SCHNAPF ENVIRONMENTAL  REPORT

A Monthly Newsletter Covering Recent Environmental Developments and Caselaw

April/May 1999												Vol. 1, Issue 5

	The Schnapf Environmental Report is a newsletter which provides updates on regulatory developments in the major environmental programs and also highlights significant federal and state environmental law decisions cases that were issued during the prior month. 

	The newsletter is published free of charge by the Schnapf Environmental Law Center which provides regulatory guidance, legal research and writing resources, litigation support and assistance with environmental issues associated with corporate, financing and real estate transactions for businesses and law firms. 

Beginning with this issue, the newsletter will be published on a bi-monthly basis. More detailed information on the topics covered by the newsletter is available at our web site: http//: www.environmental-law.net. Back issues of the newsletter are also available from our website. 

We also offer environmental law seminars which are taught by Larry Schnapf who is an adjunct professor of environmental law at New York Law School. The seminar focuses on the environmental issues associated with business transactions. The seminar can be conducted at your office or at periodic department meetings that you might organize over the course of the year. The seminar is eligible to be approved by the Continuing Legal Education Board as an Accredited Mandatory Continuing Legal Education (“MCLE”) Program so that attendees would receive credits towards the New York State MCLE requirements. If you are interested in this seminar, please contact Larry Schnapf at LSchnapf@environmental-law.net or call him at (212) 996-5395.

Finally, if you would be interested in being added to our subscription list for our quarterly New York Brownfields Report, please let us know at LSchnapf@environmental-law.net. The New York Brownfield Report analyzes the agreement issued by the New York Department of Environmental Protection under its voluntary cleanup program and also discusses major policy changes for the program.  

ENVIRONMENTAL DISCLOSURE/AUDITING/DUE DILIGENCE

EPA Releases Fiscal Year 1998 Enforcement and Auditing Policy Results

	In our last issue, we reported that that EPA had been increasingly targeting individuals for enforcement actions and that companies had been able to receive significant penalty reductions by voluntarily disclosing violation pursuant to the EPA auditing policy. EPA recently issued a report on its 1998 activities that confirmed these trends.

	In fiscal year 1998, EPA initiated 411 civil enforcement actions and 266 criminal actions which resulted in the assessment of approximately $184 million in penalties. 74% of the enforcement cases involved individuals which compares to just 20% in 1990. The majority of the enforcement actions involved violations of the Clean Water Act (37%), followed by RCRA (24%) and the Clean Air Act (23%).
 
The agency estimated that the enforcement actions compelled companies to spend over $2 billion to correct violations or perform cleanups. 46% of the civil actions required violators to change the way they managed their facilities to reduce emissions or discharges of pollutants into the environment. The other 54% of the cases required companies to implement or improve environmental management systems, take preventative measures to avoid future non-compliance, or to provide for enhanced public disclosure.
    
	 During fiscal year 1998, 96 companies utilized the EPA audit policy and voluntarily disclosed violations at over 927 facilities. 63 of the companies corrected instances of non-compliance at 390 facilities. Since the inception of the audit policy, 455 companies have disclosed violations at 1850 facilities. As of April 30, 1999, EPA has reduced or completely forgiven penalties for 166 companies covering 936 facilities, or roughly 50% of the facilities that have disclosed violations. There were 131 instances when no monetary penalty was assessed and 19 instances where the penalty was reduced by 75%. There were also 6 instances where the company’s economic benefit was recouped but no monetary penalty was assessed. 

	84 percent of the violations addressed by the audit policy involved reporting and monitoring violations such as failure to report, failure to properly sample/label/manifest wastes, recordkeeping, testing and employee training. 16% of the violations involved unauthorized releases of pollutants or hazardous materials, improper waste management, permit applications and failure to comply with remediation requirements. 16 parent corporations have disclosed the same type of violation at over 900 facilities. 

To date, there have been 14 instances where violations were deemed to be criminal and were forwarded to the EPA criminal enforcement program for review. Three of these criminal violations were not eligible for the audit policy because they were submitted to EPA after a criminal investigation had been commenced. Of the remaining 11 violations, seven were deemed either to not be criminal and were referred to the EPA civil enforcement program, or were closed after consultation with the EPA civil enforcement program. 

Helpful Hint: Once a transaction has been completed, the purchaser could become criminally liable for violations that continue after the closing. As a result, prospective purchasers of businesses and lenders may want to consider expanding pre-loan or pre-transfer due diligence beyond the traditional Phase I site assessment and address environmental compliance issues to take advantage of the policy. Since the EPA auditing policy or a state auditing policy can be used to substantially reduce potential environmental liability when environmental violations are promptly reported and corrected, purchasers of businesses may want to consider utilizing the EPA audit policy or a state audit policy to disclose violations discovered as part of environmental due diligence. Lenders should also consider requiring borrowers to comply with audit policies as part of their environmental risk management policies. Under this approach, borrowers would have to implement corrective actions in accordance with the timeframes set forth in the EPA audit policy. For more information about the EPA and individual state audit policies, please visit the “Disclosure of Environmental Liabilities” page of our website.

EPA Proposes Changes to Audit Policy

	On May 17th, EPA proposed revisions to its audit policy. One of the more significant revisions includes broadening the disclosure period from 10 to 21 calendar days from the time there was an objective basis for believing that a violation had occurred. Another proposed change clarifies that when a company owns or operates multiple facilities, the commencement of an inspection or investigation by EPA at one facility will not automatically disqualify other corporate facilities from relief under the policy. The revised policy also contains a description of the internal procedures EPA will use for determining if disclosures of civil or criminal violation are eligible for relief under the policy. Another clarification is that violations discovered as part of “partnership” program with EPA such as Project XL will still be considered to be a voluntary disclosure that may be eligible for relief under the audit policy. 

Bank Will Use Environmental Insurance To Replace Phase I Requirements for Loans

	For much of the 1990s, banks served as surrogate regulators by requiring prospective borrowers to perform environmental due diligence as a condition to their loans and also mandating that borrowers correct environmental problems identified during the diligence process. With the passage of the CERCLA lender liability amendments in 1996, many lenders have been relaxing their environmental due diligence requirements in an effort to increase profits in a highly competitive loan market and to expedite the time it takes to process loans. Indeed, First Union recently announced that it will no longer require borrowers to perform Phase I site assessments but instead allow them to purchase an environmental insurance policy. The policy reportedly covers the lender for losses arising when there is a default and the discovery of contamination. The policy will pay the lesser of the outstanding loan balance or the cleanup costs.  In many instances, the policy premium will be less than the cost of a commodity-style Phase I environmental site assessment.  

To reduce transaction costs, some unsophisticated borrowers or purchasers may be tempted to forego performing their own environmental due diligence if a lender does not require environmental investigations or simply requires purchasing an insurance policy. However, this can be a shortsighted approach for a number of reasons. First, the lender environmental insurance policy protects the bank and not the borrower from environmental hazards. Second, failure to perform due diligence will preclude the borrower or purchaser from asserting any innocent purchaser’s defense that might be available under state or federal law. Third, a borrower or purchaser who does not perform due diligence will not understand the future environmental liabilities associated with a property or business and, thus, will not be able to effectively price the transaction or allocate the liability. Moreover, a borrower or purchasing failing to perform due diligence will not be able to take advantage of the substantial penalty reductions available under the EPA or state audit policies discussed in the previous articles. 

Lenders who rely on environmental insurance policies in lieu of requiring borrowers to perform due diligence should consider providing borrowers with a written disclosure that the waiver of the environmental due diligence requirement or the purchase of an environmental insurance policy does not constitute a finding by the bank that there are no environmental concerns associated with the property. Otherwise, some unsophisticated borrowers who end up facing substantial cleanup costs may argue that they were led to believe by their bank that there were no serious environmental problems associated with the property. Indeed, two years ago in Mattingly v. First Bank of Lincoln, the Montana Supreme Court reversed a summary judgement ruling in favor of a bank and allowed the borrower to proceed with negligent misrepresentation and constructive fraud claims against its former lender because there was a question of material fact whether the bank had created a false impression about the environmental conditions of the property. Readers can obtain more information on this decision and other lender liability cases from our “Lender Liability” page of our website. 

Helpful Hint: There are a number of new environmental insurance products offered by a handful of insurers that can serve as useful environmental risk management tools in corporate or real transactions especially those with environmentally complex contamination or multi-site transactions. It is important to keep in mind that there can be considerable variation among the policies offered by the insurers and that the standard off-the-shelf forms may not reflect the actual policies that may be issued in some transactions. Because each deal has different environmental issues and the complexity of environmental issues at sites can vary, the policies should be tailored to the particular needs of the transaction or parties. The terms of coverage and the language of the policy may have to be heavily negotiated either by endorsements or manuscripting of the actual policies. However, policy modifications can result in delays as well as change the pricing and deductibles of the policies. These policies are highly specialized insurance products which require a fairly thorough understanding of environmental law. For more information about the insurance products that are available for corporate and brownfield transactions, please visit the “Articles” page of our website.

AIR POLLUTION DEVELOPMENTS

New Source Review Rules Can Impact Small Businesses and Transactions

Under the Clean Air Act, businesses that install new major sources of air pollution or modify existing major sources must undergo a permit review process known as New Source Review (“NSR”). The definition of a “major source” varies depending on the air quality of the region where the plant is located. In areas where the ambient air achieves national air quality standards (“NAAQS”), a major source is considered a source that has a potential to emit 250 or more tons per year (“tpy”) of certain pollutants although for some industries the threshold is 100 tpy. However, vast regions of the country do not meet the NAAQS. In those so-called non-attainment areas, the definition of a “major source” varies with the severity of the air quality. In those areas with extreme ozone pollution, the threshold for being regulated as a major source is just ten tpy. This threshold amounts to just 2.25 pounds per hour so facilities with numerous valves may have great difficulty avoiding regulation as a major source. 

A modification may occur when a business expands or changes its operations that increases emissions of air pollutants above certain limits. For example, increasing operating hours or product output, changing product mix, using different raw materials or altering the design or function of equipment may qualify as a modification that must undergo NSR. 
	
The NSR process usually involves the installation of pollution control equipment. In addition, the business must offset the increased emissions by either reducing emissions elsewhere at the facility or purchasing emission credits from other businesses who have reduced their emissions below the amount allowed by their permits. While the amount of the offset is usually set at a ratio of 1:1, the ratio will increase with the severity of the air pollution in the region where the plant is located. For areas with severe ozone problems, the offset may be as high as 1:5. 

EPA has become concerned that there is widespread non-compliance with the NSR program. As a result, it has begun to focus its enforcement efforts on businesses that are expanding their operations. EPA also recently announced that it will seek significant emissions reductions from companies that improperly bypass the NSR permitting process. 

NSR violations may occur at the “front end” of the permitting process when a facility avoids review or at the “back end” when facilities inaccurately calculate impacts to the environment. Following are some of the more common types of NSR violations:

•	Improper Use of Exemptions- Facilities may seek to avoid NSR permitting by claiming an improper exemption. For example, routine maintenance, repair and replacement of sources is exempt from NSR. However, some facilities have tried to claim this exemption for activities that are infrequently performed or which involve design changes to equipment. Likewise, some facilities have failed to recognize that switching fuels may also trigger NSR requirements in certain situations.
•	Failure to Recognize a Change as a Modification- Many facilities fail to treat certain activities as a modification. For example, changing catalysts to increase capacity might be considered a modification.
•	Improper Emission Estimates- Some facilities fail to list all pollutants emitted at a facility or fail to correctly total emissions from all emission points in the facility (e.g. valves or vents).
•	Improper Offsets- EPA has discovered that some facilities have improperly calculated the value of their offsets by double counting previous emission offsets, underestimating emission increases or using emission decreases that were ineligible for offsetting because the emissions were not regulated. 

Helpful Hint:   The Clean Air Act is increasingly regulating small businesses. A purchaser who contemplates changing operations of a business that they are about to acquire should carefully  review the air permits to determine if the contemplated changes would trigger NSR permitting requirements or other permit programs of the Clean Air Act since those changes could not be implemented until the revised or new permits have been obtained. This exercise should be done as part of the pre-acquisition due diligence. 

District Court Invalidates New EPA Air Quality Standards

	Under the Clean Air Act, the EPA is responsible for establishing the NAAQS. The states, in turn, must develop State Implementation Plans (“SIPs”) which specify the particular control measures and strategies that will be imposed on air pollution sources within the state to achieve the NAAQS. Sources in states with air quality that does not achieve the NAAQS will have to comply with more stringent requirements than similar plants located in states with cleaner air. (See preceding article on modifications). States that do not achieve the NAAQS may also become ineligible for federal funding of certain transportation projects (see related article below on the Atlanta brownfield site). 

In 1997, EPA proposed more stringent NAAQS for ozone and fine particles that would go into effect in the next decade. If the new standards were in effect now, many cities and urban areas would not be compliance and would have to impose tighter emission controls on a wide range of businesses. However, on May 14th the federal district court for the District of Columbia invalidated the new rules. Presumably, EPA will appeal this decision. 

WATER POLLUTION/ENDANGERED SPECIES 

EPA and Army Corps of Engineers Issue Interim “Tulloch” Rule

In our February issue, we discussed the controversy over the so-called “Tulloch Rule”. The Clean Water Act prohibits the discharge of dredged or fill material without a permit. In 1993, the EPA and Army Corps of Engineers (“Corps”) promulgated the Tulloch Rule which redefined “discharge of dredged material” to include any “incidental fallback”  which is the redeposit of dredged material into virtually the same spot from which it was excavated. In 1997, the district court for the District of Columbia ruled that the agencies had impermissibly exceeded their authority when they issued the Tulloch Rule because “incidental fallback” could not be considered an “addition” of pollutants since the material was simply falling back into the area from where it came. The agencies appealed the decision and the Court of Appeals for the District of Columbia affirmed the lower court’s decision in June, 1998. On May 10th of this year, the agencies issued an interim rule which is intended to comply with the injunction that was issued in the Tulloch decision.

Under the interim rule, the agencies modified the phrase “discharge of dredged materials” so that it no longer refers to “any” redeposit or “incidental fallback.” The agencies affirmed that certain kinds of redeposits are still regulated by the Clean Water Act. These include mechanized landclearing activities, redeposit of excavated soil alongside ditches or at various distances from the point of removal (“sidecasting”) as well as the removal dirt and gravel from a streambed and subsequent redeposit in the waterway during mineral extraction activities.  The agencies are concerned that large-scale destruction of wetlands and critical habitat could occur unless the definition of “discharge of dredged materials” is clearly defined. As a result, they will shortly propose regulations that will clearly delineate the scope of acceptable redeposit activities under the Clean Water Act. In the meantime, they will determine on a case-by-case basis whether a particular redeposit will be subject to regulation. 

TOXIC SUBSTANCES

New Lead Paint Notification Rules for Renovation and Remodeling Activities Become Effective in June

	Under the Lead Paint Disclosure Rule that went into effective in 1996, lessors and sellers of certain housing built before 1978 (“target housing”) have been required to provide tenants or purchasers with all known information regarding the presence of lead-based paint (“LBP”). The Lead-Based Paint Disclosure obligations are only triggered by the sale or lease of target housing. The rule does not require disclosure of new information that a lessor becomes aware of during the term of a lease though the information must be disclosed when the lease is renewed. 

Beginning June 1st,   new disclosure requirements will go into effective for renovation and remodeling of target housing. Under the Pre-Renovation Lead Information Rule (“PLIR”), anyone who performs renovations of target housing for compensation must provide a lead hazard pamphlet to owners and occupants of target housing prior to commencing the renovation work. The PLIR also requires disclosure of the nature of the renovation activities in certain circumstances involving multi-family housing. 

The PLIR applies to renovation activity which will disturb more than 2 square feet of LBP. Activities that are not subject to the rule include minor repair and maintenance activities such as minor electrical an plumbing work, emergency renovation operations and renovation activities conducted on components or surfaces that have been certified as being free of LBP. 

The PLIR applies to owners of rental property, occupants of owner-occupied and rental housing, property managers and renovators.  Persons who will be considered performing renovation for compensation shall include contractors, maintenance staff as well as neighborhood handymen providing services to those in the neighborhood for services and goods other than money. 

When the renovation work is to be performed in a residential unit, the renovators or a designated representative such as a building manager or landlord must provide the owner or occupant with a copy of the lead hazard pamphlet no more than 60 days before beginning the renovation work and obtain a written acknowledgement from the owner/occupant that they have received the pamphlet. If an adult owner/occupant cannot be reached or refuses to sign the acknowledgement, the renovator or its designee may certify in writing that the delivery was attempted, explain the circumstances why delivery could not be made and the date of the attempted delivery. The rule also allows the renovator to mail the notice and obtain a certificate of mailing at least seven days prior to the renovation.

There are different requirements when renovation work is scheduled for common areas of buildings with four or more units. In those circumstances, the renovator must not only deliver a copy of the pamphlet to the owner but also provide information on the timing and extent of the renovation work to all of the residents of the building as well as make the pamphlet available to them at no cost upon request. For more information on the various LBP regulations that have been promulgated or proposed, please visit the “Lead-Based Paint” page of our website. 

HAZARDOUS WASTES

Lender Barred from Recovery Cleanup Costs Under RCRA
 The past few years have seen a dramatic increase in the number of RCRA private cost recovery actions. Landowners performing UST cleanups or remediating historical contamination have sought relief under section 7002(a)(1)(B) of the RCRA citizen suit provision. This section provides that any person may commence a civil action against “any person… who has contributed to the past or present handling, storage, treatment, transportation, or disposal of any solid or hazardous waste which may present an imminent and substantial endangerment to health or the environment.” Courts are given broad discretion to fashion any remedy that they deem appropriate. 
The RCRA citizen suit provision offers several advantages over CERCLA private cost recovery or contribution actions. First, because of the  CERCLA excludes petroleum from the definition of hazardous substances, property owners cannot bring CERCLA contribution actions to recovery cleanups of petroleum contamination. In contrast, RCRA not only covers petroleum products but also extends to a potentially broader range of substances than CERCLA because RCRA regulates solid wastes. Under RCRA, solid waste includes any “garbage, refuse …and other discarded material, including solid, semi-solid or contained gaseous material resulting from industrial, commercial, mining, and agricultural operations, and from community activities…”. Courts have held that petroleum fuel leaking from an underground storage tank is a “discarded material resulting from commercial activity and, therefore, qualifies as a solid waste.
Second, private parties seeking to recover response costs under CERCLA must demonstrate that their costs were “necessary” and that they complied with the National Contingency Plan (“NCP”) which establishes complex procedures for investigating contamination, selecting remedies and also requires that the public be given the opportunity to participate in the remedial selection process. RCRA does not contain any NCP requirements. Thus, costs that might be excluded under CERCLA might be recoverable under RCRA.
Finally, unlike CERCLA, plaintiffs may seek recovery of their attorneys fees under section 7002. It should be noted, though, that, several courts have denied awards of attorneys fees where the plaintiff is a landowner of the contaminated property. In those cases, some courts have suggested that where the plaintiff is trying to clean up its own property, it is not acting primarily for the health of the community. Therefore, these courts reason, the plaintiff should not be entitled to attorneys fees. 
Most of the private 7002 actions have involved properties that were contaminated by leaking USTs. However, this section has also been used by developers of shopping centers against former tenants and municipalities that operated sewer systems which leaked hazardous substances into the environment or against dry cleaning tenants who disposed of hazardous substances at the property. 
The scope of relief that is available under 7002 was limited by the United States Supreme Court in 1996. In KFC Western Inc v. Meghrig, the Court ruled that private parties cannot recover cleanup costs under section 7002 that were incurred prior to the commencement of the litigation. However, the Court left unresolved the question of whether plaintiffs could seek recovery of their cleanup costs incurred after they commenced suit. 
This was exactly the situation in Avondale Federal Savings Bank v. Amoco Oil Co, No. 98-2003 (7th Cir. March 11, 1999). In this case, the plaintiff bank acquired title to a former gasoline station when it merged with another bank. The plaintiff found a purchaser for the property in late 1995. Avondale then performed an environmental audit that was required by the purchase agreement and discovered petroleum contamination from leaking USTs. The plaintiff then filed a RCRA 7002 action in May 1996 against Amoco Oil Company who had owned and operated the gasoline station from 1926-1970 seeking an injunction requiring Amoco to remediate the contamination. To preserve its deal, Avondale then went ahead and removed the USTs and contaminated soil. In November 1996, Avondale received a no further action letter from the state of Illinois. 
After the closing, Avondale amended its complaint to add a claim for restitution to recover the value of the benefit it had conferred upon Amoco by performing the cleanup. Of cleanup costs. Avondale still sought an injunction for any off-site contamination that might exist. 
The federal district court granted Amoco’s motion for summary judgement on both claims and the Court of Appeals for the Seventh Circuit affirmed the lower court opinion in a 2-1decision. The Court interpreted Meghrig as prohibiting the recovery of any past cleanup costs regardless if they were incurred prior to the commencement of the litigation or after the suit was filed. The Court said that Avondale should have waited for the court to rule on its injunction. Moreover, the Court noted that Avondale could still seek recovery of its cleanup costs under state law. The dissenting opinion vehemently disagreed that Meghrig prohibited recovery of cleanup costs after a RCRA citizen suit was filed.  
Helpful Hint: This decision illustrates the importance of reviewing the historical information of all properties that may be acquired or leased. Even though a property may currently be used for a purpose which appears to present a low environmental risk, many sites have undergone substantial changes in use in the past. This is particularly true with fast food restaurants where many of the sites were once used as gasoline stations because of their location. Since cleanup practices and standards were not as stringent in the past, it is important for purchasers acquiring properties by direct purchase or through a corporate transaction such as a merger to adequately investigate the historical uses of the properties. 
Mercury Will Be Regulated as a Universal Waste

	In the 1980s, we had the asbestos scare. In the 1990s, the regulatory focus has been on lead. Now, it appears that attention is shifting to mercury. Because this metal is considered a persistent, bio-accumulative and toxic chemical (“PBT”), EPA unveiled a plan last year to reduce the amount of mercury that is released into the environment. As part of this program, EPA  recently announced new rules for the disposal of mercury-containing lamps. 

	Under this new proposal, the mercury lamps will be considered a hazardous waste  and subject to the RCRA waste management rules if the lamps are disposed. However, when they are to be recycled, the lamps will be regulated as “universal waste” with less stringent waste management and transporting standards. EPA hopes that lower disposal costs associated with this rule will encourage businesses to replace existing mercury lamps with more energy-efficient lighting.  

SUPERFUND/BROWNFIELDS

EPA Announces New Brownfield Grants

	During the past few years, EPA and approximately 40 states have enacted regulatory reforms to stimulate the redevelopment of brownfields. However, these administrative fixes have not been enough to eliminate the disincentives to brownfield redevelopment because the additional costs and time delays that are not encountered to remediate these sites still make these sites more difficult to redevelop than so-called “Greenfield” sites. 

As a result, EPA has created two types of brownfield financing programs that are intended to help “level the playing field” between brownfield sites and undeveloped land.  Under the Brownfield Assessment Demonstration Pilot Program, EPA has awarded over 250 grants (“BADP Grants”) in the amount of $200,000 to communities that can be used to investigate and assess contamination at brownfield sites. Earlier this year, EPA announced it would award 23 additional BADP grants.

EPA has also created a Brownfield Cleanup Revolving Loan Fund (“BCRLF”) which can be used to perform short-term cleanup actions at brownfield sites. The grants are awarded to municipalities who, in turn, establish revolving loan funds which issue low-interest loans to perform cleanups at brownfield sites that have been previously awarded a BADP grant.  EPA has awarded 24 BCRLF Pilots which averaged $350,000 each and plans to award 63 more BCRLF grants by June. The size of the new grants may be up to $500,000 per site.

According to EPA, these grants have resulted in the assessment of 398 brownfield properties. 273 of these sites did not require any cleanup while cleanups have been completed at 71 sites. Thus far, 38 of the sites have been redeveloped.

Helpful Hint: Neither the BADP nor the BCRLF grants may be used for sites contaminated with petroleum. While developers are not eligible to receive these grants directly, private developers have worked with local governments to have BADP and BCRLF grants awarded for sites that the developers were interested in developing. For more information on these EPA financing programs as well as other federal and state brownfield financing programs, please visit the “Brownfield” page of our website. 

EPA Issues Innovative Prospective Purchaser Agreement to Facilitate Redevelopment in Long Island

In 1995, EPA revised its policy on prospective purchaser agreements (“PPAs”) as part of its initiatives to encourage the redevelopment of brownfields. The policy liberalized the eligibility criteria for these agreements. The PPAs generally contain covenants not to sue to prospective purchasers for historical contamination at a site and for future cleanup costs that may be associated with the historical contamination. The Covenant Not to Sue may also extend to the purchasers lenders and successors or future purchasers of the property. 

As a result, PPAs can now be a useful tool to help minimize the risks associated with brownfield sites and can be used to enhance the marketability of the sites. An example illustrating how PPAs may facilitate brownfield redevelopment was the PPA issued by  EPA for a superfund site located in Glen Cove, Long Island. 

In this transaction, the Glen Cove Industrial Development Agency is planning to acquire a 240 acre parcel of waterfront property which contains two superfund sites from a defunct savings and loan that went into receivership in the mid-1980s. The purchase price for the property is $2.6 million. The agency has been negotiating a re-sale of the property to a developer. 

EPA expended over $6 in investigative costs but has not yet selected a cleanup remedy. Preliminary estimates for the cleanup costs range from $13 million to $75 million. As part of the PPA, the development agency will reimburse EPA for $100,000 of its costs incurred to date and remediate the site. In addition, EPA will also receive a percentage of the sales price. In exchange for this consideration, EPA issued a covenant not to sue which will extend to subsequent purchasers and lessees of the site. 
Exxon Proposes Using Project XL to Streamline CERCLA Investigation and Remediation Process

Project XL is a national pilot program launched in 1995 which tries to identify innovative ways to achieve environmental protection.  The Project XL program has generally been limited to manufacturing facilities who are looking for more flexible and cost-effective ways to comply with their environmental obligations. However, Exxon recently proposed a Project XL project that would dispense with the usual CERCLA investigation and remedial selection process. It its place, Exxon proposes to implement a streamlined and cost-effective strategy for the investigation,  risk assessment, remedy selection and remediation of its inactive Sharon Steel Corporation-Fairmont Coke Works plant located in Fairmont, West Virginia. The plant had been shutdown in 1979 following its failure to comply with Clean Air Act and Clean Water Act regulations. Sharon Steel was liquidated in a 1991 bankruptcy proceeding.  EPA conducted investigative activities in the 1980s and placed the site on the National Priorities List (“NPL”) or Superfund list in 1996. Exxon signed an administrative order on consent in 1997 where it agreed to perform a traditional CERCLA Remedial Investigation/Feasibility Study (“RI/FS”). Exxon had been identified as a PRP at the site because a corporate predecessor had operated the facility earlier in the century.  In 1998, a subsidiary of Exxon purchased the plant.

Under this proposal, the RI/FS will be suspended. In its place, Exxon will use an expanded form of the removal action procedures set forth in the National Contingency Plan (“NCP”) with enhanced public participation. At the conclusion of the removal work, the RI/FS will be reinstated for the purpose of preparing a Record of Decision (“ROD”) to select a long-term remedial action for the site. Both Exxon and EPA believe the short-term cleanup will be implemented much more quickly under this project than would normally occur during the RI/FS process. The parties also believe that negotiations for the ROD and the underlying Consent Decree implementing the ROD will proceed more rapidly with substantially reduced legal costs. 

Helpful Hint: Many states have implemented voluntary cleanup programs (“VCPs”)that allow for expedited review and the use of risk-based protocols that may permit cleanups to be completed more quickly with reduced costs. For a survey of the various state VCPs, please visit the “Articles” page of our website. 

Project XL Will Be Used to Facilitate Development of Atlanta Brownfield Site

EPA has also approved a Project XL proposal that will help redevelopment of a brownfield site in Atlanta. Under this proposal, Jacoby Development Corporation plans to build a mixed use development on a 138 acre site near Atlanta’s central business district. A key component of the project is a multi-modal bridge that would cross over Interstates 85 and 75 and provide access to a nearby Metropolitan Atlanta Rapid Transit Authority (MARTA) station which currently suffers from poor accessibility. This bridge would contain paths for bicycles and pedestrians.

The reason for the Project XL proposal was that the bridge is a critical element of the redevelopment. However, Atlanta is currently not in compliance with the Georgia air quality plan and the Clean Air Act prohibits construction of new transportation projects that use federal money or require federal approval in such circumstances. Measures that are expected to reduce air emissions which are known as transportation control measures (“TCMs”) may proceed even when a region is “out of conformity” with the state plan.  

Normally, the redevelopment would not qualify as a TCM because it will likely attract more automobiles to downtown Atlanta and result in increased air emissions. The Project XL proposes to give EPA greater flexibility and allow the agency to consider the entire redevelopment project, including the bridge, as a TCM. Under this approach, EPA believes that the project will result in lower air emissions because the MARTA station will become more utilized not only by occupants of the redevelopment but by other commuters working downtown. In addition, the project uses “smart growth” features that provide greater mass transit and pedestrian access and requires tenants to participate in a transportation management association which will encourage workers to use mass transit or car pooling. Finally, the project would result in an accelerated cleanup of a brownfield site which will shift growth to midtown and away from suburban or undeveloped areas. 

Helpful Hint: A number of federal agencies including the Housing and Urban Development Corporation (“HUD”) and Department of Transportation (“DOT”) has established funding mechanisms that can be used to redevelop brownfields. For more information, please visit the “Brownfield” page on our web site and click on the “Financing Brownfield Redevelopment” article.
	
 ENVIRONMENTAL CASES INVOLVING CORPORATE AND REAL ESTATE TRANSACTIONS 

Lender Liable Under Common Law for Damages Caused by Petroleum Discharge

	Since the enactment of the lender liability amendments to CERCLA and RCRA in 1996, many financial institutions have become less concerned about potential environmental liability. Indeed, with Wall Street increasingly competing with traditional lenders for loans, many banks have relaxed their due diligence requirements (see related article on insurance in the due diligence section).

	However, the lender liability amendments fall short of offering complete immunity from environmental liability because they do not provide any relief for claims brought under state environmental laws or common laws. This was recently illustrated in a Maryland state court decision.

	In Edwards v. First National Bank of North East, the owner of a gasoline station/mini-market defaulted on its mortgage and the defendant bank foreclosed on the property. After the bank acquired title to the site, the bank performed a tightness test on underground storage tanks (“USTs”). While the USTs passed the test, petroleum contamination was detected when the USTs were removed. Presumably, the contamination was from older tanks that had been replaced. 

	The borrowers operated a day care center from their home that was located near the former mini-market. When contamination was detected in their drinking well, the borrowers filed statutory and common law claims against the bank. The trial court ruled that the state lender liability statute which was patterned after the CERCLA provision insulated banks from any environmental liability. However, a state appellate court reversed the decision. The court said that banks which complied with the requirements of the state lender liability law were only immune from suits for the cleanup of contamination. The court  held that state lender liability law did not pre-empt common law causes of action and remanded the case back to the trial court for a hearing on the merits of the common law claims.

Helpful Hint:   Lenders need to exercise extreme caution and perform detailed site inspections when foreclosing on assets of a defaulted borrower. There have been a number of unreported instances where lenders have been issued administrative orders by governmental agencies and have had to pay to perform a cleanup when lenders have taken control of a site after a borrower has gone out of business. Often times, a bank will take control of the facility in order to sell off the inventory, fixtures and machinery and equipment of the borrower which is subject to the bank’s lien. The bank typically does not take title to the property but simply hires an auctioneer to conduct the sale of the personal property. There may be barrels or drums of hazardous waste strewn about the facility as well as USTs located at the site as well. In order to avoid any suggestion that the bank or the auctioneer had any control over hazardous wastes, the auctioneer will often rope off the area where the drums or barrels are found.  In some cases, the bidders are actually allowed to cherry-pick barrels containing useful raw materials. After the auction is conducted, the drums and barrels are then left in the abandoned facility. At some point, government authorities find out that there are abandoned drums at the facility and have ordered the lender to pay for the removal of the materials.

By taking control of the site, lenders may also be unwittingly asserting control over the USTs and expose itself to a claim from the landlord especially where there may be environmental covenants imposing obligations on the borrower or where the borrower had the right to use or control the USTs under its lease.
 
As a result, financial institutions should consult with environmental counsel prior to taking possession of a former borrower’s facility or conducting any auction at a manufacturing facility. It would be advisable for lenders to retain an environmental consultant or environmental attorney to inspect the facility prior to taking control of the facility in order to evaluate the possible environmental liabilities that might be associated with the auction. In addition, the lender should have its counsel review the both the lease and the state UST registrations to determine who is responsible for the USTs. If the USTs are registered in the name of the borrower, the lender should discuss the status of the USTs with the landlord. If the owner believes that the existence of the USTs enhance the marketability of the site, the lender may be in a good position to negotiate a satisfactory resolution to the UST issue prior to assuming control of the site for the purpose of conducting an auction of the former borrower’s assets.

Another practice that can expose a lender to liability is the hiring of guards. Often times, lenders conclude that they must hire a guard to protect inventory or equipment until an auction may be conducted. More times than not, the guard is posted at the entrance to the plant and will not allow access to the property without the approval of lender. There have been a number of occasions when the lender’s guard denied access to a local government inspector who wanted to confirm that the abandonment of the facility did not pose a risk of danger or explosion. By exercising such control over a facility, a lender could be deemed to be an operator of the facility and be held responsible for remediating environmental problems at the site. To minimize this possibility, a lender should have its guard posted in or outside the building where the collateral is located instead of a the gate leading to the entire facility.
 
The lender may also want to have an environmental consultant be present at the auction to make sure that hazardous materials remaining at the property are not disturbed or spilled. If any materials are inadvertently spilled, the consultant could take immediate steps to contain and cleanup the spill and document those actions.

Over two dozen states have enacted their own lender liability statutes or promulgated lender liability regulations which can differ from the federal law. Thus, in order to minimize potential liability, lenders should review the specific requirements of those 
state laws or regulations in addition to the practical guidelines mentioned above before they take possession of their collateral. Lenders may also want to consider purchasing one of the new insurance policies that protect lenders against certain kinds of environmental risks.

Tenant Liable for 95% of Cleanup Costs

Under  CERCLA, current owners of contaminated property may be strictly liable for the cleanup of their property even where the contamination was caused by a third party such as a predecessor in interest or a tenant. The third party defense can be asserted by a PRP if it can establish that the release was solely due to the act or omission of a third party, the PRP had no contractual relationship with that party, the PRP exercised due care with respect to the contaminants and took precautions against the foreseeable actions of third parties. 

Landlords cannot generally assert the third party defense for contamination caused by their tenants because their lease constitutes a “contractual relationship” with the party responsible for the contamination. While landlords have been able to bring contribution actions against tenants for contamination they cause, landlords are rarely able to completely escape the CERCLA liability net.
 
Usually, landlords are allocated at least 20% of the cleanup costs even when the tenant caused the contamination on the grounds that the lessor benefited from the leasing of the property, acquiesced to the tenant’s activities or stands to benefit if the property is remediated. However, in Bedford Affiliates v. Richard Sills, the Court of Appeals for the Second Circuit affirmed a 5% allocation of liability to a owner of a shopping center for solvent contamination caused by a dry cleaner tenant.

In this case, the owner purchased vacant land and leased it to a construction company to build a shopping center. A dry cleaner who operated at the shopping center from 1973 to 1988 allowed intermittent releases of dry cleaning solvents into the environment. However, the plaintiff/owner of the shopping center did not become aware of the contamination until 1990. Upon discovering the contamination, the plaintiff/owner first demanded that the trustee of the leasehold remediate the contamination. When the trustees failed to act, the plaintiff/owner terminated the leasehold and entered a consent order with the state Department of Environmental Conservation in 1993 to perform a site investigation and cleanup. The plaintiff/owner then filed a cost recovery action against the trustee and the dry cleaner to recover all of its cleanup costs. 

The district court ruled that the plaintiff/owner was not an innocent landowner because releases of hazardous substances had occurred during its ownership of the property. As a result, the plaintiff/owner could only bring a contribution action. The court ruled that while the plaintiff/owner did not cause the pollution, it was not blameless because it had waited three years to take action. Had the plaintiff/owner acted sooner, the court reasoned, the contamination might not have been as extensive. As a result, the plaintiff/owner was held responsible for 5% of the cleanup costs. 

TIP: The contractual relationship between the owner and the sublessee prevented the plaintiff from asserting the third party defense. Even if there had not been a contractual relationship between the parties, the plaintiff would not have been to assert the defense because by failing to take action for 3 years, the plaintiff would have been deemed to not have satisfied the third prong of the third party defense- exercising due care with respect to the hazardous substances. This case should be contrasted to the Second Circuit’s decision in New York v. Lashins Arcade Co.[91 F.3d 353 (2d Cir. 1996)] where the owner of a shopping center was allowed assert the third party defense because the landowner immediately took steps to cleanup contamination caused by a dry cleaner tenant who had operated at the site prior to the time the owner took title to the shopping center. 

The information contained in this newsletter is not offered for the purposes of providing legal advice or establishing a client/attorney relationship. Environmental issues are highly complex and fact-specific and you should consult an environmental attorney for assistance with your environmental issues.