The most recent decision in Flake v. Schrader-Bridgeport Int’l, Inc., 2011 U.S. Dist. LEXIS 30372  (M.D. Tenn., Mar. 23, 2011) is just another chapter in this long-running environmental saga involving a successor liability, bankruptcy, toxic tort and environmental justice issues along with a piece of American automotive history. This well-traveled case began in a Tennessee county court in 1994, moved to the federal bankruptcy court and federal district court in New York, went back to Tennessee for rulings by a federal district court, and is now on appeal to the Court of Appeals for the Sixth Circuit.

The story begins simply enough in the 1920s when Scovill, Inc acquired the A. Schrader Co, a manufacturer of the Schrader pneumatic tire valve (a/k/a the American valve). From 1964 to 1985, the Schrader Automotive division of Scovill, Inc. operated a plant located in Dickson, Tennessee. The plant was leased from the Dickson County Industrial Development Authority (IDA). The plant used TCE as a degreaser.

In 1985, Scovill was acquired by First City Industries (First City) who began to divest the firm of its non-core assets. As part of this strategy, the Dickson plant was closed. Around this time, the state started to become concern about potential groundwater contamination from a local landfill that had received wastes from the Dickson plant and other manufacturers in the areas.

Scovill decided to spin-off its Schrader Automotive division into a newly formed subsidiary, Schrader Automotive, Inc. (SAI). Pursuant to an October 1985 transfer agreement, SAI acquired all of the assets and liabilities of the Schrader Automotive division. SAI agreed to indemnify Scovill from all known and unknown liabilities relating to the Schrader Automotive Division’s business.

In March 1986, ArvinMeritor, Inc. (Arvin) agreed to purchase SAI. The purchase Agreement attempted to disclaim any liability on the part of Arvin relating to Dickson County by expressly affirming that SAI was not the owner of the Dickson Plant and that Arvin would not be assuming any liabilities relating to the operation of the Dickson Plant. To facilitate the transaction, SAI and Scovill entered amended the 1985 Transfer Agreement to unwind or rescind the SAI’s obligation to indemnify Scovill for claims arising from the Dickson Plant. Scovill released SAI and also agreed to indemnify SAI as well as Arvin for any breach of any representation or warranty by Scovill under the 1986 Agreement. Scovill’s indemnification obligation was guaranteed by First City.

In 1988, Scovill exercised its option to purchase the Dickson Plant from the IDA and then sold the Plant to Tennsco Corporation (“Tennsco”). In the mid-1990s Arvin sold SAI which was merged with Bridge Products, Inc. SAI was the surviving entity and changed its corporate name to Schrader-Bridgeport International, Inc (SBI).

Between 1985 and 1988, Saltire worked with the state to obtain closure of the facility’s hazardous waste management units. However, the closure did not include groundwater analysis and EPA launched its own RCRA Facility Assessment in 1987 that resulted in the identification of 15 solid waste management units. Scovill entered into a RCRA 3008(h) order to implement corrective actions.

First City filed for bankruptcy protection and as part of pre-packaged chapter 11 plan of reorganization, Alper Holdings (Alper) began the controlling shareholder of First City and assumed the obligations of First City under the Arvin Guaranty. By this time, Scovill changed its name to Saltire Industries, Inc. (Saltire). Alper and Saltire entered into a management agreement in where Alper agreed to manage Saltire’s various environmental matters. Nicholas Bauer was appointed as Saltire’s Vice President of Environmental Affairs but he was paid by Alper and sometimes represented himself as an Alper official. He also worked out of an office in Virginia where Alper was authorized to do business.

In December 2003, a number of plaintiffs filed suit against Saltire and Alper Holdings, alleging property damage and personal injuries from TCE in the groundwater. Partly to manage the environmental liabilities related to the Dickson plant, Saltire filed a chapter 11 petition in 2004. Arvin filed a claim against Saltire pursuant to the Indemnity that was disallowed after Saltire filed an objection and Arvin decided not to oppose the motion. Arvin reasoned it had a full guarantee from Alper that would provide greater protection than an unsecured claim in the bankruptcy proceeding. SBI did not file a proof of claim, though. A liquidating plan of reorganization was confirmed in 2006. As part of the plan, Alper negotiated a settlement on behalf of Saltire with the creditors committee where Alper agreed to forego its claims against Saltire and to pay $1 million to Saltire.

In 2004 and 2005, residents filed claims against Saltire, Alper, Schrader and ArvinMeritor alleging personal injury and property damage claims arising out of the contamination of a spring flowing through their property by the Dickson manufacturing plant. The Flake plaintiffs wanted to bottle and sell water from the spring and asserted their plans were upended when they learned that the wells on their property were contaminated. Other plaintiffs asserted property damage and personal injury claims.

In 2007, Scovill reached a $15MM settlement with its insurer that resolved the plaintiffs’ claims arising out of remediation of the Dickson Plant as well as liabilities associated with other facilities. The bankruptcy court issued a Stipulation and Order Approving Settlement that allowed plaintiffs’ claims for personal injury and property damage in the aggregate amount of $1.5 million, and expressly released Scovill/Saltire from any and all other claims.

Schrader notified Alper of a claim under the Guarantee in 2006 and then filed a complaint against Alper in 2007. This action prompted Alper to file its own chapter 11. The plaintiffs filed claims in the Alper bankruptcy case. Schrader also filed claims for past and future defense costs relating to the toxic tort litigation as well as indemnification. In a series of opinions in 2008, the bankruptcy court ruled that Alper could not be held liable for claims arising out of the Dickson plant and disallowed the claims. In re Alper Holdings USA, 2008 Bankr. LEXIS 86, (Bankr. S.D.N.Y. Jan. 15, 2008); In Re Alper, 2008 Bankr. LEXIS 522 (Bank. S.D.N.Y. 2/25/08), In re Alper Holdings USA, Inc., 386 B.R. 441 (Bankr. S.D.N.Y. 2008). The rulings said that Alper could not be directly liable for causing the contamination because Alper had no connection or relationship to Saltire or Dickson County until seven years after the Dickson Plant closed in 1985. The court also concluded that Alper’s “indirect, incidental” ownership interest in Saltire through First City did not retroactively make Alper liable for what went on in the Dickson Plant prior to its closure. The court also said that the plaintiffs had failed to plead sufficient facts to show that Alper had direct liability for negligent remediation when it effectively loaned Bauer, its employee, to Saltire to supervise the remediation. Finally, the court found that Alper had no indirect liability to the on either an alter ego or veil piercing theory, holding that neither the existence of a management agreement nor the common employee between the parent and subsidiary justified the extraordinary remedy of piercing the corporate veil. The plaintiffs appealed but the bankruptcy court rulings were affirmed. In re Alper Holdings USA, 398 B.R. 736 (S.D.N.Y. 2008).

Alper also objected to the Schrader claim, asserting they should be disallowed under section 502(e)(1)(B) of the Bankruptcy Code because they were contingent claims for reimbursement or contribution from an entity that is co-liable with the debtor. The bankruptcy court found that Alper was obligated under the Guaranty to indemnify Schrader for its past legal fees and expenses and that these were not contingent liabilities since these costs had already been incurred. Thus, the court overruled the objection. However, the court said the claims for future costs and indemnification were clearly claims for contribution or reimbursement, and contingent since the amount of the ultimate liability was unknown. Schrader argued that it could not be co-liable with Alper under 502(e)(1)(B) because Tennessee law no longer recognizes the common law doctrine of joint and several liability. However, the court said that the toxic tort plaintiffs had alleged that Alper and Schrader were liable as the corporate successors to Saltire for the negligent actions of Saltire. These allegations were in stark contrast to those asserted against ArvinMeritor which had been sued based upon its own subsequent and independent negligent and grossly negligent conduct. Accordingly, the court disallowed the Schrader claims for future costs and indemnity. In re Alper Holdings USA, 2008 Bankr. LEXIS 2634 (Bank. S.D.N.Y 9/18/08).

Plaintiffs then turned their attention to Schrader-Bridgeport International, Inc (SBI), its parent, Tomkins plc, and Arvin. First, the district court disposed with the claims against Tomkins, ruling in 2010 that general involvement with the subsidiary corporation’s performance, finance and budget decisions, and general policies and procedures was insufficient basis to assert personal jurisdiction over the parent much less pierce the corporate veil. Flake v. Schrader-Bridgeport Int’l, Inc, 2010 U.S. Dist. LEXIS 23951 (M.D.Tenn. 3/15/10).

Turning to the claims against SBI and Arvin, the court also rejected plaintiff’s motion for partial summary judgment that the defendants were the successor in interest to Scovill, and Schrader Automotive. The court agreed with SBI that none of the exceptions to the general rule of non-liability for purchasers of corporate assets applied. The court said that Scovill retained responsibility for the Dickson Plant under the 1986 agreement. Likewise, Arvin did not acquire the plant in the 1995 agreement. Indeed, the court observed that Scovill continued to list the plant on its insurance policy after the 1986 transaction. Thus, the court held, so there was no assumption of liability.

The plaintiffs also asserted that SBI and Arvin were liable under the mere continuation theory. The facts that plaintiffs relied on were that Schrader Automotive Group employees became SAI employees and performed the same work after the transfer to SAI, Plaintiffs also pointed to the fact that Arvin and Schrader Automotive Group had the same general manager. The court ruled there was no successor liability under a mere continuation theory because there was no common identity of stock, shareholders and directors among SBI and Scovill or Arvin.

Plaintiffs had also pointed to an affidavit that SAI removed waste materials from the Dickson Plant. However, the court said the public records reflected that Scovill was the cleanup lead for the property. Moreover, the court said the contamination described in the affidavit related to metal sludge materials deposited offsite from the Dickson Plant and was unrelated to plaintiffs’ claims about TCE-contaminated groundwater.

Finally, the court said that even if SBI or Arvin could be considered to be successors to SBI’s, their liability would be limited to the extent of Scovill’s liability. However, the court explained, plaintiff’s settlement with Scovill settled SBI’s liability. As a result, the settlement also extinguished SBI’s and ArvinMeritor’s liability for those claims.

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.

EPA recently published notice of two proposed prospective purchaser agreements (PPAs) . PPAs had been a critical tool for brownfield development prior to the 2002 CERCLA amendments that added the bona fide prospective purchaser (BFPP) defense. Following the 2002 amendments, EPA issued guidance that indicated that the agency would only issue PPAs in special circumstances since the BFPP was self-implementing (i.e, the defense could be asserted as a matter of law without express approval by EPA).

The fact that the agency has considered entering into these PPAs is newsworthy in itself. The Glendale/Goodwin Realty PPA was also noteworthy because it involved a private purchaser. What is more interesting, though, is that both PPAs require the settling party to establish financial assurances for the amount of the cleanup.

In the PPA for Glendale/Goodwin Realty I LLC (GGRI) agreed to purchase a parcel to facilitate expansion of a warehouse and distribution facility operated by Ralphs Grocery Co. (RGC) located adjacent to the property.  The parcel subject to the PPA lies above a regional groundwater plume known as Glendale Operable Unit of the San Fernando Valley Supefund Site Area 2.  The parcel had been used by a number of companies that conducted engaged in plating, anodozong and painting of metal parts  from 1946 to December 2004. The owners of the parcel, two family trusts, had received PRP notice letters from EPA. In addition, the Los Angeles Regional Water Quality Control Board had issued a number of Cleanup and Abatement Orders and the state Department of Toxic Substances Control had issued an Imminent and Substantial Endangerment Determination and Order. A cleanup plan was approved in 2010 but the family trusts lacked the resources to implement the cleanup. RGC, another settling party to the PPA, had a license to park empty delivery trailors on the paved portions of the parcel subject to the PPA.

GGRI agreed to purchase the parcel provided a PPA could be obtained. EPA agreed to issue the PPA to GGRI, RGC and The Kroger Co. (Kroger), the parent of RGC, in exchange for GGRI’s commitment to implement the cleanup. However, the parties had to agree to establish and maintain financial responsibility in the amount of $3.4MM which is the estimated cleanup costs. The financial assurance can be met using a surety bond, letter of credit, trust fund, insurance policy or by  Kroger satisfying the RCRA financial assurance criteria.

In the City of Dowagiac Brownfield Redevelopment Authority (CDBRA) PPA, ICG Castings ceased operations in December 2010. As is frequently the case with abandoned properties, the city responded to complaints of vandalism and tresspassing, and observed that numerous drums containing hazardous wastes and chemicals. EPA then performed a number of time critical removal actions to remove the waste containers from the site. The city had property tax liens in the amount of $228K and had estimated the cost to develop the site for reuse would be between $560K to $700K. EPA agreed to issue a PPA in exchange for the CDBRA agreeing to secure the property, extend and maintain essential utilities, rehabiliate and operate the wastewater treatment system, decontaminating building interiors, performing supplement sampling and implementing post-removal measures required by EPA. The authority was also required to reimburse EPA $25K in past response costs as well as establish and maintain a performance guarantee of $300K using one or more of the standard forms of acceptable financial assurance.

EPA did not typically impose financial assurance requirements in past PPAs. Under section 108 of CERCLA, EPA was authorized to require financial assurances to ensure completion of remedies but EPA had largely ignored this provision for the bulk of the CERCLA program. It was only two years ago that EPA promulgated regulations to implement this requirement for certain industrial sectors.  It is unclear if the financial responsibility provisions of these PPAs represents new policy for PPAs.

The New York State Court of Appeals (New York’s highest court) rejected a challenge that the New York State Department of Environmental Conservation (NYSDEC) exceeded its authority when it promulgated regulations requiring state superfund sites to be remediated to “pre-disposal” conditions when feasible. In the Matter of New York State Superfund Coalition v New York State Dept. of Environmental Conservation, 2011 N.Y. LEXIS 3624 (N.Y. 12/15/11).

This was not the first time that the petitioner, a non-profit organization whose members consist of commercial entities that own sites on the state superfund list, has sued the NYSDEC. Back in 1989, the Superfund Coalition had challenged an earlier version of the state superfund regulations that had would have allowed the NYSDEC to place sites on the state superfund list (formally known as the “Registry of Inactive Hazardous Waste Sites” or simply the “Registry”) based on potential presence of hazardous waste. In that proceeding, the Court of Appeals invalidated the NYSDEC regulations. The Court said that the state superfund law (located at ECL § 27-1301 et seq.) limited Registry sites to those posing a “significant threat” while the challenged regulation authorized NYSDEC to require cleanups at all inactive hazardous waste disposal sites, even those that did not pose a significant threat.

The NYSDEC subsequently promulgated new superfund regulations in 1992 that clarified that the mere presence of hazardous waste did not constitute a significant threat. These regulations also stated that the goal of a remedial program was to restore a site to predisposal conditions “to the extent feasible and authorized by law”. When NYSDEC revised its regulations in 2007, it simply eliminated the phrase “and authorized by law” as surplusage. It was this deletion that was at issue in the current case.

The petitioners challenged 6 NYCRR 375-2.8(a)[i] and 6 NYCRR 375-1.8(f)(9)(i)[ii] which call for the restoration of inactive hazardous waste disposal sites to “pre-disposal conditions, to the extent feasible”. The petitioners asserted that this requirement went beyond NYSDEC’s authority under § 27-1313 (5)(d) which provides, in part, that the goal of a remedial program is “a complete cleanup of the site through the elimination of the significant threat to the environment posed by the disposal of hazardous wastes at the site.”  The Superfund Coalition argued that since the phrase “complete cleanup” was modified by  ”the elimination of the significant threat to the environment”, NYSDEC could only require a cleanup that eliminated the significant threat and not a cleanup of the contamination that might remain after the immediate risk was abated.

The trial court agreed with the petitioners, holding that the revised regulation was “an unlawful continuation by the DEC to equate hazardous waste with significant threat, in that a return to pre-disposal conditions necessitates removal of all hazardous wastes, whereas the statute requires only the elimination of the significant threat and of the imminent danger of irreversible or irreparable damage to the environment.”

The Appellate Division reversed. The court found the language of section 27-1313 (5) was ambiguous and concluded that NYSDEC’s had reasonably interpreted the ECL and reversed the lower court’s holding that annulled the regulations at issue. The court said “the regulatory goal is consistent with the statutory definition of inactive hazardous waste disposal site remedial program which is broad enough to allow the employment of a wide range of methods and may address even potential hazards once DEC has made the threshold determination that remediation is necessary

The Court of Appeals began its analysis by noting the definition of a remedial program encompassed a full range of activities from controlling or abating eliminating risks posed by hazardous wastes to the complete elimination of the waste. The Court also said that § 27-1313 (5) (d) only applied to remedies implemented by NYSDEC because a responsible party has either refused or is unable to implement a remedy. The Court went on to say that the factors listed in that statutory section provide guidance to the agency in determining whether to perform a complete or limited cleanup. The Court characterized the stated goal of a “complete cleanup” was aspirational since the statute recognizes that DEC may implement limited actions that reduce rather than completely eliminate dangers.

The Court also rejected the notion that the regulations provided NYSDEC with unfettered authority since a remedial program is limited “to the extent feasible” and the regulation provides a number of factors that must be considered in shaping the goals and scope of a remedy for a particular site. In addition, the Court emphasized that the ECL provided landowners with ample due process to challenge remedial orders. For example, the Court pointed out that NYSDEC regulation provide “notice and the opportunity for a hearing” to persons subject to such an order. In addition, the Court said any person subject to such an order is entitled to present a defense or comment on the matter. Moreover, the Court said a challenged order will not become effective until it is upheld by an administrative law judge and the NYSDEC commissioner affirms the decision. (The ECL does not provide the NYSDEC with the authority to issue unilateral administrative orders like EPA does under CERCLA section 106 or RCRA section 7003). Finally, the Court said a person subject to an order may challenge it through an article 78 proceeding within 30 days after the service of an order. As a result, the Court held that the challenged DEC regulations mirror this statutory scheme, are reasonable interpretations that incorporate the essential goals of the ECL and do not exceed the enabling authority of the legislation with respect to the cleanup of inactive hazardous waste sites.

The United States District Court for the Eastern District of New York dismissed a cost recovery action filed by the State of New York because the state waited too long to file its complaint. The outcome hinged on whether construction of wellhead treatment constituted a remedial action or removal action. This case is significant because New York uses CERCLA almost exclusively to recover response costs.

In State of New York v Next Millenium Realty, LLC , 2011 U.S. Dist. LEXIS 136902 (E.D.N.Y. 11/29/11), the Nassau County Health Department (NCHD) discovered widespread contaminated groundwater at the New Cassel Industrial Area (NCIA) site in 1986 that threatened the drinking water supply wells of the Bowling Green Water District (“Bowling Green”). In 1988, the New York State Department of Environmental Conservation (“NYSDEC”) placed the entire NCIA on the Registry of Inactive Hazardous Waste Sites (“Registry”) which is the state superfund list.

In 1990, Bowling Green authorized construction of a $1.25MM granulated activated carbon treatment system (“GAC System”). The state Department of Health (NYSDOH) approved the application the modifications to the public water supply system and delegated supervision of the construction to the NCHD. The GAC system became operational at the end of 1990.   

In 1995, NCHD identified higher than expected contaminant concentrations in the groundwater. As a result, a $1.22MM air stripping tower was added to supplement the GAC system. The state superfund reimbursed the NCHD for the cost of the air stripper in 1988.

From 1995 to 1998, NYSDEC removed the NCIA area from the Registry but added individual properties that were believed to be sources of the groundwater contamination. The NYSDEC a Record of Decision (“ROD”) in 2003 that required the remediation of three distinct plumes located in the upper and lower portions of the aquifer with in-well stripping treatment systems. In 2005, the NYSDEC issued an Explanation of Significant Differences that separated the sites involved into two distinct groups: those located in the source areas of the origin of the Eastern and Central plumes, and those located in the area of the origin of the Western plum

In March 2006, the State commenced an action against the current and former owners and operators of the properties identified to be sources of the VOC contamination. The state sought  to recover NYSDOH oversight costs incurred in connection with approval and supervision of the wellhead treatment systems, the construction costs for the air stripping tower system as well as its investigation costs. The complaint also sought injunctive relief to abate the contamination in the NCIA as well as reimbursement of the State’s past costs under public nuisance, restitution and indemnification theories of liability.

The defendants filed a motion for summary judgment, contending that the GAC and air tower systems had been remedial actions and that the CERCLA statute of limitations for remedial actions had expired since the complaint had been filed more than six years after construction of the remedial action had commenced. The State argued the statute of limitations had not run because the GAC and air stripping tower were removal actions.

In September 2010, a magistrate recommended that the defendants’ motion for summary judgment be granted. The magistrate concluded that the GAC System and the air stripper were part of a permanent remedial action designed “to prevent and minimize the release of hazardous substances so that they do not migrate to cause substantial danger to present or future public health or welfare or the environment.” In ruling that the GAC and air stripper were remedial actions, the magistrate said the manner in which the project was planned, designed and implemented suggested that the response was intended to be a remedial action. Moreover, he said the response action was undertaken as part of a long-term strategy for the remediating of the groundwater contamination. Moreover, he noted that state representatives referred to the work as a remedial action in correspondence with the NCHD as well as in an interrogatory. All of this evidence suggested to the magistrate that the response activities were undertaken as the initial phases of remediation as opposed to a short-term clean-up arrangement. The court not only adopted the magistrate’s report but also declined to exercise jurisdiction over the state common law claims. As a result, the entire federal action was dismissed with prejudice.

While the court was deciding if it should adopt the magistrate’s recommendations, the NCIA was added to the NPL earlier this year. EPA has considerably more authority than the NYSDEC has under the state Environmental Conservation Law (ECL) and it will be interesting to see if EPA will fund the groundwater remediation (estimated to range from $10MM to $30MM) or to “encourage” the PRPs to implement the work.

We have been sharing and commenting on articles discussing how lenders are becoming increasingly concerned about borrowers who lease their property to allow hydraulic fracturing (“fracking”). The operations permitted by the leases on what is typically rural or agricultural land include storage of hazardous substances and wastewater that likely would constitute defaults under the mortgages.

Now comes another article published by the New York Times that discusses how the bulk of the eight million oil and gas leases that have been entered nationwide often fail to adequately protect property owners from risks associated with what amounts to industrial activity on their property. http://www.nytimes.com/2011/12/02/us/drilling-down-fighting-over-oil-and-gas-well-leases.html?_r=1&ref=todayspaper

The article reports that the leases are often presented to property owners on a “take-it-or-leave-it basis” by the brokers who are retained by the energy companies. The article says that these agents, known as “landman” often try to pressure property owners to sign the leases by warning them that their neighbors have signed leases and that if the property owner does not sign the lease, the gas under its land will simply be drained by the adjoining operations.

The New York Times obtained copies of 110,000 leases used in Texas, New York, Pennsylvania, Ohio, Maryland and West Virginia. The vast majority of the leases were from Texas. Following are some of the key observations from the lease review.

•  Most of the leases reviewed did not require periodic sampling of drinking water. As a result, it is often difficult for property owners to link contaminated groundwater with the fracking operations;

•  Less than half of the leases required the companies to compensate landowners for contamination of groundwater. While eight states require energy companies to provide some sort of indemnification, the terms of the indemnity are to be negotiated;

•  When companies are obligated to provide alternative drinking water for properties with contaminated groundwater, the owner often has to pay the increased electric bills resulting from the need to prevent the water from freezing during the winter;

• Most leases do not establish “setbacks” from various structures or areas on a property but instead grant the companies broad discretion where to build roads, store chemicals and cut down trees;

• Most leases do not contain any disclosure about the potential environmental risks associated with the drilling activity;

• Many leases allow companies to store waste generated by the fracking operations in pits or underground. Indeed, some of the leases reviewed in the article allowed the energy companies to simply cap the waste;

• Those leases that did require the company to remove waste often offset those costs against the royalties to be earned by the property owner;

• Most leases contain clauses that enable companies to extend leases beyond the negotiated term which is typically three to five years in length. For example, some companies have invoked the “force majeure”  clause in New York because of the drilling moratorium that was established while the state Department of Environmental Conservation adopts fracking regulations;

• Less than 20% of the Texas leases and virtually none of the leases in the eastern states contained the so-called “Pugh Clause” which prevents leases from being indefinitely extended;

• Another clause that has been used to extend leases is the “preparations” for drilling provision. The article says the term is broadly construed by companies and cited to an example where an oil company sought to invoke the clause a day before a lease was to expire. The company had not yet drilled any wells but said it had engaged in “preparations” by locating a bulldozer near the  leased property and had surveying for an access road;

• Most leases allow the rights to be freely assigned to other companies without the prior approval of the property owner, thereby preventing an owner from terminating a lease that might be assigned to a company that may not be financially stable or perhaps does not have a good environmental track record.

The state attorney generals of New York, Ohio and Pennslyvania have published advisories about leasing land for drilling. While there are a number of websites that can assist property owners with such leases, the article should be a wakeup call to landowners to retain a lawyer before signing such a lease. Without legal review, you could be committing your grandchildren to the terms of an unfavorable lease.

The New York Court of Appeals heard oral argument on November 14th on whether the New York State Department of Environmental Conservation (NYSDEC)  exceeded its authority when its set a goal of cleaning hazardous sites to “pre-disposal conditions” in its superfund regulations.

After the NYSDEC revised its Part 375 regulations in 2006, the New York State Superfund Coalition filed lawsuit in March 2007 claiming NYSDEC exceeded its authority under Environmental Conservation Law § 27-1313(5)(d), which states, “The goal of any [Superfund] remedial program shall be a complete cleanup of the site through the elimination of the significant threat to the environment posed by the disposal of hazardous wastes at the site and of the imminent danger of irreversible or irreparable damage to the environment caused by such disposal.”

Specifically, the plaintiffs challenged  6 NYCRR 375-2.8(a) which states that “The goal of the program for a specific site is to restore that site to pre-disposal conditions, to the extent feasible. At a minimum, the remedy selected shall eliminate or mitigate all significant threats to the public health and to the environment presented by hazardous waste….”

The state Supreme Court (trial court) ruled that ECL 27-1313(5)(d) authorized ” a complete cleanup”  that eliminates a “significant threat’. Therefore, court said NYSDEC exceeded its authority when it required removal of all hazardous wastes to “pre-disposal conditions”. However, the Appellate Division  reversed. The court said that because the ECL refers both to a “complete cleanup”  and “to the elimination of the significant threat to the environment”, the ECL was ambiguous. The court then held that DEC’s interpretation of the remedial goal set forth in ECL 27-1313(5)(d) as expressed in regulations was reasonable.

Purchaser found contamination after closing and filed lawsuit under citizen suit provision of RCRA 7002 . Defendant brings counterclaim asserting that plaintiff is obstructing remediation by denying access. Court denies plaintiff motion to dismiss on grounds that its obstruction could be construed as active storage of wastes and allowing continued leaching of wastes. Therefore, plaintiff could be actively “contributing” to the hazardous waste condition. Carlson v Ameren Corp., 2011 U.S. Lexis 5997 (C.D.Ill. 1/21/11).

Once again, plaintiff is exposed to liability from counterclaims filed in response to a complaint. It is very important for plaintiffs to evaluate their potential defenses to liability and try to correct any deficiencies prior to filing lawsuit.

Last year, the brownfield community was rattled by the Ashley II decision of United States District court for the District of South Carolina holding that a brownfield developer failed to comply with the requirements of the Bona Fide Prospective Purchaser defense. The court ruled the developer did not comply with its post-closing continuing care obligations when it did not timely implement recommendations in a phase 1 report.

 Now, we have an equally scary case from the federal District Court for the Eastern District of Michigan where confusion over the scope and timing of a RCRA corrective action caused the brownfield developer to become exposed to potential CERCLA liability.  

 Saline Properties LLC v Johnson Controls, Inc, 2011 U.S. Dis. Lexis 119516 (E.D. Mi. 10/17/11) involved a 22-acre former die cast auto parts manufacturing facility in Saline,Michigan. Universal Die Casting (UDC) owned and operated the facility as a subsidiary of Hoover Universal from 1944 and 1984. In 1985, Johnson Controls, Inc (JCI) merged with UDC and operations continued at the facility until 1991.

After the plant was shut down, the Washtenaw Industrial Facility, LLC acquired title to the property and leased the site to an automotive parts storage and distribution company. When the tenant vacated the premises in 2002, the owner defaulted on its mortgage. The lender holding the mortgage on the site wanted to avoid foreclosing on the property because of the concerns about environmental conditions that might exist due to the site’s manufacturing history. The lender apparently contacted EPA to obtain information about potential liable parties and then approached JCI about getting the Site “delisted” from the RCRA Information System database so that the site could be marketed. In 2003, JCI entered into an RCRA 3008(h) Administrative Order on Consent (“AOC”) to perform a RCRA Facility Investigation/Corrective Measures Study (RFI/CMS).

 JCI had originally contemplated a Corrective Measures Plan (CMP) based on a commercial/industrial cleanup standard. However, while the RFI was underway, plaintiff Saline River Properties LLC (SRP) obtained a zoning change to residential to support a proposed $20MM condominium development. SRP acquired the site in 2006 after performing a Baseline Environmental Assessment (BEA). However, SRP did not conduct a pre-acquisition AAI-compliant phase 1. Instead, SRP performed a database update of a four-year old phase 1.

SRP obtained $1MM in brownfield funding fromMichiganin the form of a $400K CleanMichiganInitiative (CMI) Brownfield Redevelopment Grant and a CMI brownfield redevelopment loan of $600K. The funds were to be used to implement SRP’s due care responsibilities under the state Natural Resources and Environmental Protection Act (NREPA). SRP demolished the building structures in 2007, leaving only a building foundation that covered approximately 40% of the site.

At this point, the publicly available facts become a bit murky. Initially, it appears that SRP had contemplated using its CMI funds and an EPA brownfield revolving loan fund to remove the foundation and excavate contaminated soils necessary to achieve the more stringent residential standards. To facilitate this work, SRP performed a phase 2 which detected more extensive contamination than originally envisioned.

EPA then told JCI that because of the re-zoning, the reasonably anticipated future use was residential and therefore, the CMP had to be amended to reflect a residential cleanup standard.  EPA advised JCI that its RFI was not acceptable because there remained data gaps, which was confirmed by the SRP phase 2. Sometime in 2007, SRP demolished the building foundation

Since JCI was now obligated under the ACO to remediate the site to a residential standard, EPA determined that the site was no longer an eligible brownfield site. In making this determination, EPA said that it was now unclear what JCI would pay for and how the brownfield funding would be used. Citing to 42 U,S.C. 9604(k)(4)(B)(i)(IV) which provides that no part of a grant or loan may be used to provide an indirect benefit to a responsible party, EPA said it did not want public funding to be used for cleanup that could be the responsibility of JCI. Also, around this time, it appears that SRP lost its CMI funding because of project delays associated with the RFI/CMS.

In 2009, JCI submitted a CMP addendum. EPA identified a number of deficiencies. In early 2010, EPA met with JCI and SRP. EPA advised both parties that they needed to coordinate their activities to ensure that an effective corrective action plan. In follow-up correspondence, EPA told SRP that it had to provide detailed site plans including specific building locations. EPA also advised SRP that it had to define what due care measures it would be implementing so this work could be coordinated with the corrective action plan. EPA also reminded SRP that the former facility had been an RCRA interim status TSDF and that corrective action obligations for such facilities “ran with the land” and applied to future owners or operators of such facilities under 40 CFR 265.1 and 270.72(a)(4).

EPA also cautioned SRP that the slab had served as a barrier to groundwater infiltration exposure to contaminated soils until SRP was ready to commence construction in the slab area. EPA told SRP that addressing the slab was now critical because the removal of the slab allowed infiltration and exposure to contaminants that had been located below the slab.

SRP filed a lawsuit in 2010 seeking to enforce the AOC under the RCRA citizen suit provision, asserting breach of contract, negligence, and nuisance claims. In an initial ruling, the court dismissed JCI’s motion to dismiss and dismissed the state claims without prejudice. SRP then filed a complaint in state court and JCI removed the action back to federal court on diversity grounds. JCI filed counterclaims against SRP under CERCLA and NREPA. JCI filed a motion to dismiss the common law claims and SRP filed a motion for summary judgment on JCI’s CERCLA and NREPA counterclaims. The court dismissed the breach of contract, nuisance, and negligence claims. The court also granted summary judgment to JCI on the SRP’s citizen suit to enforce the AOC.

In its CERCLA counterclaim, JCI argued that SRP exacerbated the existing environmental contamination below the building by allowing additional rainwater into the ground that the building and slab might have partially diverted to the slab perimeter. SRP asserted it was exempt from CERCLA liability as a bona fide prospective purchaser (BFPP). JCI also alleged that it incurred additional response costs because it had to work around the rubble piles to continue its investigation, and was forced to change its remediation plan from using the slab as an engineered barrier with some “hot spot” removal to installation of an “in-situ oxidation” system. As a result of SRP’s action, JCI said it would have to spend an additional $520K.

The court said, though, that SRP had not presented evidence on each of the BFPP elements and also had not shown it had not impeded the performance of the response action. In contrast, the court said that JCI introduced evidence that vinyl chloride concentrations had been stable while the slab had been intact but began to fluctuate significantly after SRP had broken up the slab. JCI’s expert testified that the reason for the increased concentrations was the infiltration of precipitation into subsurface soils through the broken up slab causing migration of previously stable contaminants. The court said the evidence also showed that SRP was also well aware of the role barriers like the slab play in preventing exacerbation of existing contamination. Despite this knowledge, the court failed to take any steps to prevent future rainwater infiltration through the broken slab or to conduct any remedial or investigative steps.

Thus, the court concluded that the evidence showed that SRP failed to satisfy the BFPP defense criteria because it failed to take reasonable steps to prevent the continued release or the threat of a future release and also caused exposures to persons on the site. Indeed, the court said that far from taking reasonable steps, SRP demolished the 3-acre floor slab after being specifically warned by its expert not to do so, and with full knowledge that contamination underlay the slab. Likewise, the court said SRP had not established it qualified for the innocent landowner defense because it had not demonstrated that it exercised due care with respect to the hazardous substance

Turning to the elements of CERCLA liability, SRP argued that JCI could not establish there had been a release during SRP’s ownership because the vinyl chloride had existed in the soil and groundwater prior to the time SRP acquired title. However, the court said that the definition of “release” was broader than “disposal”. As a result, the court said that a release encompassed movement of hazardous substances without any human activity. Indeed, the court said that JCI had not simply alleged passive migration but that Saline took the affirmative action of breaking up the concrete slab, which caused hazardous substances beneath that barrier to migrate into additional soils and groundwater. Thus, the court said JCI had created a genuine issue of material fact as to whether SRP caused a release or disposal at the facility

On the NEPRA claim, JCI asserted that by breaking up the concrete slab that was serving as a barrier to the known contamination in the soil beneath the slab, SRP had exacerbated the existing contamination by causing a change in facility conditions that increased response activity costs. SRP argued that it is exempt from liability under M.C.L. § 324.20126(1)(c) because it conducted a BEA. The court noted that JCI had presented evidence showing that:

• there was a very large concrete slab on the Property;
• SRP knew there was contamination beneath the slab; 
• a concrete slab can serve as an engineered barrier to contamination beneath the slab;
• SRP’s environmental expert told SRP about their due care requirements, which were “first and foremost not to make the contamination worse, not to move it around, not to excavate it, not to create any new conditions of exposure for the existing contamination.”;
• SRP’s environmental expert advised SRP not to break up the slab and to leave it in place;
• SRP hired a contractor who broke up the slab;
• SRP had not undertaken any measures to prevent rainwater infiltration through the broken up building slab; and
• SRP environmental expert prepared a “Due Care Plan” for SRP but SRP did not follow that plan.

Thus, the Court concluded that JCI has submitted sufficient evidence to create a genuine issue of material fact as to whether SRP’s actions constitute exacerbation.

As Ashley and this case demonstrate, brownfield development is extremely complex and parties that move dirt need to understand the requirements of the CERCLA and state law liability defenses. Demolition and construction schedules need to be closely coordinated with remedial activities to ensure that the work is done in a cost-efficient manner and that the remedy is effective. Courts are going to be evaluating the performance of a remedy with the benefit of hindsight and what might may had made sense from a construction schedule when the work was be done may in retrospect not look like the exercise of due care or appropriate care.  

This case also serves as a reminder of how RCRA interim status will follow the land. Purchasers often only focus on CERCLA or state superfund law and fail to consider potential RCRA liability.