This interview occurred at the old Yankee Stadium in 2008 shortly after the last game was played.
Archive for the ‘vapor intrusion’ Category
This interview occurred at the old Yankee Stadium in 2008 shortly after the last game was played.
As anyone who has gone through the New York State Brownfield Cleanup Program (BCP) is all too aware, the New York State Department of Health (NYSDOH) has an important role in the cleanup process. The NYSDOH is responsible for determining that work completed under the NYSDEC remedial programs are protective of public health for the intended use of the property.
The NYSDOH is often the critical regulator that BCP applicants have to satisfy during the remedial site cleanup process. The NYSDOH Bureau of Environmental Exposure Investigation will assign staff for each site to investigate the potential for human exposure from environmental contamination as well as coordinate and communicate health-related activities. NYSDOH reviews sampling results, work plans, investigation reports and remediation decision documents, and provide comments or recommendations to NYSDEC. While NYSDEC guidance indicates that the agency project managers will consult with and receive input from NYSDOH, the recommendations from NYSDOH will often drive investigation and remedial decisions.
Back in 2013, we reported that the NYSDOH has lowered its air guideline value for PCE from 100 to 30 micrograms per cubic meter of air (30 ug/m3). The air guidelines are used to evaluate if further action is warranted to address exposures to certain volatile organic compounds (VOCs). Recently, NYSDOH lowered its chronic TCE exposure standard to from 5 micrograms per cubic meter (5 ug/m3) to 2 micrograms per cubic meter (2 ug/m3). NYSDOH has also set 20 micrograms per cubic meter (20 ug/m3) as the default level for taking “immediate and effective action” to protect the fetuses of pregnant women in the first trimester of pregnancy.
The impact of the changes to the TCE air guidelines will likely be geographically expanded remedial investigations and additional remedial obligations such as installation of sub-slab depressurization systems (SSDS). What is unclear is if previously approved workplans at sites that have not yet obtained COCs will now need to be revised. The changes could possibly trigger reopeners for sites that have already obtained COCs for additional investigation or installation of an SSDS to address vapor intrusion or require extended/enhanced Operation, Maintenance and Monitoring if indoor air exceeds the revised TCE air guidelines.
NYSDOH reduced its TCE air guideline because of new information on TCE. In 2011, the federal EPA recommended a 2 ug/m3 reference concentration (RfC) which is the level of a chemical in air that is unlikely to cause harmful non-cancer health effects. Because NYSDOH policy has been to set a guideline for a chemical at an air concentration that is equal to or less than its RfC, NYSDOH replaced its old RfC with EPA’s revised RfC.
In the revised fact sheet, DOH indicates that it is particularly concerned about exposure during pregnancy to air concentrations higher than 20 ug/m3 especially during the first trimester because the major steps of heart development occur during this period and TCE may be a risk factor for fetal heart defects in humans. Thus, NYSDOH recommends taking immediate and effective action to reduce exposure when an air concentration is equal to, or above 20 ug/m3. In all cases, the specific recommended action depends on a case-by-case evaluation of the situation.
By way of comparison, the EPA Region 9 office recently published Interim TCE Indoor Air Response Action Levels for residential and commercial/industrial exposure scenarios to address non-cancer risks posed by exposure to TCE. The EPA Region 9 TCE “urgent response action level” (interim measures implemented and completed within days) is 6 ug/m3 for residential exposures, 24 ug/m3 for commercial exposures for 8-hour workdays and 21 ug/m3 for 10-hour workdays. The EPA Region 9 “accelerated response action level” (interim measures completed with a few weeks) is 2 ug/m3, 8 ug/m3, and 7 ug/m3, respectively. Meanwhile, EPA Region 10 office has also established a short-term (21-day) non-cancer residential exposure of 2 ug/m3 while the commercial/industrial exposure setting is set at 8.4 ug/m3. Both of these regional offices have adopted a cancer risk chronic (lifetime) level of .43 ug/m3 and chronic non-cancer level of .21 ug/m3 for residential settings with the commercial/industrial settings set at 3.0 ug/m3 and .88 ug/m3, respectively. It should be noted that the use of the non-cancer risk level for TCE is very controversial and EPA is facing litigation over
DOH cautions that the air guideline is not a bright line between TCE concentrations that cause health effects and those that do not. The guideline was set at an air concentration that is lower than air concentrations known to cause, or suspected of causing, effects in humans and animals. Thus, exposure to concentrations above, but near the guideline, is not expected to cause health effects in people. In addition, the guideline is based on the assumption that people are continuously exposed to TCE in air all day, every day for months or as long as a lifetime. Continuous exposure is rarely true for most people, who, if exposed, are more likely to be exposed for a part of the day, part of a week, or part of their lifetime.
NYSDOH has developed two decision matrices to provide guidance about actions that should be taken to address current and potential exposures related to soil vapor intrusion. Actions recommended in the matrix are based on the relationship between sub-slab vapor concentrations and corresponding indoor air concentrations. NYSDOH is in the process of updating its matrices to reflect the changes to the TCE and PCE air guidelines.
EPA recently issued new VI guidance which is available Here. Look for a future post discussing the revised EPA VI guidance.
Cal Appeals Ct Affirms $2MM judgment against foreclosing bank for failure to complete remediation isSaturday, September 20th, 2014
The foreclosing lender in Hoang v. California Pacific Bank, 2014 Cal. App. Unpub. LEXIS 5230 (July 23, 2014) made some curious decisions and the result was the bank was ordered to pay damages to the purchaser that exceed the sales price of the property. The irony is that the lender probably complied with the CERCLA and state secured creditor exemption by foreclosing and then quickly selling the property. Unfortunately, the lender incurred contractual liability for the cleanup.
In 2000, California Pacific Bank (CBP) had financed the purchase of a commercial real property that had been contaminated with PCE from a dry cleaning solvent packaging and supply business that had formerly operated at the site. At the time of the loan, the known maximum PCE contamination had been 3,200 parts per million (ppm) in the soil and 82,000 parts per billion (ppb) in the groundwater. The highest PCE concentrations were located in areas where product had been offloaded from railcars and trucks to an aboveground storage tank.
A consultant retained by the borrower concluded the remediation could be completed within three years at a maximum cost of $250K. The estimate was based on a limited soil removal and groundwater monitoring. The purchaser/borrower negotiated a reduction in the purchase price from $900K to $850K. In addition, the purchaser agreed to release and indemnity the seller as well as to covenant to obtain a no further action letter from the water board. An escrow was established equal to the $250K estimate.
Despite the high PCE concentrations, the bank made its first judgment error when it accepted what proved to be a woefully inadequate estimate without retaining its own consultant to independently vet the estimate. The bank then committed its second error when it approved an escrow equal to the estimated cleanup costs. Most lenders will require escrows to be at least 125% and often 150% of the estimated costs to obtain closure.
After excavating 130 cubic yards of contaminated soil and pumping 5,000 gallons of groundwater, the borrower’s consultant sought regulatory closure form the State Regional Water Quality Control Board (Water Board). In October 2001, though, the Water Board required further groundwater and soil remediation.
In November 2002, borrower defaulted on its loan and eventually filed for bankruptcy. In March 2003, the bank acquired title through a non-judicial foreclosure. In another curious decision, CPB retained the same environmental consultant who had underestimated the cleanup and did so two months AFTER CPB too title. The consultant reportedly told the bank that he could he could obtain Water Board closure for $45K of additional remediation. However, at trial he testified he had informed the CPB that other environmental consultants probably would have estimated that it would cost over $1 million to obtain Water Board closure. Another lender might have wondered if it was provided with a low-ball bid but CPB appears to have elected to proceed with the environmental equivalent of a “Hail Mary” pass. The Water Board approved the workplan for quarterly monitoring but required submission of a remedial investigation and proposed remedial action by the end of 2003.
CPB then agreed to sell AND finance the acquisition of the property to the plaintiff for $1.14MM. Paragraph 29 of the amended agreement provided that CPB agreed to fund the remedial work up to $45K consisting of additional source removal and installation of additional groundwater wells. If additional remediation was required to obtain an NFA letter, the Bank had the discretion to authorize additional remediation work up to a maximum cost of $100K, with plaintiff paying half of the additional costs. Any costs in excess of $100K were to be the sole responsibility of CPB. The bank covenanted to obtain the NFA letter within three years of the August 6, 2003 closing.
After the closing, the bank’s consultant conducted groundwater monitoring and requested regulatory closure in 2004 and 2005 based on natural degradation of the PCE concentrations but each time the Water Board denied the request.
In 2005, the purchaser/plaintiff refinanced the property for a higher amount ($1.2MM) at 8.25% as opposed to the existing loan of $868K at 5.25%. The refinance allowed the purchaser/plaintiff to recoup its original down payment and pocket an additional $60K. In addition, the purchaser/plaintiff was able to lease the property for approximately $20K a month. By the time the lawsuit was filed, plaintiff had received nearly $290K in rental income.
Meanwhile, a dispute had risen between CPB and the original seller over ownership of the original $250K escrow. The seller demanded the escrow to be released since the original purchaser had failed to obtain the NFA letter. In 2009, the parties settled this lawsuit whereby CPB agreed to remediate the property and obtain an NFA letter by April 2014 (subsequently extended to April 2016) and to pay the seller’s counsel fees of approximately $330K.
In July 2010, plaintiff filed a breach of contract action asserting CPB had failed to remediate the property within three years from the date of purchase. As a direct result of CPB’s failure to perform, plaintiff claimed it has suffered the loss of use of the property, was unable to enter into a lower interest rate when it refinanced the property , and had lost a sale for a portion of the property that would have netted it $650K.
In August 2010, the Water Board issued another directive requiring additional investigation and requiring submission of remedial alternatives. The remedial investigation revealed maximum PCE soil samples at 8800 ppm in the soil and 28,000 ppb in groundwater. Maximum TCE concentrations in groundwater were 41,000 ppb, DCE at 61,000 ppb and vinyl chloride at 21,000 ppb. The report also revealed concentrations of PCE and TCE in the soil gas of 8,529,800 ug/m3 and 5,591,070 ug/m3, respectively. As a result, the Water Board also became concerned about vapor intrusion.
A trial was conducted in two phases. First, a bench trial was held to interpret the contract. In April 2012, the trial court found that the agreement did not require the Bank to obtain a NFA letter by any specific date. Instead, the court ruled that the bank had simply promised to complete the tasks set forth in the agreed upon scope of work but did not include a guarantee that the scope of services would result in regulatory closure before the third anniversary after the close of escrow. The plaintiff then filed an amended complaint alleging that CPB’s failure to obtain an NFA letter within a reasonable time constituted a breach of contract for which Plaintiff sought damages of $4.5MM.
In the second phase of trial, a jury awarded plaintiff approximately $2.3MM for the bank’s failure to complete the cleanup in a reasonable time period. The jury based its damage award on expert testimony proffered by the environmental consultants who had conducted the original investigation. These experts had testified based on contaminant levels, it could cost from $1,332,990 to $3,235,770 to achieve the environmental screening levels (ESL) of 0.69 ppm in soils and 5 ppb in groundwater.
On appeal. CPB argued that paragraph 28 of the agreement stating that the bank “shall have no liability to buyer for any known or unknown hazardous contamination on the property” limited plaintiff’s remedy to an indemnity. Since the plaintiff had yet to incur any cleanup costs, CPB asserted that the jury erred when it awarded damages. However, the appeals court noted that CPB had not raise this issue with the trial court prior to or during the trial, did not assert this ground as an affirmative defense and had not objected to the jury instruction on damages until after the jury had returned its verdict. Thus, the court concluded CPB had waived the indemnity issue.
Even if the bank had not waived the indemnity issue, the appeals court went on to say the two contractual provisions do not operate to limit plaintiff’s contractual remedies to indemnity. The court held that Paragraph 28 was an “as is” clause that simply limited the bank’s liability in connection with any representations. This provision, the court continued, could not be reasonably understood to limit plaintiff’s remedies for failing to complete the remediation in a in a reasonable time period as required in Paragraph 29.
Turning to the damage award, CPB contended the evidence was insufficient to support the $2.3MM damage award. The damage claim was based, in part, on plaintiff’s testimony that 1600 tons of contaminated soil would have to be excavated. The bank said the plaintiff’s experts did not explain how they reached the 1600 ton figure. CPB noted that only two of the 15 soil borings relied upon by plaintiff’s experts had PCE concentrations over the ESL, suggesting plaintiff’s expert opinions on the quantity of soil that needed to be removed was unfounded. However, in yet another questionable trial tactic, the court noted that the bank’s counsel did not ask plaintiff’s expert on cross-examination to explain why he would recommend the removal of soil in areas where the borings showed contamination levels below the ESL. Moreover, the court observed, CPB did not offer any expert witness testimony to contradict plaintiff’s expert testimony.
The court found that it was uncontroverted that at least a portion of property contained very high levels of PCE contamination and that while plaintiff’s expert testified that the precise extent of the contamination could not be determined without more testing, his remediation scenarios contemplated excavating soil from the three known hot-spots to resolve the contamination. Moreover, the court said that while it did appear only one or two of the samples were above the ESL, plaintiff’s expert relied on other evidence in forming his opinions. Again, the court highlighted more questionable trial strategy by the bank, noting that CPB did not raise any evidentiary objections to plaintiff’s expert testimony and did not challenge the proffered jury instructions on how to evaluate expert testimony.
The appeals court said while there was uncertainty on the disposal costs of the excavated soil, the evidence was sufficient to support the plaintiff’s estimates on the cost of each element of remediation that would be needed to obtain an NFA letter. Once again, the court noted that the bank did not object before or during the plaintiff’s expert testimony that estimates were based on speculation, either. Since the jury’s award fell within his estimates, the court ruled that the award was not is unduly speculative.
CPB also objected to the amount of the award because it exceeded the purchase price of the property. However, the court noted that the Bank did not argue in advance of the jury’s verdict that there was a ceiling on damages based on the purchase price. The court said the evidence supported the conclusion that plaintiff purchased the property with the understanding that the Bank would remediate the property and obtain an NFA letter would be obtained within a reasonable time. The court said the remediation costs were not awarded based on injury to the property, but to enable plaintiff to be in as good a position as if the bank had remediated his property according to its promise in the contract. Additionally, the court noted that because the state had a firm policy in favor of environmental remediation, it could not say an award of remediation costs was unreasonable just because it exceeds the amount that the present owner paid for the property.
The plaintiff had asserted at trial that he was unable to refinance his property in 2005 at a lower interest rate of 6.75 percent, and instead elected to take a loan at 8.25 percent, allegedly due to the Bank’s breach of the contract in failing to obtain a NFA letter prior to 2005. CPB asserted there was no evidence showing that it breached the contract in 2005 because it had until August 2006 (three years from close of escrow in August 2003) to complete the work. Even if there had been a breach, the Bank argued, any claim for breach would have been barred by the statute of limitations. However, the court ruled that the action involved an executory contract where the plaintiff had fully performed and was waiting for the bank to complete its performance. In such situations, the court said an injured party can wait until the time for complete performance by the other party to bring an action for damages. The court said the party waiting for performance was not required to treat the contract as abandoned on the first breach but could elect to wait for performance, and the statute of limitations will not begin to run until the injured party has made its election. Since the trial court found that the time for the Bank’s performance was not three years, but was instead “reasonable time, there was no error.
After a little more than six months after ASTM issued its new E1527-13 Phase 1 standard practice, problems are emerging over the new definition Controlled Recognized Environmental Condition (CREC) definition. The difficulties are related to the definition itself and differences among state environmental programs.
Before discussing the CREC problems, a little background might be helpful for readers. Prior to 2000, there were only two types of conditions that had to be evaluated in an ASTM Phase 1 report by an environmental consultant: a Recognized Environmental Condition (REC) or a de minimis condition. The term REC does not appear in CERCLA but was developed by ASTM to help consultants distinguish minor spills from those conditions that would be required to be investigated or remediated. If a consultant identified minor spills or releases that did not pose a risk to human health or the environment, and that would not result in enforcement actions if brought to the attention of regulators could be classified as a de minimis condition.
The 2000 revisions to E1527 added the term Historical Recognized Environmental Conditions (HREC) which was intended to be used for sites where contamination was remediated to applicable standards. Instead of labeling the former contamination as a REC, consultants could now identify the former spill as an HREC, confirming that it has been remediated and no longer poses a risk to human health of the environment. The HREC concept was a useful tool since it prevents property from continuing to be stigmatized by the existence of a former release in state or federal databases.
Unfortunately, consultants did not consistently apply the HREC term so that similar situations were classified as HRECs, RECs or de minimis conditions. Some made HREC determinations without verifying the cleanup standard used in the past was still valid and that the remedy (i.e., engineering or institutional controls) was still protective and functioning as designed. Other consultants identified the continuing presence of residual contamination a REC notwithstanding regulatory approval. This was a significant concern since most cleanups now employ risk-based approaches where some remnant of contamination is allowed to remain so long as institutional or engineering controls are used to prevent unreasonable exposure to the residual contamination.
To promote more consistency in how these remediated RECs were described and presented in phase 1 reports, the ASTM E1527 task group revised the HREC definition and added the new CREC designation. The HREC term was intended to apply to cleanups that had achieved unrestricted residential cleanup standard while the CREC term for cleanups where residual contamination remained and the site was subject to institutional or engineering controls (known as Activity and Use Limitations or “AULs” in ASTM parlance). As a result, there are now four types of conditions that may be identified in an ASTM E1527 phase 1 report: REC, HREC, CREC, and de minimis conditions.
The task group hoped that creating the CREC term would help alert purchasers if there were controls on future use of the property as well as develop plans for complying with the controls that are in place so that they can satisfy their post-acquisition “continuing obligations” and maintain their liability protections. A CREC will not require further action so long as the “controlled” conditions remain in effect.
As originally drafted, the CREC term would have been limited to circumstances where ECs/ICs were actually created or recorded against the property and the environmental professional would be required to verify that the EC/ICs were properly maintained/recorded. However, the environmental consultant representatives on the task force pushed back on these requirements, arguing they should not be put in the position to determine if a particular control was “enforceable.” As a result, the final CREC definition selected by the task force group did not require consultants to actually verify that the controls are in place or are properly working. The final definition adopted by ASTM provides that a CREC is:
“ a recognized environmental condition resulting from a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority (for example, as evidenced by the issuance of a no further action letter or equivalent, or meeting risk-based criteria established by regulatory authority), with hazardous substances or petroleum products allowed to remain in place subject to the implementation of required controls (for example, property use restrictions, activity and use limitations, institutional controls, or engineering controls).”
Many of the lawyers on the legal subcommittee were opposed to the CREC definition. Several well-known and respected lawyers submitted negative comments during the balloting process, asserting that the CREC term added a needless level of complexity and was unnecessary because conditions that had been addressed to the satisfaction of regulators should be considered a “de minimis condition.” One particularly prescient negative comment stated that the CREC term was inconsistent with the common understanding of the word “control” or “controlled” and was misleading because it implied that residual contamination was under “control” when it fact consultants were not required confirm that controls were actually in place and effective. The task group was also cautioned that term would be problematic in a number of states because of their approach to cleanups. Despite these warnings, the ASTM task force found these negative comments “non-persuasive.”
Because ASTM did not limit CRECs to those conditions where formal AULS have been implemented and did not require the consultant to verify if the “control” has been properly implemented and remains effective, the usefulness of CREC and the extent that an owner, lender or their counsel can rely on the designation will depend on the type of CRECs that exists for the property. At one end of the CREC continuum are those sites where enforceable AULs have been recorded against the property such as a deed restriction and the specific cleanup standards has been memorialized in the NFA letter. In such circumstances, then owner, its lender and counsel will be able to determine if “control” has in fact been implemented, can assess if it remains protective and if it continues to be in compliance with current cleanup standards.
At the other end of the spectrum are cleanups that were done without any oversight by the regulator (commonly known as “self-directed” or “at-risk” cleanups) where the developer or property owner implemented a cleanup on its own to avoid regulatory delays. Because the cleanup would not have been completed “the satisfaction of the applicable Regulatory Authority”, this cleanup would not qualify as a CREC and probably have to be identified as a REC subject to post-remedial confirmatory sampling. An exception would be if the cleanup was supervised by a licensed environmental professional in a state with a licensed environmental professional program such as Massachusetts, Connecticut or New Jersey and the licensed professional opines that the cleanup met “risk-based criteria established by regulatory authority”
The more challenging CRECs will be those within the murky middle of the continuum where a regulator may have signed off on a cleanup without referencing a formal control. Many state regulators have signed off on risk-based cleanups without referencing any AULs, particularly with petroleum-contaminated sites where many state programs rely on natural degradation of petroleum and only require removal of grossly contaminated soils/source materials. There is still petroleum contamination in the ground but no actual “control” in place. The contamination has been addressed to the satisfaction of the regulator but often times the records are archived or destroyed so the consultant cannot verify the actual levels that were left in the ground. In such an instance, the note to the CREC definition advises consultants that they can look to the data and infer an implied a control!
In other words, the consultant can assume that if the site was a gas station or a commercial property with a UST, the cleanup was approved by the state on the condition that the property would continue to be used only for commercial purposes. Indeed, ASTM trainers are emphasizing to consultants that AULs are just one indication of a past of a past or present release but not the only evidence that a property may not be used for unrestricted use. Consultants are also being instructed that if there are no formal AULs, they should look at the data and ask if the “dirt is eatable and the water drinkable”. How this assumption is helpful to property owners and their lenders remains unclear.
Then there are the situations where regulatory controls may be implemented but human exposures remain because of the potential for vapor intrusion. Some states allow local governments to adopt groundwater ordinances that prohibit the use of groundwater to facilitate cleanups. The groundwater ordinance serves as a “control” that could qualify as a CREC. However, many states do not take into account potential human exposures from vapor intrusion. In such a situation, while the groundwater “control” is in place but human exposure is not controlled. This is particular so in states with dry cleaner trust funds. Most state programs rank sites for funding based solely on impacts to drinking water. If the groundwater is not used, the site will receive a low priority ranking for cleanup. While the property owner waits years for the dry cleaner fund to get around to funding the cleanup, the groundwater plume could be migrating off-site and posing a risk of vapor intrusion to nearby residences.
For example, there was recent loan transaction involving a shopping center where a plume from a dry cleaner had migrated off-site and was within proximity to single-family residences. Because the local government had passed a groundwater ordinance, the state issued an NFA letter. However, the soil gas near the residential community was 20 times the EPA residential screening level. In a different state where vapor intrusion is evaluated as part of a cleanup, closure would not have been granted, the dry cleaner plume would have been identified as a REC and the owner additional investigation would have been required to assess the extent of the REC. However, in this state which allowed for pathway elimination by ordinance, closure was granted and the dry cleaner contamination was identified as a CREC with no further investigation recommended even though there was a strong likelihood that human exposures were not “controlled”. In other words, the same condition in a different state would have a different designation even though in both situations human exposures were not controlled.
In essence, because of the regulatory program of this state, what might have been a REC in another state was transformed into a Business Environmental Risk in the form of a potential toxic tort claim. Fortunately, counsel for both the lender and property owner recognized the potential liability and a pollution legal liability policy was obtained to protect against potential third party claims for bodily injury or property damage.
Since the ASTM Task Group declined to follow the prescient warnings of several seasoned environmental transactional attorneys and approved a flawed CREC definition, what are property owners, lenders or counsel to do? E1527-13 does require that CRECs be listed in the findings and conclusions section of a phase 1 report, and consultants are also required to explain their reasoning related to the impact of the CREC on the property. So users of phase 1 reports, particularly purchasers who will need to take comply with their continuing obligations to maintain liability protections (i.e., take reasonable steps to stop continuing releases and prevent exposure to existing releases), should carefully review the discussion of any CREC and be prepared to ask the consultants the following questions:
If the environmental consultant cannot verify what cleanup standard was used or that it remains the correct standard, this could be viewed as a significant data gap that would have to be verified to be in compliance with AAI. If the consultant believes in its professional judgment that the condition is continuing to pose a risk of human exposure, the condition should be a REC and not a CREC even if regulatory closure has been granted-especially where the consultant is representing a purchaser. Appropriately identifying the condition as a REC early enough in the transaction will enable the parties to further evaluate the issue or negotiate some risk allocation mechanism for the condition.
Until ASTM takes another look at the definition, owners and possessors of property should be prepared to ask hard questions of the environmental professionals to make sure that they are not lulled into a false sense of comfort only to inadvertently forfeit their liability protections because they failed to comply with “controls” they did not anticipate after they taking title or possession of the property.
As we discussed in an article, lenders are positioned differently than property owners from a liability standpoint and therefore may have risk tolerances that are different from those who take title to potentially contaminated property. Since understanding a CREC will likely be vital to maintaining liability protections, purchasers should not simply rely on consultants retained by their lenders but be prepared to retain their own professionals to independently verify the CRECs and their underlying controls.
Finally, do not forget that a CREC only applies to regulatory “controls” (i.e., institutional and engineering controls) and not human exposures. Purchasers should not assume that a CREC means human exposures are safely controlled. The purchaser who fails to have their consultant verify that if human exposures are under control may later learn that they have bought themselves into a toxic tort lawsuit.
Earlier this week, Governor Cuomo sent his sweeping BCP reforms to the State Legislature. Under the state Constitution, the Governor has 30 days to make technical amendments to his budget legislation without involving the legislature.
Despite vociferous complaints by brownfield developers, environmental lawyers and affordable housing advocates about the severe curtailments to the categories of projects that would be eligible for brownfield tax credits, the Governor made only modest revisions to the original bill. However, the Governor submitted his legislation under a self-imposed 21-day amendment process so it is possible that there will be additional tweaking to the BCP portion of the bill. Once the 30-day period has expired, changes to the BCP would be subject to the usual legislative process.
Notwithstanding the cacophony of critical voices to the proposed BCP changes, there is much to like about the proposed revisions. In this post, we will cover the positive changes. In a second post, we will then discuss the changes that need to be tweaked and then close the series with a review of the changes that threaten to transform the BCP into a zombie program.
The changes listed below are not in order of importance but simply track the changes in the legislation.
1. Extension of BCP- Obviously, the most important change is that the legislation would extend the brownfield tax credits (BTCs) to December 31, 2022. The fact that the Governor agreed to extend the BTCs was a victory for brownfield developers since there was considerable sentiment within the budget office to allow the BTCs to expire because of their costs. Sites accepted into the BCP after December 31, 2022 would not be eligible for brownfield tax credits.
2. New COC Deadlines– Under the existing BCP, all sites had to obtain their COCs by 12/31/15 to be able to qualify for the tax credits. The proposed amendments retain the 12/31/15 COC deadline for sites that were accepted into the BCP prior to the 6/23/08 amendments. Projects that were accepted after 6/23/08 but before 7/1/14 will have an extra two years to obtain their COC (12/31/17) to remain eligible for the BTCs. Sites accepted into the BCP after 7/1/14 will have until 12/31/25 to obtain their COCs and qualify for BTCs.
3. Revised Brownfield Site Definition- The new definition requires that an applicant do sufficient sampling to establish actually contains contaminants that exceed the applicable soil cleanup objectives or other health-based environmental standards promulgated by the NYSDEC. This change brings more clarity to what constitutes a brownfield site but really just conforms the definition to current NYSDEC policy since the agency was requiring applicants to demonstrate that the site was actually impacted by contamination by performing and including the results if a phase 2 in the BCP application. The revised language indicates that the applicant must submit an investigation that is sufficient to demonstrate that the site requires remediation to meet the remedial requirements of the BCP.
Significantly, the revised brownfield definition does not require the contamination to be from an on-site source which represents a significant eligibility expansion since applicants are currently required to establish an on-site source of contamination to be eligible for the BCP. Instead of excluding these sites from the BCP, the proposed bill would simply prohibit applicants of these sites from claiming tangible tax credits for addressing such contamination. For example, an applicant who would have to install an sub-slab depressurization system (SSDS) to address vapors from contaminated soil gas because of a plume that originated from an adjacent dry cleaner could enroll in the BCP and be eligible for site preparation costs tax credit but not the tangible property tax.
4. Eligibility Extended to Class 2 Sites- The original BCP legislation contained a six month amnesty period for class 2 sites to apply to the NYSDEC that expired in July 2004. Since then, class 2 sites have been ineligible for the BCP even when innocent parties seek to redevelop the properties or the site may simply sit above a regional plume.
The proposed changes would allow state superfund sites (class 2 sites) to be eligible for the BCP where the applicant is a volunteer who owns the site or where the applicant is a volunteer who is under contract to purchase a class 2 site and the NYSDEC has been unable to identify a PRP with the ability to pay for the cleanup. [emphasis added]. It is unclear if the clause containing the limiting language following the “and” only modifies the clause pertaining to volunteers under contract to purchase a class 2 site or if the clause applies to sites already owned by the volunteer.
The explanation for the “viability” test is that the State of New York does not want to incur BTC liability when there is a financially responsible party who could pay for the cleanup. A responsible party is likely only to remediate a site to its current or reasonably anticipated use but in the absence of a development plan, the reasonably antiicipated use of a property with obsolete or deteriorating buildings may not be obvious. In contrast, a brownfield developer will be enhancing the property and likely doing a more robust cleanup in a shorter period of time. While there is a legitimate concern for requiring class 2 sites that are under contract to be eligible only if there is not a financially viable responsible party, it may be worthwhile to consider other tests for determining when a class 2 site should be eligible for the BCP such as the responsible party does not currently own or has not owned the site since the expiration of the original amnesty period.
While pondering the conditions for allowing class 2 sites to be eligible for the BCP, the legislature should also consider allowing sites that are under enforcement orders to be eligible for the BCP. This would particularly make sense for sites that are covered by multi-site manufactured gas plant (MGP) orders on consent that several utilities have entered into with NYSDEC. Many of these sites will have cleanups that require long-term institutional and engineering controls because the contaminants lie beneath existing commercial structures. So long as these sites are subject to site management plans (SMPs), the NYSDEC considers these sites to be still subject to an enforcement order and therefore not eligible for the BCP. It seems that the same rationale for allowing class 2 sites to be eligible for the BCP should apply to sites subject to enforcement orders. Indeed, there is precedent for this suggestion. In 2004, the legislature amended the BCP law to allow sites that were subject to petroleum stipulations agreement issued under the Oil Spill Program of the Navigation Law to be eligible for the BCP. If an innocent party is willing to remediate and redevelop a contaminated site, it should be able to enroll in the BCP subject to reasonable conditions such as ensuring that NYSDEC is reimbursed for past costs and the volunteer has not indemnified the responsible party.
5. Expansion of Track 1 Cleanups- If a BCP project has to use institutional or engineering controls, it is not eligible for a track 1 cleanup which allows for a higher site preparation cost tax credit and a 2% bonus for the tangible property tax credit. Where all the contaminated soil has been removed but elevated levels of contaminants remain in groundwater, the NYSDEC has been willing to approve conditional track 1 cleanups if there has been a significant reduction in the contaminant mass and contaminant levels have reached asymptotic conditions. Under this approach, the applicant will have to record an environmental easement and continue to monitor groundwater for five years. However, if the contaminant concentrations remain above groundwater standards after five years, the cleanup would revert to a lower cleanup track that could cause recapture of tax credits.
The proposed legislation will allow sites to qualify for an unconditional track 1 status where engineering or institutional controls are required for more than five years solely to address vapor intrusion as well as for groundwater remediation where the bulk contaminant concentrations have been reduced to asymptotic levels. However, there would no longer be a 2% tangible tax credit bonus for achieving track 1 cleanup;
6. Transfer of COCs- The legislation clarifies that COCs may only be transferred to subsequent legal or equitable title holders of all or a portion of the brownfield site. It had been unclear if the COC could be transferred without title changing hands.
7. BCP-EZ program- The proposed amendment would create a streamlined remedial program that would be called the BCP-EZ program. Applicants that qualify as volunteers would be exempt from certain procedural requirements for implementing remedial investigations and remedial actions for sites where the contamination does not pose a significant threat provided the applicant waives rights to any tax credits and the work satisfies the technical requirements of Part 375.
8. Oversight Costs- Because both the NYSDEC and the New York State Department of Health (NYSDOH) play a role in the state remedial programs, oversight costs can be significant especially for larger projects. Under the proposed bill, volunteers will no longer be required to pay oversight costs on or after July 1, 2014. This exemption applies both to applications submitted after July 1, 2014 as well as sites accepted into the BCP prior to July 1, 2014. However, parties that are accepted into the BCP as “Participants” will be required to pay the NYSDEC for past costs incurred prior to the effective date of the brownfield cleanup agreement but the NYSDEC may negotiate a “reasonable” flat rate fee for future oversight costs.
9. Extra Tangible Tax Credits For Certain Projects– The Governor’s bill would allow certain categories of projects to be eligible for extra tangible property tax credits above the base of 10%. A bonus of 5% would be available for projects with affordable housing (based on square footage of the total affordable housing units(§25), an extra 10% could be claimed by projects on sites located Environmental Zones and a bonus of 5% would be available for “strategic sites” located in and conforming with a Brownfield Opportunity Area (BOA) plan.
10. Clarifies Treatment of Costs for Expired Federal Brownfield Tax Credit- BCP applicants are currently allowed to claim up to $35MM ($45MM for manufacturing sites) in tangible property tax credits (known as the “hard cap”) or 3x the site preparation costs (6x for manufacturing ), whichever is less. The 3x or 6x times site preparation calculation is known as the “soft cap.” The proposed legislation clarifies that on-site groundwater remediation costs and costs that could have been ”expensed” and deducted for purposes of the IRS 198 brownfield tax credit but were not given such treatment may be used in calculating the “soft cap.”
11. Clarifies Treatment of Costs To Address Treatment of Contaminated Groundwater From Off-Site Source– Based on the way the qualifier in section 3 of the proposed legislation excluding tangible property tax credits for off-site contamination migrating onto property, it appears that site preparation tax credits will be available for costs to address contamination migrating onto site if required in the approved remedial action plan.
12. Abatement and Disposal of Hazardous Building Materials- The proposed amendment would allow applicants to include abatement costs for removing and disposing asbestos-containing materials, lead-based paint or PCB caulking in their site preparation costs provided the work is done under supervision of the Department of Labor or Department of Health would be eligible.
13. Hazardous Waste Generation Fee Exemption– Urban sites often contain significant swaths of fill material that may contain constituents such as heavy metals, semi-volatile organic compounds (SVOCs), petroleum and lead-based paint from demolished buildings. As a result, construction projects in urban areas can generate large quantities of excavated soil that may have to be managed as hazardous waste. Having to dispose soils and building debris as hazardous waste not only significantly increases disposal costs but can also trigger two types of state hazardous waste tax assessments or fees that can significantly add to the total project costs.
If the remediation is performed under the state superfund program or BCP, the generator of the waste does not have to pay the hazardous waste tax or fee. However, projects enrolled in the Voluntary Cleanup Program (VCP) administered by the New York City Office of Environmental Remediation (OER) are not exempt from the tax or fee. Depending on the size of the site or the depth of the excavation, the hazardous waste taxes could approach or even exceed the total remediation costs. Click here for more information about the hazardous waste fee and tax
The bill would also exempt remediation wastes from the state hazardous waste generator fee that are generated for cleanups are done under an agreement with EPA, pursuant to an order issued by a court or an agreement with a municipality such as OER that has entered into a memorandum of agreement with NYSDEC.
The legislation also includes some new submission deadlines and grounds for revoking COCs that have been criticized by some business groups but seem to fall into the into the “Meh” category (for readers who are not fans of the TV show “The Simpsons”, the term is like a verbal shrug of the shoulders that expresses indifference or lack of enthusiasm). At the very least, the provisions do not seem to be worth expending political capital and advocates would probably be better served keeping their powder dry for other more important issues raised by the bill.
EPA Recognizes E1527-13 But Preamble Raises Specter of Retroactive LIability For Past Phase 1 Reports that Did Not Assess Vapor IntrusionTuesday, December 31st, 2013
On December 30th, the federal Environmental Protection Agency (EPA) published a final rule in the Federal Register (78 FR 79319) recognizing the new ASTM E1527-13 phase 1 standard practice as an approved method for complying with the All Appropriate Inquires (AAI) rule. As explained below, while the preamble to the final rule is an improvement to the text that accompanied the August rulemaking since it attempts to address some of the concerns raised in the adverse comments, this action amounts to Band-Aid where surgery was needed to repair the ill-conceived rulemaking exercise.
Despite receiving adverse comments to the botched August rulemaking, EPA declined to delete the reference to the now obsolete E1527-05 from the AAI rule. Instead, agency included language in the explanatory text (the “preamble”) encouraging property owners and consultants to use ASTM E1527-13. In responding to some of the adverse comments it received, EPA may have opened the door to retroactive liability to consultants and their clients for previously completed phase 1 reports that did not evaluate the vapor intrusion pathway.
In response to concerns that the continuing reference to E1527-05 could cause confusion in the marketplace, EPA first said-unconvincingly to this observer-that because it did not propose to remove the reference to E1527-05 in the August rulemaking, such action was “well beyond the scope of today’s action”. However, to address the concerns that the parties may be confused about the level of due diligence required because of the continuing reference to a historic ASTM standard, EPA said it planned on issuing a future proposal to delete the obsolete ASTM standard from the AAI rule. The agency said it felt that these concerns would be best done through a separate rulemaking process to give the public an opportunity to review and comment on that proposed action. EPA did go on to say that it intends “to monitor the uptake of the new ASTM E1527-13 across the commercial and industrial real estate sector to see if these expectations are borne out.”
In announcing this decision, EPA reminded the regulated community that while E1527 may be used to comply with AAI, “ASTM standards do not comprise a federal regulation or standard, nor are they incorporated by reference into the federal regulation. Parties may use industry standards to comply with Part 312, but the standard for compliance is the AAI rule itself.” In its specific responses to comments the agency reviewed key due diligence case law that EPA said stood for the proposition that courts look to the “quality of the investigation and reasonableness of the conclusions reached as a result of the investigation” in determining the adequacy of a particular phase 1 report. EPA said it believed “that site-specific circumstances and conditions would continue to inform the courts’ review of the strength and satisfactoriness of parties’ conduct of all appropriate inquiries, under both the ASTM standard and the all appropriate inquiries rule.”
Because of the caselaw and the fact that parties seeking to asset one of the CERCLA landowner liability protections have the burden of establishing that they qualify for those defenses, EPA said it believed that parties conducting AAI for this purpose have a strong incentive to ensure that the investigation is done thoroughly and properly. As a result, the agency indicated that it “anticipates that those conducting or relying on the ASTM International standard for the conduct of All Appropriate Inquiries will generally adjust to using the updated standard, particularly in light of the fact that ASTM International will label the ASTM E1527-05 Standard a historical standard and establish that the revised standard, the E1527-13 standard, is the only standard reflecting the current consensus of the responsible ASTM International technical committee.” EPA’s responses to the comments are set forth in a new document that has been added to the regulatory docket and is available here:
In recognizing the new ASTM standard, EPA said it believed that ASTM E1527-13 “improved upon the previous standard” and “reflected the evolving best practices” that would provide prospective purchasers with the necessary and essential information that is required to satisfy AAI as well as meet their “continuing obligations” under the CERCLA liability protections. This statement is another indication of how even though phase 1 reports are usually ordered to satisfy AAI, the reports may have implications for satisfying post-acquisition appropriate care/continuing obligations (think Ashley and Voggenthaler).
From a purely legal standpoint, all a consultant needs to do to complete its contractual obligations to its clients under an E1527-13 phase 1 assignment is to determine if there are RECs, CRECs or HRECs at a property. To satisfy AAI and therefore qualify for the bona fide prospective purchaser liability protection, a property owner simply has to identify current and prior releases of hazardous substances at a site using an investigation that complies with AAI. While no further investigation is generally required to comply with AAI and therefore qualify for the BFPP, a property owner/ purchaser may need to do further investigation about the releases (or RECs/CRECs using ASTM parlance) to be able to comply with its appropriate care/continuing obligations. Depending on specific site factors, such an investigation may be more comprehensive than a phase 1 investigation. Users should discuss with their environmental consultants and lawyers if it makes sense to do this more comprehensive all at once prior to acquisition so the user can develop an appropriate care/continuing obligations plan or to do additional investigation soon after acquisition to be able satisfy those obligations.
In touting the virtues of ASTM E1527-13, EPA focused on one of the hottest issues in environmental law-vapor intrusion. The agency said that one of the important revisions contained in ASTM E1527-13 was clarifying that “all appropriate inquires and phase I environmental site assessments must include, within the scope of the investigation, an assessment of the real or potential occurrence of vapor migration and vapor releases on, at, in or to the subject property.” The more potentially troubling statement for consultants and property owners was the statement that “In the case of vapor releases, or the potential presence or migration of vapors associated with hazardous substances or petroleum products, EPA notes that both the All Appropriate Inquiries Rule and the ASTM E1527-05 standard already call for the identification of potential vapor releases or vapor migration at a property, to the extent they are indicative of a release or threatened release of hazardous substances.”[Emphasis added]
In the response document that is in the regulatory docket, EPA said that “Some users of the ASTM E1527-05 standard and some who submitted comments in response to EPA’s August 15, 2013, proposed rule raised concerns that potential vapor releases on, at, in or to a property are often not considered or may be overlooked by many practitioners when conducting all appropriate inquiries. EPA wishes to be clear that, in its view, vapor migration has always been a relevant potential source of release or threatened release that, depending on site-specific conditions, may warrant identification when conducting all appropriate inquiries.…” [Emphasis added]
The agency then went on to say “ In the case of the ASTM E1527-05 standard, users and environmental professionals are required to identify recognized environmental conditions that include the presence or likely presence of hazardous substances or petroleum products under conditions that indicate an existing release, a past release, or a material threat of a release. Neither the All Appropriate Inquiries Rule nor the ASTM E 1527-05 standard excludes the identification of vapor releases as a possible type of release.”
These statements seem to reinforce the fears that many lawyers expressed to me as chair of the legal sub-committee that was working on the ASTM revision process. There was consensus that the role of vapor intrusion had to be clarified in the E1527 revisions but not in a way that could call into question the adequacy of phase 1 reports prepared prior to the ASTM revisions. The principal concerns were if such evaluation required sampling and if the evaluation of the vapor pathway would be a prospective obligation so that it only applied to transactions that closed after the publication of E1527.
The ASTM task force satisfactorily addressed the first concern by explaining that vapor intrusion was like any other exposure pathway and that sampling to confirm that the pathway was completed was typically outside the scope of a phase 1 and more properly addressed as part of a phase 2 investigation.
Unfortunately, EPA’s statements that the vapor pathway should have been considered all along raises the very risk that many lawyers and property owners feared-namely that parties who thought they had qualified for the CERCLA landowner liability protections because they had performed an AAI-compliant investigation may now suddenly not qualify as a BFPP because they did not consider the vapor intrusion pathway. Of course, this concern would only be for sites where vapor intrusion is or becomes a problem. However, the uncertainty created by EPA’s statements in the preamble and response document is going to be unsettling to some property owners. It will also provide ammunition to plaintiffs’ counsel who could use these statements as evidence that the defendant property owner breach a duty it owned to plaintiffs and was therefore negligent by failing to comply with a regulatory requirement. In some states, failure to comply with a regulatory standard is considered negligence per se while in others can be used as evidence of a duty.
Moreover, EPA’s statements in the preamble and response document could be used by clients in malpractice or breach of contract against consultants who failed to evaluate the vapor pathway in a prior phase 1. Of course, each situation will be highly fact dependent. Vapor intrusion will have to be a concern at the site and the plaintiff will have to show some nexus between the consultant’s failure to flag the vapor pathway and the damages the client has incurred to be successful. Nevertheless, these statement do potentially expose consultants to the retroactive liability through a backwards looking lens where hindsight is always 20-20 or a classic “Monday Morning Quarterbacking” scenario (or whatever other aphorism you prefer). EPA may not have been the Grinch that stole Christmas but this certainly was not a good New Year’s Eve present for property owners and environmental professionals. .
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.
Earlier this year, we discussed the federal district ruling in Orix Capital Markets, LLC v Cadlerocks Centennial Drive, LLC, 2013 U.S. Dist. LEXIS 48424 (D. Mass. 4/2/13) where a special servicer was allowed to pursue a guarantor despite the presence of an environmental insurance policy and was awarded over $100K in environmental investigation costs.
This week, a three judge panel of the federal Court of Appeals for the First Circuit reversed the district court ruling on the environmental investigation costs and remanded the award of attorneys fees back to the district court. VFC v. Cadlerocks Centennial Drive, 2013 U.S. App. LEXIS 22816 (1st Cir. 11/12/13). This case should be particularly important to lenders and borrowers in the Commercial Mortgage-Back Security (CMBS) market since the decision interprets the scope of the free-standing environmental indemnity agreements commonly used in those transactions.
As more fully discussed in our prior post, Cadlerocks decided to obtain an environmental insurance policy naming the original Lender as the insured after a phase 1 ordered by the original lender reveal The original Lender conducted a Phase I Environmental Site Assessment (“1999 Phase I”) prior to the closing of the Loan revealed the potential presence of tetrachloroethylene (“PCE”) at the property from a tenant that pre-dated Cadlerocks acquisition of the site.
As part of the loan documentation, Cadlerocks entered into an Indemnity Agreement which provided, inter alia, that Cadle and Cadlerocks (the “Indemnitors”) would indemnify the Lender and its assignees and successors (“Indemnitees”) from:
“ all . . . costs, . . . demands, . . . expenses” and other liabilities “of any kind or nature whatsoever . . . sought from or asserted against Indemnitees in connection with, in whole or in part, directly or indirectly, . . . the presence, suspected presence, release, suspected release, or threat of release of any Hazardous Material” on or around the Property.
The Indemnity Agreement further stated that applied to seven particular categories of liability including: “the cost required to take necessary precautions to protect against the release of any Hazardous Materials in, on, or under the Property, the air, any ground water, waterway or body of water, any public domain or any surrounding areas to the Property.”
The original lender assigned the loan to a securitization trust in August 2000. Cadlerocks was unable to make the balloon payment when the loan matured in January 2010. Orix Capital Markets, LLC (“Orix”) as special servicer issued a Notice of Default to Cadlerocks who acknowledged the default and entered into a Pre-Negotiation Letter. Cadlerocks continued to make monthly principal and interest payments until August 2010 while the parties discussed the possibility of a loan modification. When these talks proved unsuccessful, Cadlerocks ceased making further payments. Orix then filed a notice of a foreclosure sale.
Cadle offered a “deed-in-lieu” in settlement of the Trust’s claims prior to foreclosure. As part of its routine due diligence during these negotiations, Orix retained an environmental consultant to conduct a new Phase I test (the “2010 Phase I”) which revealed the possible presence of PCE on the Property. Based on the results of the test, Orix rejected the offer of the deed-in-lieu, postponed the foreclosure sale, and sought the appointment of a receiver. Cadlerocks did not oppose the appointment motion and the district court appointed a Receiver for the Property in December 2010.
Meanwhile, Orix ordered a Phase II, consisting of an integrity test of an underground storage tank on the Property and a soil vapor investigation of the exterior of the warehouse. The tank passed the integrity test but the soil vapor investigation identified the presence of PCE in the soil outside of the building. The phase 2 recommended indoor air sampling of the warehouse. The sampling was conducted in March 2011 and detected PCE in concentrations of 1.65 micrograms per cubic meter (μg/m³) in the portion of the building occupied by the daycare center.
After Orix notified the Receiver of the results, Receiver immediately authorized a second round of indoor air sampling which revealed PCE in concentrations of 1.16 μg/m³. The Receiver provided the results of the sampling to daycare center along with an analysis by a licensed environmental professional retained by the Receiver which indicated that the PCE concentration were two to five orders of magnitude below available short-term guidelines and did not represent an acute (short-term) risk. The LEP did go on to say that to evaluate the risk of chronic risk, a more thorough investigation was required. The LEP then collected eight-hour samples in June 2011 and twenty-four-hour samples on July 2011. None of the tests showed concentrations of PCE at hazardous levels.
The Receiver sought reimbursement from Cadlerocks for the costs of the 2011 investigation. When Cadlerocks did not respond, the Receiver requested payment from Orix who agreed that the Receiver could draw down on income and sales proceeds generated from the Property that otherwise would have been applied to pay down the debt.
In the fall of 2012, the Receiver authorized an additional round of indoor air sampling as well as soil and groundwater sampling to facilitate a possible sale of the property. However, the purchaser declined to pursue the sale.
The federal district court partially granted a motion for summary judgment by Orix. The ruled that Orix was entitled to recover the $102,536 under the Indemnity Agreement for its environmental investigation costs, finding that the costs were reasonable and necessary since the Receivers needed to ensure that conditions were safe for the occupants of the day care facility on the premises. However, the court did not allow Orix to recover the costs of the 2010 phase 1 because Orix ordered phase 1 reports in connection with its standard pre-foreclosure due diligence situations and not in response to suspected environmental conditions. In a separate order, the court awarded Orix $50,000 in attorney’s fees and $5,609.75 in costs.
Cadle and Cadlerocks appealed the award of expenses related to the environmental testing. During the appeal, Orix assigned the Loan and Judgment to VFC. However, we continue to refer to Orix since because Orix was the loan servicer during the relevant time period.
The appeals court said that the district court interpreted the Indemnity Agreement too broadly when it ruled the environmental costs were covered as “reasonable and necessary” expenses conducted in response to suspected environmental hazards.
Orix had argued that because the Receiver demanded Orix to pay the costs and expenses related to the environmental investigation, these expenses fell within the Indemnity Agreement. The appeals court first noted that the Indemnity Agreement only covered liabilities “sought from or asserted against” the Indemnitees. Thus, only those costs Receiver sought to recover from Orix after March 23, 2011 were potentially covered by the Indemnity Agreement.
The appeals court went on to find that the second sentence of paragraph four (beginning “Such Liabilities shall include . . .”) functioned as a limitation on the much broader preceding sentence. In addition, subclause (iv) of the second sentence limited the indemnity obligation to “the cost required to take necessary precautions to protect against the release of any Hazardous Materials” in or around the Property. The court said it must determine if the Receiver’s expenses fall within the enumerated categories of liability listed in the second sentence.
The Indemnitors argued that the environmental tests were not necessary, because “there was never a recognized immediate threat to public health at the Property.” Orix asserted that Cadlerocks and Cadle should be liable long as the tests were at least indirectly related to the suspected presence of a hazardous material. The court noted found that the test results that Orix gave to the Receiver on March 23, 2011 indicated a detectible presence of PCE already in the air but at a level unlikely to pose a health threat to the building’s occupants and that the PCE levels declined slightly in the second round of sampling. Because there was no evidence that a hazardous level of PCE was likely to be released into the air, the court found that the Receiver costs were not incurred to take steps to prevent such a release. Instead, the court found that the testimony and exhibits all indicated that the purpose of the Receiver’s additional testing was to confirm that the known presence of PCE in the air was at concentrations that were safe for the daycare center and to facilitate the foreclosure sale.
The court there was no doubt that the Receiver acted reasonably and that the tests were undoubtedly necessary for Orix and the Receiver to ensure that the Property was free from harmful contaminants before selling it. However, the court concluded that Indemnity Agreement allocated liability for costs “necessary precautions to protect against the release of any Hazardous Materials” and not for tests to confirm the safety of tenants or attracting buyers in a foreclosure sale. Accordingly, the court held that the Receiver’s environmental testing costs fell outside of the scope of the Agreement.
State statutes of limitations (SOL) establish the time period when an injured party may bring a lawsuit seeking compensation for damages. In general, the SOL “clock” will start when a claim “accrues” (e.g. when all of the required elements of the cause of action have been satisfied.
Because of the long latency period between exposure to hazardous substances and manifestation of illness as well as the delayed discovery of releases of hazardous substances that may have damaged real property, injured parties may not become aware of their damages until decades after the alleged wrongful conduct and well after the SOL has expired. Some states have tried to minimize this harsh effect by crafting a “discovery rule” that tolls or suspends the SOL until the injured party has an opportunity to discover or with reasonable care should discover his injury.
One of the predecessor bills to CERCLA attempted to address the concern by creating a remedy for exposure to hazardous substances. This bill imposed liability against manufacturers, transporters, and disposers of hazardous substances for any loss of earnings and out-of-pocket medical expenses resulting from personal injury. Plaintiffs would have been allowed to file claims in federal court or file administrative claims when responsible parties were unknown or unavailable six years from the discovery of their injury.
This victim compensation plan proved contentious and not included in the final bill that became CERCLA. Indeed, as an interesting aside, the exclusion from the definition of releases for “any release which results in exposure to persons solely within a workplace” was a relic of this victim compensation remedy. It was intended to prevent workers from “double-dipping” by filing workers compensation claim and lawsuit for personal injuries. Apparently some congressional staffers inadvertently left the workplace exclusion in the definition of Release in the final version of CERCLA. Just one more installment in the infamous history of CERCLA’s last minute passage.
As a compromise, Congress authorized creation of a twelve-member study group under section 301(e) of CERCLA ( 42 U.S.C. 9651(e) to study the adequacy of existing common law and statutory remedies for harm caused by the release of hazardous substances into the environment. The so-called 301(e) Superfund study group published its report in August 1982.
In response to the study group, Congress added section 309 (42 U.S.C. 9658) to CERCLA as part of the 1986 Superfund Amendments and Reauthorization Act (SARA). This section creates a federally mandated discovery rule known as the Federal Required Commencement Date (FRCD) for the accrual of state law claims involving releases of hazardous substances, pollutants or contaminants that cause or contribute to personal injury or property damage. The FRCD provides that a SOL would begin to run when the plaintiff discovers, or should have reasonably discovered that the personal injury or property damages were caused or contributed to by the hazardous substance or pollutant or contaminant. The FRCD would pre-empt a state SOL when the FRCD would provide a more generous accrual date than available under state law.
Courts have also grappled with the scope of section 309. One early issue if 309 only applied where there was an underlying CERCLA claim for contribution or cost recovery. More recently, court have been struggling with the question if FRCD applies to statutes of response which are laws that provide an outside date for filing lawsuits regardless when the claim accrued. In Waldburger v. CTS Corp, 723 F.3d 434 (4th Cir. 2013), a federal appeals court reversed a ruling by a district court and held that the FRCD pre-empted the North Carolina statute of repose.
In Waldburger, defendant CTS had owned and operated the Mills Gap Road Electroplating Facility in Asheville from 1959 to 1985. In 1987, CTS sold the site to Mills Gap Road Associates (“MGRA”). As part of the transaction, CTS represented that that the property was in “an environmentally clean condition,” that to the best of its knowledge, no on-site disposal had occurred at the property and that as soon as “the existing inventory of materials contained in drums and other miscellaneous equipment within the plant [was] removed from the premises, no threat to human health or the environment [would] remain. In 1997, MGRA sold approximately forty-four acres of the property in 1997 to the plaintiffs. In 2009, the landowners learned that their well water was contaminated with volatile organic chemicals (VOCs). The plaintiffs filed a lawsuit in 2011.
CTS moved to dismiss, maintaining that North Carolina’s ten-year statute of repose (SOR) barred the claim. The landowners countered that section 309 preempted the North Carolina SOR. The district court found that section 309 did not apply to the North Carolina SOR. Since the last act or omission of CTS occurred in 1987 when it sold the Facility to MGRA, the court dismissed the lawsuit.
The appeals court observed that courts and legal scholars have historically used the terms “statute of limitations” and “statute of repose” interchangeably. The court also found section 309 ambiguous because of internal inconsistencies. In one section the applicable limitations period was said to be that “specified in the State statute of limitations or under common law” while the definition of “applicable limitations period” and “commencement date” make no reference to common law. Thus, the court looked to the legislative history to determine Congressional intent for this section.
From this review, the court said that Congress enacted section 309 to remove barriers to legitimate causes of action relating to exposure to toxic substances. A narrow interpretation that would exclude the SOR, the court concluded would thwart this unmistakable Congressional goal. Moreover, the court noted that North Carolina SOR appeared in a section titled, “Limitations, Other than Real Property”. Accordingly, the appeals court held that the FRCD preempted North Carolina’s SOR and reversed the judgment of the district court.
[In June, the United States Supreme Court vacated the 4th Circuit ruling and held that CERCLA section 309 did not apply to the North Carolina Statute of Repose].
In Harris v. Bristol-Myers Squibb Co., 2013 U.S. Dist. LEXIS 137335 (D.N.J. 9/25/13), a federal district court held that the FRCD preempted a state wrongful death SOL There, current and prior residents filed a lawsuit against the current and former owners or operators of a manufacturing plant for exposure to toxic and hazardous substances that allegedly emanated from the plant. The defendants filing motions to dismiss a group wrongful death claims under the New Jersey Wrongful Death Act (WDA), N.J.S.A. 2A:31-1 et seq. The WDA contains a two-year limitations period that begins to accrue on the date of death. The court held that the FRCD had a more generous accrual date for wrongful death claims than the WDA. Accordingly, the court held that the WDA claims were tolled until Plaintiffs knew or reasonably should have known that the contamination conduct caused their deaths.
Discovery rules have become particularly important with the emergence of vapor intrusion. In many instances, homeowners may have been aware of regional plumes but there was little concern about health risks because groundwater was not used for drinking water or the area was connected to public water supply. If vapor intrusion later emerges as a concern, a number of courts have held that the vapor pathway is newly discovered contamination that either tolls the SOL or create a new time period for bringing claims.
The New York State Department of Health (NYSDOH) recently reduced its air guideline value for PCE from 100 to 30 micrograms per cubic meter of air (30 mcg/m3). Three other ways of expressing the new guideline are 0.03 milligrams per cubic meter of air (0.03 mg/m3), 4.4 parts per billion (ppb) or 0.0044 parts per million (ppm)
The guideline of 100 mcg/m3 was issued in 1997 and had been based on toxicological data available at the time. In 2012, EPA completed a new PCE risk assessment and recommended a chronic reference concentration (Rfc) 40 mcg/m3 for the non-cancer risk and 4 mcg/m3 a cancer risk of one-in-one million (10-6 ) based on continuous, lifetime exposure. EPA has established regional screening levels (SLs) to help identify areas, contaminants, and conditions that require further federal attention at a particular site. Sites where contaminant concentrations fall below SLs generally do not require further action or study so long as the exposure assumptions at a site match those taken into account by the SL calculations. Sites where contaminants exceed the SLs do not necessary require cleanup but will likely undergo further investigation. For PCE, EPA’s indoor air concentration screening level residential buildings is 9.4 ug/m3 for the one-in-a-million (10-6) excessive cancer risk and 42 ug/m3 for the non-cancer risk. For commercial / industrial buildings the new range is 47 ug/m3 (cancer) to 180 ug/m3 (non-cancer).
Because it has been the past practice of NYSDOH to set its air guideline values at or less than a RfC, the agency reduced its guideline to 30 mcg/m3. Note that the estimated excess cancer risk associated with lifetime, continuous exposure to 30 mcg/m3 is about one-in-one-hundred thousand (10-5). In contrast, California has adopted a .41 ug/m3 threshold for PCE.
NYSDOH has developed two decision matrices to provide guidance about actions that should be taken to address current and potential exposures related to soil vapor intrusion. Actions recommended in the matrix are based on the relationship between sub-slab vapor concentrations and corresponding indoor air concentrations PCE has been assigned to matrix 2.
NYSDOH has emphasized that the air guideline value are not a bright line test and that exposure to levels above but near the guideline will not cause health effects in most, if not all, people. However, the practical effect of the change will be that mitigation may now be recommended for PCE concentrations exceeding 30 mcg/m. More information is available at: http://www.health.ny.gov/environmental/chemicals/tetrachloroethene/index.htm.