It is no secret that distressed debt investors are eagerly looking for opportunities to purchase defaulted or underwater loans. One strategy used by investors with a healthy risk appetite is to purchase promissory notes secured by contaminated property at deeply discounted pricing. The investor then brings an RCRA 7002 action seeking an order requiring the responsible party to remediate the site. If the investor prevails, the investor can then either sell the note at full face value or foreclose on the remediated property and sell it for a significant profit. Moreover, the prevailing plaintiff/investor can recovery its attorney fees under RCRA 7002.

RCRA 7002 is not the only remedy available to pursue this business model. Investors may be able to use state common laws such as nuisance to seek injunctive relief. However, courts in a number of states have ruled that holders of notes do not have sufficient interest in the property to bring nuisance actions (known in legal parlance as “standing”). A recent example of this line of cases is Cox v. Louisian, 2011 Cal. App. Unpub. LEXIS 3207 (Ct.App-2^nd Div 4/27/11).

In this case, Douglas Oil Company (Douglas) constructed and operated a gas station from 1964 until 1980 when Douglass old the property to the Harpers who subsequently conveyed the site to the Bodamer Family Trust (the Trust). It appears that the property continued to be operated as a gas station during this period.

In 1991, the Trust sold the property to the current owners. As part of this transaction, the current owners executed a promissory note to the Trust (the Note), secured by a deed of trust (the California version of a mortgage). Sometime around the turn of the century, the current owners abandoned the property.  The Los Angeles Department of Public Works (DPW) issued written notices to the current owners in 2002 and 2003 advising them that they had improperly abandoned the gas station without removing the underground storage tanks

In July 2004, the plaintiff purchased the Note and received an assignment of Deed of Trust. The face value of the Note was approximately $467K but it is unclear if the plaintiff purchased the Note at a discounted price. Upon learning that the property was scheduled to be sold at a tax auction, the plaintiff filed a lawsuit asserting a variety of common law claims including nuisance, strict liability and negligence against Douglas and its parent corporation, ConocoPhillips (Conoco). The plaintiff sought a preliminary injunction requiring Douglas and Conoco to remove the USTs and remediate the contamination. The plaintiff argued that was prevented from proceeding with a judicial foreclosure because of the existence of the USTs and associated contamination, and that his security interest would be extinguished if he did not foreclose and the property was sold at auction. Of course, there was nothing PREVENTING the plaintiff from foreclosing. Instead, the plaintiff simply wanted to AVOID becoming liable for the cleanup.

The trial court denied the plaintiff’s motion for a preliminary injunction, concluding that the plaintiff failed to present evidence that it was likely to prevail and also that the plaintiff as a mere note holder did not have standing to bring a nuisance action. The appeals court affirmed the denial of the motion.

Plaintiff argued that Douglass and Conoco had failed to comply with the state Underground Storage Law (UST Law) that had been enacted two years after the property was sold, and that this violation constituted a nuisance. The appeals court ruled that there was no evidence that Conoco ever owned, leased, occupied or controlled the Property. In addition, the plaintiff had not established any basis to hold Conoco liable for its subsidiary under a corporate veil piercing theory.

Turning to Douglas, the court said that there was no evidence that the legislature intended the UST Law to impose retroactive obligations on former owners or operators of USTs. Moreover, the court said the plaintiff had failed to produce any admissible evidence of the existence of leaks or release of hazardous materials at the Property during the period Douglas owned and operated the property.

More importantly, the court held that the plaintiff failed to show that it had standing to pursue its nuisance claim. Since a private nuisance involves an unreasonable and significant interference with the use and enjoyment of land, the court said the plaintiff had to prove that it owned, leased, occupied or controlled real property. However, the court said the plaintiff had failed to cite to any authority that a holder of a deed of trust can maintain a private nuisance cause of action. The court said a person with a security interest in real property does not “use and enjoy” real property, and thus lacks the kind of interest in real property that is protected by a private nuisance cause of action. Furthermore, the court ruled that while the UST Law did allow for issuance of preliminary injunction or permanent injunctions without a showing of irreparable damage, this exception did not apply to a private person with a security interest in real property.

The court also noted that a preliminary injunction was intended to preserve the status quo but granting the preliminary injunction would have resulted in plaintiff receiving the ultimate relief it sought-a cleanup. Also weighing against the preliminary injunction was that the preliminary injunction would have caused Douglas to spend a significant amount of money and time dealing with a potentially serious environmental problem at a site it had not owned in 30 years and that Conoco had never held an interest. The court said Douglas and ConocoPhillips in all likelihood would have been compelled to incur the significant costs and that this task would have been further complicated by the apparent lack of cooperation of the current owners, who abandoned the Property long ago.

Finally, the plaintiff’s task was further complicated by a problem that has been frequently encountered in the wake of the credit crisis-namely, the plaintiff could not locate the Note. Without the Note, the court explained, there was no evidence if its terms so the plaintiff could not prove when payments were due, whether the owners have defaulted or the balance due on the Note. In addition, the plaintiff had not produced any evidence about the fair market value of the property. Thus, the court reasoned, there was no way to determine if the proceeds from a foreclosure sale would cover the balance due, if any, under the Note. Without this information, the court explained, the plaintiff could not prove that the alleged nuisance has caused him any injury.

It is unclear why the plaintiff did not consider bringing a RCRA 7002 action instead of proceeding under state law. It may be the plaintiff determined that while the contamination constituted an “unreasonable” interference with the use of the property, it did not rise to the level of an “imminent and substantial endangerment” given that the plaintiff took six years to file its action.

Hager’s of Cohasset, Inc. v. Nelson, 2011Minn. App. Unpub. LEXIS 156 (Minn.Ct. App. Feb. 15, 2011) is yet another lesson from a long line of cases that illustrate the risks of not using counsel for commercial property transactions especially those have problematic environmental issues.

In this case, the plaintiff operated a fuel-oil business. In October 2007, plaintiff decided to sell his property and divided it into two parcels. After selling Tract A, he entered into a purchase agreement with the defendant for Tract B. Another defendant, the broker, served as a dual agent.

The broker drafted a clause at the instruction of the defendant buyer that provided the sale was contingent on seller obtaining a letter from the Minnesota Pollution Control Agency (MPCA) stating that the land was free from any future clean up. In addition, the clause stated that “Seller was to have tanks removed and proper fill removed and new fill in place prior to closing per MPCA rules in place at present time, seller to provide buyer with a completion certificate by the MPCA. Buyer to have no financial obligation for the removal and compliance with MPCA rules and regulations”

After the contract was signed, the plaintiff removed the above-ground fuel tanks and fuel pumps removed from tract B but did not provide buyer with any documentation from MPCA that the tanks were removed in compliance with MPCA rules and regulations, nor a letter from the MPCA stating that the land was free from future cleanup. The only letter from the MPCA seller provided was dated six months before the parties had entered into the purchase agreement that addressed a petroleum release associated with two 10,000-gallon USTs that had been removed in 2007. The MPCA closure letter simply indicated the petroleum release had been adequately addressed and did not require any additional investigation or cleanup work at that time. However, the letter also said that “file closure does not mean that all of the petroleum contamination has been removed from this site” and “that the MPCA reserves the right to reopen this file.” In addition, the letter stated “This letter does not release any party from liability for the petroleum contamination . . . . If future development of this property or the surrounding area is planned, it should be assumed that petroleum contamination may be present.”

Buyer refused to close, saying that the 2007 MPCA letter was not satisfactory. Seller then filed a breach of contract action and sough an order compelling specific performance. Seller also sued the broker, asserting that the broker breached his fiduciary duty because he drafted the purchase agreement per Nelson’s instructions without seeking legal advice or additional expertise from the MCPA about the conditions.

The buyer and broker moved for summary judgment and dismissal of all of Hager’s claims. The district court granted summary judgment in favor of buyer and the broker, concluding that the 2007 MPCA letter did not satisfy the minimum requirements of the condition because it predated the purchase agreement, released no party from liability, and indicated that it should be assumed that petroleum contamination may be present.

The appeals court affirmed, holding that because seller did not provide buyer with any documentation from the MPCA related to the tank removal in May 2008, the conditions precedent were not satisfied.  On the claim against the broker, the court said seller had not shown that the broker had a duty to obtain legal advice or consult with MPCA prior to drafting the condition precedent.

Anyone who has negotiated the purchase of a gas station is aware that these agreements are incredibly complex. The contracts have dense definitions, dependent and inter-related provisions, and grant broad discretion to the sellers in determining the scope and conduct of the cleanup.

A buyer who does not retain an environmental attorney who has previously worked on one of these agreements runs the risk of committing G. Gordy Liddy’s infamous aphorism of being unarmed in the battle of the minds.  The recent decision of D& H Ventures v Exxon Mobil, 2011 Cal. App. Unpub. LEXIS 8580 (Ct.App-2nd^h Div 11/8/11) illustrates this point.

In this case, D&H Ventures purchased a gasoline service station site from Exxon in 1995. D&H was owned by the franchisee that had been operating the property since 1989. Exxon had been remediating the contamination at the property since 1991 and had submitted a summary report to the Los Angeles County Department of Public Works (Regional Board in 1994. The Regional Board eventually issued an NFA letter in October 1997.

The agreement provided that the sale was “as-is” and the purchaser acknowledged that some spills had occurred that resulted in soil or groundwater contamination. Section 10 of the Agreement outlined the parties’ remediation rights and obligations. Exxon was obligated to conduct an environmental site assessment prior to closing and provide the results to the purchaser before closing. If the initial assessment or any additional assessment was unacceptable to D&H, it had the right to terminate the Agreement prior to closing. The environmental assessments served as the “Baseline Condition” for the contamination. If the Regional Board required further testing or remediation, the agreement provided that the Baseline Condition would be amended to reflect the additional sampling. Exxon made no representation or warranty regarding any aspect of any reports delivered to the purchaser and the purchaser had the right to conduct its own investigation.

Exxon was obligated to remediate the Baseline Conditions as it reasonably deemed necessary or appropriate to comply with “Legal Requirements”. Exxon’s remedial obligations under the agreement would be satisfied (1) upon receipt written notice from the appropriate Government Authority that either no further remediation and monitoring of the Baseline Condition was required or (2) when Exxon provided written notice to D&H that remediation had been completed, Exxon had submitted a written request for closure indicating that the soil and/or groundwater had been remediated to the applicable levels but  Government Authority had not provided a written notice within a reasonable time.

The agreement also provided that Exxon was not responsible for investigation or remediation of contamination occurring after the closing date or for increases in contaminant levels above the Baseline Condition.  In addition, the agreement indicated that Exxon’s remediation responsibilities inured only to the benefit of D&H and its lender, and did not extend to subsequent purchasers or assignees.

Exxon agreed to indemnify the purchaser until October 31, 2003 from third parties claims resulting from contamination occurring from Exxon’s use, operation or remediation of the property. However, Exxon would not indemnify purchaser for environmental contamination occurring after closing unless the contamination resulted from the remediation activities or negligence of Exxon. In exchange for the indemnity, purchaser provided a general release for itself, its representatives, successors and assigns except for any obligations of Exxon relating to the Baseline Conditions. The deed conveying title incorporated the environmental provisions of the agreement and provided that the environmental provisions were covenants that ran with the land.

In October 2006, D&H sold the Property to Fry’s Petroleum, Inc (Fry’s). One month later, the Regional Board advised D&H that groundwater contamination had been detected at a former service station site near the property and that the Regional Board was re-opening the case to determine if some of the contamination had migrated from the site. In April 2007, the Regional Board directed both D&H and Exxon to install additional groundwater monitoring wells to determine the direction of groundwater flow and groundwater quality. Exxon refused D&H’s request to resume its assessment and remedial activities at the Property.

D&H then filed its lawsuit, claiming Exxon had breached the agreement and asserting other common law claims. In the breach of contract claim, D&H argued that the 2006 reopener triggered section 10.B providing that if further testing or remediation is required by any government authority, the Baseline Condition would be modified by the results of any such tests. D&H also argued that even if Exxon had no contractual obligation to remediate the Property in 2006, Exxon was not entitled to summary judgment because there were triable issues of fact whether Exxon had breached the Agreement in 1997 and 1998 by failing to properly remediate the contamination.

The trial court rejected all of D&H’s claims and granted summary judgment in favor of Exxon. The court ruled that Exxon had completed its obligations under the agreement when the Regional Board issued the NFA letter. The court said the purchaser was relying on clauses outlining Exxon’s initial assessment obligations as well as pre-closing obligations but not relating to regulatory site closure

Exxon had asserted that D&H’s inadequate remediation claim was barred by the statute of limitations. D&H responded that the discovery rule should have operated to toll the statute of limitations. The court found for Exxon, finding that there was undisputed evidence that D&H was aware of the environmental conditions of the property, including the Baseline Condition, when it purchased the site in 1995, when the application for closure was submitted in 1997 and when Exxon ceased all remediation activities in 1998. The court said that the delayed discovery rule typically did not apply to breach of contract actions, which ordinarily accrue at the time of breach. The trial court also ruled that the broad release clearly and explicitly applied to bar D&H’s the common law claims. Likewise, the court held the release precluded Fry’s claims since the release specifically applied to successors and assigns, and was incorporated into the deed.

The appeals court affirmed. Looking at the entire agreement, the court said the only reasonable construction of the agreement was that the NFA letter relieved Exxon from any further remediation obligation. The court noted that Exxon was required to conduct an assessment, the results of the assessment would establish the Baseline Condition, that Exxon was to remediate the Baseline Condition and that Exxon’s remedial obligations continued until an NFA letter was issued by the appropriate Government Authority. The court said that to impose an indefinite remedial obligation on Exxon for an unidentified period of time was patently inconsistent with the provisions of Section 10 as well as other clauses of the Agreement

On the statute of limitations issue, the appeals court said that even though D&H knew the property was heavily contaminated at the time of purchase, it conducted no independent environmental investigation prior to purchase. Moreover, the court said, the purchaser did not investigate the requirements for site closure when Exxon submitted its request and did not object to Exxon’s representation that it had satisfied all the requirements for site closure. On the basis of this undisputed evidence, the court agreed that the doctrine of delayed discovery did not apply, and that any claim for breach of contract accrued more than 10 years before D&H filed its action

Many commercial properties are subject to old leases that were originally negotiated prior to the advent of environmental laws. These leases not only do not address environmental issues but also may contain clauses that can create liability for landlords when the property contains USTs.

One of the more problematic clauses in old leases are those that provide that property left behind when a tenant surrenders the premises becomes the property of the landlord. When a tenant fails to remove a UST, these clauses can result in the landlord becoming responsible for taking corrective action as the owner of the UST.

A case that illustrates this issue is The Carroll Independent Fuel Company v Washington Real Estate Investment Trust, 2011 Md. App. LEXIS 161 (Ct. Special App. 12/1/11), the plaintiff (CIF), a wholesale distributor of motor fuels, entered into a ten-year commercial lease agreement with defendant (WRIT) in July 1988 to lease a gasoline service station in Westminster, Maryland. Approximately one year later, CIF and WRIT entered into another ten-year commercial lease agreement for an adjacent gasoline service station. An addendum to the lease required CIF to install new gasoline tanks at each of the leased properties.

Both leases required CIF to remove all of its personal property and unattached movable trade fixtures prior to surrendering the premises. If CIF failed to remove its personal property and trade fixtures, the leases provided that such property would be considered abandoned and become the exclusive property of WRIT. The leases also required CIF to provide an environmental inspection certificate declaring that the “Demised Premises” were “free of dangerous and/or toxic substances or materials in quantities or concentration which would require clean up under applicable governmental regulations”.

In July 2005, CIF provided notice to WRIT that it would be terminating the leases effective August 15, 2005. CIF had sought to renegotiate the leases and modernize the properties but WRIT declined, explaining that it had decided to demolish the buildings to facilitate leasing of the properties to a bank.  After CIF vacated the premises, WRIT advised CIF it had failed to remove the USTs or provide the environmental inspection certification required upon termination of possession.” As a result, WRIT told CIF that that until these conditions were satisfied, WRIT would consider CIF not to have surrendered possession of the premises and would reserved its right under the leases to collect daily holdover fees.

Between January 30 and February 1, 2006, CIF removed the gasoline storage tanks and removed tons of contaminated soil. CIF continued to corrective action until March 2007 when it ceased work. At this point, WRIT took over remediation of the property. In May 2007, WRIT combined the two sites and leased it to Susquehanna Bank. Demolition of the service station buildings was completed in October 2007.

WRIT filed breach of contract claims for each lease. WRIT alleged, inter alia, that CIF had failed to keep the properties in the condition required by law due to the petroleum contamination and it failed to surrender possession of the properties as required by the leases. WRIT requested a judgment of $3,000,000, consisting of rent at the holdover rate and additional damages, including attorneys’ fees and costs and expenses associated with remediation.

CIF responded that there was no evidence that any spills or contamination had occurred during its occupancy and that it did not provide the environmental inspection certificate because  it was limited to the condition of the buildings and felt the certification was unnecessary since WRIT was going to demolish the buildings. On the claim for holdover rent, CIF said it did not initially remove the USTs because it believed that ownership of the tanks vested in WRIT upon termination of the lease. CIF also said when it subsequently discovered that WRIT never registered the tanks in its name, CIF decided to remove the tanks between in January 2006. CIF continued to pay base rent for both properties during that time.

In January 2010, the circuit court ruled that CIF was not liable for environmental contamination that predated its tenancy and that WRIT had not shown that CIF caused the contamination of the sites. The court also refused to award damages for lost rent since there was evidence that construction could have occurred while remediation efforts were occurring.

Turning to the holdover rent issue, the court rejected CIF’s argument that the tanks were to become WRIT’s property under the lease because CIF was aware that WRIT was not interested in leasing the property for a gasoline station but wanted to convert it to a bank. Accordingly, the court found that CIF was holding over from September 2005 through January 2006, and WRIT was entitled to holdover rent for that period of time in the amount of $123,460.81

However, the court agreed with CIF that its duty under environmental certification clause was only to have an inspector certify that the buildings themselves were free from hazardous waste and did not extend to the soil or groundwater contamination. Thus, the court concluded that WRIT was entitled to charge holdover rent until CIF could certify that they had not left the demised premises in a dangerous state. The court found CIF liable to WRIT for holdover rent from September 2005 through October 2007, when the buildings were demolished, in the amount of $624,621.09

The appeals court reversed the judgment for holdover rent.  The appeals court said the record reflected that WRIT was the owner of the tanks and therefore the failure of CIF to remove property owned by the landlord did not constitute holding over.  On the environmental certification, the appeals court CIF’s failure to deliver the certificate may have constituted a breach of the lease but there was no evidence that CIF’s failure interfered with WRIT’s possession and control of the premises. However, the court awarded WRIT reasonable attorneys fees for the breach of the lease.

Can a party be indemnified for its own negligence? In many states, such provisions are void as against public policy. Other some states allow enforcement of indemnification for the indemnitee’s own negligence when the clause expressly references “negligence.” Likewise, many states will enforce indemnities where the indemnified party is strictly liable because of its status as an owner or operator if the clause refers to “strict liability”. As a result, environmental  indemnity clauses often contain a parenthetical reference to “including strict liability”  to ensure that such liability is covered.

Even in those states that where indemnification for the indemnified party’s negligence is void as a matter of public policy, there may be circumstances that allow enforcement of such a provision. For example, a New York case recently allowed enforcement of an indemnity where the tenant was required to obtain an insurance policy for third party liability.

In DiBuono v Abbey, LLC, et al, 2011 N.Y. App. Div. LEXIS 2822 (App. Div.-2^nd Dept. 4/5/11),  the plaintiffs commenced an action for property damage related to contamination that had migrated from three nearby  service stations. One of the defendants, L.M.C. Partners, LLC (LMC) filed a third party complaint against its former tenant, Palisades Resources, Inc. (Palisades), alleging that Palisades breached its the lease by failing to defend and indemnify LMC and for not obtaining insurance.

LMC moved for summary judgment.Palisadesargued that the General Obligations Law (GOL) § 5-321 prevented enforcement of the indemnification provision in the lease. GOL § 5-321 provides that exculpatory clauses that purports to exempt a lessor from its own negligence are void and unenforceable.  However, the trial court said that GOL § 5-321 does not apply to an indemnification provision in a commercial lease negotiated at arm’s length between two sophisticated parties when coupled with an insurance procurement requirement. Under such circumstances, the trial court explained, the purpose of the indemnity clause is not to exempt the lessor from liability to the victim, but to allocate the risk of liability to third parties between the lessor and the lessee. The said the lease indemnification provision operated as such an allocation since LMC and Palisades agreed in that Palisades would be responsible for liability to third parties arising from damages incurred during the lease period. Accordingly, the trial court granted summary judgment to LMC. The appellate division affirmed that the indemnification clause was enforceable but modified the order so that the indemnification was limited to damages incurred during the term of the lease.

Federal and state underground storage tank (UST) programs impose closure obligations on the owners or operators of USTs that are taken out of service. If the tanks are to be inactive for a short period of time (the time period varies depending on the state), the tanks must comply with temporary closure requirements. Owners or operators of tanks that will not be used again must comply with the more stringent permanent closure rules.

The temporary closure requirements recognize that continued operations of the tanks may be important to the property (e.g, for the specific use of the property such as a gas station or perhaps to heat a building). As a result, temporary tank closure rules do not require inactive tanks to be removed. Instead, they must be emptied, capped and monitored. In contrast, permanent closure usually requires removal of the tank and implementing corrective action.

Closure obligations can be an important issue when a tenant vacates a property. Older leases that were originally executed prior to the UST programs and extended or renewed since then may not outline the respective obligations of the parties regarding the USTs. Worse are those leases that provide that any personal property left by the tenant becomes the property of the landlord. Since the UST obligations are imposed on owners and operators of the USTs, such a provision could impose liability on the owner for a tank it did not install or use. Sometimes, tenants will identify the landlord as the owner on the UST registration form.

A recent New York case, In re Matter of RGLL, Inc, 2011 NY Slip Op 08882 (App. Div-3rd Dept 12/8/11) illustrates this issue. There, a gas station operator installed USTs and was registered as the UST owner. The gas station closed operations in 2003 and the gas station operator/petitioner filed a temporary closure application with the NYSDEC.  The petitioner monitored the tanks from April 2003 through January 2006. The NYSDEC sought to have the petition implement permanent closure and when the negotiations failed, the NYSDEC filed an administrative complaint. An administrative law judge approved a penalty assessment of $68K  and ordered the petitioner to permanently close the tanks.

The petitioner filed an article 78 proceeding to review the administrative ruling. The petitioner asserted the tanks were trade fixtures that had become property of the landlord.  However, the trial court found the lease did not provide that trade fixtures became the property of the landlord. In addition, the court said there was suficient  evidence to show that the petitioner continued to own and operate the tanks.

While the appeals court affirmed the holding and the penalty assessment a, the appeals court modified the ruling that imposed individual liability on the petitioner’s officers, directors and employees.

We have discussed in prior posts that New York courts have broadly construed the definition of a “discharger” under the New York Navigation Law. Even owners of property with inactive underground storage tanks (USTs) have been held liable as “dischargers” despite the fact they may have not known about the tank much less exercised any control over it. However, there are limits to this wide liability net. A recent case explored the outer boundaries of the Navigation Law liability.

C & J Cleaners, Inc., v GACO Fashioned Furniture, Inc. 2011 N.Y. App. Div.LEXIS 5512 (App. Div. 6/28/11) involved a UST that had been located on the plaintiffs’ property known as 274 Hempstead Avenue. A fuel line connected the UST to a building on an adjacent property with an address of 284 Hempstead Turnpike. This building was leased by defendant GACO Fashioned Furniture, Inc. (GACO). However, there was no evidence that GACO had ever used the UST.

In 1972, the father of defendant John Acerra, GACO’s president and sole shareholder, purchased 284 Hempstead Turnpike. At the time of the sale, the property had been held in common ownership with 274 Hempstead Turnpike. The UST was located in a strip of land between the two buildings. The purchase agreement granted the purchaser access to the fuel oil fill line as well as to repair or maintain the fuel oil fill line.

In 1978, the father of plaintiff George Nudelman purchased 274 Hempstead Turnpike subject to the express easement. At the time of the lawsuit, 274 Hempstead was owned by the Estate of George Nudelman. The mother of defendant John Acerra acquired title to the GACO property after her husband died.

In 2006, plaintiff began noticing discoloration on asphalt parking lot from oil from the fill cap of the UST. The plaintiffs asked the defendant to address the UST. After the defendants refused, the plaintiffs filed a complaint against both GACO and John Acerra, asserting a variety of common law claims including trespass and nuisance as well as bringing a claim under the Navigation Law.

The plaintiffs sought a declaratory judgment on the common law claims asking the court to find that the defendants were the owners of the UST and therefore responsible for remediating the contamination. The plaintiffs advanced two theories to support their claim that the defendants were the owner of the UST. First, the plaintiffs said the 1972 agreement had created ownership by way of a prescriptive easement. Second, the plaintiffs argued that the UST was a trade fixture because it was physically connected to the defendants’ leasehold. The defendants responded with a motion for summary judgment.

The trial court said that to establish a prescriptive easement as to the UST, the plaintiff would have to show, by clear and convincing evidence, that the use of the tank was adverse, open, continued and uninterrupted for the prescriptive period. Since the plaintiff had testified that the tank had not been used for 20 years, the trial court said the plaintiffs failed to establish ownership by a prescriptive easement.

Regarding the 1972 agreement, the trial court said the neither defendant had not been a party to the agreement and there was nothing in the agreement that conveyed ownership of the UST or otherwise imposed a maintenance obligation on the defendants. Since the plaintiff had sought declaratory judgment, the trial court said it was not sufficient to simply dismiss the plaintiffs’ cause of action but that it also had to make a ruling on their respective rights. Accordingly, the trial court ruled that the defendants did not own the UST by way of a prescriptive easement or as a consequence of the 1972 contract.

Turning to the Navigation Law claim, the trial court said that to hold a corporate stockholder, officer or employee personally liable under the Navigation Law for a discharge occurring at a site owned or operated by the corporation, the plaintiff must show that the defendant had been directly, actively and knowingly involved in the culpable activities or inaction that led to a spill or that allowed a spill to go unabated.  Since the plaintiff testified that the UST had not been used for 20 years, the trial court said there was no evidence demonstrating that the Defendants knowingly engaged in any activity that permitted an oil spill to emanate from the UST. The trial court ruled that as the tenant of the adjacent building, GACO did not have the capacity to take action to prevent the oil spill or to clean up the resulting contamination

The appellate division affirmed, agreeing that GACO did not an ownership interest in the UST and did not assume any responsibility for its maintenance and repair.

In Sunrise Harbor Realty LLC v 35^th Sunrise Corp, 2011 N.Y. App. Div. LEXIS 5834 (App. Div-2^nd Dept 7/12/11), the plaintiff owned a commercial building in Copiague, New York. The plaintiff contemplated purchasing the adjacent property that contained a gas station to expand its building. A phase 2 detected petroleum-contaminated groundwater migrating onto the plaintiff property and the plaintiff commenced a lawsuit against the owner of the gas station under the state Navigation Law seeking recovery of cleanup costs and diminution of property value.

In a non-jury trial, the plaintiff introduced evidence that it would have to implement a cleanup plan to address vapors migrating from the contaminated groundwater consisting of installation of an air sparge soil vapor extraction system that would have to be operated for five years along with a sub slab depressurization system underneath the building on the plaintiff’s property that would have to be operated for 30 years. The trial court found that the defendant was liable as a discharger under the Navigation Law even though the contamination pre-dated the defendant’s ownership of the property. The court held that a landowner who purchases property after a spill may be liable under the Navigation Law if it fails to cleanup the spill after learning of the discharge. As a result, the court awarded $1,085, 559 in damages consisting of $721,827 for the estimated cleanup, $117, 733 in consultant fees and $175K in attorney fees. However, the court declined to award any damages for stigma.

On appeal, the defendant (now appellant) argued the plaintiff (now respondent) damages should be limited to $172K which was the costs estimated by its expert, and that the trial court should not have allowed testimony about vapor intrusion because the plaintiff had failed to plead vapor intrusion in its bill of particulars.  The Appellate Division for the Second Department upheld the determination that the defendant (now appellant) was a discharger but vacated the judgment and ordered a new trial for damages because of the failure of the plaintiff/respond to allege vapor intrusion in its bill of particulars. The court also ruled that in determining the cleanup costs, the trial court should consider any offset that might be caused by discharges of the plaintiff’s tenants into the on-site cesspool and from a former heating oil tank spill. Finally, the court said that since the award of litigation costs was based on the vapor intrusion cleanup costs, the trial court would need to make a new litigation costs award determination.

Article 12 of the New York State Navigation Law imposes strict liability on “dischargers” of petroleum. The term “discharger” has been broadly construed so that it can encompass owners of property with abandoned or inactive underground storage tanks (USTs) even where the owners never used the tanks. A recent New York State appeals court illustrates the potential scope of liability property owners can face under Navigation Law. 

In Huntington and Kildare, Inc , v Alexander B. Grannis, 2011 N.Y. App. Div. LEXIS 7597 (App. Div-3rd Dept 11/3/11),  petitioners Huntington and Kildare (H& K) purchased  property in 1988 that had been operated as a gas station since the 1930s. It appears that a prior tenant of the property had reported inventory losses in 1987. Three steel tanks were closed in place because they were located under the building and new tanks were installed just prior to the purchase by H&K.

In 1997, petroleum contamination was detected in a water supply well located on an adjacent property.  The New York State Department of Environmental Conservation (NYSDEC) conducted an investigation that included installation of groundwater monitoring wells on the H&K property. In 1998, the NYSDEC advised H&K that gasoline had been detected in groundwater wells near the area where the old steel tanks were located. NYSDEC requested that H&K takeover the investigation but H&K declined.

Three years later, NYSDEC notified H & K that the three old steel USTs had not been properly closed, directed H & K to either remove or properly close the tanks, and to conduct quarterly sampling of on-site monitoring wells located in the vicinity of the tanks. Again, H & K declined to take any action.

In February 2004, H & K sold the property to Metz Family Enterprises, LLC (MFE). A principal of MFE reviewed the monitoring reports generated by H&K consultants and also discussed the site with the consultant who had closed the tanks.

NYSDEC then filed a complaint against both H&K and MFE, seeking $15K in penalties from each entity.  An administrative hearing was held and the  Administrative Law Judge (ALJ) issued a report finding that petitioners were guilty of the violations alleged in the complaint. As part of its decision, the ALJ noted that the old steel tanks were trade fixtures and that title to the tanks passed first to H&K when the tenant failed to remove them at the termination of its lease, and then to MFE when it purchased the property. The NYSDEC Commissioner adopted the ALJ’s report and ordered H&K and MFE to submit a remedial action work plan. H&K and MFE then sought judicial review of the decision.

The Petitioners then filed an article 78 action seeking review of the NYSDEC decision. The petitioners argued they could not be liable as “dischargers” under the Navigation Law because they never owned or operated the closed steel tanks that were the source of the petroleum plume. However, the court said that strict liability under the Navigation Law need not be premised on ownership of land or a petroleum system at the time a discharge occurs but instead could be founded either upon a party’s capacity to prevent spills or the ability to clean up contamination thereafter. As a result, the court said the petitioners were liable because they had control over the activities conducted on the property they owned and failed to remediate the contamination. The court said that both petitioners had reason to know that petroleum products had been and were being used on the property. In addition, the court went on, petitioners were aware that a discharge had occurred and each had the ability to clean up the contamination but failed to do so. Based on the foregoing, the court said the NYSDEC determination that petitioners were responsible as dischargers was supported by substantial evidence.

New York City has thousands of old USTs that were abandoned in place before the advent of the modern environmental era. As a result, it is important to carefully review the historical use of properties to determine if former tanks might exist on the property. Do not be fooled by the current use or configuration of a property. It is not uncommon to discover abandoned tanks in a parking lot or in a parking garage. Many buildings that are now serviced with natural gas may have previously used oil-fired burners that were supplied by large heating oil tanks. And, of course, many former industrial facilities located in areas that have been rezoned for residential use may have USTs that were used to store solvents or other hazardous wastes that were closed in place.

Under article 12 of the New York State Navigation Law (Oil Spill Act), “dischargers” of petroleum are strictly liable for cleanup and removal of petroleum spills. To ensure that petroleum spills are promptly remediated, the Oil Spill Act created the State Environmental Protection and Spill Compensation Fund (Oil Spill Fund) to finance state cleanups when the discharger is unknown, unwilling or unable to pay these costs. When the Oil Spill Fund incurs cleanup costs, it can seek reimbursement from a party responsible for the discharge and impose a non-priority environmental lien on the property where the cleanup costs were incurred and the discharge took place.

In State of New York v Getty Petroleum Corporation, 2011 N.Y. App. Div. LEXIS 7604 (App. Div-3^rd Dept 11/3/11), defendant M & A Realty (M&A) purchased property in 2002 where there had been petroleum discharges in 1979 and 1984. In 2003, the New York State Department of Environmental Conservation (NYSDEC) detected significant increases of petroleum products in monitoring wells at and near the property. NYSDEC concluded that this contamination was a result of a new discharge. In response, M & A excavated and replaced the USTs but NYSDEC continued to incur monitoring costs between 2003 and 2009 which were paid by the Oil Spill Fund.

The New York State Attorney General who has the responsibility for bringing cost recovery actions under the Oil Spill Act demanded payment for the post-2003 costs. The attorney general advised M & A that if it failed to reimburse the Oil Spill Fund, a civil action would be commenced and an environmental lien would be recorded against the property. M & A claimed that the costs were related to the old spills that occurred prior to its ownership of the property and therefore it had no obligation to pay.

In January 2010, the attorney general filed a complaint and a notice of an environmental lien was filed in February 2010. M & A moved for summary judgment, arguing that a judicial determination of liability was a prerequisite to filing an environmental lien because the phrase “potentially liable” was used in other sections of the Oil Spill Act but the lien section did not contain the word “potentially.” The trial court upheld denied the motion and M&A appealed. The appellate division for the Third Department affirmed.

In so holding, the court said that the statute makes no specific mention of a judicial determination as a prerequisite to filing a lien. When the entire statute is viewed in contect, the court went on, the absence of the word “potentially” in the lien provisions of the Oil Spill Act was simply insufficient to read such a requirement into the law. The court said that had the Legislature intended a pre-filing judicial determination of liability, it undoubtedly would have not only affirmatively so stated but also would have provided at least cursory guidance to pertinent procedural issues. For example, the court asked, who would make the determination-a judge, an administrative law judge, a hearing officer, or someone else? What level of proof would be required at this early procedural point-substantial evidence, preponderance of the evidence or something else? Would the hearing be akin to an administrative proceeding with its relaxed rules of evidence or would the evidentiary standards of a civil trial control?

Turning to the question of whether that lack of a pre-filing judicial determination ran afoul of due process, the court said that legislative enactments were presumed to be valid and that one who challenges a statute bears the burden of proving the legislation unconstitutional beyond a reasonable doubt.  In attacking the environmental lien process, M & A pointed to Reardon v United States (947 F2d 1509 [1st Cir. 1991]) where the Court of Appeals for the First Circuit found due process violations in the lien procedures implemented by EPA under section 107(l) of CERCLA. However, the court said there were several important distinctions between the procedures in Reardon and the case at hand. The court noted that in Reardon, the lien was filed before the action was commenced and the Court noted that this could result in a delay of several years before the landowners received a hearing regarding the lien. In contrast, in the case at bar, the attorney general had commenced its action before the lien was filed. In addition, unlike Reardon, prior notice was given before the lien was filed and the amount of the lien was established. Moreover, the court observed that M&A had an opportunity to seek expedited review of the lien under the state Lien Law. As a result, the court held that M & A had not established as a matter of law that the Oil Spill Act violated due process.

The court did state that where a landowner contests the filing of an environmental lien, due process requires that the agency expeditiously present substantial evidence supporting each element necessary for the lien. The State argued that the statutory requirements including the availability of an order to show cause in which short deadlines can be judicially established demonstrate that quick review should be available for a landowner. The court found that M & A had failed to show that expeditious review was not available and, as the proponent of summary judgment, its failure to make such a showing precludes it at this procedural point in the case from the relief it sought.