Archive for the ‘Methane Gas’ Category

Federal Court Rules Methane Gas Constitutes “Imminent and Substantial Endangerment” Under RCRA 7002

Thursday, December 12th, 2013

A federal district court ruled that methane migrating from a closed landfill to a residential development project constitutes an imminent and substantial endangerment under section 7002 of the Resource Conservation and Recovery Act in Marcas, L.L.C. v. Bd. of County Comm’rs,2013 U.S. Dist. LEXIS 104380 (D.Md. 7/25/13).  The court also followed an emerging trend and found that knowledge of groundwater contamination did not trigger the statute of limitations for the soil gas pathway.

Following discovery of the methane issue, a dispute subsequently arose about the extent of actions required to mitigate the methane and the VOCs. When the landfill gas collection system became operational in 2007 and elevated levels of methane gas remained in the subsurface soils at the property, the plaintiff filed its lawsuit. After a series of preliminary rulings which we covered in an earlier post, the parties moved for partial summary judgment on a number of issues. We will discuss the statute of limitations, CERCLA and RCRA rulings.

The County argued that plaintiffs were not entitled to summary judgment on their nuisance, trespass and strict liability claims because those claims were barred by Maryland’s three year statute of limitations (SOL). The County contended the plaintiff had actual notice of the groundwater contamination because of a March 2000 letter from the Maryland Department of the Environment (MDE) that advised plaintiff that contamination from the landfill had migrated to the shallow groundwater beneath its property aquifer but not in the drinking water wells and that a cap to be installed on the landfill later that year would greatly reduce rainfall infiltration mitigate the shallow groundwater contamination. However, the court said that the crux of the lawsuit was the migration of methane gas and VOCs from the landfill onto plaintiff’s property, not groundwater contamination. Since the plaintiff did not have notice of the methane gas before September 8, 2004, the court ruled that the County was not entitled to summary judgment on the common law causes of actions.

In a prior ruling, the court had entered judgment on the CERCLA contribution claim but reserved judgment on the amount of the response costs that plaintiff was entitled to be reimbursed. The County asserted that plaintiff had failed to demonstrate substantial compliance with the National Contingency Plan (“NCP”) for its investigative costs. The court agreed that plaintiff had not presented any evidence that it complied with the NCP requirement regarding community relations/public comment of 40 C.F.R. §§ 300.430(c), (f)(3), 300.700(c)(6).

In addition, the County argued that plaintiff’s investigative and monitoring costs were not necessary because the response costs were incurred as part of the commercial development and not in response to any threat to public health. Moreover, the County claimed these costs were duplicative of work already performed by the MDE. The Court said the MDE had not asked plaintiff to perform any response actions and found that the gas monitoring wells plaintiff installed on its property performed the same function as gas monitoring wells that the MDE had required to be installed without cost borne by Marcas. For these reasons, the court concluded that plaintiff had not met its burden of showing its investigative and monitoring costs were substantially compliant with the NCP. Therefore the court not only denied plaintiff’s motion for summary judgment in the amount of $35MM but also vacated its earlier judgment in favor of plaintiff.

In additional to its CERCLA cost recovery and common law damages claims, plaintiff sought injunctive relief under two sections of the Resource Conservation and Recovery Act (RCRA). First, plaintiff sought an order under 42 U.S.C. § 6972(a)(1) for violations of Subtitle D requirements. The County opposed the motion on the grounds that there were no ongoing violations since the landfill was not longer operating and because remediating was underway pursuant to a plan approved by the MES. The court agreed that a prohibitory injunction was not an appropriate remedy because the County ceased all operations in June 2001. However, the court found a mandatory injunction requiring additional remedial measures was warranted and appropriate because methane gas continued to exceed the LEL at the boundary of the landfill in violation of 40 C.F.R. § 258.23(a)(2) more than a decade after operations ceased and six years after a mitigation system had been installed.

The court also found that plaintiff was entitled to injunctive relief under RCRA § 6972(a)(1)(B), finding that the continued migration of methane gas at levels above the LEL beyond the landfill boundary was a present imminent and substantial endangerment to the health or the environment.  In support of this conclusion, the court pointed to correspondence from the MDE in 2005 that advised the County that the migration of methane gas beyond the landfill boundary could cause “potential risks to on-site structures, neighboring homes, pedestrians, businesses and properties, “that the County “must immediately take all necessary steps to protect human health from potentially explosive conditions from the migration of methane gas from the landfill.”

The court directed the parties to submit a jointly propose an injunctive order. If the parties cannot agree on the terms of a proposed injunctive order, the court said each party must submit a proposed injunctive order for court’s consideration.

This case illustrates several trends. First, the willingness of courts to view discovery of a completed soil gas exposure pathway as triggering a separate statute of limitation period even though plaintiffs may have been aware of a groundwater plume years. Second, RCRA 7002 continues to be a powerful tool in vapor intrusion litigation and many courts will allow these actions to proceed where there is evidence that an existing remedy is not mitigating the threat. Third, defendants continue to try to use the primary jurisdiction doctrine to defeat common law claims for site where a cleanup is underway but courts tend to allow common law claims to proceed when the plaintiffs are not seeking response costs or challenging the adequacy of the remedy but seeking compensation for property damage or bodily injury. Finally, it appears that the growing awareness of the vapor intrusion pathway may be contributing to an increase in the number of methane gas lawsuits.

Methane Gas, an Apartment Complex and a Bankruptcy Filing

Sunday, May 5th, 2013

A federal bankruptcy court authorized the owner of the upscale Marble Cliffs Crossing Apartments complex in Columbus, Ohio to install a methane gas remediation plan over the objections of the purchaser of the mortgage note, holding that the plan was necessary to protect the safety of tenants and was critical for preserving the value of the property. The order allowed the owner/debtor-in-possession (DIP) to use cash collateral in the form of rent proceeds to pay for the installation and monitoring of the methane remediation system.  In re Marble Cliffs Crossing, LLC, 2012 Bankr. LEXIS 5099 (Bankr.S.D.Ohio 10/21/12)

In many ways, the events surrounding the Marble Cliff Commons Apartments are a microcosm of the national economy over the past decade. The project involved lack underwriting, overly-optimistic financial projections, inadequate environmental due diligence, a failed restructuring attempt, a loan default,  debt purchase at an auction sale and a pre-emptive bankruptcy filing by the property owner to facilitate debt restructuring.

The 30-acre complex consists of includes 276 rental units located in nine ranch style buildings and twenty-four two story buildings, a 3/4-acre pond, a community building and a mail center. A 7,000 square foot community center includes the leasing offices, three social rooms, a business center, a fitness center, a billiard parlor, a movie theater and an outdoor heated swimming pool, and a dog park. The complex was constructed in 2003 on the site of a former limestone quarry was used for the disposal of construction/demolition debris, yard waste, and other biodegradable materials between the 1970s until approximately 1985. Prior to construction, soil fill material was placed over the fill and a compacted clay “cap” was installed. Some of the buildings were constructed on the solid rock portion of the quarry and some of the buildings were constructed on the clay “cap” where the construction fill was located.

The development was originally financed with a $30MM loan originated by Armstrong Mortgage Company (Armstrong) in 2002 and guaranteed by the Department of Housing and Urban Development (“HUD”). Marble Cliffs Crossing, LLC (Marble or Debtor-in-possession) also granted a liens on all rents and profits generated by the complex.  Apparently, Armstrong was owned by the former owner of the property. The project encountered unanticipated delays in infrastructure construction and a market shift to home ownership that prevented the complex from reaching its projected occupancy rate. By 2005, the complex was encountering financial difficulties and had to restructure the HUD-guaranteed loan.

Also in 2005, tenants began complaining of odors. The Debtor retained a consultant to perform an indoor air quality investigation which detected elevated levels of organic compounds in certain areas. As a result, a passive methane system was installed in certain areas around the complex and odor complaints decreased significantly.

Financial conditions further deteriorated in late 2008 and the HUD-guaranteed loan went into default. In 2010, Armstrong assigned the mortgage to HUD who sold the loan at auction for $23.25MM to MTGLQ Investors, L.P. (MTGLQ). Marble subsequently entered into a forbearance agreement with MTGLQ to allow Marble to explore refinancing options. A prospective purchaser who was acceptable to both the note holder and the property owner performed additional environmental due diligence. The investigation revealed the presence of elevated levels methane and hydrogen sulfide gases in the subsurface below the complex at levels, and recommended additional investigation.

When the purchaser declined to proceed with the transaction, MTGLQ commenced foreclosure proceedings on November 1, 2011. Marble responded by filing a chapter 11 bankruptcy proceeding in November 2011 approximately two weeks later, staying the foreclosure action. Marble then obtained approval by the court to use cash collateral to retain an environmental consultant to further evaluate the environmental issues at the complex.

In early 2012, Marble’s environmental consultant conducted two rounds of indoor air monitoring in eleven apartments that revealed only minor concentrations of methane and no hydrogen sulfide. The consultant also performed a desktop review of historical reports and aerial photographs to better understand the location and type of fill material. Based on this information, the consultant drilled seven additional soil bores and installed twelve gas probes. The results of the additional subsurface gas testing were consistent with the earlier data. As a precautionary measure, Marble authorized the installation of methane detectors in the common areas of all buildings and in each of the ranch apartments.

The consultant also recommended installing a subsurface remediation system to control the lateral and vertical migration of methane gas. Marble obtained approval for the consultant to evaluate alternatives for the remediation system and prepare detailed engineering plans and technical specifications for the remediation system at a cost of approximately $71K.

Marble sought input from the Ohio Environmental Protection Agency (OEPA), Ohio Department of Health, the Columbus Public Health Department, the federal Environmental Protection Agency and the Agency for Toxic Substances and Disease Registry. The agencies requested that Marble perform supplemental sampling in additional locations, and then approved the design of a remedial system. Marble also worked with the agencies to prepare a letter to the tenants describing the environmental issues and the proposed remediation System.

Because of the additional work and interaction with the government agencies, Marble had to file a motion with the court to increase the authorized budget by approximately $42K. Initially, MTGLQ objected to the request for additional funds but the court ultimately approved the request.

Marble then sought court authority to implement the remedial system approved by the government agencies that was estimated to cost approximately $754K. The proposed remedial system consisted of a series of seventeen wells at the probable locations of fill materials that would collect the methane gas and direct it through underground pipes to a central area for safe ventilation. The remediation system would operate for several years until the methane gas concentrations dropped to acceptable level.

MTGLQ retained an expert to review the proposed remediation plan and filed an objection. At a hearing, MTGLO’s expert testified that the system might not be effective in removing methane gas because the radius of influence around each of the seventeen wells may be insufficient to extract methane gas, especially for the wells located directly under the buildings. MTGLQ’s expert said the remediation costs could increase significantly if the remedial system was improperly designed. Instead, he testified that additional testing should be conducted, which could cost as much as $50K to $100K. Marble objected to any delays because the approaching cold season could increase the costs of the existing proposed system.

The court found that both experts agree that the radius of influence would not be in perfect circles, and that Marble’s expert acknowledged described the radius of influence would be “amoeba-like” in shape, and that there was a possibility for some overlap and some gaps because the nature of the soil and the heterogeneity of the fill material. However, the court noted, Marble’s expert testified that further testing was not necessary because the system could be re-balanced after installation without having.

The court noted that MTGLQ’s expert had not visited the property to conduct testing, did not review OEPA documents or even talk to OEPA personnel. Moreover, the court observed that MTGLQ’s had never designed a gas extraction system and did not have any data indicating that the proposed remediation system would be ineffective. Furthermore, the court observed that OEPA would review the Debtor’s periodic reports to determine the efficacy of the post construction balancing. Finally, the court observed that OEPA has not requested any additional pre- construction testing.

As a result, the Court concluded that the Debtor had presented a reasonable plan and that it was imperative to implement the remediation as soon as possible to protect the interests of all creditors and the safety of the tenants. The court said the gas remediation plan was a capital and/or maintenance expense contemplated by the Agreed Order, and constituted an ordinary and necessary business expense as contemplated by Section 363(c)(1) of the United States Bankruptcy Code. Finally, the court found that MTGLQ had adequate protection because the property value exceeded the amount of the secured claim. Since the Creditor was over secured, there was no need for any type of adequate protection payment or additional liens to commence and complete the remediation program, as proposed by the Debtor.

In March, the Debtor filed a progress report and presented testimony confirming that the remediation plan had been installed and was properly operating. The bankruptcy proceeding was subsequently dismissed after the parties informed the court that they had settled their dispute.

Ct Allows CERCLA Claim Agst Bank To Proceed In Methane Case

Friday, May 3rd, 2013

Back in October 2011, we discussed a failed $35MM development project where a bank sought damages from three environmental consultants for failing to anticipate methane gas problems at the development site. The plaintiff, BancorpSouth Bank, was a successor by merger to The Signature Bank that had financed the project. The project consisted of 150-acre site that was to be developed for industrial and warehousing facilities. Included within the development site was a 30-acre unpermitted landfill that had operated for 50 years.

In this case, a 2005 Remedial Action Plan (RAP) had been developed based on a number of environmental reports prepared by co-defendant Geotechnology, Inc (Geotech) including a 2001 Phase 1 for St. Louis County and certain sampling reports prepared between 2002-04 for a member or related entity of the borrower/developer. The Geotech reports identified nine areas of environmental concern on the development site, with the primary concern being the landfill. The RAP required excavation, screening, and depositing certain organic and other materials retrieved from the landfill site through six inch diameter screens. Soil and organic matter that passed through the screens were to be transported to an onsite deep fill zone, compacted, and reused across large portions of the development site. Waste that did not pass through screens was to be deposited into the onsite engineered cell.

An engineering cell was to be constructed with 24-inch thick clay liner located in an area selected by The Clayton Engineering Company (Clayton). The RAP was subsequently amended to increase the minimum required cap thickness to 60 inches as well as to include a dewatering system to monitor and remove water inside of the cell.

Environmental Operations Inc. (EOI) entered into an Environmental Services Agreement with the borrower/developer Hazelwood Logistics Center, LLC (Hazelton) in June 2006 to perform the approved RAP. EOI was to achieve substantial completion of the landfill remediation work, other than capping the engineered cell, within seven months, and substantially complete construction of cap within 12 months. All other remediation work was to be completed within 14 months at which time EOI was obligated to obtain a no further action letter from the state. The agreement also provided that EOI would obtain a Premises Pollution Liability Insurance Policy (“PPL Policy”) and a Remediation Cost Contamination Insurance Policy (“RCC Policy”) that collectively provide environmental insurance coverage up to $5MM.

EOI then entered into a subcontract agreement with Geotech where Geotech agreed to perform a geotechnical investigation of the engineered cell area, supervise construction of the engineered cell liner, conduct trash screening and closure sampling assistance, perform trash compaction and cell filling oversight. Geotech, in turn, entered into its own subcontract with Clayton to design the engineered cell.

According to the bank’s complaint, the defendants did not perform a study to characterize the waste present at the landfill to determine the potential for methane generation despite the fact they were aware of biodegradable materials. Plaintiff also claimed defendants failed to properly design and construction an engineering cell and spread waste around site due to a deficient screening process. Specifically, the bank alleged that the Geotech environmental reports did not evaluate of the potential for landfill gas generation, failed to properly identify and delineate certain waste which caused the study to omit landfill areas later discovered during implementation of the RAP, that neither EOI nor Geotech tested or reported on the existence of methane gas in the landfill and failed to address the existence, level, or generation potential of methane gas by the landfill materials placed inside the engineered cell.

According to the bank’s allegations, after completion of remediation work by EOI and Geotech, methane levels arose across portions of the Property previously uncontaminated by methane. The bank said the methane levels methane discovered inside and outside the engineered cells at the Property posed a health concern and preventing the issuance of a NFA Letter. Moreover, the bank alleged, the cells were constructed without methane gas collection and dewatering systems and as a result of this defective design/construction, methane gas was migrating from the cells and affecting large portions of the site. The bank also alleged the cells were negligently designed because they were located below the natural water table and stormwater retention ponds were placed on top of the cells, all of which may have allowed water to seep into the cells. The bank estimated that it would cost an additional $43.1 million to obtain the NFA letter. The bank claimed the additional work included remove and disposing of the contents of the former landfill off-site, backfilling and grading the development site.

On the CERCLA claim, the plaintiff bank alleged that a variety of hazardous substances had been illegally disposed at the landfill property including asbestos, medical wastes, and leaking drums containing waste paints, thinners, lubricants and industrial cleaners that had been released into the soil and groundwater, and that methane gas had been generated from organic and other materials buried at the development site. The bank further alleged that the defendants had caused additional releases of hazardous substances by disturbing, unearthing, spilling, moving and re-depositing hazardous substances. Moreover, because the defendants made decisions concerning compliance with environmental regulations, plaintiff charged the defendants were CERCLA “operators” of the development site.

In the court’s September 2011 decision, the court granted some of the defendants’ motions to dismiss but allowed the negligence and CERCLA claims to proceed to discovery. When ruling on a motion to dismiss, a court assumes the facts as alleged are true in determining if the complaint states a claim to relief that is plausible on its face. If the claims are only conceivable, not plausible, the complaint must be dismissed.

In the latest motion, it was the bank’s turn to file a motion to dismiss counterclaims filed by the defendants. BancorpSouth Bank v Environmental Operations, Inc., 2012 U.S. Dist. LEXIS 159466 (E.D.Mo. 11/7/12).  We only discuss the CERCLA claim against the bank in this post. To review the other claims including the cross-claims against Geotech and Clayton, you can access the decision here

Defendant EOI alleged, inter alia, that the bank was liable as CERCLA operator for contribution. In addition to the CERCLA claim against the bank, EOI filed cross-claims against co-defendants Geotech and Clayton alleging they were liable for contribution under CERCLA as well as under state common law contribution and indemnity. EOI also claimed Geotech was liable for breach of contract.

According to EOI, Geotech failed to adequately characterize the waste present at the  landfill for biodegradation and landfill gas generation potential in the its 2001-04 reports. EOI also claimed that Geotech did not identify landfill areas that were discovered during implementation of the RAP. Interestingly, Geotech asserted in its answer that the 2001 report had a $50K limitation of liability, expressly state that Geotech was not to be consider a generator of any hazardous substances under any circumstances and that the developer, would be responsible for any hazardous, pollutants, or contaminants.

In its counterclaim, EOI asserted that the plaintiff bank was an “owner” or “operator” of the Property that was contaminated with volatile organic compounds (VOCs), semi-volatile organic compounds (SVOCs), metals, total petroleum hydrocarbons (TPH), pesticides, and polychlorinated biphenyls (PCBs). EOI also asserted that if the Court finds that EOI has been an “operator” of the Property, then Geotech and Clayton similarly should be CERCLA “operators” and/or “arrangers” for the development site.

The bank argued that it is entitled to be dismissed because of the secured creditor exemption. However, EOI contended that the bank may be responsible because of the subsequent actions it took at the development site. The court said that in a motion to dismiss, the question is not if the parties are responsible but if the defendant sufficiently stated a cause of action in its counterclaim. While discovery might reveal that the bank and the co-defendants had no authority to control the handling of the hazardous material at the development site, the court concluded that the counterclaim and cross-claims sufficiently alleged facts to place the parties on notice of the CERCLA claim against them and met the extremely lenient pleading standards for surviving motions to dismiss.

County Liable to Developer for Migration of Landfill Gas

Friday, January 6th, 2012

A federal district court ruled that a Maryland county government was liable to a developer for damages resulting from the migration of landfill gas from a closed landfill to a planned development community. The court held that developer was entitled to recover response costs under CERCLA and that the subsurface migration of methane gas and VOCs from the landfill constituted a trespass and public nuisance. The court also found that the county had violated certain provisions of Subtitle D of RCRA.

In Marcas, LLC v Board of County Commissioners of St. Mary’s County, 2011 U.S. Dist. LEXIS 110378 (D. Md. 9/28/11),  the County of St. Mary’s (County) had owned and operated the St. Andrews Landfill from 1974 to 1999. Three waste disposal cells had been closed in 1997 and the remaining disposal cell was closed in 1999. A C&D disposal cell was closed in 2001.

Beginning in 1994, groundwater sampling began detecting elevated levels of volatile organic compounds (VOCs) in groundwater monitoring wells located at the landfill. One off-site well that was located within 200 of the future development parcel also had elevated levels of PCE and vinyl chloride. In November 1996, representatives of Marcas LLC (Marcas) and the St. Mary’s County Department of Public Works and Transportation (DPWT) met to discuss the landfill condition since Marcas sought to have a 227-acre parcel rezoned for a Planned Unit Development (PUD) to be called the First Colony Planned Development Unit. After the rezoning was approved, Marcas acquired title in April 1998.

In 1999, the Maryland Department of the Environment (MDE) inspected the landfill and observed several leachate seeps. The MDE ordered the County to contain and collect the leachate. In 2001, the County retained a consultant to conduct landfill gas sampling from the perimeter of the landfill.  Methane was detected at 100% of the lower explosive level (LEL) in a number of locations. After a second round of sampling largely verified the initial results, the DPWT proposed to enhance the existing methane collection system by installing mini-blowers at the vent flares located within the disposal cells.

The MDE approved the proposed upgrade in 2002. In December 2002 the DPW&T asked plaintiff to enter into an access agreement to implement a soil has monitoring plan approved by the MDE. In January 2003, the director of the DPW&T allegedly sent a letter to plaintiff that landfill gas has migrated approximately 200 feet beyond the landfill property boundary and that additional sampling may be required. Plaintiff denied it receiving this letter and claimed it did not learn of the letter until September 2004. The timing of the notification became significant because Marcas agreed to sell 240 building lots in August 2004 to Lincoln Property Company Southwest, Inc. (“Lincoln”) who intended to construct new homes for the U.S. Navy.  The January 2004 letter was discovered during Lincoln’s environmental due diligence.

Following discovery of the methane issue, plaintiff retained its own consultant to fill data gaps. A dispute subsequently arose about the extent of actions required to mitigate the methane and the VOCs. The engineering consultant retained by Marcas  recommended enhancements to the Landfill Gas Remediation Plan to facilitate the development, including an active gas extraction system be installed that would cost approximately $950K. The County, on the other hand, wanted to install a passive system at a cost of approximately $200K that could be upgraded to an active system if subsequent sampling indicated additional measures were required. Marcas authorized an additional investigation to try to convince the County to implement the more robust methane collection system. The County informed Marcas that it while it appreciated the additional information, it would proceed with the previously-approved remedy.  Interestingly, when Marcas told the County that it could be potentially damaged by the methane gas because Lincoln was backing away from developing two of the three areas to be developed, the County’s response was to assert that plaintiff had acquired the tract and  entered into the development agreements with full knowledge of the landfill and the potential for the gas to migrate to adjacent properties. The County later amended the rezoning approval to reconfigure the development so that commercial development would occur at the portion of the property impacted by the landfill gas instead of residences.

The landfill gas collection system became operational in the spring of 2007 but levels of methane gas continued to be detected about the 5% LEL in the subsurface soils at the Marcas property.  Marcas then filed its lawsuit. In a 56 page decision, the court denied the County’s motion for summary judgment and granted portions of plaintiff’s motion for summary judgment. Following are some of the more interesting rulings.

On the CERCLA claim, the County argued that Marcas costs were unnecessary because Marcas knew as early as 2002 that the County had already implemented a monitoring plan and had selected a remedial plan. However, the court said there was nothing in CERCLA preventing an owner or operator from initiating its own investigation.

The county further argued that the declarations and invoices submitted to support the motion for summary judgment did not comply with the NCP. The court also rejected this argument, saying the County has apparently overlooked two reports that described in detail the release, the probable nature of the release and recommended remedial actions.

Finally, the County contended that the reports were not consistent with the NCP because they were generated in part for the commercial development of the property and not due to any threat to public health.  The Court said there were some documents prepared for Marcas prior to the time it was notified by the County that sampling had confirmed landfill gas had migrated to its property. However, the court said that at this stage of the litigation, all Marcas had to show was that it had incurred some costs consistent with the NCP to maintain its CERCLA claim. Thus, the court ruled that Marcas was entitled to recover its investigative costs incurred after the date it was received the notice from the County that were consistent with the NCP.

On the nuisance claim, the court ruled that Marcas had demonstrated the release of landfill gas had interfered with its use and enjoyment of its property. As support, the court pointed to a “Supplemental Site Evaluation” prepared for Marcas that showed that the project design had to be changed because of the presence of the landfill gas. In particular, the report recommended that no residences with basements or other subsurface structures be constructed in areas impacted with landfill gas.

On the trespass claim, the County claimed that Maryland law did not recognize subsurface migration as a trespass. Even if Maryland law did recognize migration as a trespass, the County asserted that Marcus did not prove that the trespass was intentional. The court disagreed, holding that all that was required was to show an unpermitted intrusion that was done in a negligent or intentional manner.

A number of other issues remain to be decided including the amount of the CERCLA response costs and the damages relating to the nuisance and trespass claims. Stay tuned.

$35MM Landfill Brownfield Project Derailed By Methane Gas

Friday, October 21st, 2011
Earlier this year, I discussed the BNY Mellon v Morgan Stanley Mortgage Corp where  the defendant/mortgage originator has been sued by the CMBS trust for a $80MM shopping center loan where methane gas issues led to a default. See detailed post at: http://lschnapf.blogspot.com/2011/07/cmbs-lender-kept-in-case-over-questions.html
Now we have another case involving a $35MM development loan where a bank is a plaintiff and is seeking damages from several environmental consultants for failing to anticipate methane gas problems at the development site. In this case, the development site contained two former landfills that had been closed before the current closure requirements went into effect. The defendants filed motions to dismiss the complaint and while the court agreed to dismiss some of the claims, it allowed the negligence and CERCLA claim to proceed to discovery.
In Bancorpsouth Bank v. Environmental Operations, Inc., 2011U.S. Dist. LEXIS 117010 (E.D. Mo. 10/11/11), the City of Hazelwood (City) requested proposals to redevelop an approximate 150-acre  blighted area known as the Robertson Development Project (Site). This area formerly contained two landfills, several auto body/salvage yards, demolished residences, a gas station, petroleum bulk storage facility and some small manufacturing concerns. The City wanted to construct a warehouse and light industrial complex.
After several years, the city received an acceptable development proposal and adopted an ordinance selecting McEagle Development LC as the developer of the Property. In November 001, Geotechnology, Inc. (Geotech) prepared a phase 1 environmental site assessment (ESA) to theCountyofSt. Louis. Interestingly, despite the fact that a large portion of the Site consisted of what was called the Edwards Landfill (Landfill), the ESA expressly provided that an evaluation of methane gas was not included within the scope of services. The ESA identified the aforementioned former uses as RECs. However, in discussing the former landfill, the report simply stated that “The vertical and horizontal extent [of the landfill] is unknown as well as the composition of on-site materials. Deleterious materials anticipated in this area (sp) and should be a consideration to both the geotechnical design of the development as well as to the environmental cleanup. The fill may facilitate (sp) utilizing a method other than probing/boring to sample both bearing capacity and contaminants. Therefore it is recommended that after a site plan has been developed, the environmental sampling and geotechnical investigation be coordinated to take place concurrently.” Unlike the phase 1 in the Morgan Stanley case, this phase 1 did not mention the potential for methane gas or flag it as an item of concern,
In October 2002, the City and Hazelwood Commerce Redevelopment Corporation (“HCRC”) entered into a Development Agreement whereby the granted HCRC the right to acquire the Site including the parcels containing the Edwards Landfill. HCRC then assigned its acquisition rights back to the City so that it could begin the process of assembling the various parcels by way of eminent domain.
Between 2003 and 2005, HCRC retained Geotech to prepare a number of sampling reports. These reports identified nine areas of concern related to the former uses. Again, the reports did not study or evaluate the potential presence of methane.
In July 2004, the Industrial Development Authority of the City ofHazelwoodsubmitted a brownfield application to the Missouri Department of Economic Development (“MDED”). This application was approved and the project became eligible for over $6.9MM in Brownfield Tax Credits. The tax credits were later sold to a tax credit purchaser.
In April 2005, Environmental Operations Inc (EOI) and Geotech prepared a Remedial Action Plan (RAP) where Geotech would act as the oversight consultant and EOI would perform the environmental remediation activities. Pursuant to the RAP, salvaged automobiles and larger waste would be removed and disposed of off site. Building debris from former site structures would be removed and existing site structures would be surveyed for asbestos. In addition, approximately 400,000 cubic yards of landfill material would be excavated and screened. Items between six and 12 inches were to be transported to an onsite engineered cell that was to be designed with 24- inch thick clay liner and capped by 60- inch clay cap. The fine material (less than six inches) was to be used as deep fill elsewhere at the Site. The material excavated for the engineered cap was to be used for grading elsewhere at the Project. A stormwater retention basis was to be constructed on top of the engineered cell. Upon completion of all remediation activities, a final report would be prepared and submitted to the MDNR for issuance of a no further action letter. Interestingly, the RAP did refer to the presence of volatile and semi-volatile organic compounds at the Property but did not address the potential for methane gas. The RAP was amended in February 2006 to provide for pumping and discharging trapped water from within the engineered cell area. No provision was made for the accumulation of methane gas within the cell
Meanwhile Hazelwood Commerce Center LLC (“HCC LLC”) and The Signature Bank entered into a one year $11.5MM Land Acquisition Loan Agreement in October 2005. The proceeds from this loan were to be used solely to complete the assemblage of the parcels for the Project and related expenses. HCC LLC made representations that the Site was in compliance with environmental laws and that there were no Hazardous Materials (the definition included reference to flammable substances) except as disclosed in the environmental reports and the RAP.
In June 2006, HCC LLC and EOI entered into an Environmental Services Agreement to implement the RAP. This agreement required EOI to achieve substantial completion of the landfill remediation work, other than capping the engineered cell, within seven months, and to achieve substantial completion of the cap within twelve (12) months. All other remediation work was to be completed within fourteen (14) months which would be memorialized by a No Further Action Letter from the MDNR. The agreement also provided that EOI would obtain a Premises Pollution Liability Insurance Policy (“PPL Policy”) and a Remediation Cost Contamination Insurance Policy (“RCC Policy”) with collective coverage of up to $5MM.
In June 2006, the City and HCC LLC entered into a Remediation and Development Agreement (the “Remediation and Development Agreement”) where the City agreed to enter into a Purchase and Sale Agreement (PSA) to sell the landfill site to HCC LLC. The City was to deposit the proceeds from the sale as an initial contribution to the Remediation and Development Project Trust Indenture (the “Project Trust Indenture”). The PSA was executed the same day along with Collateral Assignment of Environmental Services Agreement and Consent of Contractor that granted Signature Bank an assignment and security interest in the Remediation and Development Agreement as well as the related agreements
With the execution of the foregoing documents, Signature Bank then entered into a $35MM Development Loan Agreement in August 2006. The purpose of the loan was to pay off the pre-existing Acquisition Agreement and to fund the activities required for the Project. However, the Development Loan proceeds were not to be used to fund the remediation which was to be financed from the sale of the tax credits and the other public financing.
In April, 2008, bubbling gas was observed rising through the detention basin constructed atop the engineered cell. EOI collected measurements for methane by placing a stainless mixing bowl directly over the bubbling area for approximately five minutes and then inserting a testing device under the mixing bowl to read the content of the “trapped” air. EOI found no methane and forwarded the test results to MDNR. EOI requested that MDNR consider the potential for methane gas generation or contamination a closed issue. However, MDNR directed EOI to install gas monitoring wells which revealed the presence of explosive levels of methane not only within proximity of the engineered cell but throughout the Site.
The borrower eventually defaulted on its loan and the successor to Signature Bank filed its complaint. The bank alleged that because of inadequate investigation and design, dangerous levels of methane gas affect large portions of the Property, further construction and sale of lots at the Project cannot proceed pending further remediation of the methane conditions. The bank estimates the additional work to address the methane gas will exceed $10 MM
I cannot imagine how three environmental firms failed to raise methane gas as a potential issue for a project involving the redevelopment of and disturbance of an old landfill. This would have been the first issue that I would have thought they would have raised.