respects” while 33% use MAE.
• Only 1% of deals had stand-alone environmental indemnities. In order words, environmental indemnity was linked to a breach of rep or warranty, or covenant.
• For survival periods for making claims, 46% of deals had 18-month survival period, with 27% having 12 month period and 14% using two year period    
• 14% of deals provided for a separate survival period for environmental liabilities    
• For indemnification baskets, 64% applied to first dollars while 33% of deals had a deductible. The average size of the bucket has been dropping with 57% of deals having buckets that represented 0.5% of the transaction value or less while a transaction percentage of 0.5% to 1% was used in 34% of deals.
• 9% of the deals with baskets had carveouts for breaches of environmental reps
• 6% of the deals with caps had carveouts for breaches of environmental reps 
• Indemnification was the exclusive remedy for breaches in 93% of the deals. However, 95% of those deals had carveouts for fraud and 54% for intentional misrepresentation.
• 81% of deals provided that buyer indemnifications claims would be reduce by insurance proceeds

The complete report is available from www. shareholderrep.com

In the wake of the Great Recession, many foreign investors are buying bulk quantities of condominium units at what they perceive to be distressed prices for projects located in certain gateway cities such as Miami and New York. Frequently, these condominium projects are developed on brownfield sites. In phased transactions where multiple buildings are constructed over a period of time, portions of the brownfield site cleanup on other parcels comprising the larger project may not be completed. Some states will not issue no further actions letters with covenants not to sue or liability releases until construction of the entire complex is completed. In such circumstances, buyers would acquire condo units without the liability protection afforded by the NFA letter.

As a result, some banks are requiring environmental due diligence when investors seek to finance condo acquisitions. However, other banks and cash buyers may not conduct any such diligence since they do not perceive of significant liability. In the case of foreign investors, they may also not be familiar with US environmental laws. 

A condo buyer will not normally be liable for an incomplete cleanup or failure of the building to comply with post-remedial engineering or institutional controls since the condominium association will be considered the property operator for purposes of CERCLA liability. Of course, if the buyer acquires enough units to control the condo association, it is possible the buyer could inadvertently become an “operator” of the property.  A condo buyer could also face indirect liability if the condo projects subsequently experiences adverse environmental publicity which causes the units to lose significant value—even from distressed valuation levels. In such instances, lenders who financed the condo acquisition could also confront a loss of their collateral.    

A recent Michigan case illustrates the risks associated with such projects. In Alfieri v. Bertorelli, 2011 Mich. App. LEXIS 1796 (Mich.Ct. App. 10/18/11), the plaintiffs purchased a condominium unit in a former factory building. The plaintiffs did not intend to live in the condo but purchased it as an investment. The factory had been impacted with trichloroethylene (“TCE”) from its former use.  A newspaper article and the sales brochure prepared by the real estate agents indicated the site had been remediated. However, the developer did not remediate the contamination beneath the building but instead installed a vapor barrier. When asked about the environmental condition of the property, the real estate agents told the plaintiffs the property had been remediated despite the fact that the Michigan Department of Environmental Quality had advised the agents that the sales brochure was inaccurate and misleading. Because of the newspaper article and the sales brochure, the plaintiffs did not perform their own due diligence

The property turned out to be heavily contaminated. Plaintiffs subsequently filed a lawsuit against the real estate agents on theories of silent fraud and negligent misrepresentation.  The defendants claimed that they owed no duty to the buyers, that there was insufficient evidence that the buyers relied on the sales brochure, and any reliance was unreasonable because the agents did not make any misrepresentations.  The jury found that the agents engaged in negligent misrepresentation. However, the jury also determined that the plaintiffs were partially responsible for their damages because they had failed to perform their own due diligence. The jury found that the buyers were 35% at fault on the negligent misrepresentation claim.

Both parties appealed but the Michigan Court of Appeals affirmed the jury’s verdict. The Court of Appeals began its opinion by distinguishing between silent fraud and negligent misrepresentation. While the concepts were similar, the court said that silent fraud was based on a defendant suppressing a material fact that they were legally obligated to disclose while negligent misrepresentation was premised on an affirmative inaccurate statement. The court said that a misleadingly incomplete response to an inquiry could constitute silent fraud.

Rejecting  defendant’s contention that sellers’ agents a per se duty of disclosure to buyers, the court said that a duty of disclosure may be imposed on a seller’s agent to disclose newly-acquired information that is recognized by the agent as rendering a prior affirmative statement untrue or misleading. The court said this would be especially true where the agent knows that the buyer has a particular concern with the subject matter of that statement.

Turning to the facts of the case, the court found there was evidence that plaintiffs made direct inquires of defendants about the condition of the property and that the Department of Environmental Quality advised defendants that the sales brochure contained inaccurate and misleading information. The defendants had  argued that there could be any fraud if the allegedly-defrauded party had the means to determine the truth of the matter. However, the court said the general rule only applied when the plaintiffs were either presented with information and chose to ignore it or had some other indication that further inquiry was needed. Moreover, the court went on, when the defrauded/injured party tried to examine extrinsic evidence supporting a false statement, the injured party owed no duty to the defrauder to exercise diligence to uncover additional evidence disproving the defrauder’s representations

The court noted that the plaintiff testified that it was his understanding that the site had been cleaned up based on general public discussion, conversations with the defendants and local newspaper articles. Moreover, the court said, plaintiffs directly inquired of Greene regarding the condition of the property and whether it had been cleaned up at the time they signed the purchase agreement. While the court acknowledged that the facts set out in the sales brochure could have been independently verified, the court said that viewing the evidence and all reasonable inferences that can be drawn from it in the light most favorable to plaintiffs, there was sufficient evidence to establish that the plaintiffs had reasonably relied on the sales brochure where numerous sources–including the defendants, the local newspaper, and public “buzz”– indicated that   the site had been cleaned up

On the jury instructions regarding the plaintiff’s comparative negligence, the court ruled that given plaintiff’s decision not to obtain an environmental inspection and execution of a purchase agreement specifically stated that defendants had no knowledge of the property’s environmental conditions, there was sufficient evidence for the jury could have found some comparative fault on the part of plaintiffs with respect to the negligent misrepresentation claim.

We have a number of posts about broker liability associated with environmental conditions and incomplete property condition disclosure statements in our “archived” blogs.

A Chapter 13 debtor had previously owned a gas station. After the New York State Department of Environmental Conservation (NYSDEC) issued a notice of violation involving failing to comply with underground storage tanks (USTs) regulations, the debtor filed its chapter 13 petition. In its Statement of Financial Affairs, the debtor disclaimed knowledge of environmental issues despite having received  the notice of violation. As a result, the NYSDEC was not included in list of creditors or any schedules of liabilities.. Because the agency was not aware of the bankruptcy proceeding, it did not file a claim or otherwise appear in the bankruptcy case.

A Chapter 13 plan was then approved by the court. The plan provided that the debtors would agree to make monthly payments to the chapter 13 trustee and that the debtor would surrender its property to the county for unpaid taxes. One year after the chapter 13 plan had been confirmed, NYSDEC filed motion to compel compliance under 28 under U.S.C. 959(b) which imposes obligations on trustee to comply with laws.

Because of the potential environmental liability associated with the property, the county did not take title to property. Because the plan had no provision for trustee to retain property, title revested to debtor by operation of law. The Court said the debtor fell within the scope of the parties subject to 959(b). Thus, the court ordered that any future surrender of the property would be conditioned on the debtor ensuring that steps are taken to comply with the NYSDEC Notice of Violation.

On NYSDEC’s motion to compel compliance, the court held that 959(b) did not create a remedy for failure to comply with environmental laws. Therefore, the court said it could not grant the relief sought by the NYSDEC. However, the court said that if debtor failed to comply with environmental laws, NYSDEC was free to either commence enforcement proceedings or move to dismiss the bankruptcy proceeding.

In re Wade Gollnitz, 2011 Bankr. LEXIS 3728 (W.D.N.Y. 9/28/11)