The 300-unit Ujima Village complex had been constructed on a portion of the former Athens Tank Farm that had contained 22 80,000 barrel aboveground storage tanks along with two crude oil reservoirs/ sumps with a combined capacity of 1.8 million barrels. The tank farm operated from 1924 until 1962 when Exxon began dismantling the structures. After Exxon sold the property, it was subdivided. The Ujima Village Apartments complex was constructed in 1973 on a portion of the old tank farm.

The complex was not adequately maintained, though, and after the owners defaulted on their loan, the federal Department of Housing and Urban Development (HUD) commenced foreclosure proceedings in 1990. According to the complaint, HUD planned to sell the complex to Drew Economic Development Corporation (Drew) in 1990 who had committed to invest $6MM to renovate the complex. However, a June 1990 environment report allegedly indicated that the property had “high potential for significant environmental impairment” including exposure to methane gas and hydrocarbons. As a result, Drew withdrew its offer to acquire the property.

The plaintiffs allege that HUD then retained a property manager who performed its own environmental investigation in 1991 that revealed benzene, xylene, toluene and ethylbenzene (BTEX) at levels that posed a risk to human health and explosion. The report allegedly recommended further investigation to delineate the extent of the contamination. The plaintiffs allege that the property manager concealed the results of the investigation. The plaintiffs also allege that HUD disagreed with the recommendations. Specifically, the complaint stated that HUD initially rejected the recommendations and that there were ongoing exposure issues. Instead, the complaint stated, “HUD’s engineers preferred to refer the issue to the HUD Office of Counsel to determine legal responsibility or further action by HUD because the environmental reports had ‘opened Pandora’s Box’ regarding notification to regulatory agencies.”

In 1992, the plaintiffs assert that the state Department of Toxic Substances Control (DTSC) advised HUD that a Preliminary Endangerment Assessment (PEA) was required because some of the contaminants exceeded ingestion screening levels.  HUD reportedly advised the DTSC that HUD was trying to sell the property to the County and that the County was reluctant to take over a contaminated site. The plaintiffs allege that HUD never shared the DTSC communications with them.

In 1993, HUD retained Earth Technology, Inc (Earth Tech), a predecessor of defendant Aecom, to perform an assessment of potential health hazards. . The firm conducted three rounds of sampling and testing of soil, soil gas, and indoor air samples. The plaintiffs allege that the Earth Tech detected elevated levels of lead and mercury in the soils and elevated BTEX beneath the buildings but that HUD edited the report so that it concluded that were “no significant threat to the health or safety of residents.”

The property manager reportedly retained its own consultant, Hunter and Associates (Hunter) in December 1993 that was highly critical of the Earth Tech Report. Hunter’s criticisms included that Earth Tech failed to address high levels of petroleum hydrocarbons in the top layers of soil, did not adequately consider that there was a significant risk of explosion, failed to adequately data showing a significant risk of exposure to benzene and that a Preliminary Endangerment Assessment (PEA) should have been performed in accordance with CAL EPA guidelines.

In early 1994, HUD issued a memo titled “Ujima Village Apartments: Assessment of Toxic Hazards Compliance with HUD Toxic Policy/Notice 79-33” that expressed HUD’s opinion that contamination at Ujima Village Apartments presented an insignificant risk of exposure to the general public. Later that year, Earth Tech prepared a report for HUD titled “Ujima Village Apartment Complex: A Survey of Potential Liability and Reporting for a Subsequent Owner or Operator” that advised HUD that it could be liable to residents or neighbors of Ujima Village Apartments and recommended HUD avoid deep excavation or drilling at the complex or use care when conducting such activities (gee-engineers providing legal advice?).

According to the complaint, the County initially insisted on additional sampling to determine the full risk to the residents in its negotiations to acquire the complex. However, the complaint alleged, the County dropped the demand when HUD offered to indemnify the County. In 1995, HUD sold the residential complex to the County for $1.

The plaintiffs also allege that in 2000, the County retained ATC to perform a phase 1 that concluded that the previous petroleum refining operations might have impacted the subsurface soils. The County then retained SCS Engineers who reported elevated concentrations of hydrocarbon vapors in soils. Plaintiffs allege that none of these reports were disclosed to the residents.

Faced with millions of dollars in repair and maintenance costs, the Los Angeles County Housing Authority and the CDC sought to find a developer to acquire, rehabilitate and manage the complex. Two prospective developers were identified but they apparently declined to proceed with the purchase after learning the results of a 2005 investigation performed by Rincon Consultants (Rincon). The Rincon report warned that residents were at a significant risk of exposure and cancer from elevated levels of hydrocarbon vapors in the buildings and BTEX groundwater contamination.

One of the developers retained TRC to perform a phase 1 and the firm reported elevated concentrations of methane and VOCs in subsurface soil vapor.  TRC also said that in some portions of the property, methane and/or VOCs in the soil gas exceeded the lower explosive limit (LEL).  TRC recommended additional investigation to define the vertical and lateral extent of soil contamination. Plaintiffs also claim that Rincon later prepared a report for the housing authority titled “Risk Based Corrective Action Evaluation Ujima Village Residential Development” where the firm stated “we believe that the possibility of a chronic health risk concern at this site warrants additional study…[F]inally, we believe that remediation is likely warranted at this site as a preventative measure to reduce possible exposure of VOC to residents, and also to mitigate existing soil and groundwater contamination underlying this property.”

The housing authority then met with HUD officials and plaintiffs assert that HUD responded with a letter that stated, in part, that “unhealthy levels of petroleum vapors existed at the project”, “a real health hazard could possibly exist for long-term residents” and that the Housing Authority was concerned about it’s potential liability because it did not have insurance for health related problems.

The plaintiffs allege that none of the foregoing reports were provided to the tenants, that communications with Exxon and various consultants between 2007 and 2008 were not disclosed and that when public meetings were held, the parties represented that the risks from the contamination were insignificant.

In 2009, the housing authority declared Ujima Village blighted and approved a plan to relocate residents. The complex is currently scheduled to be demolished. In 2010, hundreds of former residents filed a toxic tort lawsuit against Exxon, alleging that exposure to chemicals associated with the former storage facility had caused 38 premature deaths, cancer, leukemia, miscarriages, respiratory distress and other health problems. The plaintiffs also sought damages from Aecom as successor to Earth Tech for negligently failing to discover the risks in its 1993 report.

In Doris Alexander v Exxon Mobil, No. BC436640, Super. Ct-Los Angeles cty). However, the court ruled that the plaintiffs did not have any contractual relationship with Aecom and were not the intended beneficiaries of the 1993 environmental. Therefore, Aecom did not have duty that could have been breached. Moreover, to allow the claim against Aecom to proceed, the court said, would expose the firm to millions of dollars in potential liability for a report it was paid approximately $35K.

If allegations in this case are true, the conduct of HUD, the CDC and the housing authority in not timely advising residents that they were being exposed to elevated levels of contaminants and carcinogens is nothing less than disgraceful. This case demonstrates the need to develop clear reporting standards for vapor intrusion sampling results. New York has a strong vapor disclosure law and could serve as a model for other states.

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

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

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

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

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

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

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

Radon-

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

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

Asbestos- 

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

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

Phase 2 Recommendations-

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

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

Property Condition and Environmental Reports: Common Issues and Best Practices

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

The OER analysis indicates that these projects generated city revenue of $369 MM  on a 30- year net present value (NPV) while state revenue is estimated at $310 MM 30 Year NPV. The revenue generated to the City includes Income Tax, Property Tax, Sales Tax, and One-Time Revenue (Remediation and Construction, Sales Tax on Materials, and Mortgage Recording Tax). Revenue to the State includes the same set excluding Property Taxes because they are collected on a local level.

To further improve the value of the program to applicants, OER  is working with the state legislature to obtain a state liability release for sites remediated in the city program (currently OER has an MOU with the DEC) and elimination of state hazardous waste fees for material removed from city voluntary sites. Both are available for state program.
 

Part of the confusion was that the ASTM E1527 phase 1 standard identified indoor air quality as a non-scope consideration.  The standard, in turn, appears to have been confused by the CERCLA definition of “Release”. The definition provides that releases resulting in “exposures to persons solely within a workplace with respect to a claim which such persons may assert against the employer of such persons“.  Consultant and many lawyers focused on the first portion of the exclusion but overlooked the “with respect to a claim which such person may assert against the employer of such persons”.  This latter clause was intended to apply to workers comp claims. Congress did not want to allow a worker to “double dip” by filing a workers comp claim and then also filing a CERCLA lawsuit for personal injury against its employer.

In 1983 and 1985, EPA explained the meaning of this exclusion when it promulgated its CERCLA notification rule. EPA explained then that the exclusion was a relic from the 1978 legislative draft of CERCLA that had provided a remedy for personal injury. When CERCLA was finalized in the dying days of 1980, the remedy for personal injuries was deleted by in the rush to finish the bill it appears that the exclusion was inadvertantly left in the law.

In 1993, EPA issued guidance describing when CERCLA authority may be used for indoor contamination. The guidance indicates that EPA could respond to releases into the environment that come into a building or releases within a building that may escape into the outdoor or subsurface environment such as through broken windows (think of asbestos), on workers clothing (think of dust) or through flooring. 1993 EPA Memo

In a 1986 guidance document, EPA also indicated that it could respond to a methane hazard under its section 104 authority to take emergency actions in response to releases of pollutants or contaminants that posed an imminent danger to human health or the environment. This memo emphasized, though, that EPA would not be able to recover its costs under section 107 since methane is not a hazardous substance. 1986 EPA Methane Memo

Hindsight is always 20-20. When these memos were written, regulators were not aware of the extent that the vapor intrusion pathway could result in exposures. The revised version of E1527 will clarify that the vapor intrusion pathway is like any other contaminant pathway and the potential for vapor intrusion should be evaluated addressed as part of a phase 1. From a practical standpoint, this will primarily affect properties where there are off-site releases since presumably an on-site release would be flagged as a REC.

Last year, another client won an BABA award for the La Terraza project that was built on a former dry cleaner site in the Bronx. Here is a link containing information about that project:2011 BABA Awards

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

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

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.

In this case, the plaintiff was trying to build a 170-mile-long pipeline in Illinois as part of a larger project of pipeline construction to meet increased demand for Canadian oil. A 120-mile segment of the proposed construction route already contained a 10-inch pipeline originally constructed in 1939 and that had not been in use for many years. Enbridge wanted to replace the 10-inch pipeline with a 36-inch one.

The pipeline route had been created by easements from private property that had been granted to predecessors of Enbridge. The easement conveyed the to the original grantee “the right to lay, operate, and maintain a pipe line for the transportation of oil, gasoline and/or other fluids.” The easement also applied to the grantee’s successors and assigns “so long as such pipe lines or other structures are maintained.” The holder of the easement was also required to compensate landowners for any and all damages to crops, fences, and land resulting from the construction, operation or maintenance of the pipe lines.

The pipeline had been inactive since 1988 when Enbridge acquired the rights to the easement. After learning of the proposed pipeline upgrade, the owners whose land was subject to the easement contended that Enbridge had forfeited the easements by failing to maintain the pipeline in good working condition. The owners said that Enbridge had failed to maintain cathodic protection, valves and pumps and seams. They alleged that segments of the pipeline were missing, and that joint or seam failures had not been repaired. The plaintiffs also alleged that the interior of the pipeline had not been cleaned.

The court said that the legal meaning of abandonment was a deliberate act and did not encompass poor maintenance. While the court acknowledged that the original pipeline had not been in use for many years, the court said there was no evidence that the defendant intended to abandon the easement. Using an economic analysis (the court is after all located in Chicago), the court said the easement owner had foreseen the possibility that demand for transportation of oil by pipeline would someday justify placing the pipeline (or a replacement) into service but there was no economic justification for keeping the pipeline in “mint” operating condition until that time.

The court also found that the word “maintain” was ambiguous but did not require that the pipeline be maintained in mint condition. A rule that forfeited a person’s property right because they failed to maintain the property in good condition would cast a cloud of debilitating uncertainty over property rights, the court concluded. To hold that failure to maintain the pipeline would cause the easement to be extinguished, the court said, would engender wasteful maintenance. The court said such a requirement would also induce expenditures on maintenance intended not to enable the productive use of the property but merely to avoid forfeiture of the property right.

The court also said that a reasonable reading of the word “pipeline” in the easement was that the word did not refer to the pipe itself but to the pipeline in the sense of a route for transporting oil, just as one might speak of an “air corridor” between New York and Chicago even if no airlines were operating between those cities. The court said that maintaining the pipeline would then just mean preserving the option to use the easements for future transportation of oil, even if the existing pipeline crumbled to dust.

The defendant landowners argued that because the instrument creating the easement referred to “such pipe lines or other structures”, the phrase applied to the physical pipeline, not the easements. As a result, the dismantlement of the pipe would have terminated the easements. However, the court said even this reading would not defeat Enbridge’s claim. The court said that all that was required of the successive easement holders was to engage in minimal maintenance to put have the pipeline put back into service with additional expenditures to clear out the rust and replace broken parts.

Contrary to the landowners’ claims, the court ruled that Enbridge had engaged in considerable maintenance in 1992, 1993, and 2004. The court said there was no evidence of any missing segments, and that an Enbridge engineer who performed 27 “integrity digs” testified that the pipeline was capable of transporting liquid. His affidavit described the pipeline as being close to being as good as new and could with relative ease be placed back into active service as a crude oil line, a gas line, or a water line.  The court said this was sufficient to show that the owners maintained the pipeline within any meaning that could reasonably be assigned to the easements and had no intention of abandoning it, for if they had intended to do so they wouldn’t have spent even a penny on maintenance.