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.

In Lusk v First Century Bank, 2012 W. Va. LEXIS 241 (Sup. Ct. 4/27/12), the plaintiff/petitioners purchased a commercial property at an auction foreclosure sale. The Notice of Trustee’s Sale and Regency’s advertising notice stated that the sale was subject to “environmental regulations” and that the property was being sold in an “as is” condition. The Deed of Trust also provided that the property would be sold “without any covenant or warranty, express or implied.” Prior to the sale, the petitioners conducted a brief walk-through of the building but did not perform any further due diligence. The petitioners then submitted the high bid of $49,000 for the property.

As it turned out, the property had been used by businesses that cleaned and rebuilt electric motors that contaminated the site with a variety of hazardous substances, including PCBs. The last operator had been Lin-Electric who acquired the site from a local charity with a loan from First Century Bank. After Lin-Electric went out of business, the loan went into default which led to the subject foreclosure sale.

Shortly after taking title, the petitioners received a PRP notice from the USEPA. The petitioners then filed a lawsuit against the bank among others, claiming they relied on the representations made by the auctioneer and a Bank representative that the property was “clean”.

The trial court granted the bank’s motion for summary judgment on the claim that the bank intentionally failed to disclose the contamination, committed fraud and intentional misrepresentation, breached its duty of good faith and fair dealing, and violated the West Virginia Hazardous Waste Management Act by failing to disclose in the foreclosure deed that the property was previously used to store and dispose of hazardous waste materials.  The case then proceeded to trial on the remaining issues. At the close of evidence, the Bank moved for judgment as a matter of law on the claim that the bank negligently proceeded with the foreclosure sale with knowledge that the real estate was environmentally contaminated. The circuit court granted the Bank’s motion and the case went to the jury on the remaining claims. In February 2011, the jury allocated found the Bank and Regency had no liability and that petitioners was 60% at fault.

Petitioners filed a motion for a new trial, arguing that the circuit court erred in granting summary judgment in favor of the Bank because the bank as a seller of real estate had an affirmative duty to disclose latent defects or conditions of the property to a purchaser and that the failure to do so constituted constructive fraud.

In denying the motion for a new trial, the circuit court said that the bank as a trust creditor did not own an interest in the real property, and therefore was not required to make affirmative disclosures concerning the condition of the property. Moreover, the court said the petitioners purchased the property “as is” and with notice that the property was subject to environmental regulations.

On the claim of breach of duty of good faith and fair dealing, petitioners contended that that the foreclosure deed constituted a contract with the Bank and formed the basis for a claim for breach of duty of good faith and fair dealing. However, the the circuit court disagreed, finding there was no contractual relationship with the Bank. In the absence of such a relationship, the court said the bank had no duty of good faith and fair dealing.

The petitioners then appealed the grant of summary judgment and the order denying their motion for a new trial. Petitioners argued that a reasonably prudent bank would not have proceeded with the foreclosure sale of property that the bank knew was environmentally contaminated. Thus, they asserted that the bank’s decision to proceed with the foreclosure sale constituted negligence. However, the Supreme Court ruled in 4-1 decision agreed that a secured party at a foreclosure sale was under no duty to make affirmative representations about the condition of the property to be sold. Without a duty, the court said, there could not be any negligence. Accordingly the court affirmed the decision of the circuit court.

Earlier this year, Freddie Mac recently clarified its environmental requirements for phase 1 reports issued for multi-family loans. The two key changes involve radon and asbestos. Excerpts for these two issues are below. The full text of the revisions are available from the link at the bottom of this post.

Radon-

Freddie Mac now requires radon sampling for ALL multi-family projects regardless of radon zone. The agency explanation is as follows:

“Recent changes to language in the Freddie Mac Multifamily Seller/Servicer Guide (Guide) have attempted to correct misconceptions regarding radon. We generally expect radon to be tested on every property. Radon concentrations are site specific and the risk cannot be adequately determined based on the EPA radon zones. The EPA specifically notes that the zone designations should not be used as a determinate in the testing decision. While there may be limited legitimate reasons that Freddie Mac will consider for waiving radon testing, location in a particular EPA zone is not among them.  All elevated radon results require further testing and, in addition, the consultant must indicate the cost of potential remediation”

Asbestos- 

Freddie Mac expressed concern that consultants are not adequately identifying suspect ACM. Thus, it has eliminated the cutoff for sampling suspect friable ACM. The explanation is as follows:

“The required asbestos scope is often not fully addressed. Some consultants still do not consider the potential risk from asbestos due to the building age and/or do not test all suspect friable materials. Asbestos is still being produced and imported into this country, so there is no cutoff date that allows the risk analysis to be dismissed. Freddie Mac does not allow friable materials with concentrations above 10 percent to remain in place so all friable materials must be tested to determine the asbestos content.”

Phase 2 Recommendations-

Freddie Mac also is apparently going to expect sampling for USTs where there is no historic test results and dry cleaners with documented spills. Here is the statement:

“Issues such as underground tanks with no historical test information or a dry cleaner with a documented spill, will likely require on-site testing to adequately evaluate the environmental risk before the report is issued.”

Property Condition and Environmental Reports: Common Issues and Best Practices

One of the more daunting tasks of environmental consultants and lawyers is to explain the environmental investigation and remediation process to clients and the public. Part of the problem is that many business people do not have a strong science foundation and may not understand some of the issues associated with environmental contamination. In addition, the investigation and remediation contamination process often does not proceed in a logical or linear manner. Clients often become frustrated because it seems that they are spending lots of money and do not seem to be making process.

The New York City Office of Environmental Remediation has completed a wonderful 8-minute video that explains the site investigation process. Every environmental consultant should have the link to this video readily handy to share with clients. The video is available at: http://www.nyc.gov/html/oer/html/Videos/investigations.shtml

Documents in agency files can provide important information on the scope of contamination, how the contamination was assessed and other valuable information on the remedy/institutional controls. Thus, many clients expect that environmental consultants routinely review regulatory agency files when assessing potential RECs at a site.

However, many phase 1 “commodity shops” or high volume firms frequently take advantage of some ambiguity in the ASTM E1527 Standard to avoid this task which allows them to underprice firms that take the time to review agency files more comprehensive reviews.

I discuss the agency file review in the current issue of the Practical Real Estate Lawyer. The article may is available from this link: PREL1205_GroundBrkers

The movement and disposal of fill material from demolition sites tends not to be well-regulated. During the real estate bubble when demand for aggregate was at a premium, unsavory actors in the industry exploited the regulatory gaps. These companies would charge clients to dispose of contaminated fill, pocket the fees and then sell the materials to sites needing “clean fill”. This practice led to a number couple of high profile projects that were slated for redevelopment. It can be particularly frustrating to a brownfield developer to incur costs to remediate a site only to then have it re-contaminated from importing dirty fill.  

A recent example of the problems with contaminated fill was Knoll v. MTS Trucking, Inc., 2011Minn. App. Unpub. LEXIS 767 (Minn. Ct. App., Aug. 15, 2011), Midwest Asphalt Corporation (Midwest) needed to dispose of asphalt millings and fill generated from road reconstruction project. The Minnesota Pollution Control Agency (MPCA) considered the excavated fill to be a regulated waste due because of the presence of asphalt in the soil.

The owner of MTS Trucking informed Midwest that Thomas Knoll was looking for fill material to prepare his property for potential development. MTS then deposited several thousand cubic yards of fill on Knoll’s property in 2003 and 2004.

In February 2005, a commercial development company agreed purchase Knoll’s property. During its pre-acquisition due diligence, the developer learned the filled areas of the property had elevated levels of diesel range organics (DROs). The developer refused to purchase the property at the price listed in the purchase agreement unless Knoll removed the impacted soil.

Knoll retained his own consultant who determined that 90% of the fill contained low-level DRO contamination along with some benzo(a)pyrene (BaP) equivalents. Knoll reported then enrolled in the state voluntary cleanup program to remove the contaminated soil at a cost of approximately $296K. After the state confirmed no further action was required, the developer the purchase the property.

In 2007, Knoll filed a complaint againstMidwest and MTS alleging negligence, misrepresentation, common-law trespass along with a cost recovery under the state superfund law (MERLA).  Knoll alleged that MTS andMidwest misrepresented to him that the fill deposited on his property was clean, and that the fill was the cause of the contamination on his property.

The defendants filed a motion for summary judgment on the grounds that the common law claims were barred by the statute of limitations. The trial court ruled that since the fill intended to improve Knoll’s property, the two-year statute of limitations applied. Since Knoll served his complaint more than two years after learning of the contamination, the court ruled the common-law claims were time-barred.

The case then proceeded to a jury trial on the sole issue of whether respondents were liable under MERLA claim. The jury found that the contamination derived from petroleum. As a result, the court ruled contamination was not a hazardous substance because it fell within the MERLA petroleum exclusion. Thus, the district court dismissed Knoll’s MERLA claim.

On appeal, Knoll argued that the six-year statute of limitation should apply since the fill material constituted a trespass. The appeals court said that the longer period applied to invasions of possessory interests and that despite the contaminated soil, Knoll still enjoyed the exclusive right to possession of his property. Indeed, the court said while the developer initially declined to purchase the property at the price agreed upon in the purchase agreement, the record indicated that the developer would have purchased the property with the contaminated soil for a lesser price. The fact that Knoll could have sold the property at a lesser price despite the alleged contaminated soil demonstrates that the alleged injury was the physical injury to his property in the form of defective fill material.

Knoll also argued the presence of the fill constituted a continuing trespass that should have tolled the statute of limitation. However, the court said under Minnesota law, a continuing trespass applied to a continuing or reoccurring wrongful act. Here, the court said, the wrong complained of was the act of depositing contaminated soil instead of clean fill on Knoll’s property. Once the fill was deposited, the alleged trespass ended and there was no reoccurring intrusion. Therefore, the court concluded that the alleged trespass was permanent rather than continuous, and the district court properly concluded that Knoll’s trespass claim was barred by the two-year statute of limitations. The Minnesota Supreme Court recently declined to hear the case.

Approximately 2.5 million miles of pipelines transverse the United States carrying hazardous liquids and natural gas from producing wells to end users (residences and businesses). Many of these pipeline networks are aging while others such as natural gas gathering pipelines remain largerly unregulated. Moreover, development has encroached on many of pipelines that were formerly located in rural areas, thereby increasing the risks posed by these pipelines.

Pipeline safety has been drawing increasing scrutiny from Congress. The “Pipeline Safety Improvement Act of 2002” required PHMSA to develop its risk-based integrity management program for transmission pipelines. Under the “Pipeline Inspection, Protection, Enforcement, and Safety Act of 2006,”  PHMSA also establish minimum standards for integrity management for distribution pipeline networks. Under the rules developed by PHMSA, all distribution pipelines are considered to be in high-consequence areas because they are largely located in populated areas. As a result, distribution integrity management requirements apply to all distribution pipelines. However, the distribution pipeline rules tend to be less prescriptive than those for transmission lines due to the lower operating pressures.  Congress recently mandated that DOT review the sufficiency of existing federal and state laws and regulations to ensure the safety of hazardous liquid and gas gathering pipelines under the “Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011.”

Despite the pervasiveness of pipelines, these structures are often not flagged or discussed in due diligence. A recent report by the GAO (“Collecting Data and Sharing Information on Federally Unregulated Gathering Pipelines Could Help Enhance Safety”; http://www.gao.gov/products/GAO-12-388) discusses the need for additional information about the pipelines used to collect natural gas from fracking operations.

The GAO indicated there are three main types of pipelines: Gathering, Transmission, and Distribution Pipelines

• Gathering pipelines- Gas gathering pipelines collect natural gas from production areas, while hazardous liquid gathering pipelines collect oil and other petroleum products. These pipelines then typically transport the products to processing facilities, which in turn refine and send the products to transmission pipelines. According to PHMSA gathering pipelines range in diameter from about 2 to 12 inches and operate at pressures that range from about 5 to 800 pounds per square inch (psi). These pipelines tend to be located in rural areas but can also be located in urban areas. PHMSA estimates there are 200,000 miles of gas gathering pipelines and 30,000 to 40,000 miles of hazardous liquid gathering pipelines. PHMSA does not regulate most gathering pipelines in theUnited States. For example, PHMSA regulates roughly 20,000 miles out of the more than 200,000 estimated miles of natural gas gathering pipelines. Similarly, PHMSA regulates only about 4,000 miles of the 30,000 to 40,000 estimated miles of hazardous liquid gathering pipelines.

• Transmission pipelines- PHMSA has estimated there are more than 400,000 miles of gas and hazardous liquid transmission pipelines. These pipelines can carry product over hundreds of miles, to communities and large-volume users (e.g., factories). Compressor stations maintain product pressure in natural gas pipelines while pumping stations maintain product flow for hazardous liquid transmission pipelines. Transmission pipelines tend to have the largest diameters and pressures of any type of pipeline, generally ranging from 12 inches to 42 inches in diameter and operating at pressures ranging from 400 to 1440 psi.

• Distribution pipelines- PHMSA has estimated there are roughly 2 million miles of distribution pipelines which transport natural gas from the transmission pipelines to residential, commercial, and industrial customers. These pipelines tend to be smaller, sometimes less than 1 inch in diameter, and operate at lower pressures—0.25 to 100 psi.

The Department of Transportation’s (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) has established uniform, minimum safety standards that establish specifications for the design, construction, testing, inspection, operation, and maintenance of pipelines. The PHMSA regulatory program uses a four-tier classification system based on their proximity to populated and environmentally sensitive areas. Class 1 involves offshore areas. Class 2 includes locations with 10-45 buildings intended for human occupancy that are within 220 yards of the center line of the pipeline. A class 3 location is an area with more than 46 buildings intended for human occupancy that are within 220 yards of a pipeline or an area where the pipeline lies within 100 yards of either a building or a outside area such as a playground that is occupied by 20 or more persons at least 5 days a week for 10 weeks in any 12-month period. Class 4 locations where unit buildings with four or more stories above ground are prevalent

In addition, PHMSA has developed supplemental risk-based regulatory program termed “integrity management” for hazardous liquid and natural gas transmission pipelines and natural gas distribution pipelines in “high-consequence areas” where an incident would have greater consequences for public safety or the environment. Pipeline operators are required to systematically identify and mitigate risks to pipeline segments located in high-consequence areas, which are defined differently for the three types of pipelines.

For hazardous liquid pipelines, high-consequence areas include areas of highly populated areas, other populated areas, navigable waterways, and areas unusually sensitive to environmental damage. For natural gas transmission pipelines, high-consequence areas include highly populated or frequently used areas, such as parks. Most natural gas distribution pipelines would generally be considered to be in high-consequence areas since they are typically located in highly populated areas. High-consequence areas can be in Class 1, 2, 3, or 4 locations.

States may be authorized to conduct inspections for interstate pipelines, as well as inspections and associated enforcement for intrastate pipelines. State pipeline safety offices are allowed to issue regulations supplementing or extending federal regulations, but these state regulations must be at least as stringent as the minimum federal regulations. If a state wants to issue regulations that apply to pipelines that PHMSA does not regulate, such as unregulated gathering pipelines, it must do so under its own (state) authority. According to GAO, only 3 of the 39 state agencies interviewed reported that they collect and analyze comprehensive pipeline spill and release data on federally unregulated pipelines.

According to GAO, leading causes for leaks and spills from transmission lines is corrosion while excavation is the most common cause of damage to distribution lines. Because of their relative low pressure, damaged distribution lines tend to develop slow leaks instead of explosions. However, undetected gas from slow leaks can migrate long distance along utilities and sewer lines and accumulate in homes where inadvertent ignition could lead to fire or explosion.

GAO said states identified the following risk factors for pipelines:

• Construction quality- GAO said that state agencies reported the construction is critical to ensure the long-term integrity of the pipeline because the installation methods and materials used in pipeline construction affect the pipeline’s resistance to deterioration over time. For example, regulated pipelines may not be installed unless they have been visually inspected at the site of installation.

• Maintenance practices-State agencies said periodic maintenance including inspecting and testing equipment is important to prevent leaks and ruptures. Unfortunately, there are no such federal requirements unregulated gathering pipelines.

• Location-State and local safety agencies may not know or may be uncertain about the locations and mileage of unregulated pipeline infrastructure. This information is particularly useful for “Call Before You Dig” programs operated by states and localities. If unregulated gathering pipelines are unmarked and program officials do not know the location of the pipelines, businesses and citizens may damage a pipeline during excavation, which could result in fatalities, injuries, or damage to property or the environment as well as the shutting down of the pipeline for repair.

• Pipeline integrity- As previously mentioned, the leading risks to pipeline integrity is excavation damage and corrosion. Although states reported that excavation damage to a pipeline from nearby digging activities was the leading cause of pipeline incidents, many state agencies told GAO they often did not know or had limited knowledge about the integrity of unregulated gathering pipelines, thus increasing the potential for such damage. GAO reported that corrosion was reported as the cause of about 60% of regulated gas gathering pipeline incidents from 2004 to 2010. However, there is limited information on the integrity of unregulated gathering pipelines to assess the internal and external condition of these pipelines.

• Land Use Changes-State pipeline safety agencies also told GAO that increased urbanization that results in encroachment on existing pipeline rights-of- way is a moderate or high risk factor. For example, GAO reported stated that although a new housing or business development can change a location’s designation from Class 1 to a higher class that would then fall under PHMSA’s jurisdiction, the operator may not be aware of the development and therefore would not monitor and apply more stringent regulations along that pipeline.

• Increased extraction of oil and gas from shale deposits- GAO said this activity accounted for 16% of the total domestic natural gas supply in 2009 and is projected to increase to approximately 47% by 2035. As a result, state and federal safety officials have identified new gathering pipelines related to shale development as a potential public safety risk since these pipelines tend to have larger diameters and operate at higher pressures that traditional transmission pipelines. Such information can be used to help reduce future incidents.

A federal district court ruled that purchaser of a coal-fired power plant was held liable as a successor for violations of the New Source Review program that had occurred prior to the transaction. The court said the purchaser had expressly assumed the liabilities even though the order of the bankruptcy court approving the sale provided that the purchaser was not to be considered a successor of the seller of the plant.

In United States v. La. Generating, LLC, 2011 U.S. Dist. LEXIS 137973 (M.D. La. 12/1/11), the Cajun Electric Power Cooperative (Cajun Electric) began constructing the “Big Cajun II” (BCII) coal-fired power plant in 1976 amendments to the Clean Air Act (CAA). Big Cajun began operating in 1981. In 1994, Cajun Electric filed a chapter 11 bankruptcy proceeding and a bankruptcy trusts was appointed in 1995.

Meanwhile, in 1994 and 1995, Cajun Electric upgraded the turbines of Units 1 and 2 (“the 1994/95 work”). Cajun Electric did not obtain a Preventing of Significant Deterioration (PSD) permit prior to starting work. In 1998 and 1999, Cajun Electric replaced portions of the primary boiler reheaters (“the 1998/99 work”) also without obtaining a PSD permit. The cost of each project was estimated at $5 million.

As part of the Cajun Electric bankruptcy reorganization plan, the trustee solicited bids for substantially all of Cajun Electric’s assets, including BCII. After a protracted auction process, a subsidiary of NRG Energy, Louisiana Generating, LLC (LaGen), submitted a final bid that was accepted by the trustee and memorialized in what was called the Fifth Amended Asset Purchase Agreement (APA).

The APA provided, inter alia, that the bankruptcy court confirmation order would state that LaGen would not assume or be liable for any liabilities of Cajun Electric except for “Assumed Liabilities and any Environmental Liabilities that attach to the owner of any of the Acquired Assets by operation of law.” The definition of “Environmental Liabilities” included any known or reasonably expected liability or obligation….. under any Environmental Law.” [emphasis added]. The APA also contained representations that the company was in material compliance with all environmental laws permits, had obtained all permits necessary to operate the business and that no other permits were required for the business.

In October 1999, the bankruptcy court issue an order approving the sale “free and clear” under section 363 of the Bankruptcy Code.  “free and clear”. The confirmation order also provided that LaGen was not a successor and “shall not have any liability for any claims against [Cajun Electric] as a result of s purchase of the Acquired Assets”. LaGen acquired BCII in April 2000.

In September of 2001, LaGen submitted a revised Title V permit application for BCII. While the application was still pending, EPA issued a notice of violation (“NOV”) regarding the 1998/99 work. Despite the NOV, the state issued the Title V permit and renewed this permit in 2011. The EPA did not formally object to the issuance of the permit or its renewal.

In 2009, the federal government filed a lawsuit against LaGen seeking civil penalties and injunctive relief for violations of the CAA New Source Review (NSR) permit program for Prevention of Significant Deterioration (PSD) and the Title V permit. Under the NSR/PSD, a new major source or an existing major source that is to undergo a physical change or change in operation (modification) that will result in a significant net increase in pollutants must apply for a pre-construction permit and install pollution control technology  known as Best Available Control Technology (BACT).  Work that qualifies as “routine maintenance, repair and replacement” is exempt from the NSR program.

The parties each filed motions for summary judgment. LaGen argued that the CAA only imposed liability on the person owning or operating the facility when the violation occurs and prohibited the application of successor liability.  Specifically, LaGen argued that the express language of section 165 of the CAA and the implementing regulations of 40 CFR 52.21 imposed the obligation to obtain a PSD permit on the owner or operator who actually engaged in the construction or modification project that triggers the requirements. Likewise, LaGen said the State Implementation Plan (SIP) only prohibited construction without a permit. In other words, LaGen argued PSD was a pre-construction program and there was nothing in the statutory or regulatory language extended PSD obligations to cover operation by entities, including a purchaser who acquired a plant after construction is completed from operating the source without a PSD permit. [emphasis added].

LaGen also pointed to a line of cases holding that violations of the PSD pre-construction permitting requirements occur at the time of construction and do not extend to post-construction operations. LaGen also claimed that a substantial majority of district courts have held that PSD imposes a one-time permitting obligation and that these cases have rejected any argument based on a “continuing violation” theory. Since the alleged modifications occurred prior to LaGen’s acquisition of the Units 1 and 2, LaGen said it could not have complied with or violated the obligation to comply with PSD prior to the commencement of the projects. Moreover, since PSD liability could not attach to the owner of acquired assets by operation of law, LaGen asserted that it could not assumed liabilities for the 1998/99 work under the APA.

The court rejected the notion that successor liability was precluded under the CAA, saying the doctrine was so well established that Congress would have to expressly exclude its application in a statute. Then ignoring the express language of the order issued by the bankruptcy court, the court proceeded with a successor liability analysis. Pointing to the language of APA section 2.4 that the purchasers assumed “any Environmental Liabilities that attach to the owner of any of the Acquired Assets by operation of Law”, the court concluded that LaGen assumed any environmental liability that it knew about or reasonably expected at the time of the signing of the Fifth APA.

The court said the 1998/99 work was the type of liability that LaGen could have assumed under APA Section 2.4. The court noted that when NRG first considered purchasing the BCII assets in 1996, a member of NRG’s due diligence team was concerned about the 1994/95 work and that the trustee had notified all of the bidders about the 1998/99 work but NRG did not perform any due diligence regarding potential PSD applicability. The government argued that this was evidence that NRG effectively hid its head in the sand while the defendant said it relied on the trustee’s representations that the plant was in compliance with environmental laws. As a result, the court said there was a genuine dispute if the Defendant knew or reasonably expected the 1998/99 work to BCII Units 1 and 2 created liability under the CAA that precluded granting of summary judgment

The defendant also argued that the government’s PSD claim was barred by the statute of limitation. LaGen said the five-year SOL began to run in 1998 when construction on the units began and had expired in 2003-six years before the government brought its action. The government, on the other hand, asserted that the SOL was tolled because the PSD violation was ongoing. The court agreed that since the CAA did not have a period of limitation period for enforcement actions, the general five-year statute of limitations found in 28 U.S.C. § 462 applied. However, the court ruled that while the applicable caselaw suggested that the SOL had not expired, the government was only able to seek penalties for the five years preceding the time the suit was filed.

The government also asserted that LaGen had submitted a deficient Title V permit by not identifying the applicability of the PSD program. Under EPA’s “no look back” policy, LaGen argued it had no obligation to evaluate prior projects when completing its Title V permit. The court ruled that even if an application had no “look back” obligation, it has an ongoing duty to supplement or correct applications “upon becoming aware of such failure or incorrect submittal.

LaGen said its certification obligation could be based only on a reasonable belief at the time of the submission. The court disagreed, saying that an applicant to perform a reasonable inquiry. Moreover, since LaGen had not properly supplemented its Title V permit to reflect the PSD and BACT applicability, the court declined to find that EPA’s failure to object to the permit renewal precluded the enforcement action. To hold otherwise, the court said, would be to encourage and reward sources for not being forthright in their Title V permit applications.

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 Shelton Property Rural Acreage, LLC v Placid Oil Co., 2011 U.S. App. LEXIS 16681 (5^th Cir. 8/10/11), Placid Oil operated oil wells on leased property from 1942 to 1956. In 1986, Placid filed a chapter 11 bankruptcy proceeding. The bankruptcy court issued a confirmation order in 1988 that contained a discharge of all claims except those created or assumed by the reorganization plan. The order also included a discharge for any future claims for damages that occurred prior to the discharge.

In 2002, Shelton Property Rural Acreage, LLC (Shelton) purchased the property that had been leased by Placid. After discovering contamination associated with the prior drilling operations,Shelton commenced a lawsuit against Placid in state court. Placid filed an adversary proceeding with the bankruptcy court, arguing that since the property owner at the time of the bankruptcy proceedings had not filed a proof of claim for any alleged environmental damage to the property, Shelton’s claim had been discharged by the bankruptcy court’s 1988 order.

In response,Shelton argued the discharge should not apply to its claim because the prior landowner had not receive adequate notice of Placid’s bankruptcy proceeding. Shelton asserted that the prior owner should have been considered a known creditor because a water study published in 1958 had showed that water wells on the property were contaminated due to oil and gas activities. Moreover,Shelton said an article in a June 1964 issue of Oil and Gas Journal discussed that the Little River bordering Shelton’s property was being polluted due to unlined oil and gas pits.

The bankruptcy court upheld the discharge and the Fifth Circuit affirmed. The appeals court said there was no specific information in the record to suggest that Placid knew of any claims related to property it leased from Shelton’s predecessor. The court said no environmental complaints had been made between 1956 and 1986. The court rejected Shelton’s assertion that the environmental damage was easily identifiable since it had taken Shelton six years to notice the damage. Finally, the court noted that Placid had tens of thousands of former leaseholds and it would have been unreasonable to require Placid to give each lessor actual notice of the bankruptcy. In light of this evidence, the appeals court agreed that Shelton’s predecessor was an unknown creditor who was only entitled to notice by publication. This requirement was satisfied when Placid published notice of its bankruptcy on three separate occasions in the Wall Street Journal.

It is unclear of Shelton performed any environmental due diligence prior to acquiring the property. However, a good historical search would have revealed the prior oil leasing activities, could have identified the responsible party and revealed the bankruptcy proceeding. If Shelton had been armed with this information prior to taking title, it could have explored various risk management strategies instead of becoming forced to bear the full brunt of the cleanup.